Gujarat High Court
In Re: Mafatlal Industries Ltd. vs Unknown on 12 July, 1996
Equivalent citations: [1996]87COMPCAS705(GUJ)
JUDGMENT R. Balia, J.
1. The company has preferred cross-objections against the finding recorded by the learned single judge [see [1995] 84 Comp Cas 230] that the allotment of shares to NOCIL and Shushrupad Investment Limited out of the rights issue of 1987 was contrary to and in breach of the prohibitory order of injunction issued by the City Civil Court, Ahmedabad, in Suits Nos. 3181 and 3182 of 1987, and NOCIL and Shushrupad could not have legitimately participated in respect of those shares at the meeting of the shareholders in pursuance of the directions issued by this court on an application having been made under Section 391(1) of the Companies Act though the court ultimately found that even after excluding participation in respect of such unauthorisedly issued shares, the proposed scheme of amalgamation had got the approval of the requisite majority under Section 391(2).
2. Controversy had arisen in the wake of objections raised by the objector-appellant that the company had proposed to increase its subscribed capital in the year 1987. The proposed increase was governed under Section 81(1) of the Act, that is to say, it was the rights issue which was required to be offered to persons who on the date of offer were shareholders of the company and offer was made in proportion as nearly as circumstances admitted to the capital paid up on those shares on that date. Two civil suits were filed in the City Civil Court at Ahmedabad, which were numbered as 3181 of 1987 and 3182 of 1987, by two different shareholders. Before allotment had taken place, the City Civil Court had issued injunction on September 4, 1987, in the following terms :
"The defendants are permitted to allot shares to the applicants in the rights issue subject to the clear stipulation operating that allotment of shares would be subject to the result of this litigation. They are also directed not to allot shares from the unsubscribed portion thereof to anyone except banks and/or public financial institutions without previous permission from this court."
3. In view of the operation of the aforesaid order and keeping in view the provisions of Section 81 of the Act, it had been contended by the objector that NOCIL was not a shareholder of MIL on the relevant date and, therefore, was not entitled to make any offer of rights issue. Another company, Shushrupad, was the holder of only 563 shares of MIL and was entitled to allotment of only 563 additional shares pursuant to the rights issue and not anything more than that. In the wake of this position, it was contended that allotment of any share to NOCIL and allotment of shares exceeding 563 shares to Shushrupad were contrary to the injunction order operating against the company and, therefore, illegal and, on the strength of such allotment or to the extent of such illegal allotment, the two companies could not have participated in the meeting.
4. It was the case of the company that NOCIL had applied for allotment of 1,50,000 shares on July 2, 1987, for participating in MIL's equity shares and Shushrupad had already been a shareholder, and was eligible to apply for additional shares more than to which it was entitled. Both were subscribers to the equity issue of 1987 and there was no violation of the order of the court. It was also contended that even if the allotment has been made in violation of the injunction order of the court by the company, it does not affect the validity of the allotment and, therefore, such allottees cannot be excluded from participation in the meeting of the shareholders, though punishment for disobedience of the injunction order may be imposed on the company or its officers responsible for the breach. Lastly, it was contended that even if such shares are held to be illegally allotted to the abovereferred to two companies to the extent stated, and they are excluded from the shareholding, the scheme had been approved by the requisite majority.
5. The learned single judge did not accept the first two contentions. It was held that the defence of the company that the shares allotted to NOCIL and Shushrupad are from the subscribed portion of the share capital or at any rate that the power which the board of directors had under Section 81(1)(d) to dispose of additional shares would cover shares other than the unsubscribed shares is not acceptable. It was also found that the petitioner company which was injuncted by the prohibitory order of the city civil court is estopped from contending that even if it has committed breach of the order of the court the only remedy is to initiate action of civil contempt and the allottees of share can legitimately participate in the meeting of shareholders. The party which is injuncted by the order of injunction cannot be permitted to contend that it having violated injunction, nothing further could be done or no relief can be granted by the court. Such stand from the corporate body shall have to be deprecated with a view to acknowledge reverence and regard for orders of the court and for discouraging the attitude of no respect for orders of the court. These findings are challenged lest they may bind the company in the pending application for contempt before the city civil court for violation or breach of the order.
6. In the first instance, it was contended that the learned company judge, even assuming the allotment of concerned shares to be in breach of the injunction order and the allottees could not have legitimately participated in the meeting, could have reached the conclusion that the result is not affected. In these circumstances, the court ought not to have decided the contentious issue. Reliance was placed on a number of decisions.
7. We are not impressed with this objection. It is common ground between the parties that the proceedings under Sections 391 and 394 of the Companies Act, 1956, are governed by the provisions of the Civil Procedure Code, in terms of Rule 6 of the Companies (Court) Rules, 1959. Rule 6 is clear in that regard that except as otherwise provided by the Act, or the Rules of 1959, the procedure of the court and the provisions of the Civil Procedure Code, so far as applicable shall apply to all the proceedings under the Act and under the Companies (Court) Rules. Order 14, Rule 2 of the Code of Civil Procedure requires the court to pronounce judgment on all issues. Order 20, Rule 4, requires judgments of all courts except Small Causes Courts to contain a concise statement of the case, the points for determination, the decision thereon, and the reasons for such decision. The principle on which these provisions have been formed is that in appealable cases the court should as far as possible decide all the issues jointly because piecemeal trial or leaving of decision on certain issues on such assumed premises will lead to protracted litigation and multiple appeals in the same proceedings, if the ultimate conclusion on the assumed fact situation on which the parties are at issue is not found acceptable to the appellate court.
8. This principle is more applicable when the end result is not dependent merely on an assumed state of affairs of particular facts but conjointly on a decision of facts that may be assumed as well as other ancillary issues which have a direct bearing on the conclusions reached as we will see in the case in hand. It is founded on sound policy for avoiding remand if the appellate court reverses the decision of the lower court on a preliminary issue founded on assumed facts.
9. In the present case, it was the objection of the objector that proper classification of the shareholders for holding separate meetings of the class of shareholders as required under Section 391(1) has not been made, which has affected the validity of approval of the scheme by the requisite majority. The case of the objector has been that apart from not holding proper class meetings, certain shareholders have been allowed to participate in respect of shares which could not have been legitimately issued.
Both the issues have a direct bearing on the ultimate question whether the scheme has been approved by the statutorily required majority. It has also been the case of the objector that, while conceding the end conclusion reached by the learned company judge about the present controversy that after the finding on the first issue, namely, about proper classification and proper class meeting did not find favour with the court, the approval by the requisite majority would be vitally affected by exclusion of shares allotted to NOCIL and Shushrupad in 1987 in breach of the court's injunction order. Therefore, the ultimate decision about the effect of issue of shares in contravention of the court's order is not dependent merely on the assumed state of affairs about issuance of such shares but also on the finding about proper class meetings. If the finding about proper classification is reversed, the finding on the first two issues inherent in the present objection with which we are concerned in this cross-objection becomes very much relevant. Therefore, it cannot be said that the finding on the first two issues was wholly unnecessary.
9. In this connection, we may notice the judgment of the Supreme Court in the case of Major S.S. Khanna v. Brig F.J. Dillon, AIR 1964 SC 497. The court observed that normally all the issues in a suit should be tried by the court. Not to do so, especially when the decision on issues even of law depends upon issues of fact, would result in a lopsided trial of the suit.
10. In the case of Baskeshar Nath v. CIT [1959] 35 ITR 190 ; AIR 1959 SC 149, the question raised before the Supreme Court was whether breach of the fundamental right guaranteed under Article 14 can be waived. The court as the court of final resort did not deem it proper to go into the question whether breach of every fundamental right under Part III can be waived which was a question of general nature. The court said (page 206 of 35 ITR) :
"The fundamental right, the breach whereof is complained of by the assessee, is founded on Article 14 of the Constitution. The problem, therefore, before us is whether a breach of the fundamental right flowing from Article 14 can be waived. For disposing of this appeal, it is not necessary for us to consider whether any of the other fundamental rights enshrined in Part III of our Constitution can or cannot be waived. We take the view that this court should not make any pronouncement on any question which is not strictly necessary for the disposal of the particular case before it. We, therefore, confine our attention to Article 14 and proceed to discuss the question on that footing."
11. It is obvious this was a case in which the court declined to decide an issue of general nature, when the only question before it was of limited nature. The court merely declined to pronounce upon the issue not before it. It was not a case in which the specific issue was before the court and it declined to decide it.
