Supreme Court of India
DARIUS RUTION KAVASMANECKversusGHARDA CHEMICALS LIMITED & OTHERS
- Citation
- 2014 INSC 745
- Decided
- 28 October 2014
- Disposal
- Appeal(s) allowed
- Bench
- JASTI CHELAMESWAR
Holding
The Companies (Amendment) Act, 2000 makes amendment of the Articles to include clause (d) optional for existing hybrid companies, so the failure to do so does not affect the operation of Article 57, and the hybrid company continues to exist with its pre‑emption clause enforceable.
Summary
The appeal concerned a minority shareholder of Gharda Chemicals Ltd., a company that started as a private firm but became a public (hybrid) company under Section 43A of the Companies Act, 1956. The Articles of Association contained Article 57, a pre‑emption clause restricting share transfers, which the appellant claimed was enforceable despite the company’s later status. The High Court had held that the Companies (Amendment) Act, 2000, which inserted clause (d) in Section 3(1)(iii), abolished the hybrid category and rendered Article 57 invalid. The Supreme Court examined the statutory scheme, held that the amendment was prospective and optional for existing hybrid companies, and that failure to amend the Articles does not affect the operation of Article 57. Consequently, the pre‑emption clause remains valid and the company continues to be a hybrid public company. The Court allowed the appeal and remitted the matter to the High Court for further consideration of ancillary issues.
Issues considered
- Whether the insertion of clause (d) in Section 3(1)(iii) by the Companies (Amendment) Act, 2000, destroys the rights and obligations created by Article 57 of the Articles of Association of a hybrid company.
- Whether a private company that became a public (hybrid) company under Section 43A retains its hybrid status after the 2000 amendment.
- Whether the failure to amend the Articles of Association to incorporate clause (d) converts the company into a public company and invalidates the pre‑emption clause.
- Whether the High Court’s view that the concept of ‘deemed public company’ was abolished is correct.
- Whether the appellant is estopped by his earlier participation in a related company petition.
Legislation cited
- Companies Act, 1956s. 27(3), s. 3(1)(iii), s. 43, s. 43A, s. 43A(11), s. 43A(1C), s. 43A(2A), s. 58A
- Companies (Amendment) Act, 1960s. 43A
- Companies (Amendment) Act, 1974s. 43A(1), s. 43A(1A), s. 43A(1B)
- Companies (Amendment) Act, 1988s. 43A(1C)
- Companies (Amendment) Act, 2000s. 3(1)(iii)(d), s. 43A(11)
Subjects
pre-emption clausehybrid companyprivate companypublic companyCompanies Act 1956Companies (Amendment) Act 2000Article 57share transfer restrictionfundamental rightsArticle 19(1)(c)Section 43A
Judgment
• [2014) 11 S.C.R. 1119
DARIUS RUTION KAVASMANECK A
v.
GHARDA CHEMICALS LIMITED & OTHERS
(Civil Appeal No. 2481 of 2014)
OCTOBER 28, 2014 B
[J. CHELAMESWAR AND A.K. SIKRI, JJ.]
Companies Act, 1956 - ss. 3(1)(iii), 43A and 43A (1C),
43A (11) - Articles of Association - Article 57 - Pre-emption
clause - Amendment made by the Companies (Amendment) C
Act, 2000 to ss. 3 and 43A - Effect of, on the rights and
obligations created by Art. 57 of the Articles of Association
of the Company - On facts, Company incorporated as private
company, became public company - Art. 57 contained
restrictions on the rights of all the shareholders to transfer their D
shares, shareholders desiring to sell his shares to offer
shares to other shareholders of the company - Respondent
no. 2-shareholder selling shares in the Company, committing
breach of pre-emption agreement contained in Art. 57-
Company petition by appellant-minority shareholder - E
Dismissed by Company Law Board - High Court also
dismissed the appeal holding that the agreement between
shareholders of unlisted public company conferring a right of
pre-emption embodied in its Articles is invalid· and
unenforceable - On appeal, held: Failure of the company to F
amend its Articles of Association to give effect to clause (d)
of s. 3(1 )(iii) does not effect the operation of its Art. 57 -
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 G
shareholders - Companies (Amendment) Act, 2000.
