SaAHIL Business Law - Final Doc

7/31/2019 SaAHIL Business Law - Final Doc

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MET-MUMBAI

EDUCATIONAL

TRUST

2011 - 12

BUSINESS LAW

PROJECT REPORT ON

INDIAN COMPANIES ACT

1956

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SUBMITTED TO :

PROF.DONGADE

SUBMITTED BY :

SR.NO NAME ROLL NO. SIGNATURE

1. IVY DSOUZA 131

2. DIMPLE JAVA 143

3. SACHIN VERNEKAR 1654. POORVA ADARKAR 121

5. SaAHIL LEDWANI 147

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us to take right step in the journey of success in

our life.

INDEX

SR.NO.

PARTICULARS PAGE NOS.

1. Introduction 5 - 7

2. Classification of Company 8 143. Formation of Company 15

4. Memorandum of Association 16 18

5. Articles of Association 19 20

6. Doctrine of Ultravires,Constructive Notice & IndoorManagement

21 23

7. Prospectus 24 25

8. Meetings 26 299. Proxies, Quorum &

Resolution30 32

10. Directors 33 34

11. Case Study 35 45

12. Forms 46 - 51

13. Conclusion 52

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INTRODUCTION

Origin of company's legislation in India:

Company's legislation in India owees it origin to English company's law. The

first law regulating the companies took its birth in 1850 as Joint Stock Companies

Act.

This act was based on the English companies Act 1844. The important

principle of limited liability was not incorporated in this act, though the concept of

separate legal entity for a company was introduced. However, it was only in the year

1857 the Joint Stock Companies act for the first time in India introduced the principle

of Limited liability to the Banking companies also.

Following the English act I862 a comprehensive act was passed in India in the

year 1866, which sought 10 consolidate and amend the law relating to the

incorporation, and winding up of trading companies and other association, this was -

followed by the economic consolidation act of 1882 which repealed the companies

act of 1882 which repeated the companies act 1866.

Then came the Indian -company's act 1913, passed with the object of

consolidating & amending the relating to trading companies and other association.

However, even the act of 1913 proved to be inadequate and therefore the1913 Act was amended several times.

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World War II witness many changes in the organization & management of the

Joint Stock Company. In 1950 the government of India appointed a committee

under the

Chairmanship of Dr.H.J.Bhabha to make the suggestion for the company law

reform. The committee comprised of reform. The committee submitted its report to

the govemment of India in March ,1952 on the basis of recommendations the

company's act of 1956 into force from April 1956.

Inspite of the great care and caution in passing of companies Act 1956. The number

of defects and loop holes remained in this act and therefore several amendments

were made from time to time by the amendments act 1960. Ther were further

amendments in 1962, 63, 65, 69, 70, 74, 77.

Object of the Companies Act:

The object of the companies act is to provide simple & cheap machinery for

formation of the company & making the liability of its numbers limited, to the face

value of the shares subscribed by them, whereby it eliminates any personal liability

of its members in the case of partnership. It has also been enacted to consolidate &

amend the law relating to the companies and certain other association. It seeks to

achieve the following objects:

1) To encourage investment.

2) To ensure proper administration

3) To arrange for investigation.

4) To prevent malpractices.

DEFlNITIONS OF COMPANIES:(1) According to Section 3/1 (i) of the companies act 1956:

"'A company is a company which is formed & registered under the act or an existing

company."

Thus according to the above mentioned definition any company registered

under the present act of 1956 or an existing company (registered under any previous

company's act is deemed to be a company. This definition however is incomplete as

in no way it helps us to know what the company is.

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(2) Section 566 of the companies act 1956 defines Joint stock company as:

A Joint stock company means a company having a permanent paid - up or

nominal share capital of fixed amount divided into shares also of fixed amount, or

held and transferable as stock a dividend and held partly in one way & partly in the

other.

(3) Some also defines company as:

A voluntary incorporated association which is an artificial person created by

law with limited liability having a common seal & perpetual succession.

ESSENTIAL FEATURES OF A COMPANY:

1) A company is compulsory registered under the companies act 1956.

2) It is a separate legal entity from the members who constitute it.

3) The shares in the share capital of the company are transferable. This makes the

company independent from of its members & enjoys what is known as perpetual

succession.

4) It is an artificial legal person & enjoys almost all the rights & is subject to all the

obligations as in the case of natural person.

5) A company being an artificial legal person can act only through natural persons.

6) A company is not an agent or a trustee of the members, on the other hand in a

particular case, a member may act as an agent or trustee or an employee for the

company.

7) A company is not a citizen & has no fundamental rights under the constitution.

8) A company being an artificial legal person has nationality & a domicile.9)A company can sue and can be sued, can enter into contracts & can exercise the

entire powers incidental to the attainment of its objects given in its M.OA.

10) The liability or its members is limited, i.e. to say, in the event of winding up of the

company, shareholders cannot be called upon to contribute more than what has

been agreed by them to subscribe by way of participation in the share capital of the

company.

11) The shareholders are not part owners or co owners of the company's property.

Thus property of the company belongs to the company, & not to the shareholders.

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12) The company has the common seal which gives it an independent existence.

CLASSIFICATION OF COMPANIES

A) ON THE BASIS OF INCORPORATION:

1. Chartered Companies / Royal Charted Companies

A company which came into being by grant of royal chartered issued by the king

or queen are referred to as chartered companies or Royal Chartered Companies

E.g. The East India Co. The Chartered Bank of Australia, Bank of England.

These companies are regulated (i.e. their power & actions are governed) by that

charter concern such type company do not exist in India.

2. Statutory Companies

A Company which came into existence by special act passed by the legislator of

a country or a state is referred to as statutory company E. RBI, SBI, LIC. TheIndustrial Finance Corporation of India, Air India etc. such companied enjoy the

power of rights, privileges as laid down in the act. The act also states the

objects, leavings & responsibilities of the companies so creative

3. Registered Companies

Registered companies are those which are incorporated with the registrar of the

companies under the provisions of prevailing companys act the company act

1956 provides for the registration of companies procedure the companies are

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governed by the provisions of companies Act 1956. Most of the companies in

India are registered co, under the companys act 1956.

B) On the Basis of Liability

1. Company with an unlimited liability :S/12

i) The liability of members of a registered company may be limited or unlimited.

ii) (S/12(1)) A company not having any limit on the liability of its members is called

an unlimited company with liability.

iii) In the event of the winding up of the company the members are liable to

contribute in the proportion of their share in the company a specified amount

necessary to discharge n full the debts & liabilities of the company.

iv) However the members are not liable to the companys creditors as the company

being a separate legal entity from the persons who constitute it is liable to its

creditor.

v) In case, the creditors can not obtain payment from the company they may

petition the court for the winding up of the company.

vi) An unlimited company may or may not have a Share capital.

vii) If it has a share capital the article must slate the amount of share capital with

which the company is to be registered.

viii)An unlimited company with the share capital may be either a public company or

private companies.

ix) The articles of an unlimited company should state the no. of members with

which company is to be registered.

2. Company with limited liability:

i) The liability of members of a registered company may be limited or unlimited.

ii) A company having a limit on the liability of its members is called a Limited

Company or A company with limited liability.

iii) A limited company may he either

a. A company limited by shares or,

b. A company limited by guarantee or

c. A company limited by shares as well as by guarantee.

a) A company limited by shares:

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i) It is a registered company having the liability of its members limited by its MOA

to the amount, it any, unpaid on the shares respectively held by them.

ii) Such company also known as a share company.

iii) The amount remaining unpaid on the shares can be called up at any time either

during the life time of company or at the time of winding up of the

company

iv) However, a shareholder cannot be called upon to pay more than the amount

remaining unpaid on his shares.

v) His personal assets cannot be called upon for the payment of me liabilities of the

company, if nothing remains to be paid on the shares purchased by him.

vi) A company limited by shares may be a public company or a private company.

b) A company limited by guarantee:

(i) A company limited by guarantee is one having the liability of its members limited

by the memorandum to such amounts as the members may respectively under a

by the memorandum to contribute to the assets ofthe company in the event of

its being wound up.

