Companies Act, 1956 sections 77A, 391 & 394 Buy-back of small lots of physical shares under Scheme of arrangement Effect of section 77A

Facts

The Petitioner company proposed a scheme of arrangement with its shareholders for the purpose of buying back the small lot shares held in physical form. As per the scheme these shares would be cancelled and the shareholders would be paid in cash for such cancelled shares. The scheme was approved by the majority of the shareholders. However, the ROC representing the Central Government raised on objection that the purpose of the scheme is to buy-back shares and as such the company ought to have followed the provisions of section 77A.

Decision

Sections 391 and 77A of the Companies Act, 1956, are independent of each other. Section 77A was not given any overriding effect over the provisions of section 391 and 394. The legislative intention behind the introduction of section 77A is to provide an alternative method by which a company may buy-back its own shares up to a certain percentage. The exclusion of jurisdiction of the court should not readily be inferred, such exclusion should be explicitly or clearly implied. There is nothing in the provision of section 77A to indicate that the jurisdiction of the court under section 391 or section 394 has been taken away or substituted. Section 77A is merely an enabling provision and the court’s powers under sections 100 to 104 and section 391 are not in any way affected.

The court, while exercising its powers under section 391 and section 394, does not sit in appeal over the decision arrived at by the shareholders or the secured creditors or the unsecured creditors, and minutely examine whether the proposed scheme of arrangement, as approved by the shareholders or the secured creditors or the unsecured creditors, as the case may be, should be sanctioned or not.

The company petition is allowed and objection overruled.
 

Companies Act, 1956. Company’s contract taken by another company in which director was interested — secret profits made – Effect

The petitioner and one Puri group hold 50% each of the capital of the Respondent company SSTS. The second respondent P was the managing director of SSTS. One Contship Containerliners (Contship), which is the 5th respondent, had a contract of agency with SSTS and the contract expired in 2001. Contship had sent a notice of renewal to SSTS, which was received by the second respondent and did not inform the same to other directors of the company. The second respondent had incorporated another company Samrat Shipping and Logistic Pvt. Ltd. (SSLL) which is the 4th respondent. On the expiry of the contract with SSTS, Contship entered into an agency agreement with SSLL, as SSTS had failed to renew the contract. The petitioner approached the CLB alleging that the second respondent had misused his fiduciary position as director to appropriate the agency to his own company to the detriment of SSTS.

The agency with contship contributed to nearly 90% of the business of SSTS. Contship could not be compelled to choose any particular agent and it had full freedom to decide on its agent. However, it had not been said that SSTS was financially incapable of taking the agency further. When the earlier agency came to an end on November 2001, unless Contship had abandoned its business in India, any further agency contract envisaged by it in India was a corporate opportunity for SSTS. Therefore, when SSLL which was a company of the 2nd respondent, took the agency from December, 2001, SSTS lost this corporate opportunity. The whole exercise of getting the agency to SSLL had been pre-planned even while the agency was subsisting with SSTS. The 2nd respondent did not disclose the notice of termination dated September 1, 2001, which was received in his name, to the board of the company. Had he disclosed it, the board could have made efforts to persuade Contship to renew the agency with SSTS. The 2nd respondent himself was obliged to persuade Contship to renew the agency with SSLL. The 2nd respondent had been interacting with Contship to get the agency for SSLL even prior to the expiry of the contract with SSTS. The agreement could not have been signed on December 1, 2001 without the prior consultation with Contship. Therefore, it was obvious that the 2nd respondent used the knowledge derived in his official capacity, that Contship was terminating the agency with SSTS effective from 1-12-2001, to his own advantage. Therefore, whatever the benefit or profit SSLL derived from Contship agency to be accounted for to the benefit of SSTS.

If the 2nd respondent was aware that Contship did not want to deal with SSTS, as a fiduciary, the 2nd respondent should have unambiguously disclosed the refusal to the company together with a fair statement of reasons for the refusal. The 2nd respondent did not disclose the letter of termination, thus depriving SSTS of a chance to persuade Contship to renew the agency. The failure to disclose the letter of termination and also the unwillingness of Contship to deal with SSTS was a breach of his fiduciary duty on the part of the 2nd respondent. The erring director directed to account for the profits made.
 

The Companies Act, 1956, section 18 – Change of registered office – filing of false documents with the Registrar of Companies – Managing Director is responsible

The Petitioner, (one of the directors of the company) filed Form 18 with the ROC and later it was found that the registered office of the company was not at all situated in that address. ROC sent prosecution notices to all the directors of the company including the managing director. The issue before the court was to determine the director who was officer in default in filing the false Form 18.

Under section 146 of the Companies Act, 1956, the liability for prosecution and punishment for failure to give notice of the situation of the registered office and of every change therein to the Registrar of Companies within 30 days of the date of incorporation of the company or of the date of change in the situation of its registered office is that of the officer of the company who is in default. All the directors of the company will be officers in default within the meaning of section 5 of the Act only when there is no managing director, whole-time director, manager, secretary, or person charged by the board of directors with the responsibility of complying with the provisions of the Act or director or directors specified by the board under clause (g) of section 5.

The petitioners were directors of the second respondent-company and had been served notice of accusations under sections 146 and 628 of the Companies Act, 1956, on the grounds that the registered office of the company was found upon verification not situated at the address given in Form 18 filed by the company with the Registrar.

Since admittedly the third respondent was the managing director of the company, it was he who was the officer in default and liable for prosecution along with the company for breach of the provisions of section 146 of the Act. The other directors; i.e., the petitioners, not having been alleged to be officers in default within the meaning of section 5, their prosecution under section 146 was illegal.

However, Form 18 filed by the company with the Registrar showed that it had been furnished by the first petitioner, and if the information contained therein was false, he was the person giving false information about the situation of the registered office of the company and was liable to be proceeded against under section 628 of the Act.
 

The Companies Act, 1956, section 383A(1) — DCA’s general Circular granting exemption – Effects

The respondent had issued a general circular No.35/2003 dated 11-12-2003 granting exemption to companies, that are not required to have a whole time company secretary, from furnishing compliance certificate from a practising company secretary if such companies have employed a whole time company secretary. The effect of this circular is that company employing a full-time company secretary is not required to obtain a compliance certificate from a practising company secretary. The question before the Court was whether such general administrative circular could run against the substantive provisions of section 383A of the Act.

It is contended that there is no power to give legitimacy to a certificate given by a company secretary in employment when the proviso stipulates issuance of such certificate by a company secretary in practice. Learned counsel for the respondent submits that the intent of the statute is to have a company secretary in employment or in practice to issue the compliance certificate. For companies with paid-up capital of over Rs.2 crores employment of a whole time company secretary is mandatory while those who are having paid-up capital of more than Rs.10 lakhs but less than Rs.2 crores the employment of a whole time company secretary is optional. In such cases when a whole time company secretary is employed the insistence on the issue of a compliance certificate only by a company secretary in practice is a surplusage and serves no purpose. It is this anomaly which is sought to be corrected by the circular.

Prima facie, it appears to me that while the respondents have sought to correct an anomaly and the circular is in the larger interest, however, what is in question is whether the respondents can do that by issuance of a general circular which has the effect of modifying the proviso to section 383A. Another option the respondents may consider is grant of a general exemption by issuing the requisite notification under section 637A of the Act. Learned counsel for the respondent seeks time to obtain instructions. Accordingly, the Government was directed to issue an exemption notification in accordance with law.