Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2481 OF 2014

Darius Rutton Kavasmaneck …Appellant

Versus

Gharda Chemicals Limited & Others …Respondents

J U D G M E N T

Chelameswar, J.

1.The first respondent is a company under the Companies

Act, 1956 (hereinafter referred to as “the Act”). Two appellants

herein who are mother (since deceased) and son respectively

are minority shareholders holding or otherwise controlling 17

per cent of the equity in the first respondent company.

Page 2 HISTORY OF THE COMPANY

2.First respondent company is carrying on the business of

“selling chemical process, knowhow and of manufacturing

dyes, chemicals and textile auxiliaries” etc. It all started as a

family firm in the year 1962 known as M/s. Gardha Chemicals

Industries. The above-mentioned partnership was created by

(1) the mother of the first appellant, (2) the husband of the

first appellant, (3) a sister of the first appellant and the second

respondent - the brother of the first appellant. The

partnership deed contained a clause that none of the partners

could sell his/her respective share in the firm without offering

it first to the other partners.

3.On 6

th

March, 1967, a private limited company was

incorporated with the principal object of taking over the assets

and liabilities of the above-mentioned partnership as a going

concern. Article 57 of the Articles of Association contained

restrictions on the rights of all the shareholders to transfer

their shares. Any shareholder desiring to sell his shares must

offer his shares to the other shareholders of the company pro

2

Page 3 rata to the holding of each of such other members respectively

at a fair value.

1

4.With effect from 17

th

August, 1988, the first respondent

company became a public company (under Section 43A (1A) of

1

57. Save as aforesaid the following provisions shall apply to the transfer of shares –

(a)A member of the company may transfer a share to his lineal descendent, but save as aforesaid no

share shall be transferred to a person who is not a member of the company so long as any member

is willing to purchase the same at the fair value as hereinafter provided.

(b)The member proposing to transfer any shares (hereinafter called the proposing transferor) shall

give notice in writing (hereinafter called a transfer notice) to the Company that he desires to

transfer the same;

(c)Within the period of seven days from the receipt of a transfer notice as aforesaid the Company

shall offer to each of the existing members of the company respectively such number of the shares

included in the transfer notice as a pro rata or as nearly as may be to the holding of each member

respectively on the footing that if he desires to purchase any or all of such members of the said

shares at the fair value he shall within fifteen days of the offer be entitled to apply for the purchase

and transfer of the same and the company shall be bound, upon payment to the transferor of the fair

value of such shares, to transfer the shares of member applying;

(d)In case any member or members shall not have applied for the purchase and transfer of any or all

of the shares to which he is entitled, the company shall within seven days of the date at which the

offer closed, offer the untaken shares to such of the members as have applied for the purchase and

transfer of all the shares to which they were entitled by the terms of the original offer in proportion

as the holding of each of such members bears to the total number of shares held by them and they

shall be entitled within fifteen days of the offer to apply for the purchase and transfer of a pro rata

number of the said untaken shares and the company shall be bound, upon payment to the transfer of

the fair value of such shares, to transfer the shares to the member applying;

(e)The promising transferor shall be bound to execute a transfer in respect of any shares so sold and

in default thereof be deemed to have executed such a transfer. The company shall thereupon cause

the names of the members who have purchased the shares to be entered in the Register as the

holders of such shares and thereafter the validity of the proceedings shall not be questioned by any

person;

(f)In case no member shall apply for any of the shares included in the transfer notice or in case any

are untaken after the compliance with the foregoing provisions of this Article the intending

transferor shall have the right (which right shall endure for the period of one year from the date of

transfer notice) to sell and dispose of hi shares to any person and at any price and to apply for

registration of the transfer of the same and the company shall be bound to give effect to the transfer

of such shares accordingly.

(g)For the purpose of this clause the fair value of the share shall be such sum, if any, as the auditors

for the time being of the Company shall certify as the fair value thereof provided that it expressly

declared that the fair value shall be (1) the amount of capital paid upon thereon plus (2) a sum

bearing the same proportion to the value as appearing in the company’s last balance sheet of any

reserve fund or other fund of the company as the capital paid up on all the shares of the company

for the time being issued plus or minus as the case may be, (3) a sum bearing the same proportion

to the value as appearing in the profit and loss account consisting of or representing undivided

3

Page 4 the Act) as its turnover exceeded the limit prescribed

thereunder:

“43A. ****** ****** ******

****** ****** ******

(1A) Without prejudice to the provisions of sub-section (1), where the

average annual turnover of a private company, whether in existence at the

commencement of the Companies (Amendment) Act, 1974, or

incorporated thereafter, is not, during the relevant period, less than rupees

one crore, the private company shall, irrespective of its paid-up share

capital, become, on and from the expiry of a period of three months from

the last day of the relevant period during which the private company had

the said average annual turnover, a public company by virtue of this sub-

section;

Provided that even after the private company has so become a public

company, its articles of association may include provisions relating to the

matters specified in clause (iii) of sub-section (1) of Section 3 and the

number of its members may be, or may at any time be reduced, below

seven.”

5.One important development in the history of the first

respondent company relevant for the decision of the instant

appeal is that on 2

nd

April, 2001 a notice was issued calling for

extraordinary general meeting of the first respondent company

scheduled to be held on 5

th

May, 2001. The purpose of the

said meeting was to adopt a resolution for amending the

Articles of Association of the first respondent by inserting

clause (d) to Article 3 thereof. The substance of the said

clause is to prohibit any invitation or acceptance of deposits

from persons other than the members, directors or the

profits or losses as the capital paid up on such share bears to the total capital paid up on all the

shares of the company for the time being issued.”

4

Page 5 relatives of the members or the directors of the company.

According to the respondents, such a proposal for amendment

was necessitated to comply with the requirements of the newly

inserted sub-section (d) of Section 3(1)(iii)

2

which came to be

inserted by Act 53 of 2000 w.e.f. 13.12.2000. The appellant

opposed the amendment of the Articles of Association and the

amendment could not be carried as the proposal failed to

muster the requisite majority.

HISTORY OF THE LITIGATION :

6.In the month of May, 2009, certain reports appeared in

the media that the second respondent was proposing to sell

his shares in the first respondent company which were at that

time valued at approximately 1600 crores. The appellant,

therefore, filed a Company Petition No. 132/397-

98/CLB/MB/2009 (hereinafter referred to as the Company

Petition 132 of 2009) before the Company Law Board, inter

alia, seeking prohibitory orders

3

against the 2

nd

and 3

rd

respondents from committing breach of the pre-emption

2

3.(1)(iii) - ‘private company’ means a company which has a minimum paid-up capital of one lakh rupees

or such higher paid-up capital as may be prescribed, and by its articles,-- …………

(d) prohibits any invitation or acceptance of deposits from persons other than its members,

directors or their relatives.

3

That this Hon’ble Bench be pleased to grant a permanent order and injunction restraining the 2

nd

/3

rd

respondents by themselves or through their servants and or agents, directly or indirectly, from selling,

transferring, alienating, dealing or disposing the shares held, directly or indirectly, by the 2

nd

/3

rd

Respondents in the 1

st

Respondent to any person without first offering the same to the Petitioners at the fair

value quantified in accordance with Article 57(g) of the Articles of Association of the 1

st

Respondent.

5

Page 6 agreement contained in Article 57 of the Articles of Association

referred to supra. On 11

th

December, 2009, ad-interim

injunction order was passed by the Company Law Board

restraining the second respondent from alienating his share

without permission of the Company Law Board. However,

the Company Petition No. 132 of 2009 was heard finally and

dismissed by an order dated 14

th

May, 2010.

7.Aggrieved by the same, the appellants preferred

Company Appeal No.24/2010 before the High Court of

Bombay on 26

th

June, 2010. The High Court summarized the

decision of the Company Law Board as under:

“75.It is on this material that the company petition was placed before

CLB and heard accordingly. The CLB firstly held that the first respondent

is a public company. Once it is held to be a public company, then, its

shares are freely transferable and the issue was to whether any preemption

clause/article restraining transferability of shares in public company is

valid. The Board held that the Article 57 does contain such restriction but,

the Board relying upon a judgment of this Court in the case of Western

Maharashtra Development Corporation Ltd. Vs. Bajaj reported in (2010)

154 Company Cases 593 (Bom) held that such an clause in the Articles of

Association will not be applicable to 1

st

respondent company. Once it is

held to be a public company, its shares are freely transferable and the

Articles would not hold good as they are contrary to the statute. Holding

that violation of such an clause in the Articles is not an act of oppression,

the petition came to be dismissed.”