(ii) Such a company is also known as Guarantee Company.

(iii) The liability of members of Guarantee Company is limited by a stipulated

amount mentioned in the memorandum

(iv) The guaranteed amount can be called up by the company from the members

only at the time of winding up, if the liability of the company exceeds to its

assets. (b) A Co. limited by guarantee may or may not have a share capital.

(v) The working funds of a company limited by guarantee not having a share capital

are raised from like donations, grants, fees, subscriptions etc. & such companies

are generally formed for the promotion of arts, science, culture, charity, sports

etc.

(vi) in case of a company limited by guarantee having a share capital, the liability of

the members to limited to the face value of the shares subscribed by him.

(vii)A company limited by guarantee having a share capital may be a public co. or a

private company.

C) A company limited by shares as well as by guarantee:

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(i) It has both the elements of the guarantee company as well as the share

company.

(ii) Such a company raises its initial capital from its members. while the normal

working funds are provided from other sources such as fees, charges,

subscriptions etc.

(iii) Every member of such a company is subject ttwo-fold liability i.e. to guarantee

which may become effective either during the lifetime of the company or at the

time of winding up.

[C] ON THE BASIS OF GENERAL INTEREST OF THE PUBLIC:

1. Private companies: S/3(i) (iii)

(i) A private company is a company which by its articles.

a) Prohibits any invitation to the public to subscribe to any of ha shares

debentures.

b) Prohibits the right to transfer its shares.

c) Limits the no of its members to 50 excluding its employees member or

part employee member.

2. Public companies S/3 (iv)

States that all companies other than private company are called public

company.

3. Government Company S/617

(i) S/617 of companies act defines the gvt company as a company in which a.

less than 51% of the paid up share capital is held by the central gvt or by

any state gvz / gvts or partly held by the central gvt & partly by one or

more state gvt /gvts & & include co. which is a subsidiary of a gvt

company.

(ii) Jan as any other co., gvt co. are governed by the provisions other Co. act

but by virtue of S/620, the central gvt may direct that any of the provisions

of the act shall not apply to them or shall apply on with such excentions,

modifications & adoptions & may be notified by the gvt.

(iii) However, the central gvts cannot exempt the gvt a company from the

provisions of which specifically deals with such Co.

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d) The names & address of someone or more persons residing in India,

who are authorized to accept service of process or notices or other

documents to be served on the company &

e) The addresses of the principle place of business in India.

f) Where a foreign company which has been carrying on business in

India, ceases to carry on such business in India, it may be wound up as

an unregistered company not withstanding the fact that the company

has been dissolved or ceased to exist under the laws of the country in

which it was incorporated.

D) OTHER COMPANIES

1. One man company :

(i) When a single person held almost all the shares of the co., it is called one

man company.

(ii) This happens in both a pvt. Co. and a public company through usually they

are a private company.

(iii) The other members of the company may just hold one share each & bulk of

the shares are held by one of the members only.

(iv) Such a company has its legal personality, if it complies with the necessary

requirements of the company.

2. Non profit making company :

3. Holding & subsidiary company : S/4 & 5.

i) When one company holds another company is called holding company.

ii) The other company which it holds is a subsidiary company.

iii) One company may control the composition of board of directors of

another company.

a) Where it controls the composition of board of directors of another

company.

b) Where it controls more than half of the total quoting of the other co.

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c) Where it holds more than half in nominal value of equity share capital

of the other company.

d) Where it is a subsidiary of any other company. E.g. Company B is

subsidiary of company A & company C is a subsidiary of company

B. In such case co. C will be subsidiary of B & A & so on.

IV) Holding company & subsidiary company are separate companies &

district legal entity.

V) The subsidiary co. cannot hold shares to make investments in a

holding co. nor can it hold the ___________ of holding company.

VI) The holding company shall attach the full documents of Balance sheet

in repeat of each subsidiary company.

a) Copy of the B/s, F & L A/c with report of BOD & the auditors of its

subsidiary company.

b) A statement of the holding company in stress in the subsidiary company at

the end of the financial year.

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FORMATION OF A COMPANY:

Procedure regarding formation of incorporation of companies-------(Certificate of In-

corporation)

1) 7 or more persons with no maximum limit for public company or 2 or more

persons but no exceeding 50 for a private company sign on a document called

MOA of the company & each of the signatures agreed & undertaken in take

shares of the company mentioned in their name.

2) Signature of such persons who are promoters must be attested by the

witnesses.

3) The memorandum is then printed, divided into paragraphs which are

numbered accordingly.

4) The memorandum is field with the registrar of companies in the state in with

the registered office of the company is established.

5) Along with the memorandum it has also to file the prospectus and AOA (Which

deals with the internal management of the company & a little consent by every

person who proposes to he a director of the company except incase of pvt

co.) is to be filed with the registrar of the company. If the requirements of the

company are complied with by the company the registrar issues a certificate

known as the certificate of incorporation which is the conclusive evidence that

all the requirements of the act have been compiled with by the company.

From the date of the issue of the certificate of incorporation the company

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becomes a legal entity capable of exercising all the functions of a body

corporate. Where the articles of association prescribe share qualification for a

director, consent in writing by that person to take & pay for his qualification

shares must be filed with the registrar. A declaration by a advocate of a

supreme court or of a high court or by attorney or pleader entitled to appear

before the high court or a chartered accountant practiced in India who is

engaged in the function of a company or by a person named in the 1rticles as

director, manager or secretary of the company that all the requirements of the

act have been complied with in respect of registration, must be filed with the

registrar along with MOA

the company.

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Memorandum of Association MOAs/2(28)

Memorandum means the MOA of a company as originally framed or as altered, from

time to time, in pursuance of, any previous companys law or of the existing act.

The MOA of a company is a fundamental charter of the company as it contains the

fundamental condition upon which alone the company can be incorporated as it

defines the extent & powers of the company, a memorandum servers two-fold

purpose, firstly, It enables the shareholders, creditors & all those who deal with the

company to know that is a power are & what is the range of its activities. Secondly, it

enables the outsiders to know whether the transaction he intends to make with thecompany is within the objects off the company & not ultra vires its objects.

Contents of MOA:

S/13 requires the MOA of the company (Ltd by shares) to contain:

a) Name clause: A company Ltd by shares:

i) Shall state the name of the Co. with the word Ltd or pvt Ltd as the last word of its

name.

ii) The name should not be undesirable or identical or resemble to a great extent to

the name of the other company already in existence & registered with the registrar.

iii) If this is done the company may be an ordinary resolution with the approval of the

central govt & registrar in writing change its name within 12 months of its registration

& within 3 months from the date of order or direction from the central government.

In the event of default, the co. & every officer found guilty is punishable with a fine of

Rs 500/- everyday, the default continuous.

b) Domicile Clause/Registrar office of the Co.: A Co. Ltd by shares must state the

state in which the registered office of the company is situated. The state law fixes the

domicile of the company. All correspondents, notices & communication are to be

served at the registered office of the company. The state in which the registered

office of the company is situated- is important for the purpose of jurisdiction as the

high court of the state (where the registered office of the Co. is situated) has

jurisdiction to wind up the company. The central govt may by notification in the-

official gazette find any district court to exercise that jurisdiction. It should however

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be noted that the company shall give a notice (With respect to the registered office)

within 30 days of the situation of the registered office.

c) Object Clause! Objects of the company: A Co. Ltd by shares must state: i) The

name of paramount object to be pursued by the Co. & the objects which are ancillary

or incidental to the attainment of main objects. Incase of conflicts between the

paramount (main) or ancillary objects, liberal construction must be constructed for

the attainment of the paramount objects.

ii) If the objects of the cc. are not confined to one state, then, the state to whose

territories the objects extend must be stated in the memorandum.

iii) The object clause must state the purpose for which the company is formed, as

object clause gives protection to the subscribers for shares who must know the

purpose for which money is utilized & risks he is taking in dealing with company.

iv)It also gives protection to the person who enters into contracts with the co to know

extent of powers of persons with whom they enter into contract & whether such

contracts are within the corporate objects of the company.

d) The liability clause/ Liability of the member:

A Co. Ltd by share must state:

(i) That the liability of the members or the shareholders of the co. is Ltd to

the unpaid amount of the face value of the shares held by each member.