12. In Shephard (K. I.) v. Union of India [1988] 63 Comp Cas 244 ; AIR 1988 SC 686, the vires of Section 45 of the Banking Regulation Act were challenged in one of the petitions. The court observed that (page 247 of 63 Comp Cas) :
"Since the grounds of attack on this score did not impress us at all, we do not propose to refer to that aspect of the submissions involving interpretation of Article 31A, Article 16 and Article 21."
13. Thus, after rejecting the plea on the merits, which were not even found worth consideration, the court said that the court should not enter into a constitutional issue and attempt interpretation of its provisions unless it is really necessary for disposal of the dispute.
14. This case, in our opinion, cannot be read as laying down the abstract proposition of such amplitude as contended by Mr. Vakil.
15. In the case of Dibyasingh Malana v. State of Orissa, AIR 1989 SC 1737, the court was considering the meaning to be assigned to the term "family" in the Orissa Land Reforms Act, 1960. It has been contended before the court that according to the definition of the term "family", the land of a married daughter is liable to be attached twice, firstly, with that of her father and, secondly, with that of her husband. The court declined to go into that question, because none of the appellants before the court in appeal was a married daughter who could be said to be an affected party on that count. Here we are not concerned with the question which does not affect the parties before the court.
16. Likewise, in the case of Dhartipakar Madan Lal Agarwal v. Rajiv Gandhi, AIR 1987 SC 1577, the court was dealing with an appeal arising from an election petition under the Representation of the People Act. The question about the validity of the election concerned had become redundant because since the filing of it, fresh Lok Sabha elections had taken place. Yet the petition had to be decided because of allegations of corrupt practice, which, if found, would result in disqualification of candidates to contest elections in future. The court said a few words of advice to Parliament to look into the need to make suitable amendments so that the court may be absolved from allotting valuable time in inquiring into stale claims. This case also did not provide any parallel to the present one. In that case, an issue has been raised which directly arose from the pleading of the parties and is very much relevant for the controversy to be decided. In fact, the company invited a decision on the question by joining issues. It at no point of time required the learned single judge not to go into question and proceed on the assumption of correctness of facts on the basis of which the objection was raised before the learned single judge. Having invited a decision by raising issues which are germane to the controversy, the party cannot claim as a matter of right that such issues may not be decided if the same are going to be decided against it so as to bind it. The fact that the court ultimately found that in spite of decision on the question of fact against the company it did not affect the result of the meeting because of the combined effect of decisions on other issues, namely, proper classification of members for separate meeting, which went in favour of the company. Therefore, merely because the ultimate result went in favour of the company, holding that the company judge ought not to have decided the issue in question at all, and in doing so he has erred, it cannot result in setting aside the findings on issues which otherwise arose out of the pleadings and on which decision was invited by both the parties before the learned single judge by now treating them to be of academic importance only.
17. Further, we may observe that in this regard no straitjacket rule can be laid down as to in which case the court will decide or will not decide a particular issue. It depends upon the totality of the circumstances bearing on the entire controversy and also the fact whether the jurisdiction exercised is a discretionary one or obligatory one and whether the orders are appealable. It is for the court to proceed in a manner as it deems fit in deciding issues raised before it. It may proceed to examine issues raised before it seriatim and record its decision one after another. It may decide to reach its conclusion in advance and if circumstances warrant, leave deciding those issues which it may consider to have become academic due to its decision on other issues. It may proceed to decide all issues irrespective of its decision on other issues. In doing so it commits no irregularity or illegality so as to warrant interference on that ground alone in appeal. Ultimately, it rests within the discretion of the court. Be that as it may, in the facts and circumstances of the case, we are satisfied that the learned single judge was fully justified and was not in error in deciding the two questions on which decision was invited by the parties.
18. Another contention raised before us was that, in the facts and circumstances of the case and keeping in view the provisions of the Companies Act, the court had no jurisdiction to decide the questions in these proceedings whether NOCIL and Shushrupad could participate in the meeting. It was contended that under Section 87 of the Companies Act every member of the company limited by shares and holding equity share capital shall have the right to vote in respect of such capital on every resolution placed before the company. Reference was made to Section 41 of the Companies Act which says that every person who agrees in writing to become a member of the company and whose name is entered into a register of members shall be a member of the company. Section 111(4) of the Act provides a mode for challenging the entries in the register of members by way of appeal before the Company Law Board. One may apply before the Company Law Board for necessary rectification in the register of members. Thus, according to learned counsel, the only remedy for restraining a person whose name has been entered in the register of members from participating in the meeting is by way of application before the Company Law Board. The objector having not resorted to that remedy against illegal allotment of shares to NOCIL and Shushrupad by seeking rectification of register of members is now precluded from raising this objection before this court and this court, in view of Section 111(4), had no jurisdiction to go into that question.
19. This argument is fallacious. Obviously, Section 41 refers to persons who can be treated as members under the Companies Act. Sub-section (1) refers to subscribers of the memorandum of the company deemed to have agreed to become members of the company. Sub-section (2) refers to persons other than subscribers to the memorandum of the company who have agreed in writing to become members of the company and whose name is in the register of members. Obviously, this provision means who can become member under the provisions of the Companies Act. Section 111 deals with appeals against the order of the company refusing to register transfer of shares and also entry made in the register of members without sufficient cause. We are here not concerned with that nor is the objection that NOCIL and Shushrupad are entered in the register of members contrary to any provision of the Companies Act. The fundamental question raised before the learned single judge was when the company was under a restraint order not to allot shares to anyone except the applicants to the rights issue without permission of the court except to banks and public financial institutions, whether the company acted contrary to the restraint order ? If so, what is its effect on the issue before us, that too in the context of finding out whether the holders of such shares could by their approval of the scheme fulfil the requisite statutory majority ? In the context of the court's jurisdiction to find out whether the proposed scheme of compromise or arrangement proceeds in compliance with the statutory requirement and whether it offers a fair deal to all concerned on the thinking plane of ordinary men of business, the court has jurisdiction to try all ancillary questions necessary for reaching a conclusion on the main issue. In the context of the application under Section 391/ 394 of the Act, the question whether any shares that have been issued contrary to the court's order can be taken into account for constituting the statutory majority squarely arises as an ancillary issue to be decided by the company court. If the court were to hold that the shares were allotted contrary to the restraint order and cannot bring into the desired legal effect such allotment made in breach of the court's order, then rectification of the register of members would be the consequence of the court's order. It would not be a result of finding about sufficiency of reasons for entering the name of such person in the register of members. The company which had issued shares is under an obligation to enter the name and it cannot by itself raise an issue about sufficiency of reasons for entering their names in the register of members. In fact, allotment of shares itself requires the names of allottees to be entered as members. The question about the illegality of allotment of shares cannot be equated with sufficiency of reason for entering any persons' name in the register of members of such allottee in its register of members. In no case, in our opinion, can the issue about the allotment of shares in breach of the court's order by interpreting the order of the court, the relevant statute and the effect of such disobedience fall in the exclusive jurisdiction of the Company Law Board so as to oust the jurisdiction of the civil court or the Company Law Board to decide upon the question whether allotment of shares in breach of its restraint order which is operating against the company should bear result. It cannot be said that the civil court has no jurisdiction to pronounce upon the question of breach of the restraint order and the consequence thereof. When the civil court pronounces against the company, the rectification in the members' register is the consequential effect of the order of the civil court and cannot depend upon order by the Company Law Board. To accept the contention of Mr. Vakil will be to accept that the Company Law Board will have jurisdiction to sit in judgment over the civil court to decide whether the register of members be amended or not. This will be against all established canons of supremacy of judicial decisions. We, therefore, overrule this objection as well.