Allowing the appeal, the Court
1119 H .
1120 SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A HELD: 1.1. The concern is with those private
companies which became public companies by virtue of
operation of s. 43(1C) of the Companies Act, 1956,by
accepting deposits from public. Mere acceptance of the
deposits from PUBLIC prior to 13.12.2000 did not
B contravene any law. Such acceptance was only
regulated by virtue of Section SBA. 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
c 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. [Para 61] [1154-F-H;
0
1155-A]
·1.2. What happens to those private companies which
existed prior to 13.12.2000 and had also invited and
c.ollected deposits from. public as they were. legitimately
E entitled to do so prior to the amendment? If the ..J.
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)
F overnight until 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
G 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
H companies prior to 13.12.2000. To deprive 'the
• DARIUS RUTTON KAVASMANECK v. ~HARDA
CHEMICALS LIMITED
1121
shareholders of HYBRID companies such a collective A
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. [Para 62) [1115-B-E]
B
1.3. The destruction of the collective rights of the
members of the companies, 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 Art.19(4) of the Constitution. In C
the absence of any express provision which takes away
the fundamental right of the shareholders of a private
company, there is inclination to read a restriction on the
collective right of the shareholders of a private company
to restrict the right of the individual shareholders to freely
transfer their shares. [Para 64) [1156-C, DJ D
1.4. The Companies Act never prohibited the
acceptance of deposits. Prior to the Amendment Act of
2000, there has never been a provision in the Companies
Act which altogether prohibited companie~ either public E
or private from inviting or accepting deposits. Section
58A(1)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 subject to which F
deposits may be invited or accepted by a company either
from the public or from its members". 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 G
respectively) collected .from "persons other than its
members, directors or their relatives" shall become a
public company. But under the proviso to sub-section
(1C), even after becoming a public company, such a
Company can retain either restrictions or limitations
H
1122 SUPREME COURT REPORTS. [2014)11 S.C.R.
•
A contemplated under Section 3(1)(iii). [Para 74; 75] [1159-
F-G; 1160-A-B, E, F]
1.5. 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
8
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
C shareholders to freely transfer their respective shares.
For that matter, in none of the four contingencies
contemplated under Section 43A(1), (1A), (18) and (1C),
Parliament thought it necessary to restrict such collective
right of the shareholders of a private company. Such
private.companies are to be treated as public companies
D for certain purposes.[Para 80] [1162-D-F]
1.6. 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
E 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. The kind of
F control which the Parliament sought to impose on private
companies which earlier attracted sub-sections (1) to (1 B)
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-
G sections. [Para 81,82] [1163-A-C]
1. 7. 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 the rights of individual shareholder
H to freely transfer shares. Therefore, to believe that such
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED
1123
restriction is now sought to be imposed only in the case A
· of those private companies in existence on 13.12.2000,
which had earlier attracted Section 43A(1 C), but not in the
case of private companies, which earlier attracted sub-
sections (1), (1A) and (1 B), would be illogical.[Para 83]
[1163-D, E] B
1.8. 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 C
acceptance of deposits .from PUBLIC. [Para 84] [1163-F-
G]
1.9. It cannot be said that by the Amendment Act 53
of 2000 and more particularly sub-section (11) of Sec.tion D
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
shares. Such a restriction which constitutes a restriction
on the fundamental rights under Article 19{1)(c), requires E
a more express legal authority and cannot be brought in
by inference. [Para 85] [1163-G-H; 1164-A-B]
1.10. The effect of the amendment to Section 3(1)(iii)
is: insofar as the private companies in existence on . F
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 G
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). [Para
86] [1164-C, DJ
H
•
·.