(ii) The amount of capital with the company proposes to be registered & division

there of into shares of fixed amount & different varieties

II) More subscribers to the memorandum shall take less than one share.

III) Each subscriber to the memorandum shall write against his name in the

memorandum the no of share he takes & should also give that in writing,

e) Capital Clause Details of share capital of a company:

I. The capital clause in the MOA of a company Ltd by shares- must state the

capital of the co. divided into different types of shares of different

denominations each.

II. In case of a co. Lid by guarantee the MOA must state that each member

under takes to contribute to the assets of the co. & the amount of

guarantee specified therein in the event of the co. being wound up when

he is the member of the company or within one year afterwards for

payment of debts & liabilities of the Co.

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III. If the Co. in addition to the guarantee has a share capital, the

memorandum shall also state the amount of share capital with which the

Co. proposes to be registered & the division of share capital into shares of

fixed amount & different varieties.

IV. If the co. Ltd by guarantee does no have share capital, any provision in the

MOA, AOA. or even in the resolution of the company permitting to give any

person a right to participate in the division of profits of the company other

than shareholders is void.

f) Subscription / Association Clause:

i) At the end of the memorandum of every co. there is an association or

subscription clause, where a declaration is made by the subscribers to the

memorandum where by they agree to take the no. of share in the capital of

the co set of opposite there respective names this decoration is then followed

by the names, descriptions, occupations of the subscribers has taken & his

signature attested by a witness.

ii) After incorporation no subscribers can withdraw his name on any ground what

so ever.

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Articles of Association : [S/2(2) to 39]

S/2(2) of the cos act defines articles Articles means Article of Association of a co.

as originally framed or as altered from time to time in pursuance of any previous cos

law or of this act, including so far as they apply to the co., the regulations contained

as the c-a may be in table A to Schedule I of this act.

1. The MOA 0f a co. lays down the objects for which the co. is formed.

2. The articles arc subordinate to the memoranda prescribes to the internal

management of the Co.

3. The rules & regulations of the Co. for the attainment of the objects of the co.

have laid down in the memoranda.

4. Articles have no power for reductions of share capital of the co. such power

can be assigned by the special resolution.

5. Incase of companies Ltd by shares Sf26 lays down there is no obligation on

the en to file for registration, but this not so incase of en. Ltd by guarantee/an

united en. where the AOA must be flied with the registrar of the cos for

registration.

6. Rules & regulation contained in Table A of Schedule I of the cos act 1956

must be followed by the co. with respect to the contains of AOA.

7. The co. act provides that the rules & regulations contained in Table A of

Schedule I shall be deemed to have in the AQA of every en. which is known

as statutory articles.

8. 8) If the AOA does not contain the contents of Table A of Schedule I the law

provides that if such articles are registered, the contents of Table A of

Schedule I shall be deemed to in such articles;a) Filling of the articles for registration

b) It must be printed.

c) Numbered accordingly

d) Divided into paragraph.

e) Signed by every subscriber to the memoranda.

f) One witness must at least the signature of the subscriber.

g) Incase of an unltd co. in addition to the above the articles must also state;

(I) The no. of members with which the co. is registered.

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I. Doctrine of Ultravires:

1) Based on common sense, a co. can not be given a roaming communication to go

where it likes or to do what it wills but the co. must circumscribe itself within thelimits

& powers mentioned in the MOA of the co. & cos act .

2) If it goes beyond it, it looses its object than such acts will be ultravires

3) The object of declaring such act as UV is to protect the interest of the shareholder& all those who deal with the company.

4) Suppose, all the shareholders of the co. give consent to purchase its own shares

(which is illegal under the cos act) the co. comes under the doctrine of UV

5) The doctrine of UV must be reasonably understood according to thecircumstances to

each specified case.

6) Illustration:

a) Suppose an association is formed for running term way but it runs luxury

buses, it is UV

b) Co. formed for erecting the building cannot use cos find for manufacturing

machines

c) A co. cannot take ever the business of another company unless is provisionto that effect in the memoranda.

d) A co. cannot pay money to a member of the parliament in consideration ofhis not opposing the bill in the parliament.

e) It is UV for a company to enter into a partnership or amalgamation ofanother

company in the absence of the power given to it in the MOA

7) Some of the pints are worth noting as regards to the doctrine of UV.

a) The company exists only for the objects which are expressly stated in itsobject clause or which are incidental upon these specified objects.

b) Any act done outside the expressed or implied objects in UV.

c) The UV acts are null, void & void Abnitio; --- The company is not bound bythis act & neither the co. nor the other contracting party can sue upon it.

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d) In case of a co. is about to undertake an UV act, the members of the co.(even a single member) can get an order of injunction restraining the co. to goahead with UV acts.

e) If the directors have exceeded their authority & done something then matter

can be rectified by the general body of the shareholders, provided the co. hasa capacity to do so by its MOA.

f) If any property acquired by the co. under an UV transaction may beprotected by the co. against the damages by the 3rd person.

//. Doctrine of Constructive Notice:

1) The MOA & AOA of the co. are registered as public documents under S/75 oftheIndian Evidence act.

2) Inspection of the document can be taken by any members of the public fromregistrar of the co. on payment of a nominal fee of Re.1 only.

3) Being public document every member of the public dealing with the co. shallbe deemed to have a notice & knowledge of its contents & shall be deemedto have read its contents & shall be deemed to have read its contents

4) Therefore, any person who contemplates entering into contract with the co.has the means of ascertaining & thus is presumed to know the powers of theco. & the extent to which they have been delegated to the directors

5) This is known as Document of constructive notice6) If the provision in the articles provide a particular contract to enter into aparticular manner a number entering into a contract with a co. must see that it isentered into a particular manner otherwise he will not be liable to file a suitagainst a co. when the dispute arises

7) This lead to an important case in the English co. law history knows as the rulein Royal British bank case.

8) In the above case the articles of the co. provide that in a particular contracttheremust be a signatures of 2 directors of the co. the person entering intocontract with the co. must enter into contract with the co. in a particularmanner. But he is not bound to know the regularity of the cos internalmanagement.

9) Such a person is not bound to know whether these particular directors whohave entered into contract with him were validly appointed by the co. orwhether there is any disqualification attached to their appointment.10) Excent securing 2 signatures on the contract the person entering intocontract with a co. is not concerned with the other irregularities with the co.provided that he has no actual or constructive notice of such irregularityotherwise he cannotsecure protection of the above rules as matter of the internal management ofthe company are the assumed to the dually complied with the company.

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III.Doctrine of Indoor Management:

The Doctrine of Constructive Notice throw a burden on people entering into contractwith the company that they are presumed to have read them. On the other hand theDoctrine of Indoor Mgmt allows although who deals with the company to assume that

The provisions of the articles have been observed by the officers of the company. Inother words they are not bound to enquire into the regular of the internalproceedings. An outsider is not accepted to see that the company carries out itsinternal regulation.

For e.g; The directors of a co. were authorized by the articles to borrow on bondsuch sum of money from time to time, by resolution of the co in general meeting, beauthorized to be borrowed. The directors gave a bond to Mr. T. Without theauthorities of any such resolutions. The question arise whether the co. was liable onthe bond?

Held: The co. was liable on the bonds as Mr. T was entitled to assume that theresolution of the co. in general meeting ha been passed.

The Doctrine of Indoor Mgmt is subject to follow exceptions:

1. The rules do not protect any person who has actual or construction noticeof the want of authority of the person acting on behalf of the company.For e.g; The articles of the co. empowered the directors to borrow up Rs.1000/- with the consent of the co. in general meeting without such consentthey borrowed Rs. 2500/- from them & took debentures. The companyrefused to pay the amount.

2. The rule cannot be invoked in favour of the person who did not consult thememoranda & articles & thus did not rely on them

3. Thus rule do not apply to the transaction which are void, illegal or voldabnitionFor e.g; The secretary of a co. forged with the signature of 2 of thedirectors required under the articles of a shares certificate & issued thecertificate without authority . The applicant calim to be entitled to beregistered as the member of the co. Held: The certificate vold & the holderof the share certificate & would not take the advantages of Doctrine ofIndoor Mgmt.