The said appeal was finally heard and dismissed by the

impugned judgment dated 14

th

June, 2011.

According to the appellants, the High Court held that –

6

Page 7 “an agreement between shareholders of an unlisted public company

conferring a right of preemption which is embodied in its Articles is

invalid and unenforceable.” - SLP

8.Elaborate submissions were made on either side dealing

with the various provisions of the Companies Act as amended

from time to time. The learned counsel appearing on either

side also submitted written briefs.

9.According to the written brief submitted by the appellant

the question that arises for consideration of this Court is

summarized as follows: -

Whether on and after the bringing into force of the Companies

(Amendment) Act, 2000, the status and character of Gharda Chemicals

Ltd. (R-1) continued to be as that of a “hybrid company” (Section 43A

company) and whether this company and its members are bound by the

terms of a preemption clause contained in Article 57 of the Articles of

Association?

In our opinion, the REAL QUESTION is not whether after the

Amendment Act 53 of 2000, the first respondent continued to

be a private company or became a public company, But

whether the amendment made by the Act 53 of 2000 to

Sections 3 and 43A destroys the rights and obligations created

by Article 57 of the Articles of Association of the first

respondent company.

10.The case of the appellants all through has been that

notwithstanding the amendment of the Act by the Amendment

7

Page 8 Act 53 of 2000, Article 57 of the Articles of Association still

governs the rights of the members of the first respondent

Company.

11.On the other hand, the case of the respondents has

always been and is that the first respondent company is a

public company having had become so by the operation of law

i.e., Section 43A(1) and it cannot now become a private

company. There is nothing in the Amendment Act 53 of 2000

which automatically renders a public company created under

Section 43A to become a private company. It is also the case

of the respondents that the failure to amend the Articles of

Association to give effect to Section 3(1)(iii)(d) ipso facto make

the first respondent a public company thereby rendering

Article 57 inoperable.

12.We shall deal with those arguments later in the

judgment. Before dealing with these various arguments, we

deem it appropriate to examine the relevant provisions of the

Companies Act, and the various amendments made to the Act

from time to time.

8

Page 9 SCHEME OF THE RELEVANT PROVISIONS OF THE

COMPANIES ACT :

13.The Companies Act, 1956, (hereinafter referred to as ‘the

Act’) as it was originally enacted, contained only the definition

of a ‘private company’ under Section 3(1)(iii)

4

to mean a

company

5

[a defined expression under Section 3(1)(i)] which,

by its articles (a) restricts the right to transfer its shares, if

any

6

, (b) limits the number of its members to fifty and (c)

prohibits any invitation to public to subscribe for any shares

or debentures for the company.

14.Section 27(3) of the Act stipulates:

“In the case of a private company having a share capital, the

articles shall contain provisions relating to the matters

specified in sub-clauses (a), (b) and (c) of clause (iii) of sub-

section (1) of section 3; and in the case of any other private

company, the articles shall contain provisions relating to

the matters specified in the said sub-clauses (b) and (c).”

This sub-section makes it clear that to be a private company

either with or without share capital the Articles of Association

of such company must necessarily provide for the matters

4

3.(1)(iii) - ‘private company’ means a company which, by its articles, -

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to fifty not including –

xxx xxx xxx xxx

5

3. Definition of ‘company’, ‘existing company’, ‘private company’ and ‘public company’ – (1) In

this Act, unless the context otherwise requires, the expressions ‘company’, ‘existing company’, ‘private

company’ and ‘public company’ shall, subject to the provisions of sub-section (2), have the meanings

specified below –

(i) ‘company’ means a company formed and registered under this Act or an existing company as

defined in clause (ii);

6

Section 12 of the Companies Act recognizes the possibility of the formation of two clauses of Companies,

companies “limited by shares” and companies “ limited by guarantee”.

9

Page 10 specified in Section 3(1)(iii) of the Act. In the case of a private

company limited by share capital all the three requirements

specified in clauses (a), (b) and (c) of clause (iii) of sub-section

(1) are to be provided. In the case of a private company other

than a company having share capital only matters specified in

clauses (b) and (c) of the above sub-section are to be

stipulated.

15.Part-II of the Act deals with incorporation of company

and matters incidental thereto. A brief survey of the said Part

insofar as it is relevant for the purpose of this case is

necessary.

16.Section 12 deals with the mode of forming incorporated

companies, either public or private. It stipulates that an

incorporated company may be formed by two or more persons

in the case of a private company and seven or more persons in

the case of a public company by subscribing their names to a

memorandum of association and complying with other

requirements of the Act in respect of registration.

17.Section 26 of the Act mandates inter alia that in the case

of a private company limited by shares, there shall be

10

Page 11 registered (along with the memorandum),

Articles of Association signed by the subscribers of the

memorandum. Such Articles of Association must prescribe

the regulations for the company.

“Section 26. Articles prescribing regulations.—There may in

the case of a public company limited by shares, and there

shall in the case of an unlimited company or a company

limited by guarantee or a private company limited by

shares, be registered with the memorandum, articles

of association signed by the subscribers of the

memorandum, prescribing regulations for the

company.”

18.The Act came to be amended by Act 65 of 1960. By the

said amendment, Section 43A came to be inserted in the said

Act. It originally contained eight sub-sections. Sub-Section (1)

declared that any private company which has a share capital,

of which twenty-five per cent of the paid-up share capital is

held by “one or more bodies corporate”

7

become a public

company.

19.The relevant part of sub-Section (1) reads as under:

“43A. Private company to become public company in

certain cases - (1) Save as otherwise provided in this

section, where not less than twenty-five per cent of the paid-

up share capital of a private company having a share capital

7

“Explanation – For the purposes of this sub-section, “bodies corporate” means public companies, or

private companies which had become public companies by virtue of this section.”

but such an explanation was not there originally, but added by Act 31 of 1988.

11

Page 12 is held by one or more bodies corporate, the private company

shall,-

***** ***** *****

***** ***** *****

become by virtue of this section a public company.”

20.Such companies popularly came to be called DEEMED

PUBLIC COMPANIES (they are referred to by the learned

counsel for the appellant as “HYBRID Companies”) though

Section 43A does not use that expression. In our opinion,

Section 43A only creates a new class of PUBLIC companies

-answering the description contained therein though they have

and can retain all the attributes of a PRIVATE COMPANY as

defined under Section 3(i)(iii). These companies are hereinafter

referred to as “HYBRID Companies” for the sake of

convenience.

21.Obviously, the question of private companies without

share capital becoming public companies does not arise.

Bodies corporate cannot hold non-existent shares in such

private companies. Sub-Section (1) has two provisos. An

examination of the contents of the first proviso is relevant and

necessary for the purpose of this case. We shall deal with the

same separately.

12

Page 13 22. Sub-section (2) mandates that within three months from

the date on which a private company becomes a public

company by virtue of Section 43A(1), the company shall inform

the Registrar that it has become a public company. It also

mandates that the Registrar shall make necessary

consequential alterations of the records.

23.The language and implication of sub-section (2) will be

examined later in the judgment.

24.We are not concerned with sub-Section (3). Sub-Section

(4) contemplates the possibility of a private company which

becomes public company by virtue of the operation of Section

43A once again becoming a private company. It stipulates

that any private company which becomes a public company by

virtue of Section 43A(1) shall continue to be a public company,

until such time it becomes a public company in accordance

with the provisions of the Act. Such a re-conversion requires

the approval of the Central Government.

“(4) A private company which has become a public company

by virtue of this section shall continue to be a public

company until it has, with the approval of the Central

Government and in accordance with the provisions of this

Act, again become a private company.”

13

Page 14 25.Sub-section (5) provides for penalties for defaults in

complying with the mandate of sub-Section (2). Sub-Sections

(6) and (7) were omitted by the Amending Act 31 of 1988.

Sub-Section (8) prescribes certain obligations attached to such

public companies, the details of which may not be necessary.

