@JUDGMENTTAG-ORDER
1. This appeal is directed against the order passed by the Company Law Board, Principal Bench, New Delhi in Company Petition No.27 of 1993 dated 25-4-1996 whereby the resolution of the Board of Directors of the appellant-Company dated 15-5-1992 to increase the authorised capital of the Company and approval of the said resolution of the share holders in the extraordinary general meeting held on 15-6-1992 are set aside and the issue of capital to 50,000 shares have been restored as also respondents 2 to 4 have been declared to be the majority share holders in the Company.
2. The facts giving rise to this appeal in brief are that; respondents No.2 to 4 had 49993 shares in the appellant-Company out of the authorised capital of 50,000 shares of Rs.10/- each while the remaining shares were held by seven individuals of one each. The Board of Directors Wallace Ltd (for short ''M/s SWC Ltd'') on 15-5-1992 passed a resolution to increase authorised capital of the Company from Rs.5 lacs to Rs.25 lacs and this resolution was approved by the majority of the share-holders in the extra-ordinary general meeting of the Company held on 15-6-1992. The petitioners (Respondents 2 to 4 in this appeal) filed a petition before the Company Law Board, Principal Bench, New Delhi, under Sections 397 and 398 of the Indian Companies Act, 1956 (hereinafter referred to as ''the Act'') alleging that M/s.SWC Ltd, was under the control of Mr. K. R. Chhabria, who had with a view to reduce the majority share holders, that is to say, the petitioners into minority share holders got the aforementioned resolution passed and then got approved it by the share holders in the extra-ordinary general meeting without noticing Sri S.S. Sanyal-respondent No.13 who was the Director of the Company as also without prior notice of extraordinary general meeting to any, one of the shareholders. It is also alleged that the issue, of shares consequent upon the increase in the authorised capital to respondents Nos.5 to 8 was only for the purpose of reducing the majority share holders into minority, even when there was no need for further capital. It was further alleged that M/s SWC Ltd. and the said Sri M.R. Chhabria were not holding shares in the Company and they did not, therefore, enjoy the support of the majority of the share holders and the Board has removed some directors and appointed certain additional. Directors and under these circumstances the acts of the Company are oppressive to the respondents 2 to 4 who were the majority share holders in the Company.
3. The appellant Company through its reply denied the allegations and alleged that after following the proper procedure, the authorised capital was increased and due notices were issued to all the share holders for the extra-ordinary general meeting held on 15-6-1992 and they had approved the resolution of the Board. They also alleged that the increase in the authorised capital was required due to business activities of the Company and in order to raise further funds.
4. The lower Court found that the appellant Company was a deemed Company at the relevant time and, therefore, by virtue of the provisions of Section 81 of the Act, shares should have been issued to existing share holders on proportionate basis, because, there was no special resolution u/s 81(1A) of the Act for allotment of shares to outsiders. The appellant-Company had not followed the provisions of Sections 81 and 81(1A) of the Act and therefore, the impugned resolution of the Board of Directors of the appellant-Company as also the resolution passed by the share holders in the extra-ordinary general meeting are liable to be set aside and accordingly, the lower Court set aside the impugned orders holding of the aforesaid acts as oppressive.
5. Feeling aggrieved by the impugned order, the Company has preferred this appeal.
6. On perusal of Para 4 of the impugned order, it appears that during the course of hearing the appeal, respondents 2 to 4 had filed a copy of the Annual Report of the Company for the year 1993-94, in which it was mentioned that the appellant-Company had become a deemed public Company with effect from 15-3-1991 and it had remained as deemed public Company till 31-7-1992 and thereafter had again become a private Company. It appears that relying on the case of Needle Industries (India) Ltd. v. Needle Industries Newy (India) Holding Lid, (1981) 51 Company Cases 743, the lower Court has held that the provisions of Sections 81 and 81(1A) of the Act applies to the appellant-Company, because at the relevant point of time, it was a deemed public Company and, therefore, in the absence of proper compliance of the provisions of Section 81 and 81(1A) of the Act, the resolution passed by the Board of Directors and approval of the said resolution in the extra-ordinary general meeting of the appellant-Company are not legal and on this count only, the said resolution and order of the approval were set aside.