4. If an officer of the company dopes something which would not be orderlywith within his powers the person dealing with him must make properenquires & satisfy himself as to the officers authority of he fails to makeenquiry, he cannot rely on the rule.For e.g A person who has a sole director & principal shareholder of acompany paid into his own account cheques drawn in favour of the co. thebank should have made the enquires as to the powers of there directors.

The bank was put upon enquiry & was accordingly dis entitled to relyupon the ostensible authority of the director.

5. Negligence: Where the irregularity in the affairs iof the co. could bediscovered with proper enquiries & with ordinary diligence.

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PROSPECTUS:

Prospectus: S/2(36)

" Prospectus means any document described or issued as a prospectus &

includes any notice, circular, advertisement or other document inviting

deposits from the public or inviting offers from the Public for the

subscription or purchase of any shares or debentures of a body

corporate."

Thus, definition of prospectus includes any invitation to the public to

subscribe for the shares & debentures of the company. Thus any

document an offer for sale of shares or debentures shall be deemed to be

a prospectus & all the provisions of the prospectus shall apply to it.

Prospectus is a therefore a document through which company receives

capital by issue of its shares & debentures to carry on its business.

A public Ltd co. must issue prospectus & it must contain all the matters

specified in part I & II of schedule II & reports specified in part II of

schedule II of the companies prospectus has been delivered to the register

of the company for registration. It must be duly signed by every person

who has been named there in as a director or a proposed director of the

co. as well as the promoter of the company. All the relevant documents

prescribed under the act must be attached to the copy of the prospectus.

Every person authorized to issue a prospectus has a primary responsibility

to see that the prospectus contain true state of affairs of the company &

does not give any fraudulent picture to the public. People are invited on

the basis of in formation published in the prospectus & therefore their

interest must be safeguarded against all false and wrong statements in the

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prospectus. Thus, prospectus must contain full &honest declaration of

material facts without concealing or omitting ay relevant facts or

information.

This rule is known as "GOLDEN RULE FOR FRAMING THE

PREOSPECTUS". Every person who is authorized to issue the prospectus

is liable for a false statement in the prospectus both in civil & criminal

courts.

In a leading case; Derry v/s Peek- (1889)

It has been held if the person making the statements honestly believe in

the true is not guilty or fraud, even if the statement is not true. The facts

of the case were. The tramway company had a power by a special act to

make tram ways & to use steam power with the consent of Board of Trade.

The plants of the company were approved. The directors of the co

honestly believed that since the plans were approved permission to use

steam power from the BOT was only formality & that it would have been

granted. Thus directors of the co. issued the prospectus where the

directors stated that the consent to use steam power were obtained by the

company. Subsequently, the consent was refused by the BOT & the co.

had to be wind up. Upon the action taken by one of the shareholders

against the director for fraud, it was held that the directors was not liable

for issued as they honestly believed that the consent of BOT would be

obtained by the co.& that there was no intention to cheat the investors

though the statement was untrue.

The prospectus which contains misleading statements is called

"MISLEADING PROSPECTUS".

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MEETINGS

The Provisions relating to meeting are covered by sections 165 to 197 or theCompanies Act.

It is important to remember, however, that apart from the Statutory provisions,the meetings of a company are governed by its articles of association. Thus,while the articles cannot contain provisions which would make an invalid meetingvalid, they would contain provisions on matters that the law leaves a for passingresolutions on matters like borrowing investments, or the quorum necessary forconstituting a meeting. It is possible that the Articles of Association may imposeon the company conditions, stricter than these provided under the law, e.g. theymay provide that a resolution should be passed by a special majority when the

Act required it to be passed by an ordinary majority.

Meeting of members may be classified into the following :1. Statutory meetings.2. Annual General meeting.3. Extra ordinary General meeting.4. Meetings of classes of shareholders.

Every public company limited by shares and every public company limited by guaranteeis required to hold a meeting known as The Statutory Meetings, within a period of notless than one month, and not more than six months from the date on which it is entitledto commence business (section 165). As this requirements applied only to publiccompanies and not to private companies, the articles of incorporating a company initiallyas a private company and converting it into a public company after six months issometimes resorted to. The object of the statutory meetings is to put the shareholdersis possession of all important facts relating to the new company at an early date. Thenotice calling the Statutory Meeting must refer to the meeting as a Statutory Meeting(section 165 (1)).

A report known as the Statutory Report certified by atleast two of the Directors ofthe company is required to be sent to every member of the company, at least twenty

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one days before the meeting unless all the members agree to have it forwarded later(Section 165 (2)). The matters that are required to be contained in this report are setout in sub-section (3) of this section. The report is required to be forwarded to theRegistrar immediately after it has been forwarded to the members (section 165 (5)). Itmay be noted that if the Statutory Re[ort is not delivered to the Registrar, the court may

order a winding of the company. The Statutory Report has to be made out in Form 22of the Appendix I of the companies (Court) Rules 1959.

At the meeting, a list of members including their addresses and occupation and theshares held by them is to be kept available for the inspection of members. It isinteresting to note that at Statutory Meeting, members are at liberty to discuss anymatters relating to the formation of the company or arising out of the Statutory Reportwhether previous notice has been given or not although no resolution may be passed ofwhich notice has not been given in accordance with the Act, (section 165 (7)). TheStatutory Meeting may be adjourned from time to time. Further, at such adjournedmeeting any resolution may be passed even if such resolution was not intended to be

passed at the first proposed Statutory Meeting provided requisite notice of suchresolution had been given during the period between on adjourned meeting and the next(section 165 (8)).

The notice required for such a meeting is also twenty one days as in the case of anyother general meeting.

AnnualGeneralMeeting

Section 166 of the companies Act provided that in addition to any othermeeting that may be held, a company shall held each year a general meeting as

its Annual General Meeting. These are two cumulative conditions to be satisfiedin this connection.

1) One meeting at least must be held in a calendar year, and (section 166 (1)).2) There must not be a gap of more than fifteen months between one meeting

and another (section 166 (1)).

Therefore, it would be a contravention of the section if the meeting is held inconsecutive calendar years, but there is a gap of more than fifteen monthsbetween one meeting and another; equally there would be a contravention if theMeeting is not held in each calendar year e.g. if one meeting is held in October

1977, and the next is held in January, 1979.

There are two exception of the above, viz. a) the first Annual GeneralMeeting of Company may be held within a period of not more than eighteenmonths from the date of its incorporation. In that case it would not be necessaryfor the company to be held any Annual General Meeting in the year of itsincorporation or in the following year e.g. a company incorporated in the month ofAugust of any year need not held meeting in that year or in the subsequent year;(this provision enables a company to draw up its accounts for a period of morethan one year and present them to the first Annual General Meeting and (b) theRegistrar may extend the period of fifteen moths by a further period of three

months.

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and place of the meeting, a public company and a private company which issubsidiary of a public company can fix only the time.

The definition of public holiday given in section 2 (38) should be noted. Thecompany is not in default if a public holiday is declared after the issue of the

notice.

Extraordinary General Meeting

An extra-ordinary General Meeting is any general meeting (i.e. of the generalbody of shareholders as opposed to a particular class of shareholders), otherthan the annual general meeting and the statutory meeting. Such meeting maybe called for the management to transact any business of special character ormay be called following requisition by shareholders under section 169 convenedby the management on its own, and advance notice of twenty one days theAnnual General Meeting is given. It should be noted that the conditions that

attach to an annual general meeting viz. be held during business hours, etc. donot attach to an extraordinary meeting

Section 173, states that all items transacted at an extraordinary generalmeeting shall be deemed to be special. The notice relating to an extraordinarymeeting must, therefore, be accompanied by a statement setting out all thematerial facts relating to the business to be transacted including in particular thenature of the interest in that business of every director and manager. If thebusiness to be transacted concerns another company the extent of shareholdingsof every director and manager in the company must be stated provided theshareholding exceeds twenty per cent.