20. As an ancillary of this plea, it was also argued that the objector having not resorted to remedy under Section 111(4) of the Act at any time prior to raising this objection before this court in the proceedings under Sections 391 and 394 is now estopped from raising the question about the legality of allotment made to NOCIL and Shushrupad in 1987. We do not find any merit in this objection either. It is the admitted case that the suit was not filed by the objector in which the injunction was made against the company. The party who had obtained the order of temporary injunction against the company had already moved an application for disobedience which we are informed has not yet been decided. The petitioner while raising the objection against sanctioning of the scheme by this court has raised the objection that the scheme has not been approved by the required majority. In support of this plea, he raised a number of grounds which includes that the equity shares in question having been issued contrary to the orders of the court cannot have legal effect for the purpose of participating in the proceedings and for counting the requisite majority because of the illegality attached to it. We are not able to appreciate how the petitioner is estopped from raising this issue if the shares have been allotted in defiance of the order and if such allotment cannot have legal consequence. It is a matter of law, orders of court, act of company in defiance and legal effect ensuing ; no part of the conduct of the appellant is involved to give rise to plea of estoppel. A person may be estopped from raising any plea or from claiming a right if by his conduct he can be said to be a person who has acquiesced in or allowed a certain state of affairs to come into existence and later on takes a plea to avoid the legal consequences thereof.
21. So also the plea that only a person who is party to the proceedings can challenge the action taken in defiance of the temporary injunction and a third party had no right to press such plea does not commend itself to us. If the question is about his right for initiating prosecution for contempt or disobedience of the court's order or it is question about execution or enforcement of order of a court, it can very well be said that only the person who is a party to the proceedings can resort to such remedy. Here, we are not concerned with question of enforcement of or compliance of with the injunction order.
22. The fact that the appellant had not raised the question about the legality of allotment to NOCIL and Sushrupad out of the 1987 rights issue, cannot be held against him. He was not a party to the suit in which injunction was issued. He is not seeking to enforce the order. His basic objection is that the scheme proposed under Sections 391 and 394 of the Act does not have the requisite approval. In support of his contention, he points out that the allotment of the shares in question, having been made in breach of the restraint order, did not have any legal effect and, therefore, for finding out whether the scheme has the approval of the statutory majority, such illegally issued shares ought to be kept out of consideration. The occasion to raise and examine this issue had arisen only now and for examination of issues which are relevant to determine whether the proposed compromise or arrangement fulfils the statutory requirement, it is Necessary to find out what is the voting strength in value to find out the required percentage majority. The right to raise such objection must be distinguished from the merits of the contention.
23. For contending that in a petition under Section 391, the court has no general power to interfere with past and concluded transactions. Reliance was also placed on certain observations made by this court in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 ; [1964] 5 GLR 804. That was a case of a petition under Sections 397 and 398 of the Companies Act, seeking relief against oppression and mismanagement. Relief was claimed that sale of movable and immovable properties, which were alleged to be acts of oppression, be set aside and directors of companies be removed and a new board may be appointed.
24. The court came to the conclusion that Sections 397 and 398 deal with powers of the court for prevention of oppression and mismanagement in the affairs of a company and the remedy given by these sections is, therefore, of preventive nature intended to prevent the occurrence or continuance of oppression or mismanagement in the affairs of the company and is not intended to set at naught what has already been done by the controlling shareholders in the course of such oppression or mismanagement which is past and concluded and no longer a continuing wrong.
25. Obviously, the decision was rendered with reference to the scope and ambit of enquiry in an application under Sections 397 and 398 which is quite different from the scope of enquiry under Sections 391 and 394. The case, therefore, offers little assistance in the present controversy as to whether the court can enquire into questions which are incidental to find out whether the majority in meeting, approving the scheme, answers the requirement of the requisite statutory majority.
26. We shall, therefore, examine the contentions on the merits.
27. In respect of the contention that there is no allotment of shares to NOCIL and Shushrupad contrary to the restraint order, the same arguments were advanced as were raised before the learned single judge. The injunction, as reproduced hereinabove, so far as it related to the restraint part, was not to allot shares from the unsubscribed portion of the rights issue to any one except banks and/or public financial institutions without previous permission from the court. The permissible sphere of allotment was that applicants to the rights issue could be allotted shares subject to the clear stipulation that allotment of such shares would be subject to the result of the litigation. The question that calls for consideration is what is meant by the term "undersubscribed portion of rights issue".
28. It had been contended that the rights issue had been undersubscribed. Subscription thereto is to the extent of 70 per cent. of the size thereof. As the temporary injunction was granted keeping in view the aforesaid fact, the undersubscribed portion of the rights issue to which the restraint order was operating should be confined to 30 per cent. of the total rights issue. On behalf of the company, it was argued that allotment to NOCIL and Shushrupad is within 70 per cent. of the total issue. Therefore, allotment to NOCIL and Shushrupad was out of the subscribed issue. Therefore, there is no contravention of the order. Alternatively, it was urged that the subscription is the stage after application for allotment is invited but before allotment is made. Therefore, any application made for allotment of shares out of an issue must be considered as subscribed and to the extent no application has been made for allotment of shares, only that part of the issue should be considered as unsubscribed issue. It was urged that there is no time limit within which or before which application can be made. Subscription is an act of a prospective buyer of shares and not an act of the company. There is no restriction on any person to make application for allotment of shares even of a rights issue though he may not be a member. Application for allotment of additional shares beyond the offer of rights shares can be made by any member or renouncee. Such application can be made at any time though allotment against such application can take place only after the applicants of the rights issue, namely, those applications of the members who had opted to apply for rights shares either themselves or have opted to renounce the same in favour of somebody else, who may or may not be a member, are satisfied. Application for allotment of additional shares by a member other than in respect of renouncement made in his favour by another member or application of any person other than a member can only be considered after applications for rights issue are satisfied. None the less, as soon as an application has been made for allotment of shares by any one member or renouncee, or otherwise has to be considered as subscription to the issue by the applicant. It is only to the extent no application has been received by the company for allotment from any quarters that it can be considered as unsubscribed portion of the issue. Reference was made to Section 69 which provides that no allotment shall be made of any share capital of a company to the public for subscription unless the amount as stated in the prospectus as the minimum amount which, in the opinion of the board must be raised by such issue in order to provide for matters specified in Clause (5) of the Second Schedule has been subscribed. The amount stated in the prospectus for the aforesaid purposes is termed the minimum subscription. From the aforesaid, it is urged that "subscription" means application for allotment of shares.
29. We may at the outset state that the terms "subscription" or "subscribed capital" or "unsubscribed capital" have different meanings depending upon the context in which the term has been used, While referring to the capital structure of the company to be stated in the prospectus inviting applications for share allotment, the terms used are authorised, issued, subscribed and paid-up capital. Here, "authorised share capital" means the number and par value of each class of shares that the company may issue in accordance with its instrument of incorporation. This is also described as "nominal share capital". "Issued share capital" means that portion of the authorised share capital which had actually been offered for subscription. "Subscribed share capital" means that portion of the issued share capital which has actually been subscribed and allotted. This also includes fixed shares allotted to corporate enterprises and "paid-up share capital" means that part of the subscribed/issued capital for which consideration in cash or otherwise has been received. This also includes bonus shares allotted to corporate enterprises. Therefore, the term "subscription" used in the financial statement of the company is not relatable merely to shares for which application has been made but refers to shares for which applications have been made and actually allotted. It is to be seen that in Section 81 of the Act the terms used "Where ... it is proposed to increase the subscribed capital of the company by allotment of further shares". Here also, subscribed capital refers to allotted shares and not to the applied shares. It provides that capital shall be increased by further allotment of shares in the manner prescribed under Section 81. The term "subscription" in Section 41 has reference to subscription of name to the memorandum of the company. This has reference to the agreement of a person to give his name in the memorandum of the company manifesting his agreement to associate with others to incorporate the company. Here also, the word "subscription" does not refer to applicants for share capital in the company. The dictionary meaning which can be aptly ascribed to such use of the word "subscription" in the financial statement, as given in the Oxford English Dictionary, means "contribution to fund". The term "subscription" to memorandum can be relatable to the dictionary meaning "to read one's name on a document either as a witness or to sign one's name to signify assent or adhesion to by signing one's name". Another meaning which has been given to "subscribe" is to give one's assent to a proposal or to express one's agreement concurrence or acquiescence. In the present context of a rights issue the dictionary meaning which can be attributed is "to give assent to a proposal", viz., acceptance to offer of rights issue and not to offer to pay sum of money for shares if .alloted. In the context of public issue, it may mean to promise over one's signature to pay a sum of money for shares in that undertaking.
30. Therefore, one has to look to the context in which the meaning of subscribed or unsubscribed portion of an issue is to be ascertained. Here, we are concerned with a case where the company, whose board of directors have decided to increase the subscribed capital by allotting new shares. The company had not decided to act under Section 81(1A) of the Act for allotment of shares by inviting the public to offer, but has decided to act in terms of Sub-section (1) of Section 81. Section 81(1) reads as under:
"81. Further issue of capital.-(l) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then-
(a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid-up on these shares at that date ;
(b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer, within which the offer, if not accepted, will be deemed to have been declined ;
(c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person ; and the notice referred to in Clause (b) shall contain a statement of this right ;
(d) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the board of directors may dispose of them in such manner as they think most beneficial to the company."