26.By the Amendment Act 41 of 1974, sub-Sections (1A) and

(1B) came to be inserted in Section 43A. By the newly

inserted sub-sections, the legislature declared that two more

classes of private companies become public companies on the

happening of the events specified in each of the newly

introduced sub-sections.

27.Sub-section (1A) declares that a private company whose

“average annual turnover” “during the relevant period” is not

less than Rs.1 crore becomes public company.

“(1A) Without prejudice to the provisions of sub-section (1),

where the average annual turnover of a private

company, whether in existence at the commencement of

the Companies (Amendment) Act, 1974, or incorporated

thereafter, is not, during the relevant period, less

than such amount as may be provided , the private

company shall, irrespective of its paid-up share capital,

become, on and from the expiry of a period of three months

from the last day of the relevant period during which the

private company had the said average annual turnover, a

public company by virtue of this sub-section :

Provided that even after the private company has so become

a public company, its articles of association may include

14

Page 15 provisions relating to the matters specified in clause (iii) of

sub-section (1) of section 3 and the number of its members

may be, or may at any time be reduced, below seven.”

28.The amount of Rs.1 crore mentioned originally in the

sub-section (1) is substituted by the Act 31 of 1988 with the

words “such amount as may be provided”.

29.Sub-section (1B) declares that any private company

holding not less than 25 per cent of the paid up share capital

of a public company shall become a public company. Both

the sub-sections contain a proviso each, which are ipsissima

verba. The implications of such provisos along with the

implication of the proviso to sub-Section (1) shall be examined

later.

“(1B) Where not less than twenty-five per cent of the paid-up

share capital of a public company, having share capital, is

held by a private company, the private company shall,-

(a)on and from the date on which the aforesaid

percentage is first held by it after the commencement

of the Companies (Amendment) Act, 1974, or

(b)where the aforesaid percentage has been first so held

before the commencement of the Companies

(Amendment) Act, 1974 on and from the expiry of the

period of three months from the date of such

commencement, unless within that period the

aforesaid percentage is reduced below twenty-five per

cent of the paid-up share capital of the public

company,

become, by virtue of this sub-section, a public company, and

thereupon all other provisions of this section shall apply

thereto :

15

Page 16 Provided that even after the private company has so become

a public company, its articles of association may include

provisions relating to the matters specified in clause (iii) of

sub-section (1) of section 3 and the number of its members

may be, or may at any time be reduced, below seven.”

30.Sub-sections (9) to (11) of Section 43A came to be

inserted by various amending acts. The complete details of

the contents of all these sections and their legislative history is

not necessary for us except to note that in the explanation

appended to sub-section (9), the expressions “relevant period”

and “turnover” occurring in sub-Section (1) and (1A) are

defined as follows:-

Explanation – For the purposes of this section, -

(i)“relevant period” means the period of three

consecutive financial years, -

(ii)Immediately preceding the commencement of the

Companies (Amendment) Act, 1974 ,or

(iii)A part of which immediately preceded such

commencement and the other part of which

immediately, followed such commencement, or

(iv)Immediately following such commencement or at

any time thereafter;

(b) “turnover”, of a company, means the aggregate value of

the realization made from the sale, supply or distribution of

goods or on account of services rendered, or both, by the

company during a financial year;

31.Act 31 of 1988 inserted sub-section (1C) which declares

that any private company accepting deposits from “the public

other than its members, directors or their relatives”

16

Page 17 (hereinafter referred to as “PUBLIC” for the sake of

convenience) pursuant to such invitation made by an

advertisement after the commencement of the Amendment Act

i.e. 15.6.1988 or renews an existing deposit becomes a public

company. Even sub-section (1C) has a proviso in terms which

are identical with the provisos to Section (1A) and (1B).

“(1C)Where, after the commencement of the Companies

(Amendment) Act, 1988 a private company accepts, after an

invitation is made by an advertisement, or renews, deposits

from the public, other than its members, directors or their

relatives, such private company shall, on and from the date

on which such acceptance or renewal as the case may be, is

first made after such commencement, become a public

company and thereupon all the provisions of this section

shall apply thereto:

Provided that even after the private company has so

become a public company, its articles of association may

include provisions relating to the matters specified in clause

(iii) of sub-section (1) of section 3 and the number of its

members may be, or may at any time be, reduced below

seven.”

32.Thus, it can be seen that by the date of amendment of

Section 43A by the Act 53 of 2000 under Section 43A, there

are four classes of private companies which are declared by

the said section to become public companies on the happening

of an event mentioned in each of the sub-sections.

17

Page 18 33.It is also necessary to note that each of the above-

mentioned four sub-sections contained a proviso. The tenor of

all the four provisos is identical.

“Provided that even after the private company has so become

a public company, its articles of association may include

provisions relating to the matters specified in clause (iii) of

sub-section (1) of section 3 and the number of its members

may be, or may at any time be reduced, below seven.”

34.Each one of these provisos declare that even after a

private company becomes a public company by virtue of the

operation of any one of the four sub-Sections i.e. (1), (1A), (1B)

and (1C) of Section 43A; the Articles of Association of such

company may include provisions relating to the matters

specified in Section 3(1)(iii). The provisos further declare that

the number of members of such company “may be or may at

any time be reduced, below seven”. The implications of the

provisos require an examination.

35.The provisos permit the continuance of stipulations in

the Articles of Association of such public companies which

relate to the matters specified in Section 3(1)(iii). In other

words, though the companies whose Articles of Association

provide for matters specified in Section 3(1)(iii) are private

companies, and under the scheme of the Companies Act a

18

Page 19 public company cannot have such stipulations, Section 43A

expressly permit the four classes of public companies to retain

such Articles of Association.

36.Secondly, the relaxation under the proviso regarding the

membership of such companies getting reduced below seven is

meant to obviate the conflict with the requirement of Section

12 which requires a minimum of such seven persons to

constitute a public company.

37.The employment of the expression “may” in the clause,

“its Articles of Association may include provisions relating to

the matters” only indicates that a private company which

becomes a public company by virtue of the operation of any

one of the four sub-sections of Section 43A has choice either

to retain those stipulations in its Articles of Association

relating to the matters specified under Section 3(1)(iii) or to

amend its Articles of Association either deleting all or some of

the stipulations relating to matters specified in Section 3(1)(iii)

from its Articles of Association. The reason is that a private

company has certain privileges and exemptions under the

Companies Act in the sense that a private company is subject

19

Page 20 to a lesser degree of regulation under the provisions of the

Companies Act, than a public company. The moment private

company becomes a public company, either by operation of

law or the volition of its member, such company becomes

subject to a more rigorous regulation of its activities by the

various provisions of the Companies Act. At the same time, a

public company has certain advantages under law. Therefore,

it is for the company and its members to decide whether the

restrictions and limitations contained in the Articles of

Association referable to matters specified in Section 3(1)(iii)

should still continue even after the company lost the

exemptions and privileges attached to a private company.

38.Section 43 of the Companies Act recognizes the existence

of such privileges and exemptions by declaring that a private

company which defaults in complying with any one of the

stipulations made in its Articles of Association relating to the

matters specified under Section 3(1)(iii), such Company “shall

cease to be entitled to the privileges and exemptions conferred

on private companies by or under this Act and this Act shall

apply to the Company as if it were not a private company.

8

8

43. Consequences of default in complying with conditions constituting a company a private

company - Where the articles of a company include the provisions which, under clause (iii) of sub-

section (1) of section 3, are required to be included in the articles of a company in order to constitute it a

20

Page 21 39.Therefore, these four provisos give an option to the

company either to retain the original Articles of Association or

alter them, but there is no statutory compulsion to alter the

Articles of Association. Our view is fortified by the language

of sub-Section (2) of Section 43A.

“(2) Within three months from the date on which a private

company becomes a public company by virtue of this

section, the company shall inform the Registrar that it has

become a public company as aforesaid, and thereupon the

Registrar shall delete the word "Private" become the word

"Limited" in the name of the company upon the register and

shall also make the necessary alterations in the certificate of

incorporation issued to the company and in its

memorandum of association.”

40.It only obligates a private company which becomes a

public company by virtue of the operation of Section 43A to

inform the Registrar within three months from the date on

which the private company becomes a public company,

regarding the change in its status from ‘private’ to ‘public’.