An extraordinary general meeting may be called if a requisition is made fromany of the following.

i) In the case of a company having a share capital such number of membersas hold not less than one-tenth of cash of the paid up capital of the companyas at that date carries the right of voting in regard to the matter.

ii) In the case of a company having a share capital such number ofmembers as have not less than one-tenth of total voting power of themembers entitled to vote on that matter (section 169).

Section 169 contains an important right granted to minorityshareholders viz. the right to compel directors to call meeting on the requisition ofholders of only one-tenth of the paid up capital of a company.

Meeting of classes of Shareholders

The shares of a company are divided into various classes. Class meetingsto be held when the Act or the Articles of Association or the terms of issue of theshares provide that they should be called.

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P R O X I E S

A member of a company who is entitled to attend and vote at a meeting is entitled

to appoint another person whether a member or not to attend and vote instead ofhimself. The provision relating to proxies may be summarized below:-

a) Every member of a public company or private company which is a subsidiaryof a public company and having a share capital has the right to appoint one ormore persons to vote in respect to his shares. This right would be available tothe member of a Company not having a share capital and a private companyonly if the articles of such a company specifically provided for this. (Section176 (1) and proviso).

b) A proxy is not entitled to speak at a meeting or normally to vote on a show ofhands, he can however join in demanding a poll and vote by way of poll. TheArticles of Association however may grant to the proxy the right to vote on ashow of hands in addition to being entitled to vote on a poll (Section 176 (1)).

Although the articles of association of most public companies providethat a proxy shall not be entitled to speak and will vote only on a poll, in actualpractice this provision is not enforced for practical reasons. viz. that noseparate sitting arrangement are made for proxy-holders and in all probabilitythese persons take an active part in the proceeding as the membersthemselves.

c) Every notice of a general meeting of a public company with share capital muststate that the member has this right (Section 176 (3)).

d) The instruments of proxy must be deposited with the company forty-eighthours (or less than forty-eight hours but not more) before the meeting and thearticles of association cannot require a member to deposit it earlier than forty-eight hours. (Section 176 (3)).

e) The company is forbidden from sending out invitations to member at its ownexpense requesting them to grant proxies in favour of a person nominated bythe company. This offence is punishable with fine exceeding upto rupees one

thousand. The Company is not however forbidden from supplying to

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members at their request proxy forms or a list of persons willing to act asproxies. (Section176 (4)).It should be noted that under the English Law this is not an offence. On thecontrary, the law provides that if directors send our proxy forms at theexpenses of the company they should send them to all members.

f) An instrument of proxy must be in writing and signed by the member or hisduly authorized attorney. The proxy by a body corporate must be under itsseal and signed by an authorized attorney, even if the articles provides for aform of proxy. A member is free to follow any of the forms set out is scheduleIX (Section 276 (5) and (6)).

QUORUM AT GENERAL MEETING

In order to constitute a valid meeting, the quorum provided under the Act mustbe present.

Section 174 states that five members personally present in the case of publiccompany (other that 43A company) and two members personally present in thecase of any other company shall be the quorum for the meeting of the company.It may be noted that under English Law while the necessary quorum for a privatecompany is the same as under the Indian Law, viz. the quorum for a publiccompany is not five but three.

It is important to remember that the persons who must be present must be theactual members and not persons who are representing the members by proxy.The obvious exceptions being a person who is representing a corporation undersection 187 or a Governor or the President under section 187 (A), since it is notpossible in these cases for the members to be personally present.

It is important to note that while articles may provide for a large number thanthat stipulated in law for constituting a quorum they cannot provide for a smallernumber. It is also submitted that the articles cannot provide that a quorum shallbe five persons present in person or by proxy as the Act required the members tobe personally present.

The quorum required under the Act must be present at the beginning of the

meeting and the business will be deemed validly transacted if thereafter thenumber falls below the statutory minimum. To make this position abundantlyclear articles relating to quorum state that the necessary quorum present at thecommencement of the business.

The Act stipulates what should be the quorum in the first instance, it leavesthe company free to provide in its articles what course should be followed if thequorum is not present at the meeting. If no provision is made in the articles thefollowing will be the procedure:-

If the quorum is not present within half an hour of the time fixed for the meeting:

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a) The meeting will stand dissolved if it has been called upon the requisition ofmembers;

b) At any other case, it will be adjourned to the same day in the next week at thesame time and place or to such other day and at such other time and place

as the Board determine;

c) IF there is no quorum at the adjourned meeting also, the members presentshall be the quorum. In this eventuality even one member can constitute aquorum whether present in person or by proxy.

RESOULTION

The Proposal put before a company in general meetings are usually

expressed in the form of resolutions. According to the normal practice the

resolution is put to the meeting by the Chairman, where upon it is discussed.

After the discussion is over, the Chairman puts resolution formally to vote viz. he

states that it has been proposed by Mr. X and seconded by Mr. Y and then

requests the meeting to indicate the sense of the house by a show of hands,

unless a poll is demanded, those in favour of resolution are asked to put up their

hands, and these are counted again. The Chairman then declares the results viz.

whether the resolution is carried by the requisite majority or lost.

While on this subject, it would be convenient to deal with the subject of

ordinary and special resolutions.

Section 189 defines the two kinds of resolutions. An ordinary resolution is one

where the votes cast in favour of the resolution by the persons who are members

or where proxies are allowed to vote, by proxy (either on a show of hands or on a

poll) exceed the votes cast against the resolution. A special resolution is one

where the votes cast in favour of special resolution i.e. the resolution requires a

three-fourth majority. It should be noted that in addition to such majority, the

notice must specifically mention that the resolution will be proposed as a special

resolution and the notice must be validly given.

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DIRECTORS

A company being an artificial person carries on its activities & business through

individuals called directors. S/232 of the companys Act provides that every public

company must have at least 3 directors & a Pvt. Co. must have at least 2 directors.

Definition S/2(13):

A director as including, any person occupying the position of Director by

whatever name called.

Legal Position of Directors:

The exact position of director is hard to define, as no formal definition; either

statutory or judicial of the term has been given. However, judicial pronouncement

have described them as:

1. Agents,

2. Trustees or

3. Managing Partners

1. Directors as Agents:

The director acts as an agent of the company and the ordinary rule of

agency apply. They exercise the powers and are subject to duties within the

framework of the companys article and the companys avt. For instance they

may make contracts on behalf of the company and they will not be personally

liable as long as they act within the scope of their authority. But if they

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contract in their own name or fail to exclude personal liability they also will be

liable. If the directors exceed their authority, the same act may be rectified by

the company. But if they do something beyond the object clause of the

company, then the act is UV and the company cannot rectify the same. But

the Directors are not agents for individual shareholders they are agents of the

company in artificial persons.

2. Directors as Trustees:

The directors have also been described as trustees. But they are not

trustee in full sense of the term. As much as no proprietary rights of the

companys property are transferred to them and therefore, they enter in to

contract on behalf of the company and in the name of the company. On the

other hand, incase of a trust, the legal ownership of the trust property is

transfereed to the trustee and therefore, he can enter into contracts in his own

name, but whatever he does, he does for the benefit of the beneficiaries.

Although the directors are not trustees in real sense of the term, they

occupy an office of the trust and are in certain respect position of the trustee

for the company such case is:

a) They are trustees of the money which comes to their hands or

which is actually under their control. If they misplay companys

money, they have to make good the same as if they were

trustees.

b) They are trustees for exercising powers conferred upon them for

the benefit of the company, for instance , power to allot shares,

to make calls, forfeit shares should be exercised bonafiedly in

the interest of the company.

c) They stand in a fiduciary relationship to company and therefore

whenever there is a clash of his personal interest with that of

the company, he should keep in mind the company interest.

3. Directors as Managing Partners:

The directors are also sometimes described as managing partners.

They manage the affairs of the company on their own behalf and on

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companys behalf of the shareholders who elect them. Directors are appointed

by the company as paid employees to control its affairs. They do mange its

affairs and day-to-day transaction, but they are not partner since they are

employees of the company and no director can bid by his acts the other

directors. There is no agency relationship between directors. The directors

has no authority to act for and on behalf of other directors of a company. The

directors are agents of the company and not of their co-directors. It is

therefore not correct to state that the directors are managing partners.