31. The scheme of the provisions is very clear that such new shares can be offered only to the persons who on the date of such offer are holders of equity shares of the company. The offer is to be made in proportion to the capital paid-up on those shares as on the date of offer. This clearly goes to show that in the first instance the entire issue is to be offered by the company to the existing shareholders in proportion to which they held shares. No one is entitled to claim anything more than what has been offered as proportionate share of capital issue to such shareholders. Sub-Clause (c) further provides that in the absence of anything contrary in the articles of the company, the offer to a member includes a right exercisable by such shareholder to renounce shares offered to him or any part of it in favour of any other person. The provision also emphasises that the offer is to be made by notice specifying the number of shares offered disclosing the limit of time within which such offer is to be accepted, failure to exercise that option to accept that offer within that limit amounts to declining the offer made to the shareholders. It is only after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from such shareholder to whom notice is given that he declines to accept the share offered that the board of directors may dispose of such shares by which the subscribed capital was proposed to be increased in such a manner as it thinks most beneficial to the company. From the aforesaid, it is clear that in the case of a rights issue no public offer is made inviting applications. Therefore, the stage for expressing agreement to subscribe to share capital by persons other than the existing shareholders does not reach before expiry of the time for exercise of the option to accept the offer for allotment of the share or to renounce such offer of allotment either in full or in part in favour of a third party or refusal to accept the offer of allotment. One important difference between a rights issue and a public issue is that the rights issue is a definite offer by the company to allot shares on acceptance of it conveyed to the company by the existing shareholders or renouncees, whereas a public issue is an invitation to subscribe to the issue whether initial or additional. A public issue is not an offer for allotment to anyone whereas a rights issue is primarily an offer for allotment by the company of additional shares to existing members. Therefore, the offering of such shares for subscription can arise only after the stage is reached when it can be said that shares are available for making subscription for allotment by third party. In the case of a rights issue, on an offer of allotment being given to shareholders by way of notice, acceptance on the part of shareholders results in a concluded contract creating a right in favour of the shareholder to claiming allotment. In the case of others, the issue is only to make an offer for seeking allotment and no right vests in anyone to claim any allotment, in the context of Section 81(1). Subscription to shares can only be made in pursuance of an invitation to intending subscribers when shares are available for such subscription. Any application made prior to that stage cannot be considered as a subscription to the rights issue. Reference to Section 69 in this connection in our opinion was inapt inasmuch as it deals with offers to the public for subscription. The meaning which learned advocate for the company want to assign to the words "subscribed and non-subscribed" generally would be applicable to applications received in response to an offer to the public for subscription. When there is no offer to the public for subscription, the question of subscribed and non-subscribed portion of issue cannot have reference to application in general. The expression "applicants to rights issue" can have reference only to the existing members or their renouncees, who alone could be applicants to rights issue offered by the company for allotment. Shares falling outside that will amount to the unsubscribed portion of the rights issue, which could be dealt with by the board under Clause (d) of Sub-section (1) of Section 81. This is further apparent that with reference to powers of the board, the court left it free to allot shares to banks and other public financial institutions, but restrained it to allot such shares to any one else except with the permission of the court. In the context of Section 81(1), non-subscribed portion of rights issue can have no meaning other than the portion of additional issue for allotment meant for increase in the subscribed capital except the one which has been refused or deemed to have been refused by the existing shareholders. Therefore, subscribed portion of rights issue in the context of rights issue cannot have reference to application for additional allotment by existing shareholders. We, therefore, are in agreement with the learned company judge on the question of interpretation of Section 81.
32. We are mindful of the fact that here we are concerned with the ambit and scope of the restraint order passed against the company referred to above and the question is not solely of the interpretation of Section 81. The words "non-subscribed portion of rights issue" are not the expression used in Section 81. The meaning of the restraint order will have to be gathered in the context in which the court has made the order and the attendant circumstances to which our attention was invited qua the statement about the undersubscription of the rights issue and subscription up to 70 per cent. of the rights issue. It was also urged that because of this statement the restraint order was made confining allotment to the applicants and restraining allotment in respect of the remainder. At first blush, the argument appears to be attractive. But a close scrutiny of the order does not sustain it. The order speaks about permission to allot shares to the applicants to the rights issue and not merely to the applicants or subscribers in a general sense and the restraint order was in respect of allotment of shares to the unsubscribed portion of the rights issue. The restraint was also not an absolute one. But the board was free to allot the non-subscribed portion to banks and public financial institutions absolutely. The restraint order related to exercise of power by the board in the matter of allotment of shares. While the court protected the rights of those who acquired the right to allotment shares by accepting the offer of allotment it restrained the discretion of the board to allot shares which it could not allot to any person other than banks and public financial institutions. Therefore, in the scheme of the interim order, there is no room for reading that the court permitted allotment to those who were not entitled to allotment as a matter of right in the rights issue. Applications to a rights issue can only be made by the existing shareholders and that too only to the extent of shares offered to them. Those applicants can be existing shareholders or persons in whose favour the existing shareholders renounced offers made to them or to make application for additional allotment of shares which can be available for allotment by the board if other persons to whom such offer has been made have declined to accept the offer cannot be considered as subscription to rights issue. It can only be subscription to the remainder of the rights issue which has not been accepted. Reference to "unsubscribed" was apparently only for the purpose of finding out whether any part of the rights issue was available to be allotted at the discretion of the board and it was that discretion which was restricted by issue of the injunction. As has been noticed above, the restraint was not to allot shares of non-subscribed portion of the rights issue except to banks and public financial institutions without permission of the court. NOCIL was not an existing shareholder. It could not have been an applicant to the rights issue. It could have been only an applicant to the unsubscribed portion of the rights issue. Therefore, it could not have been considered to be a person to whom the court permitted allotment. So also Shushrupad to the extent, it made offer for additional shares it was in no better position than that of NOCIL. May be that for the purpose of facilitating the board in exercising its discretion for making allotment out of expected unaccepted offers of rights issue the shareholders have been given opportunity to make simultaneous application for allotment of additional shares, it cannot be considered as part of subscription to the rights issue. We are, therefore, also in agreement with the learned single judge that allotment of "shares made to NOCIL who was not holder of equity shares of the company and to Shushrupad of additional shares applied for without seeking permission of the court, was in contravention of the temporary injunction operating against the company.
33. It was strenuously urged that notwithstanding that shares were allotted to NOCIL and Shushrupad in breach of the restraint order, the validity of the transaction remains unaffected in all circumstances and the only consequence of breach of the temporary injunction is that the offender can be punished for contempt of court and that penalty can be visited only at the instance of the party to the suit or proceedings in which injunction has been issued. It was urged that it has been the consistent view of the courts in India that breach of a temporary injunction does not render the transaction void and that being the settled position, the court should not deviate from that view. For the proposition that the transaction in breach of the restraint order is not void and its legality cannot be affected.
34. Having carefully considered the rival contentions and the question at hand, we are of the opinion that it is not possible to accept in absolute terms that in no case the validity of a transaction carried in breach of temporary injunction is affected. It must depend upon the tenor of the interim order, the subject-matter affected by such interim order, the actual action taken or done, the time at which action is alleged to have been taken in breach of the injunction order and may be in some case the ultimate decision about rights of the party. What is urged before us is that a temporary injunction Which is relief in equity is a remedy in personam and only a person is affected by the restraint order but the rights of the parties, in the subject-matter of injunction, are not affected and, therefore, any transaction carried out by them, which can be related to their right in the subject-matter also cannot be affected. Since the restraint order acts against a person, the remedy also is only against the person by way of proceeding in contempt and not against the subject, then the subject of injunction order may be property. It was also urged that by a catena of decisions the courts in India have taken one view, and this court ought not to unsettle the settled position of law in respect of breach of injunction.
35. We may first examine the various cases referred to by learned counsel for the petitioner-company to find out the ratio of such cases.