41.On receipt of such intimation, the Registrar is required to

make a change in the name of the company in his register and

private company, but default is made in complying with any of those provisions, the company shall cease to

be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this

Act shall apply to the company as if it were not a private company :

Provided that the Central Government, on being satisfied that the failure to comply with the

conditions was accidental or due to inadvertence or to some other sufficient cause, or that on other grounds

it is just and equitable to grant relief, may, on the application of the company or any other person interested

and on such terms and conditions as seem to the Central Government just and expedient, order that the

company be relieved from such consequences as aforesaid.

21

Page 22 is also required to make necessary alterations in the

‘certificate of incorporation’ issued to the company and its

‘Memorandum of Association’.

42.Sub-section (2) does not obligate either the company or

the Registrar to make any changes in the Articles of

Association. No other provision of the Companies Act is

brought to my notice which creates such an obligation.

43.Sub-section (11) was inserted by Act 53 of 2000 which is

the bone of contention in the instant appeal and reads as

follows:-

“(11) Nothing contained in this section, except sub-section

(2A), shall apply on and after the commencement of the

Companies (Amendment) Act, 2000.”

The implication of the same requires a detailed examination at

a later stage of this judgment.

DECISION OF THE HIGH COURT :

44.The High Court noted the history of Sections 3(1)(iii) and

43A of the Act and recorded a finding that in view of the

22

Page 23 insertion of sub-section (2A) in Section 43A by the Companies

Amendment Act (Act 53 of 2000)–

“……… the concept of deemed public company under section

43A and introduced by the Companies (Amendment) Act has

now been abolished based on the recommendation of the

working group of Companies Act, 1956.”

45.The High Court also recorded a finding that the first

respondent company is a public company

9

. The High Court

then went on to examine whether there can be any restriction

on the shareholder’s right to transfer shares in a public

company. The High Court reached a conclusion that in view of

the subsequent statutory amendments made in 1988 and

2000 to the Companies Act, Article 57 of the Articles of

Association of the first respondent company would no longer

govern the rights of its shareholders to transfer their shares.

“After 17

th

August 1988 and in any event after dated 13

th

December 2000, the position has undergone a change and

Article 57 appearing in the Articles of Association would no

longer be the governing article. It is not necessary to then

consider the argument as to whether the said article is void

or not. That article must give way to the statutory provision.

If the shares of public company are freely transferable, then,

the statutory provisions in that behalf will take such effect

notwithstanding anything to the contrary contained in the

Articles of Association of such company. The over-riding

effect given to the Act by section 9 cannot be ignored and

brushed aside as desired by the appellants.”

9

117. Therefore, in my view, once the first respondent is a public company as evidenced by the

certificate referred to above, with effect from 17

th

August 1988, then, the amendment made in 2000 would

be applicable and section 43A ceases to apply to it. That the words “On and After”, are used makes no

difference as far as present case4 is concerned. In the present case, the status of the first respondent as a

public company remains and it is now academic to find out whether it was a deemed public company

earlier as contended. Once the law makes only a broad categorization as noticed above, then, it is not

necessary to deal with this contention any more.

23

Page 24 46.An alternative argument of the appellants that in view of

the fact the shares of the first respondent company are not

listed shares, there can be a right of preemption, is rejected by

the High Court.

“Their alternate argument that assuming that GCL is public

company, its shares being nonlisted, there can be a right of

preemption, is equally unsound and not tenable. There is no

distinction made in the Act of this nature. That argument is

canvassed only by relying on the definition of the term ‘listed

public companies’ appearing in section 2(23A). The

definition itself clarifies that a public company which has

any of its securities listed in any of the recognized stock

exchange will be termed as listed public company.

Nonetheless it remains a public company and merely

because its shares are not listed in any recognized stock

exchange does not mean that there is any restriction on their

transfer. They are and continue to be freely transferable as

they are shares of a public company. The broad distinction

as noticed above, between the term ‘Private’ and “Public”

company, is enough to turn down this alternate argument.”

47.The High Court also rejected the other submission of

oppression and mismanagement pleaded by the appellants as

the basis of the plea of oppression and mismanagement is the

existence of legally valid preemption clause. The High Court

held–

“127. Once all these arguments and contentions are dealt

with, then, other part of submissions of Mr. Samdani on

oppression of minority also fail. They are raised on the basis

that the preemptive right is defeated by respondent Nos.2 to

5 by their several acts of omission and commission. Once

the preemptive right itself is not in existence by virtue of the

statutory provisions in the field, then, there is no act of

24

Page 25 oppression. As held above, the plea of mis-management has

been given up and has not been pursued.”

48.The reasons which led to the above extracted conclusions

of the High Court are as follows:

A) Section 43A prior to its amendment by Amendment

Act 53 of 2000 only provided for various situations in which a

private company becomes a public company by operation of

law but not vice-versa.

“112.… In other words, this section permitted a private

company to become a public company in certain cases and

once the word private is deleted it becomes a public

company. However, there was nothing which

permitted such public company to again become

private company and that is achieved by

insertion of section 43(2A).

B) The High Court also opined that in view of the

declaration contained under sub-section (11) of section 43A,

which was inserted by the Amendment Act 53 of 2000, the

entire Section 43A becomes inoperative w.e.f. 13.12.2000 (the

day on which the Amendment Act came into force) except for

sub-section (2A). Thereby “the concept of deemed public

company under Section 43A” has “been abolished”.

“112.…….. Sub-section 43A(11) which also was inserted by

Act 53 of 2000 from 13

th

December 2000, clarified that

nothing contained in section 43A, save and except sub-

section 2A shall apply on and after the commencement of

25

Page 26 Companies (Amendment) Act 2000. In other words, whole of

section 43A except for one sub-section viz., sub-section 2A

ceases to apply after the commencement of Companies

(Amendment) Act, 2000. ………………. Thus, section 43A

itself became inapplicable by virtue of sub-section 11. The

effect of all this is that the concept of deemed public

company under section 43A and introduced by the

Companies (Amendment) Act has now been abolished

based on the recommendation of the working group the

Companies Act, 1956.”

C) The High Court held that though the first

respondent company was initially incorporated as a private

company, it became a public company (in the language of the

High Court ‘a DEEMED public company’) by virtue of the

operation of Section 43A (1A) but ceased to be a private

company. Since its Articles of Association could not be

amended to give effect to the newly inserted clause (d) of

Section 3(1)(iii) (introduced by Act 53 of 2000 w.e.f.

13.12.2000), therefore, its status as ‘DEEMED public

company’ itself lapsed w.e.f. 13.12.2000 and thereafter the

first respondent company would only be a public company but

not either a private company or a DEEMED public company

whose Articles of Association could contain restrictions on the

transfer of shares of its members.

“115.It is clear from the factual position that the attempt to

amend the Memorandum and Articles of Association of the

first respondent was unsuccessful. The said resolution

26

Page 27 proposed in the meeting held on 5

th

May 2001 was not

carried but in fact defeated. Once it was defeated, then, the

first respondent which had become a public company on 17

th

August 1988 continued with that status. It would be of

relevance to note that the resolution was moved in the

meeting held on 5

th

May 2001. That resolution was defeated

on that day. However, the Companies Amendment Act 2000

had come into effect already and to be precise from 13

th

December 2000. On 13

th

December 2000, GCL was not a

deemed public company but a public company. Once it was

a public company, then, the argument of the appellants that

it continued to retain its fundamental and basic character as

a private company cannot be accepted. The status is

conferred by law. The status was sought to be changed or

amended by moving an amendment to insert an additional

clause (d) was defeated, then, there is no scope to alter the

status of the respondent No.1 company by either terming it

as a deemed public company or a public company retaining

the fundamental and basic character of a private company.

Both these concepts are unknown to law.”

49.SUBMISSIONS BY THE APPELLANTS :

(i)On a plain reading of sub-Section (11), it is clear that

Section 43A is retained on the statute book and not deleted by

the Companies (Amendment) Act, 2000. Had the Parliament

intended to completely efface all Section 43A companies, the

surest manner would have been to delete Section 43A from the

statute. The retention of Section 43A is an extremely strong

indicator of the legislative intention to continue recognition of

existing “hybrid companies” even after 13.12.2001.