CASE STUDY

2000-(099)-COMPCAS-0153-BOMMADALSA INTERNATIONAL LTD. AND OTHERS v. CENTRAL BANK OF INDIA.

Appeal No. 426 of 1997 in Chamber Summons No. 428 of 1997 in Suit No. 278of 1995, decided on December 11/12, 1997.

IN THE BOMBAY HIGH COURT

S. H. Doctor and Ms. J. M. Sidhwa instructed by Mehta and Girdharilal for theappellants.

Pravin Diwan instructed by Kanga and Co. for the respondents.

JUDGMENT

The judgment of the court was delivered by

V. P. TIPNIS J. - The Central Bank of India filed a suit being Suit No. 278 of 1995against the (1) Madalsa International Ltd., a company incorporated under theCompanies Act, 1956, (2) Deepak Bhandari, and (3) Hotel Emerald Pvt. Ltd., acompany incorporated under the Companies Act, 1956, for recovery of a largeamount of more than Rs. 5 crores. Ultimately the parties reached a settlement and adecree on admission was passed on April 16, 1996, for a reduced amount of Rs.1,34,94,692. The decree also provided that the decree shall not be executed andshall be marked as satisfied on the defendants jointly and severally paying thedecretal amount as mentioned under clause (2) of the said decree on admission. Itprovided for payment. of a sum of Rs. 75 lakhs within two months from the date of

execution of the terms and the balance was to be paid in nine monthly instalmentseach for a minimum amount of Rs. 50 lakhs, the first of which shall be paid on or

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before June 30, 1996, and each subsequent instalment on or before the last day ofeach succeeding month so that the entire balance decretal amount shall be paid onor before March 31, 1997. Under the very consent decree Hotel Emerald PrivateLimited, defendant No. 3, created a mortgage in favour of the plaintiffs to secure thedues under the decree. It was contemplated that before the mortgage is created the

plaintiff's advocates will have to be satisfied as to defendant No. 3's marketable titleto the said property and the property being free from encumbrances. Defendant No.3, Hotel Emerald Private Limited, gave an undertaking to this court to create themortgage as agreed. The decree also mentions regarding several undertakings bydefendants Nos. 1 to 3 for creating the mortgages in respect of the propertymentioned therein and also make out a marketable title to the properties so agreedto be mortgaged. In the event of default it was provided that the plaintiff shall be atliberty to forthwith execute the decree and claim the entire decretal amount. Theterms, inter alia, also contemplated sale of properties described in exhibits A and Bby sale in execution in the event of defendants Nos. 1 to 3 committing any default inpayment of any instalment as provided in clause (2) of the decree or in case of

breach of any other terms and conditions of the decree. Clause 8 which is relevant isas under :

"In the event of the defendants committing any default in the payment of theinstalments as specified in clause 2 above and/or breach of any other terms hereof,the Court Receiver, High Court Bombay shall forthwith stand appointed as receiver inrespect of the stocks of goods and book debts described in exhibits A-4, A-5, A-7, D-7 and D-8 to the plaint and the properties described in annexures A and B heretowithout any further orders from this Hon'ble Court with full power to take possessionof the said securities, forcibly if necessary and to sell the same in execution by publicauction or private treaty and to hand over the net sale proceeds and/or realisationthereof to the plaintiffs after deducting his cost, charges and expenses."

After the decree was passed, absolutely no payment was made and as such theterms of the decree were breached by the defendants and the plaintiff moved thereceiver to take steps as were contemplated under clause (8) of the decree, i.e., totake forcible possession of the properties of which he was appointed receiver.

Thereafter, the defendants took out Chamber Summons No. 428 of 1997 prayingthat the execution of the aforesaid decree be stayed against all the defendants andin particular against defendants Nos. 2 and 3.

Before the learned judge it was contended that defendant No. 1 has filed a referenceto the Board for Industrial and Financial Reconstruction (for short "the BIFR") onMarch 19, 1997, and since defendants Nos. 2 and 3 are guarantors, they are alsoentitled to protection undersection 22 (2) of the Sick Industrial Companies (SpecialProvisions) Act, 1985 (for short "the SICA 1985"), and the decree cannot beexecuted against their estate without obtaining permission of the Board for Industrialand Financial Reconstruction. The plaintiffs have contended that under theprovisions of section 22 of the Sick Industrial Companies (Special Provisions) Act,1985, the guarantors cannot plead that the proceedings against them have to besuspended. Submissions were made before the learned judge and authorities were

cited on the interpretation of section 22 and as to whether the guarantors are alsoprotected under the provisions of the said section. The second submission on behalf

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of the plaintiffs was that mere filing of the reference under the Sick IndustrialCompanies (Special Provisions) Act, 1985, does not amount to an inquiry and assuch no impediment is created by the provisions of section 22 of the Sick IndustrialCompanies (Special Provisions) Act, 1985, as contended by the defendants. Thelearned judge elaborately considered the scheme of the Sick Industrial Companies

(Special Provisions) Act, 1985, referring in detail to the various sections of the saidAct as also decisions of the Andhra Pradesh High Court in Sponge Iron India Ltd. v.Neelima Steels Ltd. [1990] 68 Comp Cas 201; [1991] Bank J 204 (AP), the CalcuttaHigh Court in Bengal Lamps Ltd. v. Furmanite Nicco Ltd. [1991] 72 Comp Cas 146and the Allahabad High Court in Industrial Finance Corporation of India v.Maharashtra Steels Ltd., AIR 1988 All 170; [1990] 67 Comp Cas 412 and observedthat the learned judge was in agreement with the view of the Calcutta High Court andwas unable to subscribe to the view of the Andhra Pradesh High Court. The learnedjudge also referred to the observations of another learned single judge of this courtand ultimately came to the conclusion that no inquiry could be said to be pendingunder section 16 of the Sick Industrial Companies (Special Provisions) Act, 1985,

and, therefore, section 22 of the Sick Industrial Companies (Special Provisions) Act,1985, cannot be said to be attracted in the facts and circumstances of the case. Inview of the said finding the learned judge felt it unnecessary to go into the questionwhether the expression "suit" occurring in section 22 which has been added byamendment in the year 1993, includes execution proceedings or not. It is on thisground the learned judge by his judgment and order dated April 11, 1997, dismissedthe chamber summons. Aggrieved by this order the original defendants havepreferred this appeal.

We have heard, Mr. Doctor, learned counsel for the appellants and Mr. Diwan,learned counsel for the respondents, the original plaintiffs. It was an agreed positionbefore us that in view of the Division Bench decision of this court dated August 8,1997, in Real Value Appliances Ltd. v.Vardhaman Spinning and General Mills Ltd.[1997] VILJ 10; [1998] 93 Comp Cas 6; [1998] 1 Bom CR 232; [1998] 1 BC 456, inthe facts and circumstances as obtainable on the date of the order of the learnedjudge the order impugned herein cannot be faulted.

However, Mr. Doctor, learned counsel appearing for the appellants contended thatalthough the reference filed by appellant No. 1 was rejected by the Board forIndustrial and Financial Reconstruction the appeal has been filed on September 15,1997, before the appellate forum undersection 25 of the Sick Industrial Companies

(Special Provisions) Act, 1985 have become operative. Therefore in this appeal onthe basis of the aforesaid developments, the question which is required to beconsidered is as to whether under the provisions ofsection 22 of the Sick IndustrialCompanies (Special Provisions) Act, 1985, the chamber summons for stay ofexecution is required to be allowed.

Mr. Doctor, learned counsel for the appellants, read out the provisions of section 22and contended that the word "suit" mentioned in the amended portion of the sectionmust include execution proceedings as well. He further submitted that the suit orproceedings are suspended not only as against the industrial company but also suchproceedings cannot be continued without the consent of the Board even as against

the guarantors. In this behalf he emphasised the following words in the amendedportion of the section, i.e., "or of any guarantee in respect of any loans or advance

38
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granted to the industrial company".