36. In the case of Beli Ram and Bros. v. Ram Lal, AIR 1925 Lahore 644, a temporary injunction was granted against Muhammad Hussain and Moti Begam restraining them from alienating the property in question. During the operation of the interim order, sale was effected by Mt. Talia Begam who was not subject to the restraint order. The court declined to affect the validity of the sale made by Mt. Talia Begam on the ground that the sale was effected by a person who was not under the restraint order and, secondly, the property was not attached. Hence, the consequence of Section 64 of the Civil Procedure Code would not follow. Obviously, this case, is of little assistance as far as the present controversy is concerned. The person who carried out the transaction was not at all subject to the injunction order.
37. In the case of Hakim Singh v. Wasan Singh, AIR 1928 Lahore 639, initially property was sold before the restraint order was communicated to the person injuncted. The court proceeded on the assumption that the prohibitory injunction becomes effective only when communicated and when any act is done in ignorance of such restraint order, before the prohibitory order is communicated, such act is not a nullity.
38. The case of Darbari Ram v. Ghidam Farid-Fazal Karim, AIR 1930 Lahore 858, was also of like nature, as was of 1928 Lahore. In this case, injunction was issued against the defendants which was served on the defendant 'X' and not the defendant 'K'. The defendant 'K' mortgaged property with 'D'. On a decree being passed in favour of the plaintiffs, in execution proceeding, the property was sought to be sold. 'D' claimed that the property could be sold subject to his rights as mortgagee. The trial court rejected the objection holding that it was contrary to injunction as well as against Section 64 of the Civil Procedure Code. The High Court in revision reversed the order relying on Beli Ram and Bros. v. Ram Lal, AIR 1925 Lahore 644. Obviously, in this case also property has been transferred by 'K' against whom the injunction has not become effective and there being no attachment there was no illegality in the sale on that ground.
39. In the case of Lal Chand v. Sohan Lal, AIR 1938 Lahore 220, and in the case of Dharamchand v. Mitsui Bussan and Co., AIR 1920 Nagpur 12, sales were concluded under execution proceedings while the injunction order was operating against the parties. Under the circumstances, the courts held that the injunction order operates against the party unlike a stay order which operates against the court. Therefore, anything done by the court in execution proceedings is not affected by an operative injunction order against the party, unless there is stay of proceedings before the court. The Lahore High Court clearly made a distinction between orders issued under Order 39, Rules 1 and 2 or Section 151 injuncting a party on the one hand and an order of stay issued by the court of competent jurisdiction to stay execution proceedings either under Order 21, Rule 29 and Section 83 of the Civil Procedure Code or by the appellate court under Order 41, Rule 5 of the Civil Procedure Code.
40. Manohar Das v. Ram Avtar Pande [1903] ILR 25 All 431 was a case under the old Civil Procedure Code. Injunction was issued against the judgment-debtor against alienation during pendency of the suit filed by 'M' on 20th May, 1898. The suit was decreed in favour of the plaintiff "on June 12, 1898. The property was sold by the judgment-debtor on 20th June, 1898, by private negotiation, which was under attachment, in execution of another decree and that decree was satisfied. Thereafter, M applied for attachment of the property which was objected to by the purchaser. In the earlier attachment, the decree holder 'M' had applied for rateable distribution. Obviously, this case has no bearing on the issue of the effect of an injunction order on the sale inasmuch as the injunction order came to an end as soon as the suit was decreed. The sale of the property was after the decree had been passed, the decree holder was claiming rateable distribution of the proceeds of property in attachment in execution of another decree. The sale was made by the judgment-debtor by private negotiation and the claim of that decree holder in whose execution proceedings the property was attached was satisfied. The plea of the first decree holder to hold such sale to be invalid was not accepted in view of the existing provisions then in force under Section 276 of the Code of 1874. There was no provision like the Explanation appended to Section 64 in the Code of Civil Procedure, 1908, which protected the claims for rateable distribution of the assets of the judgment-debtor.
41. Balbhaddar v. Balla, AIR 1930 All 387, was also a case of like nature where temporary injunction in a money suit restraining the defendants from alienating the property in question was made on the same day on which the suit was decreed. The property was sold on the next day. The decree-holder filed a suit for declaring the sale made by the judgment debtor to be void in breach of injunction. The court held that the temporary injunction came to an end with the passing of the decree, i.e., no injunction was in force when the transaction took place. The transaction was otherwise held to be genuine and bona fide and not hit by Section 53 of the Transfer of Property Act. In the fact situation, the observation that the existence of an injunction does not render an alienation made in contravention of the injunction void can at best be treated as obiter and not the ratio of decision. The issue really did not arise for decision.
42. Another case of the same High Court relied upon by learned counsel, Ram Lakhan v. Mirza Mahbub Hasan Beg, AIR 1954 All 422, has no bearing on the issue at hand. It was a case where an order of temporary injunction passed in favour of the decree holder was sought to be treated as an order of attachment invoking the operation of Section 64. The court negatived the contention by holding that the order of temporary injunction in favour of the decree holder restraining alienation of the property would not amount to an order of attachment.
43. Likewise, in the case of Mohd. Abdul Rahman v. Mohd. Shamsuddin, AIR 1951 Hyd 167, the plea raised was that the property in question was under attachment when the mortgage was effected. The court found against the existence of attachment. No direct issue about the effect of an operative order of injunction on the transaction made by a person under restraint order was raised.
44. In the case of Pushakhal Edom v. Mahadeva Pattar, AIR 1919 Mad 772, an injunction was obtained by the plaintiff restraining the defendant from managing the property of the karnavan. In view of the wide wording of the injunction the court firstly assumed in favour of the plaintiff that it included restraining the defendant from contracting a loan. The defendant, thereafter, obtained permission of the court to raise Rs. 3,000 by leasing the jungle tree. The defendant was unable to find a lessee. He, therefore, obtained that loan from 'M'. When recovery of the loan was sought to be enforced against the property of the tarwad the plea was raised that the property of the tarwad was not liable for the debt because it was contracted contrary to the injunction. The court found as a fact that the money was borrowed for the necessary purposes of the tarwad. In those circumstances, the court held that it will be going much too far to say that a person in the position of Andi Achan being so restrained is not liable to repay the money which he in fact borrowed and if the money borrowed was utilised for the benefit of the tarwad that the tarwad is not liable.
45. The case obviously offers no parallel to the case in hand laying down any principle of universal application. It was a case in which the court has permitted to borrow money in relaxation of the injunction order against the management. Money had been borrowed in a different mode. Then money was borrowed for necessity of a joint family, for which the property of the tarwad would have otherwise been liable, irrespective of the competence of the contracted person. Then the tarwad having accepted the benefit of the borrowing was estopped from disowning its liability to repay. Hence, this case does not offer any assistance to the case of a company in defending a breach of injunction by it.
46. Another case referred to by learned counsel was Kusuma Dei v. Malati Bewa, AIR 1969 Orissa 195. The High Court said that the principle applicable to an attachment order affecting an alienation is not applicable to an alienation in defiance of an injunction order. For stating this position of law, it relied upon the ratio in the case of Lal Chand v. Sohan Lal, AIR 1938 Lahore 220. As we have noticed, the decision in the case of Lal Chand v. Sohan Lal, AIR 1938 Lahore 220, is founded on a distinction between an injunction operating against a party and a stay order operating against the court, the former not affecting the proceedings in the court. It, therefore, does not further the contention advanced by learned counsel.
47. The facts in the case of Pranakrushna v. Umakanta Panda, AIR 1989 Orissa 148, were that the purchasers of property pendente lite had applied to be impleaded as party in a suit in respect of which relief in the nature of permanent injunction was sought. The application was allowed by the trial court, which was challenged in revision before the High Court. The learned single judge was also of the opinion that the order of injunction prohibiting a person from alienating property suspends his right to transfer. Therefore, the defendant could not convey any marketable title. As his opinion was in conflict with the view expressed by the learned single judge in Pranakrushna v. Umakanta Panda, AIR 1989 Orissa 148, referred to above, he referred the matter to a larger Bench. The Division Bench was of the view that a transferee pendente lite was neither a necessary nor proper party inasmuch as he would be bound by the decree in the suit in view of the principle contained in Section 52 of the Transfer of Property Act. So far as the dispute in revision was concerned, it came to an end and the question whether transfer by a person restrained to alienate can validly alienate the property did not fall for consideration. However, for observing that transfer by a person injuncted is only voidable and not void, the court relied upon the decisions in Pushakkal Edom v.Mahadeva Pattar, AIR 1919 Mad 772, Dharamchand v. Mitsui Bussan and Co., AIR 1920 Nagpur 12, Ram Lakhan v. Mirza Mahbub Hasan Beg, AIR 1954 All 422 and Mohd. Abdul Rahman v. Mohd. Shamsuddin, AIR 1951 Hyd 167.