(ii)This legislative intention is made clear by the insertion of

clause (11) in Section 43A by the Companies (Amendment)

Act, 2000 which reads:

27

Page 28 “(11). Nothing contained in this section, except sub-section

(2A), shall apply on and after the commencement of the

Companies (Amendment) Act, 2000.”

The expression “nothing contained in this section .. shall apply

on and after”, coupled with the retention of Section 43A on the

statute book, clearly indicates that the legislature did not want

the regime of hybrid companies to lapse w.e.f. 13.12.2000.

(iii)Apart from retaining Section 43A on the statute book,

Section 111(14) of the companies Act, 1956 also remained in

the statute after the Companies (Amendment) Act, 2000.

Section 111(14) reads:

“In this section “company” means a private company and

includes a private company which had become a public

company by virtue of Section 43A of this Act.”

The justification for retaining a specific reference to Section

43A in Section 111 is that the status of deemed public

companies continued to be recognized even after the 2000

amendment. Had the Parliament’s intention been otherwise,

Section 43A itself and all references in the Companies Act,

1956 to Section 43A would have been deleted by the

legislature.

(iv)The insertion of sub-section (2A) into Section 43A was

required to provide an exit route on and after 13.12.2000 for

28

Page 29 an existing hybrid company which ceased to attract the

operation of Section 43A(1) - (1C). Prior to the 2000

amendment, where a hybrid company ceased to attract the

operation of the relevant sub-section of Section 43A which had

rendered it a hybrid company with approval of the Central

Government was mandatory in terms of sub-section 43A(4).

The 2000 amendment removed the requirement for Central

Government approval.

(v)Each of the sub-sections of Section 43A contained a

specific clarificatory proviso which preserved the essential

character and status of a private company. Therefore, to

construe Section 43A subsequent to 13.12.2000 to destroy the

essential character and status of the companies covered by

Section 43A would be illogical.

(vi)A “Company” is a legal vehicle for more than one

person/collection of persons to come together and form an

enterprise. The basic terms on which such persons would join

together would be contained in the Memorandum & Articles of

Association of such a company, creating rights and obligations

including the conditions subject to which shares are to be

held. When a person becomes a member of a company he

29

Page 30 agrees to be bound by the covenants in the Articles of

Association (Section 36

10

). The Articles are the foundation on

the basis of which shareholders of the company deal with each

other. In the case of a company such as the Respondent No.1,

the application of Section 43A did not in any manner disturb

the existing arrangements among the shareholders but added

on certain regulatory requirements. Assuming (whilst denying)

that Section 43A stood effectively “repealed” on and after

13.12.2000, there is nothing to suggest that the intention of

the legislature was to completely disrupt the foundational

arrangement amongst shareholders across the country in tens

of thousands of private limited companies. In other words,

assuming there was a repeal, the status of every deemed

public company reverts back to a private company and not a

public company. Should the status of every hybrid company

subsequent to the 2000 amendment be regarded as “public”

that would mean a destruction of various Articles which

thought permissible in a private company are illegal with

regard to a public company.

10

Section 36. Effect of memorandum and articles.—(1) Subject to the provisions of this Act, the

memorandum and articles shall, when registered, bind the company and the members thereof to the same

extent as if they respectively had been signed by the company and by each member, and contained

covenants on its and his part to observe all the provisions of the memorandum and of the articles.

(2) All money payable by any member to the company under the memorandum or

articles shall be a debt due from him to the company.

30

Page 31 (vii)It is settled position that unless the contrary intention

appears, an enactment is presumed not to be intended to have

a retrospective operation. The amendment to the definition of

a “private company” affects its status and would affect

substantive vested rights acquired over decades. An

amendment which affects alteration in status/substantive

vested rights is always presumed to be prospective in

operation.

(viii)By the Amendment Act of 2000, two prospective changes

were introduced in the definition of a “private company” – first

regarding such a company having a minimum paid up capital

of one Lakh and second that such a company in its Articles

must also include a fourth prohibition (d) regarding invitation

or acceptance of deposits from persons other than its

members, directors or their relatives. Consequently, whilst no

fresh private company could be incorporated after the

Amendment Act of 2000, unless it met with the new amended

definition, for existing private companies, the 2000

Amendment made a provision by introducing sub-sections (3)

and (5)

11

thereby pre-existing private companies were required

11

“(3)Every private company, existing on the commencement of the Companies (Amendment) Act,

2000, with a paid-up capital of less than one lakh rupees, shall within a period of two years from such

31

Page 32 to increase their paid up capital within a period of two years to

meet with the minimum threshold of Rupees One Lakh now

introduced by the Amendment Act of 2000, no provision was

contained for pre-existing private companies to amend their

Articles of Association to introduce the new sub-clause (d) in

its Articles. Thus, the existing private companies were not

required to amend their articles by introducing the fourth

clause (d) in its Articles to retain their character of a private

company.

50.SUBMISSIONS BY THE RESPONDENTS :

(i)With the introduction of the Amendment Act of 2000 on

13

th

December 2000, an existing private company that does

not have clause (d) in its articles becomes a public company.

Any other construction of the amendment would result in the

creation of two classes of private companies leading to

discriminatory results.

(ii)Neither the definition in Section 3(1) nor the other sub-

sections of Section 3 carve out an exception from the operation

commencement, enhance its paid-up capital to one lakh rupees.

(5) Where a private company … fails to enhance its paid up capital in the manner specified

in sub-section (3) ….., such company shall be deemed to be a defunct company within the meaning of

section 560 and its name shall be struck off from the register by the Registrar.”

32

Page 33 of clause (d) to companies existing on 13.12.2000; and do not

prescribe a time limit for insertion of the provisions to give

effect to clause (d) in the Articles of Association. Therefore,

such non-inclusion necessarily led to the result (by operation

of law) that all such private companies become full-fledged

public companies on 13.12.2000 until they amended their

articles to include the provisions of clause (d).

(iii)Section 43A (1C) was introduced to regulate the

unhealthy practice of accepting deposits from the public by

private companies. The only legal consequence of Section

43A(1C) was to treat such private companies to be public

companies but that did not stop them from being ‘private

companies’ who accepted deposits from the public. Parliament

wanted to remedy the malpractice or ‘mischief’ of collecting

deposits by private companies and it did so by the addition of

clause (d) to Section 3(1)(iii) on 13.12.2000 so as to

mandatorily prohibit acceptance of deposits from the public.

If they did not incorporate the provisions of clause (d) in their

articles and stop accepting deposits from the public they were

to become ‘public companies’.

33

Page 34 (iv)The appellant voted against the resolution to introduce

(d) on 5

th

May 2001 and issued his letter dated 6

th

June 2001.

Therefore, estopped from arguing that the first respondent is a

private company.

(v)The fact that the first respondent is a public company

and Article 57 is invalid has been conclusively held by the

Bombay High Court vide an earlier Order dated 14

th

November

2008 – which is a judgment in rem and has attained finality.

(vi)The appellant applied for transfer of 5 shares – which

resulted in the total members exceeding 50. The fact that the

total members have exceeded 50 is admitted. Thus, the first

respondent cannot claim to be a private company.

(vii)After the Amendment Act of 2000, S. 43A stands

abolished; Sub-section 2A is merely ministerial and a surplus;

As first respondent is not a private company after 13

th

December 2000,it cannot be a deemed public company.

(viii)Article 57 offends the principle of free transferability

under S. 111A(2) which was recognized under S. 22A of the

SCRA and is recognized by this Hon’ble Court in the case of

34

Page 35 Vodafone International Holdings B.V. v. Union of India, (2012) 6

SCC 613.

EXAMINATION OF THE CORRECTNESS OF THE

CONCLUSIONS OF THE HIGH COURT :

(A)

51.When the High Court recorded that “ there was nothing which

permitted such public company (companies covered under Section 43A,

emphasis supplied) to again become private company’, obviously,

Section 43A, sub-section (4) escaped the attention of the High

Court. Sub-section (4) is on the statute book since the

inception of Section 43A. At the cost of repetition, I reproduce

it.

“(4) A private company which has become a public company

by virtue of this section shall continue to be a public

company until it has, with the approval of the Central

Government and in accordance with the provisions of this

Act, again become a private company.”