7. It is not disputed before me that the appellant-Company, which was a private Company had become a Public Company by virtue of Section 43A of the Act and, therefore, was a deemed Public Company at the relevant time. The Apex Court in the case of Needle Industries supra, after reproducing the relevant parts of Sections 3, 43A and 81 of the Act was pleased to observe that for interpreting these and allied provisions of the Act, it would be necessary to have regard to the relevant Articles of Association of Needle Industries especially, since the Section 81(1)(c) of the Act is subject to the qualification "until the Articles of the Company otherwise provides" and thereafter reproducing the relevant Articles 11, 32, 38 and 50 of the Articles of Association of Needle Industries (supra), was pleased to observe that a Section 43A Company (deemed Public Company) may include in it Articles as part of its structure, provisions relating to restrictions of transfer of shares, limiting the number of its members to fifty and prohibiting any invitation to the Public to subscribe for shares which are typical characteristics of the private Company. A Public Company cannot possibly do so, because by the very definition, it is that which is not a Private Company, that is to say, which is not a Company which by its Articles contains the restrictions mentioned in Section 3(1)(iii) of the Act. Therefore, the expression "Public Company" in Section 3(1)(iv) of the Act cannot be equated with "Private Company" which has become a "Public Company" by virtue of Section 43A. The Apex Court was further pleased to observe that the Private Company which becomes a Public Company by virtue of Section 43A does not cease to be for all purposes a "Private Company" becomes clear when one compares and contracts the provisions of Section 43A with 44; when the Articles of a private Company no longer include matters u/s 3(1)(iii), such Company shall on the date of alteration ceases to be a private Company. It has been observed that private Companies enjoy certain exemptions and privileges which are peculiar to their constitution and nature. The Public Companies arc subjected severally to the discipline Act. Companies of the third kind like, Needle Industries which become public Companies, but which continue to include in their articles the three matters mentioned in Clauses (a) to (c) of Section 3(1)(iii) are also broadly and generally subjected to the rigorous discipline of the Act. They cannot claim the privileges and exemptions to which private Companies which are outside Section 43A are entitled. And yet there arc certain provisions of the Act which would apply to public Companies but not to Section 43A-Companies. It posed a question "is Section 81 of the Companies Act one such provision? and if so, docs the whole of it not apply to a Section 43A - Company (deemed Public Company) or only to some particular part of it?"
The Apex Court has held that:
"There is no difficulty in giving full effect to Clauses (a) and (b) of Section 81(1) in the case of a Company like NIIL, even after it becomes a Public Company u/s 43A. Clause (a) requires that further shares must be offered to the holders of equity shares of the Company in proportion, as nearly as circumstances admit, to the capital paid up on those shares, will Clause (b) requires that the offer of further shares must be made by a notice specifying the number of shares offered and limiting the 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. The real difficulty arises when one reaches Clause (c) according to which, the offer shall be deemed to include the right of renunciation of shares or any of them in favour of any other person. We will keep aside for the time being the opening words of Clause (c) "unless the articles of the Company otherwise provide". Clause (c) further requires that the notice referred to in Clause (b) must contain a statement as to the right of renunciation provided for by Clause (c). Having given to the matter our most anxious consideration, we are of the opinion that Clause (c) of Section 81(1) cannot apply to the erstwhile private Companies which have become public Companies u/s 43A and which include, that is to say which retain or continue to include, in their articles of association the matters specified in Section 3(1)(iii) of the Act, as specified in the first proviso to Section 43A.
X X X
In coming to the conclusion that Clause (c) of Section 81(1) cannot apply to Section 43A-proviso-Companies, we have not taken into consideration the impact of the opening words of Clause (c) : "Unless the articles of the Company otherwise provide." The effect of these words is to subordinate the provisions of Clause (c) to the provisions of the Articles of Association of the Company. In other words, the provision that the offer of further shares shall be deemed to include the right of renunciation in favour of any other person will not apply if the articles of the Company "otherwise provide". Similarly, the requirement that the notice of offer must contain a statement of the right of renunciation will not apply if the Articles of the Company otherwise provide.
X X X
For these reasons, we are of the opinion that Clause (c) of Section 81(1) of the Companies Act, apart from the consideration arising out of the opening words of that clause, can have no application to private Companies which have become" public Companies by virtue of Section 43A and which retain in their Articles the three matters referred to in Section 3(1)(iii)of the Act.
X X X
Coming to sub-section (1A) of Section 81, it provides, stated briefly, that notwithstanding anything contained in subsection (1), the further shares may be offered to any persons in any manner whatsoever, whether or not those persons include a person referred to in Clause (a) of sub-section (1). That can be done under Clause (a) of sub-section (1A) by passing a special resolution in the general meeting of the Company or under Clause (b), where no such special resolution is passed, if the votes cast in favour of the proposal exceed the votes cast against it and the Central Government is satisfied that the proposal is most beneficial to the Company. For reasons similar to those for which we have come to conclusion that Clause (c) of Section 81 cannot apply to Section 43A -Proviso-Company, we must hold that subsection (1A) can also have no application to such Companies..."
8. The upshot of the aforesaid discussion is that for deciding whether the provisions of Section 81 of the Act applies in the whole or not to a Section 43A - Company, that is to say, to a deemed Public Company, the Articles of Association are to be looked into; in order to verify whether such Company retains or continue to include in its Articles of Association, the matters specified in Clause (iii) of sub-section (1) of Section 3 of the Act, especially for giving full effect to Clauses (a) and (b) of Sections 81 and 81(1A) of the Act.
9. On perusal of the impugned order it does not appear that the Company Law Board had considered the Articles of Association of the Appellant-Company before applying the provisions of Sections 81 and 81(1A) of the Act. On this count only, the impugned order is liable to be set aside.
10. In the result, the impugned order is set aside and the case is remanded to Company Law Board, principal Bench, New Delhi with a direction to decide afresh whether the provisions of Sections 81 and 81A of the Act applies to the appellant-Company, after considering its Articles of Association and on the strength of the authority of Needle Industries (supra), particularly keeping in view the aforementioned passages of the Apex Court. As the matter is pending since the year 1992, the Company Law Board, Principal Bench, New Delhi is directed to dispose of the matter preferably within two months from the date of receipt of a copy of this order. Parties to the present petition through their learned Counsel are directed to appear before the Company Law Board, Principal Bench, New Delhi, on 7-10-1998 for further proceedings..