48. As already discussed, none of these cases had a bearing on the controversy before us and are distinguishable on the facts. In this connection, we would like to note that while the court reached the conclusion that a restraint order does not in any way deprive or suspend the rights of a person, it did accept that it only aims at a prohibition to act in a particular manner. With utmost respect we may notice that there is a distinction between the Tight of person in property and right of a person to deal with property by entering to a valid contract. While the former remains unaffected, the latter, namely, to deal with the property in any manner, is affected to the extent the restraint order provides and if that right to deal in property is right in person, then, in our view, the person is incapacitated to deal with the property in the manner prohibited and cannot bring about the legal consequences by acting with incapacity.
49. Another case falling in this genre is Udairam v. State [1963] RLW 66, It was a case in which "S" obtained a decree for possession of fields and in execution a warrant of delivery of possession was issued. Before the Tehsildar could execute the warrant of delivery, B instituted a suit against "S" restraining him from interfering with the possession of fields. The Tehsildar who was assigned the task to execute the warrant for delivery of possession in execution proceedings executed a warrant after he was apprised of the injunction order. The court held that delivery of possession to "S" was not affected on the ground that he was restrained by a temporary injunction not to take possession. Possession was delivered by the Tehsildar who was acting under the direction of the executing court. There was no stay of proceeding of executing the decree but the order was operative against the party to the civil suit, namely, "S". As there was no prohibitory order against the executing court, the question of declaring the delivery of possession in execution proceedings by the executing court would not arise. The court clearly said that "order of the Tehsildar dated September 15, 1959, on which reliance has been placed by learned counsel is of no avail to him because the Sub-Divisional Officer directed his officer to stay delivery of possession". The Tehsildar obviously read something more than what the order of injunction issued by the Sub-Divisional Officer contained. He has only carried out execution.
50. We would presently see that the case is squarely in consonance with the principle enunciated by the Supreme Court in the case of Mulraj v. Murti Raghunathji Maharaj, AIR 1967 SC 1386, where the court drew a distinction between an injunction and a stay order itself. The injunction order not being addressed to the court if the court proceeds in contravention of the injunction order the proceedings are not a nullity.
51. From the aforesaid, we notice that the chain of decisions relied upon by learned counsel are either distinguishable on the facts or do not bear on the controversy before us, apart from the fact that there cannot be any absolute restriction on the court to examine itself the effect of an injunction order on the action complained against in view of the existing decisions of other courts. In fact, none of the decisions referred to by learned counsel invites application of that principle inasmuch as the cases are either distinguishable on the facts or had no application to the facts of the present case.
52. About the binding nature of precedents in Goodyear India Ltd. v. State of Haryana, AIR 1990 SC 781 ; [1991] 188 ITR 402 the court said that a precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it.
53. In Vijay Kumar Sharma v. State of Karnataka [1990] 2 SCC 562, 571, the apex court said :
"Question on which there is no discussion or on which no arguments have been advanced, reproduced in the law report or dealt with, then the observation, if any, not necessary for the decision in the case and not discussed in judgment on appeal, cannot be regarded any more than a general observation and not obiter dicta much less the ratio decidendi of the case. Such observations have no binding effect."
54. One case, which directly concerns this issue and has been referred to in some of the cases relied on by learned counsel is Delhi and London Bank Ltd. v. Ram Narain [1887] ILR 9 All 497. It was a case in which the defendant hypothecated property to a bank in defiance of the injunction order restraining him from alienating property. When the property was attached in execution of a money decree, the bank put forward its claim that the property can be sold only subject to the right of the bank under hypothecation. The plea about invalidity of the alienation for want of authority in the defendant to alienate was negatived primarily on the ground that no precedent was cited. But, with utmost respect, any precedent to the contrary was also not cited or noticed by the court to negative the plea of decree holder.
55. From those decisions, it cannot be inferred that in all cases where an earlier decision is sought to be relied on affecting the arrangement of affairs in defiance of a binding court order, and the earlier view is not commending to court, the courts must stay their hands to examine the issue afresh. On the other hand, it was stated in no uncertain terms in the case of Nirshi Dhobin v. Dr. Sudhir Kumar Mukherjee, AIR 1969 SC 864, while endorsing the views that a long settled position by earlier decisions ought not ordinarily be disturbed held (headnote) :
"Different considerations would arise if the disputed interpretation relates to a penal provision or the same is detrimental to public interest or causes public inconvenience."
56. The court clearly made the distinction between the two positions when it said (page 869) :
"The rule that where the terms of a statute or ordinance are clear then even a long and uniform course of judicial interpretation of it may be overruled, if it is contrary to the clear meaning of the enactment is inapplicable to decisions on the basis of which titles and transactions must have been founded."
57. It cannot be said that the decision relied on by the petitioner-company which is alleged to have acted in breach of the injunction order, operating against it, laid down any such law on the basis of which title or rights can be founded. To read otherwise will be inducing the persons under the restraint order to act in defiance of it with impunity or at any rate lead persons to act and arrange their affairs in a manner which may defeat the effect and purpose of binding court orders. That will be grossly against the public interest resulting in undermining the authority of law making a severe dent in people's faith in the efficacy and enforceability of courts' orders and its instrumentality as protector of people's rights.
58. In the case of Duroflex Coir Industries Ltd, v. Assistant Commissioner (Assessment) of Sales Tax [1992] 85 STC 157, the issue raised was that since deletion of Section 18 of the Kerala General Sales Tax Act, Sub-rules (7) to (14) of Rule 21 must be declared to have become otiose. The Kerala High Court had repelled the contention in Asoka Oil Mills v. STO [1985] 58 STC 282. The Supreme Court approved the conclusion of the High Court in Asoka Oil Mills' case [1985] 58 STC 282 and also observed that since interpretation of procedural laws is prevailing in the State for some time, it need not be disturbed. Thus, apart from upholding the case on the merits, it was a case where statutory functionaries acted in furtherance of such interpretation to bring about certain legal effects. The case squarely fell within the ratio that such decisions on the basis of which title and transaction must have been founded ought not to be easily departed from. The present cannot be said to be a case of that genre. Title and transaction are not founded on decisions relied on. On the basis of . those decisions, the consequences of a wrongful act are being sought to be avoided.
59. Likewise in B. Lakshmipathi Naidu v. District Educational Officer, AIR 1992 SC 2003, an interpretation affecting the eligibility for appointment to the post of headmaster was in force in the State of Tamil Nadu for quite some time. The court directed the State authority to consider the case of the appellant in accordance with the prevalent status of interpretation of law relating to eligibility. This was also a case where a decision was affecting the foundation of a particular transaction of like nature by various authorities within the State.
60. Similarly in Bishamber Dass Kohli v. Satya Bhalla [1993] 1 SCC 566, the court was concerned with interpretation of Section 13(2)(ii)(b) of the East Punjab Urban Rent Restriction Act, 1949. The court noted that a Division Bench of the Punjab and Haryana High Court in Telu Ram v. Om Parkash Garg [1971] RCJ 1, took the view that (page 570) :
"A Division Bench of the Punjab and Haryana High Court in Telu Ram v. Om Parkash Garg [1971] RCJ 1, while dealing with Section 13(2)(ii)(b) of the Act mentioned one of its conclusions in para 21 as under ;
'(b) that if the result of the use of even a small portion of a building is such that the category of the premises is changed from residential, non-residential and scheduled, and it becomes a category different from the one for which the same had been let, the clause would be attracted'."
61. In view of the interpretation prevailing in the State of Punjab since 1971, the court observed (page 571) :
"This is how this provision appears to have been understood at least ever since then and the people in the State have arranged their affairs on that basis. Apart from the fact that this view commends to us as the correct view, the desirability of continuing the settled view is also a reason in its favour."
62. All these cases reveal that where an interpretation of a substantive provision of law or rule has been accepted, in accordance with which a person is expected to act as a law abiding citizen of a civilised societybound with discipline of law, deviation from such interpretation be not ordinarily made so as to render a lawful transaction to be unlawful. No court has said so far that it is lawful to act in breach of an injunction order, giving out that people may so arrange their affairs in accordance with law.