52.Parliament always recognized the possibility of a private

company (which becomes a public company by virtue of

operation of Section 43A) once again reverting back to its

status of a private company.

53.The reasons are obvious. Each one of the events

stipulated under Section 43A sub-sections (1), (1A), (1B) and

35

Page 36 (1C) which have the effect of converting a public company into

a private company is transient. For example, if we take a case

falling under sub-section (1) of Section 43A, i.e. a private

company becoming a public company by virtue of the fact that

25% of its shares are held by one or more bodies corporate; it

is always possible that at some point of time such bodies

corporate decide to disinvest either completely or partially

(thereby reducing their holding to less than 25%) their shares

of such private company. In such a case, the event or the

condition which is essential to convert a private company into

a public company under Section 43A (1) ceases to exist.

Similarly, take the case falling under Section 43A(1B), i.e. a

private company becoming a public company by virtue of the

fact that such a private company holds not less than 25% of

paid-up shares of a public company; If the private company

(becoming a public company, by virtue of operation of Section

43A sub-section (1B), disinvest its shares either entirely or

partially (thereby reducing the holding to less than 25%) in

the share capital of that public company, once again the

condition/event which converted the private company into a

public company ceases to exist. Such company can always

36

Page 37 revert back to its original status of a private company.

However, sub-section (4) stipulates that such a reversion to

the original status is subject to the prior approval of the

Central Government.

(B)

54.The High Court recorded a finding that after the

amendment to the Companies Act by Act 53 of 2000, only two

classes of companies remained, i.e. private and public

companies and the third class of public companies under

Section 43A (HYBRID companies) ceased to exist. The

correctness of this conclusion is required to be examined.

55.Obviously, from 1960 to 2000, innumerable private

companies would have become public companies (HYBRID) by

virtue of the operation of the various sub-sections of Section

43A. If the Parliament really wanted to do away with HYBRID

companies, the best way would have been to repeal Section

43A. Because it is a settled principle of statutory

interpretation that the repeal of an enactment effaces the

repealed statute from the statute book ab initio thereby

creating a fiction in law that such a statute never existed, and

37

Page 38 never created in any legal consequences except for rights and

obligations which emanated from various acts and omissions

covered by the statute and are saved by the express provisions

under the repealed act or by virtue of the provisions of the

General Clauses Act. Therefore, by repealing Section 43A,

Parliament could have put an end to the existence of all

HYBRID companies. We are aware that there can be other

technics by which the same result can be achieved. Therefore,

it is required to be examined whether the Act 53 of 2000 refers

to achieve the same result. It does not repeal Section 43A.

Sub-section (11) which came to be inserted by the said

amendment in Section 43A only declares:-

“(11).Nothing contained in this section, except sub-section (2A), shall

apply on and after the commencement of the Companies (Amendment)

Act, 2000.”

56.What exactly is the meaning of sub-section (11) is to be

examined?

57.There must be innumerable private companies in this

country. For the purpose of our analysis, they can be

classified into two categories, (i) private companies which came

into existence prior to the Amendment Act 53 of 2000 (w.e.f.

38

Page 39 31.12.2000); and (ii) private companies which came into

existence after the abovementioned date.

58.Insofar as the first of the abovementioned two categories

is concerned they can further be categorized into (i) private

companies which remained as such, and (ii) private companies

which became public companies by virtue of operation of

Section 43A.

59.Insofar as private companies which came into existence

prior to 13.12.2000 and remained as such without falling into

the net of Section 43A and private companies which came into

existence after 13.12.2000, sub-section (11) of Section 43A

would have no application.

60.The legal consequences emanating from insertion of sub-

section (11) in Section 43A only visit the second category

mentioned above i.e. private companies which came into

existence prior to 13.12.2000 but became public companies by

virtue of operation of Section 43A.

61.Of them, we are only concerned with those private

companies which became public companies by virtue of

39

Page 40 operation of Section 43A(1C), that is, those private companies

which had accepted deposits from PUBLIC. Mere acceptance

of the deposits from PUBLIC prior to 13.12.2000 did not

contravene any law. Such acceptance was only regulated by

virtue of Section 58A. Though such private companies were

treated as public companies by virtue of Section 43A(1C) they

were entitled to continue those stipulations dealing with the

matters specified under Section 3(1)(iii)(a)(b)&(c). It is only

w.e.f. 13.12.2000, Section 3(1)(iii) of the Act came to be

amended by inserting sub-clause (d) which obligates a private

company to contain a prohibition against any invitation or

acceptance of deposits from PUBLIC in such company’s

Articles of Association.

62.What happens to those private companies (obviously

there must be innumerable) which existed prior to 13.12.2000

and had also invited and collected deposits from PUBLIC as

they were legitimately entitled to do so prior to the

amendment? If the conclusion of the High Court that the

concept of DEEMED public company is abolished is correct,

all those private companies should become public companies

(not HYBRID/DEEMED public companies) overnight until

40

Page 41 their Articles of Association are amended. As a consequence

thereof, their respective shareholders lose a vested right

flowing out of the Articles of Association (created by a contract)

which they collectively enjoyed till 13.12.2000 to restrict the

right of individual shareholders to freely transfer their shares.

Such a collective right by definition inheres in the

shareholders of a private company and protected by virtue of

proviso to Section 43A(1C) notwithstanding the fact that such

companies were treated as public companies prior to

13.12.2000. To deprive the shareholders of HYBRID

companies such a collective right would be too drastic a

change overnight without giving any option or time to the

HYBRID company and its members to retain the basic

character of the company as a private company.

63.Though, in theory, it is open to the legislature to create

such a situation, whether the Parliament intended such a

drastic course of action is the question. It must be

remembered that in the ultimate analysis a company is a

voluntary association of its members who have a fundamental

right to form associations under Article 19(1)(c) of the

Constitution of India, the inference which is obvious from the

41

Page 42 text of the Constitution and also on cumulative reading of the

decisions of this Court in Damyanti Naranga v. The Union

of India & Others, (1971) 1 SCC 678, Rustom Cavasjee

Cooper v. Union of India, (1970) 1 SCC 248, Bennett

Coleman & Co. & Others v. Union of India & Others,

(1972) 2 SCC 788. The fundamental right to form an

association implies the right to form the association on such

terms and conditions agreed upon by its members, so long as

such terms and conditions are not in conflict with any law or

public policy. No doubt, the State can, by law, impose

restrictions on such rights on the basis of the considerations

mentioned in Article 19(4), but such restrictions must be

reasonable.

64.The destruction of the collective rights of the members of

the companies mentioned in para 62, in our view, would

require, at the least, an express provision of law and such a

provision must be a ‘reasonable restriction’ within the

meaning of that expression occurring in Article 19(4). In the

absence of any express provision which takes away the

fundamental right of the shareholders of a private company,

we are inclined to read a restriction on the collective right of

42

Page 43 the shareholders of a private company to restrict the right of

the individual shareholders to freely transfer their shares.

65.Our view is supported by the parliamentary practice and

history of the amendments made to the Companies Act itself.

66.Under the Act 53 of 2000 when the definition of private

company is amended by inserting a clause by which

requirement of having a “minimum paid up share capital of

one lakh rupees or such higher paid up capital as may be

prescribed by its articles” is introduced for the first time,

Parliament also gave a window of 2 years for the private

companies existing on the date of the commencement of the

Amendment Act i.e. 13.12.2000. By Section 3(5)

12

it is

declared that companies failing to comply with the newly

introduced obligation “shall be deemed to be defunct”

companies and their names “shall be struck off from the

register”. Parliament not only gave a window period to the

existing companies to take steps to comply with the amended

law but also provided expressly for the consequences to follow

on the failure to comply with the law.

12

Section 3(5) – Where a private company or a public company fails to enhance its paid-up capital in the

manner specified in sub-section (3) or sub-section (4), such company shall be deemed to be a defunct

company within the meaning of section 560 and its name shall be struck off from the register by the

Registrar.