In support of his submission that the word "suit" in the section must includeexecution, Mr. Doctor relied upon the following extracts on pages 2336 and 2358from Venkataramaiya's Law Lexicon, 1982, second edition.

"Suit. The word 'suit' has no doubt not been defined anywhere and is a word of verywide import. The dictionary meanings of the word are as comprehensive as to takeany request of any person, in particular, to a court of law or Tribunal for redress. Inlaw, it means, vide Mukherjee, LawLexicon at page 529.

'Suit' in its common parlance is a term of wide amplitude. Broadly' a 'suit' is aproceeding in a court of justice for the enforcement of a right denoting a legalproceeding of a civil kind. It is a proceeding in a court according to the forms of lawto enforce the remedy to which a party deems itself entitled. Lord Coke defines a suit

to be 'actio nihil aliud est quam jus prosequend in judico qunod licui debetur'meaning an action is nothing else that the right of pursuing in a court of justice, thatwhich is due to one. 'Blackstone simply says that a 'suit' is a legal demand of one'srights. In its generic sense, a 'suit' is the pursuit or prosecution of some claim. Theterm 'suit' in its comprehensive sense may be treated as applying to any originalproceedings in a court of justice by which a party pursues the remedy which the lawgrants him. The modes of proceedings may be various depending upon the differentstages in the litigation, that is, proceedings in the original court, court of appeal,proceedings in the nature of review or revision and execution proceedings. The legalsignificance of the word 'suit' is very broad, and the term has also a much narrowermeaning when it is examined in the procedural sense".

"No definition is given of the term 'suit' either in the Act or the Civil Procedure Code.The term 'suit' has sometimes been interpreted as not including an appeal but at thesame time it has also been at places interpreted to include an appeal which isregarded as a continuation of the suit. The meaning to be given to the term 'suit'should depend on the context in which the term is used in the Civil Procedure Code.Special procedure has been provided for appeals, and the term 'suit' appearing in theprocedure prescribed for original courts is, therefore, taken as not including anappeal. But this does not however, mean that the Legislature has always used theterm 'suit' in the same context. At places it has been used in its wider sense as

including an appeal also."

Mr. Doctor next relied upon Wharton's Law Lexicon 14th edition and especially thefollowing extract appearing at page 387 thereof:

"Execution. - The last stage of a suit whereby possession is obtained or anythingrecovered by a judgment. It is styled final process, and is regulated by R.C.C. 1883,Order XLII, r 17, which allows immediate execution in ordinary cases."

Mr. Doctor next relied upon the decision of the apex court reported in DokkuBhushayya v. Katragadda Ramakrishnayya, AIR 1962 SC 1886, and paragraphs 4,

8, 9, 20 and 22 which are as under :

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"4. Order 32, rule 7 of the present Code corresponds to section 462 of the Code of1882. It has been settled since the Code of 1882 was in force that the provisionunder consideration applies to proceedings in execution though it only mentionsagreement or compromise with reference to the suit. As long ago as 1901, jenkinsC.J. said in Virupakshappa v. Shidappa, 26 ILR Born 109, 114, 'I will first deal with

the question whether section 462 applies to a compromise of execution proceedings.On the words of the section I think it does; applications in execution are proceedingsin the suit so that a compromise of such a proceeding would be a compromise withreference to the suit. This view has been followed ever since.

8. Beyond this, I find no justification for limiting the operation of the rule. I observethat jenkins C.J. in what I have earlier read from his judgment, said that the rule'applies to a compromise of execution proceedings'. Therefore, it seems to me thataccording to the learned Chief justice it applies to all compromises of executionproceedings, excepting of course compromises concerning the conduct of them andthis whether the compromise directly affects the rights or liabilities under the decree

or not. I think the principle of the rule was correctly stated by Heaton J. when dealingwith section 462 of the Code of 1882 he observed in Gurmallapa v. Mallapa, AIR1920 Bom 37; ILR 44 Bom 574. "That section, I think necessarily implies that duringthe continuance of proceedings in court the dispute between the minor and anotherparty which the court has to decide could not be compromised except by theguardian ad litem of the minor and by him only with the leave of the court'. I think thatany compromise of a proceeding which concerns the dispute involved in it wouldrequire the sanction of the court. I should also point out that sub-rule (5) of rule 3 ofOrder 32 provides that a person appointed guardian in the suit for minor shall unlesshis appointment is terminated continue as such throughout all the proceedingsarising out of the suit including the proceedings in execution of a decree.

9. Quite obviously the word 'suit' in this observation would include a proceeding inexecution.

20. The next limitation is that the protection is only during the pendency of the suit.When does a suit come to an end ? It has been held that for the purpose of the saidrule an execution proceeding is a continuation of a suit.

22. We agree with these observations. The result is that Order 32, rule 7 of the Codewill apply only to an agreement or compromise entered into by a guardian of a party

to the suit, who is a minor, with another party thereof during the pendency of a suitand the execution proceedings."

Mr. Doctor next relied upon the decision of the apex court reported in BatisidharSankarlal v. Mohd. Ibrahim [1970] 3 SCC 900; [1971] 41 Comp Cas 21; AIR 1971 SC1292; [1971] 2 SCR 476, and to the following observations in paragraph 7 thereof :

"The contention raised on behalf of Bansidhar loses all significance for an execution,application is only a continuation of the suit and the control of the High Court enuresduring the execution proceedings also ..."

Reliance was next placed by Mr. Doctor on the decision of the Madras High Court inMuthulahhammal v. Narappa Reddiar, AIR 1933 Mad 456, wherein it was held that

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Order 32, rule 7, Schedule I to the Civil Procedure Code applies to executionproceedings, on the basis that the proceedings in execution are proceedings in a suitand that compromise in such proceedings is compromise with reference to the suit.

The next decision cited by Mr. Doctor was the decision of the Delhi High Court in

Parhash Playing Cards Manufacturing Co. v. Delhi Financial Corporation, AIR 1980Delhi 48, 52, wherein in paragraph 5 a reference was made to Mukherjee's LawLexicon page 529 on "suit" and thereafter it was observed as under :

"However, it is seen that the expression derives colour from its setting and has beeninterpreted in different ways in different legislative contexts. In Bhai Kirpa Singh v.Rasalldar Ajaipal Singh, AIR 1928 Lahore 627, a Pull Bench of the Lahore HighCourt pointed out that the words 'suit, proceedings' and words of a similarconnotation have different meanings in different statutes and it is not possible to laydown a general rule of interpretation which would be applicable to all cases. In eachparticular case the question has to be examined in reference to the context and that

meaning is to be preferred which will best fit in with it."

Reliance was next placed on the decision of the Allahabad High Court in AchaibarSingh v. Ram Murat, AIR 1973 All 261, wherein the question was what is the ambit ofthe term "suit" in section 6 of the Specific Relief Act and whether it would include anobjection under section 47 of the Code of Civil Procedure filed against the executionof the decree passed in a suit and it was held that the term "suit" under section 6 ofthe Specific Relief Act would include an objection under section 47 of the Code ofCivil Procedure filed against the execution of decree passed in such a suit and inview of the bar created by the provisions of sub-section (3) of section 6 of the saidAct, no appeal would lie from an order passed on such an objection filed undersection 47 of the Code of Civil Procedure.

Mr. Doctor also relied upon the decision of the Lahore High Court in Bhai Kirpa Singhv. Rasalldar Ajaipal Singh, AIR 1928 Lahore 627 [FBI. In the said case the FullBench of the Lahore High Court was concerned with the provisions of the SikhGurudwaras Act (Punjab Act 8 of 1925). In the aforesaid judgment an occasion aroseas to what is the meaning of the word "suit" and "proceeding". The learned judgesobserved that it is possible to cite an equally large number of cases in which anarrower meaning has been attached to the word "suit" as denoting the stage of thelitigation before the court of the first instance, beginning with the filing of the plaint

and ending with the decree or final order passed by such court. Finally afterconsidering several authorities on the issue, the learned judges observed as under(page 632) :

"An examination of these and other cases leads to the conclusion that suit','proceeding' and words of similar connotation have different meanings in differentstatutes and that it is not possible to lay down a general rule of interpretation whichwould be applicable to all cases. In each particular case the question has to beexamined in reference to the context and that meaning is to be preferred which willbest fit in with it .