63. The apex court accepted in principle the justifiability of reconsideration of an earlier view of its own in view of the later development and new experiences to reach the right conclusion in Synthetic and Chemicals Ltd. v. State, of U.P. [1990] 1 SCC 109 ; [1991] 80 STC 270 (SC).
64. We are of the opinion that in these state of affairs, we will not be justified in not examining the effect of the injunction order operating against the petitioner-company on the transaction of allotment of shares made in breach of it.
65. The purpose of temporary injunction to restrain doing certain acts or directing to do certain acts under Order 39, Rule 1 of the Code of Civil Procedure is stated to be for the purpose of staying and preventing the wasting, damaging, alienation, sale, removal or disposition of the property or staying and preventing dispossession of property or otherwise causing injury to the plaintiff in relation to any property in dispute. These are the objects to be achieved through injunction orders as per the statutory provisions contained in Order 39, Rule 1 of the Code of Civil Procedure. Rule 2A provides for detention in civil prison of a person who is found to be guilty of disobedience. The property of the defier is also liable to be attached. It also provided that in case disobedience continues in spite of attachment, the property may be sold and the proceeds may be allotted as compensation to the injured party as the court may deem fit. However, Rule 2A only provides for punishment for committing breach of the order of the court. It does not spell out as to what shall be the effect on the act done in breach of the injunction order. So also where the decree for perpetual injunction has been granted, Order 21, Rule 32 visits the defaulter with the same penalties. Therefore, for this reason alone that no consequential effect has been provided by the statute on the act committed in breach of injunction, no distinction can be made in considering the effect of breach on a transaction between temporary or permanent injunction. Yet it has been argued that while no legal effect will be attached to the acts committed in defiance or breach of a temporary injunction, it would be held that a transaction in defiance of a permanent injunction would be unenforceable. That would be cutting at the roots of efficacy of administration of justice and rule of law. The provisions of Rule 2A ofOrder 39, or Rule 32 of Order 21 are aimed at punishing the person responsible for disobedience of the orders of the court. Civil imprisonment or attachment of the property of the defaulter by itself cannot be equated with satisfaction of the decree of the court or giving effect to the order of the court for achieving the object of a statutory provision, viz., preventing a person from damaging, wasting, selling or alienating the property for which purpose orders are required to be made. The efficacy of the rule of law lies in the satisfaction of the orders passed by courts. To say that non-compliance with the order of the court is unlawful and renders a person open to civil imprisonment, but the act complained of in breach of such order bears the stamp of validity beyond the pale of scrutiny is a contradiction in terms and results in defeating the object for which power to issue injunction has been conferred on courts. As noticed above, injunction orders can be issued with the object of preventing alienation of the property in dispute pending the dispute. Yet if a person injuncted can bring into effect a valid alienation in breach of it, it will be to accept that fulfilment of the object for which restraint orders can be made, is dependent on the volition of the person injuncted and not as a part of the discipline of law and law is powerless to fulfil that object, where it is possible to achieve it, and must rest content with punishing the person guilty of defiance. In our view, the fact that the Code provides for imprisonment of a person committing disobedience of the orders of the court and also provides for payment of compensation to the injured party out of proceeds of sale of the property in attachment does not prevent the court from taking such course of action to enforce its orders or to order to bring into existence a fact situation even in case orders have been vacated, if still capable of enforcement in any manner. The cases are not wanting where person under restraint order for maintaining status quo alters the status quo in breach of restraint order can be directed to restore status quo by mandatory direction. If the legal effect and efficacy of a transaction carried out in breach of a restraint order is not affected and the only remedy is to commit the defaulter for imprisonment under contempt, such course would not be open.
66. In this connection, reference may be made to the judgment in the case of Magna v. Rustam, AIR 1963 Raj 3. In that case, the defendants made a certain construction in the disputed property in defiance of the injunction order. The trial court ordered demolition of such construction. The defendant approached the High Court on the plea that penalty for such defiance has been provided for under Order 39, Rules 2 and 3 and no other penalty can be imposed hence no order of demolition can be made. The court held in paragraph 5 as under :
"But the imposing of penalty on the party guilty of the disobedience does not provide any relief to the party in whose favour the order of temporary injunction is passed. The object of such an order is to safeguard the rights of a party against a threatened invasion by the other party. If in disobedience of the order of injunction such rights are invaded during the pendency of the suit relief can only be granted to the aggrieved party by invoking the inherent power of the court under Section 151 of the Code of Civil Procedure."
67. Thus, the court came to the conclusion that the order of the court can be made effective and the desired objective of compliance can be achieved by invoking the inherent powers. In other words, it was accepted as the court's duty to nullify the effect of things done or transactions carried out in defiance of the court's order. Obviously, if no legal effect would attach to the thing done in violation of the injunction order, courts would not be in a position to enforce such orders.
68. In this connection, we may refer to the judgment in the case of Mulraj v. Murti Raghunathji Maharaj, AIR 1967 SC 1386. It was a case in which a suit was filed under the U. P. (Temporary) Control of Rent and Eviction Act after obtaining permission from the Registrar. The issue raised was whether permission granted by the Magistrate for filing suit could be said to be a nullity. The contention was that when the authority granted such permission, a stay order was operating ; therefore, the Magistrate granting permission had no jurisdiction to do so. The facts were that the stay order was passed on September 29, 1951, but the Magistrate, when he granted permission on October 4, 1961, had no knowledge of it. The trial court and the district court upheld the contention that the order in breach of the stay order was nullity. The High Court held that the stay order could not take away the jurisdiction of the Magistrate from the moment it was passed and as the Magistrate had no knowledge of information about the stay order when he granted permission, he acted within the jurisdiction and the suit was maintainable. Under these circumstances, the matter went to the Supreme Court. The court drew parallels between the stay order and the injunction order pointing out the difference between the two (page 1389) :
"As soon, therefore, as the executing court has come to now of the order either by communication from the court passing the state order or by an affidavit from one party or the other or in any other was the executing court cannot proceed further and if it does so it acts illegally. There can be no doubt that no action for contempt can be taken againstan executing court, if it carries on execution in ignorance of the order of stay and this shows the necessity of the knowledge of the executing court before its jurisdiction can be affected by the order. In effect, therefore, a stay order is more or less in the same position as an order of injunction with one difference. An order of injunction is generally issued to a party and it is forbidden from doing certain acts. It is well-settled that in such a case the party must have knowledge of the injunction order before it could be penalised for disobeying it. Further, it is equally well-settled that the injunction order not being addressed to the court, if the court proceeds in contravention of the injunction order, the proceedings are not a nullity. . . That, in our opinion, is the only difference between an order of injunction to a party and an order of stay to a court. In both cases knowledge of the party concerned or of the court is necessary before the prohibition takes effect."
69. This clearly goes to show that the act done by a court or person under a stay order [the former by way of a stay order and the latter by way of an injunction order] if he acts contrary to it after knowledge, the act is held to be illegal and nullity. On this point, the court did not find any distinction between the stay order and the injunction order.
70. We are reminded of observations made by the Supreme Court in the case of Bapubhai Mohanbhai v. Mahila Sahakari Vdyog Mandir, AIR 1975 SC 2128, where the court cautioned that the court ought not to construe a statute in a manner that will encourage the breach of any of its provision.
71. It is of the essence of the rule of law that everyone within the society is governed by the rule of law and should consider himself bound by and obey the rule of law. It is fundamental to the system of polity that India has adopted and which is embodied in the Constitution that the courts of the land are vested with the powers of interpreting the law and of applying it to the facts of the cases which are properly brought before them. When once an order has been passed which the court has jurisdiction to pass, it is the duty of all persons bound by it to obey the order so long as it stands, and it would tend to the subversion of orderly administration and civil government, if parties could disobey orders with impunity. If disobedience could go unchecked, it would result in orders of courts ceasing to have any meaning and judicial power itself becoming a mockery. The right cannot be doubted that the court is empowered by the statute to issue injunction against the defendant in appropriate cases in such terms as the court thinks proper. Machinery has been providedto penalise the person who disobeys the order which is binding on the person injuncted as a part of the fundamental rule of law which governs equity. The further question that is required to be considered is whether the act itself committed in breach of the order remains unscathed. In our opinion, taking the view that such a transaction in all circumstances irrespective of binding circumstance or nature of the order does not affect the transaction would be encouraging breach of the injunction order by any person venturing to suffer penalty and would result in cutting at the very roots of the effective nature of the orders and attainment of the object for which the courts exist and exercise judicial power.