43

Page 44 67.One more reason for our inability to accept the theory of

abolition of HYBRID companies is that – if accepted, the

Amendment Act 53 of 2000 would have the effect of

retrospectively taking away the rights collectively enjoyed by

the shareholders (of private companies which became HYBRID

companies) from 1956 onwards. In this context, it is worth

remembering the words of this Court in K.C. Arora &

Another v. State of Haryana & Others, (1984) 3 SCC 281 at

294:

“The legislation is pure and simple, self-deceptive, if we may

use such an expression with reference to a legislature-made

law. The legislature is undoubtedly competent to legislate

with retrospective effect to take away or impair any vested

right acquired under existing laws but since the laws are

made under a written Constitution, and have to conform to

the dos and don’ts of the Constitution, neither prospective

nor retrospective laws can be made so as to contravene

fundamental rights. The law must satisfy the requirements

of the Constitution today taking into account the accrued or

acquired rights of the parties today. The law cannot say, 20

years ago the parties had no rights, therefore, the

requirements of the Constitution will be satisfied if the law is

dated back by 20 years. We are concerned with today’s

rights and not yesterday’s. A legislature cannot legislate

today with reference to a situation that obtained 20 years

ago and ignore the march of events and the constitutional

rights accrued in the course of the 20 years. That would be

most arbitrary, unreasonable and a negation of history. ...

Today’s equals cannot be made unequal by saying that they

were unequal 20 years ago and we will restore that position

by making a law today and making it retrospective.

Constitutional rights, constitutional obligations and

constitutional consequences cannot be tampered with that

way. A law which if made today would be plainly invalid as

offending constitutional provisions in the context of the

existing situation cannot become valid by being made

44

Page 45 retrospective. Past virtue (constitutional) cannot be made to

wipe out present vice (constitutional) by making

retrospective laws.”

68.Apart from that, it is rightly pointed out by the appellant

– if Parliament really wanted to put an end to the existence of

all the HYBRID Companies, Parliament should have deleted all

reference to the HYBRID (Section 43A) companies in the Act.

But Section 111(14) still continues to make reference to

Section 43A.

69.Therefore, we are of the opinion that the concept of

HYBRID (Section 43A) companies is not altogether abolished.

At least insofar as the Companies falling under Section

43A(1C) are concerned which were in existence on 13.12.2000

would continue as HYBRID Companies.

(C)

70.The other conclusion of the High Court that the failure of

the first respondent company to amend its Articles of

Association to give effect to clause (d) of Section 3(1)(iii)

rendered the first respondent company to cease to be a private

company, in our opinion, is irrelevant for the decision on the

REAL question in this case.

45

Page 46 71.The REAL question is not whether the failure to amend

the Articles of Association by the first respondent company

rendered the first respondent company (which is otherwise a

private company) a public company, but whether such a

failure destroyed the collective right of the members of the first

respondent company to have shares whose transferability is

subject to limitations and restrictions contained in Article 57

of its Articles of Association.

72.Originally, Section 3(1)(iii) stipulated - to be a private

company a company’s Articles of Association are required to

contain certain stipulations with regard to the matters

specified in clause (a), (b) and (c). By virtue of the Act 53 of

2000 w.e.f. 13.12.2000 a private company’s Articles of

Association are required to contain additional stipulations

relating to the matter contained in clause (d) also. The

question is whether the newly introduced requirement is

applicable to existing private companies also or only to those

which come into existence subsequent to the commencement

of the Act 53 of 2000?

46

Page 47 73.Section 27(3) mandates that the articles of a private

company having share capital (such as the one on hand) shall

only contain provisions relating to matters specified in clauses

(a), (b) and (c) of Section 3(1)(iii) but not matters relating to

clause (d). In other words, though the Parliament chose to

introduce clause (d) in Section 3(1)(iii) (by an amendment in

the year 2000), did not think it necessary to make a

corresponding amendment to Section 27(3). Whether such an

omission is accidental or by a design is required to be

examined? If it is by a design what is the purpose sought to

be achieved of such a design requires an examination?

74.The Companies Act never prohibited the acceptance of

deposits. Prior to the Amendment Act of 2000, th ere has

never been a provision in the Companies Act which altogether

prohibited companies either public or private from inviting or

accepting deposits. Section 58A(1)

13

of the Act, (which was

introduced by Act 41 of 1974) for the first time made a

provision enabling the Central Government to prescribe “the

limits up to which, the manner in which and the conditions

13

Section 58A. Deposits not to be invited without issuing an advertisement.—(1) The Central Government

may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which

and the conditions subject to which deposits may be invited or accepted by a company either from the

public or from its members.

47

Page 48 subject to which deposits may be invited or accepted by a

company either from the public or from its members”. The

remaining sub-sections of Section 58A make various

stipulations regarding the method and manner of inviting and

accepting (after the insertion of the Section) deposits or the

renewal of deposits taken prior to introduction of the Section

and the penalties for the failure to comply with the

stipulations contained in the said Section - the details of

which are not necessary for the present purpose. But even

Section 58A did not prohibit the acceptance of deposits.

Irrespective of the fact whether a company accepting deposits

is a private company or a public company, the invitation or

acceptance of such deposits is only made to strict regime of

regulations under Section 58A.

75.Then came, in 1988, Section 43A(1C), which only

declared that a private company either accepting deposits

from or renewing existing deposits (made either after or prior

to 15.6.1988 respectively) collected from “persons other than

its members, directors or their relatives” (hereinafter for the

sake of convenience referred to as “PUBLIC”) shall become a

public company. But under the proviso to sub-section (1C),

48

Page 49 even after becoming a public company, such a Company can

retain either restrictions or limitations contemplated under

Section 3(1)(iii).

76.Therefore, the question is-what is the effect of the

insertion of clause (d) in Section 3(1)(iii)?

Prior to 1988 :

77.Whether a Company should accept deposits from

PUBLIC or not is a policy choice only of the company and its

members. Even prior to the introduction of Section 3(1)(iii)(d)

& Section 43A (1C), the members of a private company could

have either permitted or prohibited the company from

accepting deposits from PUBLIC or stipulated conditions

subject to which deposits could be taken. If a company’s

internal policy prohibited the acceptance of deposits from

PUBLIC and contrary to such internal policy deposits are

collected from PUBLIC it was always open to the members of

the company to deal with the situation and the persons

violating the company’s policy.

78.In 1988, the Parliament thought it necessary to provide

for a more rigorous control and scrutiny of the activities of

49

Page 50 accepting deposits from PUBLIC by private companies and

introduced sub-section (1C) of Section 43A, thereby enabling

the State to have a greater control over such activity of such

private companies by treating them as public companies. The

regulations, control and supervision to which the management

of public companies is subjected to under the Act is higher in

degree compared to the regulations, control and supervision to

which the management of a private companies is subjected to

under the Act. The control contemplated under Section

43A(1C) is in addition to the regulations and supervision

brought in by virtue of Section 58A.

Before the amendment Act 53 of 2000 :

79.If a private company chose to incorporate a stipulation

not to accept deposits from PUBLIC, it is a matter of its

internal policy. But if it incorporated such a stipulation and

defaulted in compliance with such stipulation, the Company

only ceased “to be entitled to the privileges and exemptions

conferred on a private company by or under the Act” and the

“Act shall apply to the company as if it were not a private

company” – by virtue of the operation of Section 43

14

which

14

Section 43. Consequences of default in complying with conditions constituting a company a private

company.—Where the articles of a company include the provisions which, under clause (iii) of sub-section

(1) of section 3, are required to be included in the articles of a company in order to constitute if a private

company, but default is made in complying with any of those provisions, the company shall cease to be

entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act

50

Page 51 only creates a legal fiction. Section 43 does not declare that

such companies do become public companies unlike Section

43A. On the other hand, the proviso to Section 43 enables the

Central Government to condone the lapse of such private

companies.

“Proviso to Section 43:

Provided that the Central Government on being satisfied that

the failure to comply with the conditions was accidental or

due to inadvertence or to some other sufficient cause, or that

on other grounds it is just and equitable to grant relief, may,

on the application of the company or any other person

interested and on such terms and conditions as seem to the

Central Government just and expedient, order that the

company be relieved from such consequences as aforesaid.”