1124 SUPREME COURT REPORTS [2014] 11 S.C.R
•
A 1.11. 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. T.he requirement of 'amending the Articles of
Association pursuant to the Amendment Act 53 of 2000,
B ·insofar as such companies are concerned, is only
optional on the part of the shareholders. 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
C does not prevent such shareholders from advancing an
argument that the first respondent company is not a
public company but still a HYBRID company. [Para 88, 91]
[1164-G; 1165-H; 1166-A-B]
Vodafone International Holdings B. V. v. Union of India
D 2012 (1) SCR 573 :(2012) 6 SCC 613; Damyanti Naranga
v. The Union of India & Others 1971 (3) SCR 840 : (1971) 1
SCC 678; Rustom Cavasjee Cooper v. Union of India 1970
(3) SCR 530 : (1970) 1 SCC 248; Bennett Coleman & Co. &
Others v. Union of India & Others 1973 '2) SCR 757 : (1972)
E 2 SCC 788; K.C. Arora & Another v. State of Ha,.Yana &
Others 1984 (3) SCR 623: (1984) 3 SCC 281 - referred to.
. '
Case Law 'Reference:
2012 (1) SCR 573 Referred to Para 50
F 1971 (3) SCR 840 Referred to Para 63
1970 (3) SCR 530 Referred to Para 63
1973 (2) SCR 757 Referred to Para 63
1984 (3) SCR 623 Referred to Para 67
G
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2481 of 2014.
From the judgment and order dated 14.06.2011 in
Company Appeal No. 24 of 2010 in Company Petition No. 132
H of 2009 of the High Court of Judicature at Bombay. •
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED
1125
Shyam Divan, Shriraj Dhruv, Manasi Kumar, Mahesh A
Agarwal, E.G. Agrawala for the appellant.
Vinod Bobde, P.H. Parekh, T.N. Subramanian, K.V.
Vishwanathan, Suhas Tulzapurkar, Nishad Nadkarni, Sumit
Goel, Ritesh Issac, Nitin Thukral, Arjun Garg, Nandita Bajpai,
B
Kamna Sagar (For Parekh & Co.), Sonali Jaitley, Ms. Neha
Jain, P.V. Yogeswaran for the respondents.
The Judgment of the Court was delivered by
CHELAMESWAR, J. 1. The first respondent is a company c
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. D
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 E
family firm in the year 1962 known as M/s. Gardha Ch.emicals
Industries. The above-mentioned partnership was created by
(1) the mother of the first a!Jpellant, (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 F
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. Ori 6th March, 1967, a private limited company was
incorporated with the principal object of taking over the assets G
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
H
f , . ,..
1126 . SUPREME COURT REPORTS
I
. (2014] 11 S.C.R.
•
A his shares to the other shareholders of the company pro rata
to the holding of each of such other members respectively at a
fair value.'
1. 57. Save as aforesaid the following provisions shall apply to the transfer
B 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 lo purchase
the same at the fair value as hereinafter provided. '
c (b) proposing
The member proposing to transfer any shares (hereinafter called the
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 b_e to the holding of each member
D . 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
E 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
F 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; ,1,,
(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
G 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
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS. LIMITED [J. CHELAMESWAR, J.]
1127
4. With effect from 17th August, 1988, the first respondent A
company became a public company (under Section 43A (1A)
of the Act) as its turnover exceeded the limit prescribed
thereunder:
"43A. •••••• *'***** ******
****** ...... -·- B
(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 c
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
D
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 E
include provisions relating to the matters specified in
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 F
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 G
balance sheet of any reserve fund or other fund of the company as the
capltal 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 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." - H
1128 SUPREME COURT REPORTS [2014] 11 S.C.R. •
A 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
B appeal is that on 2nd April, 2001 a notice was issued calling
for extraordinary general meeting of the first respondent
company scheduled to be held on 5th 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
C (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 relatives of the
members or the directors of the company. According to the
respondents, such a proposal for amendment was
D 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
E 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
F 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
G
'
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, dir.ectors or their relatives. ·
H
• '.
DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1129
prohibitory orders3 against the 2nd and 3rd respondents from A
committing breach of the pre-emption agreement contained in
Article 57 of the Articles of Association referred to supra. On
11th 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 B
Law Board. However, the Company Petition No. 132 of 2009
was heard finally and dismissed by an order dated 14th May,
2010;
7. Aggrieved by the same, the appellants preferred C
Company Appeal No.24/2010 before the High Court of
Bombay on 26th 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 D
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 E
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 (201 O)
154 Company Cases 593 (Born) held that such an clause
in the Articles of Association will not be applicable to 1st F
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.