Mr. Doctor submitted that taking into consideration the object of the Act and the factthat section 22 was amended in the year 1993, and it was provided that no suit for

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recovery of money or for the enforcement of any security against the industrialcompany or of any guarantee in respect of any loans, or advance granted to theindustrial company shall lie or be proceeded with further except with the consent ofthe Board or as the case may be, the Appellate Authority, the word "suit" must begiven wider meaning so as to include also execution as such interpretation would

advance the remedy and the object to be achieved by the provisions of the SickIndustrial Companies (Special Provisions) Act, 1985. In this behalf Mr. Doctor reliedupon the decision of the apex court in Kanai Lal Sur v. Paramnidhi Sadhukhan, AIR1957 SC 907, 910, and especially to the following observations :

"However, in applying these observations to the provisions of any statute, it mustalways be borne in mind that the first and primary rule of construction is that theintention of the Legislature must be found in the words used by the Legislature itself.If the words used are capable of one construction only then it would not be open tothe courts to adopt any other hypothetical construction on the ground that suchhypothetical construction is more consistent with the alleged object and policy of the

Act.

The words used in the material provisions of the statute must be interpreted in theirplain grammatical meaning and it is only when such words are capable of twoconstructions that the question of giving effect to the policy or object of the Act canlegitimately arise. When the material words are capable of two constructions, one ofwhich is likely to defeat or impair the policy of the Act whilst the other construction islikely to assist the achievement of the said policy then the courts would prefer toadopt the latter construction."

Mr. Doctor also relied upon the decision of the apex court reported in Union of Indiav. Filip Tiago De Gama of Vedem Vasco De Gama, AIR 1990 SC 981; [1990] Mah.LJ 724 and especially the observations in paragraph 16 thereof which are as under :

"16. The paramount object in statutory interpretation is to discover what theLegislature intended. This intention is primarily to be ascertained from the text of theenactment in question. That does not mean the text is to be construed merely as apiece of prose, without reference to its nature or purpose. A statute is neither aliterary text nor a divine revelation. 'Words are certainly not crystals, transparent andunchanged' as Mr.justice Holmes has wisely and properly warned. Towne v. Fisher[1918] 245 US 418, 425. Learned Hand J. was equally emphatic when he said :

'Statutes should be construed not like theorems of Euclid, but with some imaginationof the purposes which lie behind them' (Lenigh Valley Coal Co. v. Yensavage, 218FR 547, 553)."

Mr. Doctor submitted that the object of the amendment of section 22 in the year1993, was to protect not only the industrial company but also the directors thereofand guarantors in respect of any guarantee given as against any loans or advancesgranted to the industrial company. Mr.Doctor submitted that in most of the casesguarantors are normally directors or their close relations who are shareholders and ifsuch directors or guarantors could be proceeded against then obviously the revival ofthe company would be in jeopardy. Mr. Doctor also relied upon the decision of the

apex court reported in Maharashtra Tubes Ltd. v. State Industrial and InvestmentCorporation of Maharashtra Ltd. [1993] 78 Comp Cas 803 [1993] 2 SCC 144 in

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support of his submission.

Mr. Diwan, learned counsel appearing for the respondent plaintiff-bank contendedthat in view of the Division Bench decision of this court referred to above, learnedcounsel for the appellant has to concede that the impugned order on the basis of the

facts obtainable on the date thereof cannot be faulted. Mr. Diwan also pointed outthat by the decree itself the receiver stood appointed in July, 1996, and, if that be so,Mr. Diwan contended, so far as the receiver's actions contemplated under the decreeare concerned, they cannot be affected by the pendency of the appeal undersection25 of the Sick Industrial Companies (Special Provisions) Act, 1985. In this behalf herelied upon the decision of the learned judge of this court in Industrial DevelopmentBank of India v. Nira Pulp and Paper Mills Ltd. [1992] BJ 274 (Bom); [1994] 79 CompCas 811. Mr.Diwan also brought to our notice the older dated August 18, 1997,passed by the Board for Industrial and Financial Reconstruction on the referencemade by Madalsa International Ltd., an industrial company under section 15 (1) ofthe Sick Industrial Companies (Special Provisions) Act, 1985. The said order shows

that the learned members of the Board for Industrial and Financial Reconstructiontook into consideration various orders passed by this court. They also took intoconsideration consent terms of the order of the court especially regarding thereceiver being empowered to take forcible possession as also copy of the plaint inthe suit, relevant and material portion of the operative part of the order passed by thecourt on March 21, 1997, especially directing the court receiver to take forciblepossession was reproduced and ultimately it was observed that after carefulconsideration of the facts and material on record and in the circumstances of thecase in particular the proceedings taken before the High Court and the orderspassed by the High Court, the Board considers that it would not legally be in order forthem to entertain and proceed with the present reference which was directed to beclosed and filed. However, it is an admitted position that the aforesaid order of theBoard is being challenged in a pending appeal before the appellate forum undersection 25 of the Sick Industrial Companies (Special Provisions) Act, 1985. Mr.Diwan also submitted that the word "suit" will have to be interpreted in the context inwhich it is used in a particular statute. He further submitted that the same wordappearing in the same statute must be interpreted in the same manner and obviouslydifferent words appearing in the same section or same statute will have to beinterpreted differently. In this behalf Mr. Diwan relied upon the decision reported inDoc v. Dyeball [1828] 8 B 969, wherein learned Chief justice Lord Tenterdenobserved as under :

"The safest course in this case is to give effect to the particular words of the enactingclause. Where the Legislature in the same sentence uses different words, we mustpresume that they were used in order to express different ideas. The words are 'thatthe house or building shall be held and the land occupied'. Here the house was heldfor one whole year, and the pauper's mother gained a settlement in Little Bolton. Theorder of sessions must therefore be quashed."

Next Mr. Diwan relied upon the decision reported in Gibson v. Skibs A/s Marina andOrkla Groube, A/B and Smith Coggins Ltd. [1966] 2 All ER 476, and particularly theobservations at page 478 which are as under :

"It will be observed that para (c) of the regulation uses the word 'inspected'; para (a)

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industrial company and/or guarantee in respect of any loans or advances granted tothe industrial company. It is extremely relevant that the word "execution" is used inthe unamended section while in the added portion by amendment the word "suit" isused. It is also further relevant that various authorities quoted above, clearly showthat the interpretation of the word "suit" in any particular statute will have to be made

in the context in which the same is used. In our opinion the intention and object ofthe amendment is not only that coercive action against the industrial company orproper-ties belonging to it should be suspended but also that the suit for anyrecovery of money or enforcement of any security against the industrial companyshould be suspended. The earlier part takes care of the coercive measures inexecution, etc., while the later part obviously suspends the very initiation or if alreadyinitiated, prosecution of any suit of the description mentioned therein. Considered inthis light we are of the clear opinion that the word "suit" in the amended portion ofsection 22 cannot include in its ambit execution or execution proceedings. On thisinterpretation in fact even if the appeal is pending so far as the executionproceedings are concerned, excepting the properties of the industrial company, there

can-not be any bar or impediment in proceeding further with the same.

The second submission is that by amendment not only the proceedings by way ofsuit for recovery of money or for enforcement of any security against the industrialcompany are suspended but proceedings against the guarantors are alsosuspended. We are not at all impressed by this submission. As is clear from thejudgment of the apex court reported in Maharashtra Tubes Ltd. v. State Industrialand Investment Corporation of Maharashtra Ltd. [1993] 78 Comp Cas 803; [1993] 2SCC 144, the purpose and object of suspension of proceedings, etc., undersection22 (1) of the Sick Industrial Companies (Special Provisions) Act, 1985, is to await theoutcome of the reference made under the Board for Industrial and FinancialReconstruction for revival and rehabilitation of the sick industrial company. TheSupreme Court in the aforesaid case referring to the words "or the like" which followthe words "execution" and "distress" held that it cle

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