80.Notwithstanding the fact that the Parliament thought it

necessary for the State to impose a higher degree of control

over the affairs of the management of such private companies

inviting and accepting deposits from PUBLIC, Parliament did

not think it necessary to restrict the collective right of the

members of a private company to impose restrictions on the

right of individual shareholders to freely transfer their

respective shares. Therefore, the proviso to sub-section (1C) of

Section 43A. For that matter, in none of the four

contingencies contemplated under Section 43A(1), (1A), (1B)

and (1C), Parliament thought it necessary to restrict such

shall apply to the company as if it were not a private company.

51

Page 52 collective right of the shareholders of a private company. Such

private companies are to be treated as public companies for

certain purposes.

81.If a private company chooses not to incorporate the

prohibition, such as the one contemplated under Section 3(1)

(iii)(d), and accepts deposits from the public then such

collection of deposits is regulated by Section 58A. If it chooses

to incorporate a stipulation but fails to comply with the same,

it would attract the consequences mentioned in Section 43

which consequences are also avoidable under the proviso to

Section 43.

82.It must be remembered that the kind of control which the

Parliament sought to impose on private companies which

earlier attracted sub-sections (1) to (1B) of Section 43A is now

thought clearly not necessary by the Parliament. An inference

obvious from Section 43A(11) whatever be the other

implications of those sub-sections.

83.Even during the period when Section 43A operated, the

Parliament never thought of curtailing the collective right of

the members of the private companies to have restriction on

52

Page 53 the rights of individual shareholder to freely transfer shares.

Therefore, to believe that such restriction is now sought to be

imposed only in the case of those private companies in

existence on 13.12.2000, which had earlier attracted Section

43A(1C), but not in the case of private companies, which

earlier attracted sub-sections (1), (1A) and (1B), would be

illogical.

84.The insertion of clause (d) in Section 3(1)(iii) is admittedly

only prospective. Therefore, on and after 13.12.2000, if any

body proposes to create a private company, the Articles of

Association of such company must contain a clause

prohibiting the invitation and acceptance of deposits from

PUBLIC.

85.For all the abovementioned reasons, we are unable to

agree with the submission of the respondents that by the

Amendment Act 53 of 2000 and more particularly sub-section

(11) of Section 43A, the Parliament intended to curtail or

destroy the collective right of the shareholders of a HYBRID

company to impose restrictions on the rights of the individual

shareholders to have unfettered right of transfer of their

53

Page 54 shares. Such a restriction which, in our view, constitutes a

restriction on the fundamental rights under Article 19(1)(c),

requires a more express legal authority and cannot be brought

in by inference.

86.The effect of the amendment to Section 3(1)(iii) is: insofar

as the private companies in existence on 13.12.2000, if they

choose to make provisions in their Articles of Association to

give effect to the mandate of Section 3(1)(iii)(d), they become

private companies w.e.f. such date they make such provision

by virtue of Section 43(2A) of the Act. If they do not make

such an amendment, they would still continue to be public

companies governed by Section 43A(1C) [HYBRID Companies]

and can continue to have provisions in their Articles of

Association referable to Section 3(1)(iii)(a), (b) & (c).

87.Here, an argument of the respondent that such an

interpretation of sub-section (11) creates “two classes of

private companies and would have discriminatory results” is

required to be answered. In our view, the argument is based

on a wrong premise. It proceeds on the basis that HYBRID

companies created prior to 13.12.2000 are private companies.

54

Page 55 We have already held that HYBRID companies are public

companies which in law are entitled to retain some features of

the private companies if the shareholders choose to retain

them. Therefore, the question of discrimination does not arise.

88.Therefore, in our opinion, the failure of the first

respondent company to amend its Articles of Association to

give effect to clause (d) of Section 3(1)(iii) does not effect the

operation of its Article 57.

89.That leaves us with two more questions raised by the

respondents herein. They are contained in submissions (iv),

(v) and (vi) noted earlier in the judgment. In fact, submissions

(iv) and (v) are interconnected. The substance is that in view

of the fact that the appellants herein opposed the resolution to

amend the articles of association of the first respondent

company to bring them in tune with the newly inserted clause

(d) of Section 3(1)(iii), they are estopped from arguing that the

first respondent company is not a public company and

secondly in view of the judgment of the Bombay High Court

dated 14.11.2008 in Company Petition No.77 of 1990 “to

which the appellants herein were originally the parties but

55

Page 56 withdrew from the said company petition later” where the

Bombay High Court held as follows:

“Insofar as the present Petitioners are concerned as a matter

of fact they are free to deal with the shares held by them. In

that, the shares are now freely transferable. Indeed, when

the Petition was presented at the relevant time, the

Respondent No.1 Company was a Private Limited Company.

As a result, there was restriction in the transfer of shares.

However, it is common ground that now the Respondent

No.1 Company has become a Public Limited Company as a

result of Special Resolution moved in the Extra Ordinary

General Meeting dated 5

th

May 2001 having been defeated.

Having acquired the status of a Public Limited Company, the

restriction on the right to transfer the shares which was

applicable to Private Limited Company, would naturally get

diluted.

The appellants are precluded to argue that the first

respondent Company is not a public company.

90.Both the submissions are required to be rejected. The

submission based on the principle of estoppel is required to be

rejected in view of my conclusion that the HYBRID companies

contemplated under Section 43A(1C), which were in existence

on 13.12.2000 would continue to be in existence.

91.It is already concluded earlier in this judgment that the

requirement of amending the Articles of Association pursuant

to the Amendment Act 53 of 2000, insofar as such companies

are concerned, is only optional on the part of the shareholders.

56

Page 57 The fact that the shareholders of a HYBRID company exercised

option not to amend the Articles of Association thereby

converting a HYBRID company into a private company does

not prevent such shareholders from advancing an argument

that the first respondent company is not a public company but

still a HBRID company.

92.The second submission is that the judgment in Company

Petition No.77 of 1990 is binding upon the appellants on the

ground that they were parties to the said company petition

earlier and withdrew from the same unconditionally and,

therefore, they are precluded from arguing anything contrary

to the conclusion recorded therein.

93.The principles of law which preclude a party to a civil

litigation from agitating certain issues are contained in Section

11 and Order II Rule 2 of the Code of Civil Procedure, 1908.

Section 11 deals with the principle of res judicata and it

prohibits a Court from trying any suit or issue in which the

matter directly and substantially in issue in a former suit has

been heard and finally decided.

57

Page 58 94.The question whether the first respondent Company is a

public company or a HYBRID company or a private company

was never directly and substantially in issue in Company

Petition No.77 of 1990. The parties to the said company

petition proceeded on the basis that in view of the fact that an

amendment to the Articles of Association to give effect to the

newly inserted clause (d) of Section 3(1)(iii) could not be

carried on, the first respondent company became a public

company. Therefore, the Court never examined that question

of law. Hence, it cannot be said that the appellants are

precluded from raising such a question of law in the instant

appeal.

95.We therefore, do not propose to examine the question as

to what is the effect of the appellant’s withdrawal from the

abovementioned company petition.

96.The only other submission of the respondent which

requires to be dealt with is regarding the transfer of five shares

of the appellant which, according to the respondents, resulted

in the membership of the first respondent company exceeding

fifty thereby rendering the first respondent a public company.

58

Page 59 Unfortunately, though the High Court noted the submission at

para 9, it did not record any finding in this regard. We,

therefore, decline to examine this question. This Court cannot

be converted into a Court which enquires into the questions of

fact for the first time.

97.In view of the fact the High Court, though noted the

contentions of the respondent herein, failed to record any

conclusion thereon, we deem it appropriate to remit the matter

to the High Court only for the purpose of considering the

abovementioned submissions of the respondent and take

appropriate decision. We order accordingly.

98.This appeal stands allowed.

………………………… .J.

(J. Chelameswar)

………………………… .J.

(A.K. Sikri)

New Delhi;

October 28, 2014

59

Page 60 IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2481 OF 2014

Darius Rutton Kavasmaneck …Appellant

Versus

Gharda Chemicals Limited & Others …Respondents

O R D E R

In view of the order remitting the matter to the High

Court, we deem it appropriate that the interim order passed

60

Page 61 earlier on 22.7.2011 by this Court will continue till the

disposal of the matter by the High Court.

The High Court is requested to dispose of the matter

expeditiously in view of the long pendency of the matter.

....................................J.

(J. CHELAMESWAR)

....................................J.

(A.K. SIKRI)

NEW DELHI

OCTOBER 28, 2014.

61