72. In Satyabrata Biswas v. Kalyan Kumar Kishu, AIR 1994 SC 1837, in a civil suit, the trial court had passed an injunction for maintaining status quo about fixed property. During the pendency of the suit, a sub-tenancy was created in respect of the property. The sub-tenancy was sought to be affected on the ground that creation of the sub-tenancy in violation of injunction order was illegal. Creation of the sub-tenancy was sought to be justified on the ground that the injunction for status quo did not suspend the right of the parties and merely concerned the physical possession of the property. It was also pleaded that in contempt proceedings taken in pursuance of disobedience of the injunction order, the sub-tenant was not a party. The court rejecting plea said (pages 1843-44) :
"Such an order cannot be circumvented by parties with impunity and expect the court to confer its blessings. It does not matter that to the contempt proceedings, Somani Builders was not a party. It cannot gain an advantage in derogation of the rights of the parties, who were litigating originally. If the right of sub-tenancy is recognised, how is the status quo as of September 15, 1988, maintained ? Hence, the grant of sub-lease is contrary to the order of status quo. Any act done in the teeth of the order of status quo is clearly illegal. All actions including the grant of sublease are clearly illegal."
73. From the above, it is clear that apart from countenancing the proceedings for contempt for breach of the injunction, the apex court permitted the action to be taken for eviction of the sub-tenant inducted in possession contrary to the injunction order by declaring the consequence of creation of sub-tenancy in breach of the injunction order itself to be illegal conferring no right on the sub-tenant to remain in possession. This clear pronouncement of the apex court fortifies the conclusion which we have reached and plea of the company that, in no circumstances, the transaction carried on in breach of the injunction order can be held to be void, cannot be sustained.
74. It may be noticed that in Mulraj's case, AIR 1967 SC 1387, while the court held that a stay order staying execution proceedings becomes effective only when the court proceedings before whom they are so stayed, gets knowledge and until then it is not deprived of jurisdiction to proceed with execution, yet did not leave the position at that, leaving the proceedings taken between the date of order and knowledge beyond remedy. Even where the stay order has not become effective, though passed its efficacy could be achieved. The court said (page 1390) :
"Though the court which is carrying on execution is not deprived of the jurisdiction the moment a stay order is passed, even though it has no knowledge of it, this does not mean that when the court gets knowledge of it, it is powerless to undo any possible injustice that might have been caused to the party in whose favour the stay order was passed during the period till the- court has knowledge of the stay order. We are of the opinion that Section 151 of the Code of Civil Procedure would always be available to the court executing the decree, for in such a case, when the stay order is brought to its notice, it can always act under Section 151, and set aside steps taken between the time the stay order was passed and the time it was brought to its notice, if that is necessary in the ends of justice and the party concerned asks it to do so."
75. As in such cases during the interim period proceedings are not a nullity, the remedy was made available to the party concerned only. But where the court gets the knowledge, the court held the proceedings thereafter to be nullity passing into the realm of void from voidable.
76. There is yet another aspect of the matter which needs consideration. A temporary injunction, undoubtedly, does not suspend the rights of the respective parties in the property but prohibits the doing of such acts in respect of the property in question. As noticed above, it was on this principle that the argument was canvassed drawing support from the decisions referred to above by learned counsel that the right to alienate a property remains with the person injuncted and, therefore, exercise of that right is not invalidated by any provision of law.
77. The right to alienate is one thing but to enter into a contract in exercise of that right is another. For bringing about an alienation, a valid contract has to come into existence, for which the parties must be competent to contract in terms of Section 10 of the Contract Act. Section 11 of the Contract Act provides that every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by anylaw to which he is subject. Competence to contract is attached to a person. If a person is restrained from alienating property or is restricted to do a particular act while his right to alienate as part of the bundle of rights in the property may not be impaired but certainly his freedom to contract in respect of that property which is very much personal is impaired by the prohibitory order which as per law of the land binds him. If a person is not disqualified from contracting by any law to which he is subjected, in our opinion, in the context of competency of a person to contract cannot be confined to statutory law but must be taken to be in its generic sense of meaning. Though it is not easy to define law, the main features and characteristics of law are recognised. The Supreme Court in the case of Raj Kumar Narsing Pratap Singh Deo v. State of Orissa, AIR 1964 SC 1793, 1797, said :
"Stated broadly, a law generally is a body of rules which have been laid down for determining legal rights and legal obligations which are recognised by courts."
78. Yet another apt expression about the meaning of law can be said to be the law includes rules and legal principles which are enforced by the State and applied by its courts for administration of justice. It embodies distinct provisions enjoining persons to do or forbear from doing such act accompanied by sanction of the State that they will have to be obeyed. The court is empowered by a statute to issue injunction against any defendant. The obligation to obey the injunction issued by the court in exercise of its powers under Order 39, Rules 1 and 2 or Section 151 of the Code of Civil Procedure or under various other provisions of law is inherent in the authority of the courts to issue such directions. If by a restraint order a person is to forbear from doing certain acts and such forbearance emanates from authority of law, namely, exercise of statutory power by the court under the statute which governs its proceedings and is further accompanied by sanction for its disobedience exposing the delinquent to penal action, the direction to forbear from alienating the property affects directly the competency to enter into any contract to the extent the prohibitory order directs in respect of that property and is attached with that person. Competency to enter into the contract is affected which is a right in personam. By acting in breach of that order, in our opinion, the person acting under the injunction order cannot bring about legal effect thereon. He would clearly be a person disqualified by law for the time being to enter into any contract relating to that property in respect of which he is to forbear from dealing under the restraint order of the court whichunder the law he is bound to obey. Law recognizes temporary incompe-tency to enter into any contract by a person in certain circumstances. One such circumstance has been stated in the Act itself. In Section 12, it is provided that a person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Similarly, where a person having right to transfer his property and is competent to make contract in respect of that property to alienate it, while acting under the restraint order, though not denuded of his rights in property, acts under temporary disqualification under law from entering in any contract in respect thereof.
79. As we have seen that allotment of share under Section 81 is a specie of contract, it requires the making of an offer of allotment by the company to the existing shareholders in the first instance and acceptance of the offer by the shareholders either by themselves or by renouncees. Shares, allotment of which has not been accepted by the existing shareholders and/or renouncees, can be dealt with by the company in such manner as the board of directors thinks in the best interest of the company. That also requires the bringing into existence a valid enforceable contract between the company and the persons to whom allotment is to be made. This necessarily requires that both the company and the purchaser/allottee must be competent to enter into a contract in respect of allotment of such shares. The temporary injunction which was in force permitted the company to complete the contract in respect of offer made by the company to the existing shareholders. The order prohibited it to allot shares from the unsubscribed portion to any one except the bank and public financial institutions without permission of the court. Therefore, obviously until permission of the court was obtained, the company was not competent to make an offer for allotment to a third party or to accept the offer made by a third party to bring into existence a valid and binding contract of allotment of shares in favour of the third party.
80. There is yet another reason which prompts us to reach this conclusion. As we have noticed above, it is fundamental to the system of polity that India had adopted that the courts of land are vested with powers of interpreting law and of applying it to the facts of the case which are properly brought to them, and as part of that fundamental system, it has to be accepted that, when once an order has been passed, which the court has jurisdiction to pass, it is the duty of all persons bound by it to obey the order so long as it stands. If an effective state of affairs can be brought into existence wilfully exposing oneself to penalty of imprisonment withoutaffecting the act itself, it would result in orders of the court ceasing to have effective operation and judicial power itself would be undermined. That would obviously be contrary to the public policy. Not only is such construction of statute contrary to law ; if the contract results into a situation nullifying the effectiveness of the operative orders of the court which are binding on the parties and which the parties are under obligation to obey and under which the parties are to act or forbear from doing such acts, then any contract which comes into existence stultifying the object for which court is empowered to issue order, would be contrary to public policy also and would be void under Section 23 of the Contract Act.
81. Thus, viewed from all angles, we are unable to accept the contentions raised by learned counsel for the company that any transaction brought into existence in defiance of the operative injunction order, its validity is not affected and the same must be given full effect. For the reasons aforesaid, we confirm the finding of the learned company judge on this question also.
82. Accordingly, the cross-objection fails and is hereby dismissed.