3. That this Hon'ble Bench be pleased to grant a permanent order and G
injunction restraining the 2nd/3rd 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 2nd/3rd Respondents in the 1st 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 1st
Respondent. H
1130
'
SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A 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 .
B impugned judgment dated 14th June, 2011.
According to the appellants, the High Court held that -
"an agreement between shareholders of an unlisted public
·company conferring a right of preemption which is
c 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 oii
D 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: -
E
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
F
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 ·
.G 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.
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1131
10. The case of the appellants all through has been that A
notwithstanding the amendment of the Act by the Amendment
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 8
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 C
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. D
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 E
from time to time. ·
SCHEME OF THE RELEVANT PROVISIONS OF THE
COMPANIES ACT:
13. The Companies Act, 1956, (hereinafter referred to ii!S F
'the Act') as it was originally enacted, contained only the
definition {)fa 'private company' urider Section 3(1 )(iii)4 to mean
a company5 [a defined expression under Section 3(1)(i)] which,
4. 3.(1 )(iii) - 'private company' means a company which, by its articles, -
G
(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 otheiwise requires,
H •
1132 SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A by its articles (a) restricts the right to transfer its shares, 4f any6,
(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:
B
"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
c 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
0
Association of such company 'must necessarily provide for the
matters 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
E 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
F and matters incidental thereto. A brief survey of the sa.id Part
insofar as it is relevant for the purpose of this case is necessary.
16. Section 12 deals with the mode of forming
the expressions 'company', 'existing company', 'private company' and
G 'public company' shall, subject to the provisions of sub·section (2), have
the meanings specified below c
(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 possibiliiy of the formation
of two clauses of Companies, companies "limited by shares" and
H companies " limited by guarantee".
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1133
incorporated companies, either public or private. It stipulates A
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. B
17. Section 26 of the Act mandates inter alia that in the
case of a private company limited by shares, there shall be
registered (along with the memorandum),
Articles of Association signed by the subscribers of the
memorandum. Such Articles of Association must prescribe the C
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 D
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."
E
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
F
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 G
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
1M8. H
1134 SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A 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 is held by one or more bodies corporate, the
private company shall,-
B
***** ***** *****
***** ***** *****
become by virtue of this section a public company."
20. Such companies popularly came to be called DEEMED
C 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
D 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.
E 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
F necessary for the purpose of this case. We shall deal with the
same separately.
22. Sub•section (2) mandates that within three mcinths from
the date on which a private company becomes a public
company by virtue of Section 43A(1), the company shall inform
G the Registrar that ii 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
H examined later in the judgment.
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1135
24. We are not concerned with sub-Section (3). Sub- A
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 B
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 C
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."
25. Sub-section (5) provides for penalties for defaults in D
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.
E
26. By the Amendment Act 41 of 1974, sub-Sections (1A)
and (1 B) 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 F
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.
G
"(1A) Without prejudice to the provisions of sup~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
H
1136 SUPREME COURT REPORTS
I
[2014] 11 S.C.R.
•
A 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 pri"'5te company
had the said average annual turnover, a public compeny
B by virtue of this sub-section :
Provided that even after the private company has so
become a public company, its articles of association may
fnclude provisions relating to the matters specified in
·clause (iii) of sub-section (1) of section 3 and the number
c 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
D words "such amount as may be provided".
29. Sub-section (1 B) 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. Botti the
E 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. '
"(1 B) Where not less than twenty-five per cent of the paid-
F 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
G commencement of the Companies (Amendment)
· Act, 1974, or . j
. J
(b) where the aforesaid percentage has been first so
held before the commencement of the Companies
(Amendment) Act, 1974 an and from the expiry of
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1137
the period of three months from the date of such A
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,
B
become, by virtue of this sub-section, a public company,
and thereupon all other 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 C
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."
D
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 E
"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 F
consecutive financial years, -
(ii) Immediately preceding the commencement of the
Companies (Amendment) Act, 1974 ,or
(iii) A part of which immediately preceded such G
commencement and the other part of which
immediately, followed such commencement, or
(iv) Immediately following such commencement or at
any time thereafter; H
•.
A
1138 SUPREME COURT REPORTS [2014] 11 S.C.R.
. (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 financ)al year;
B 31. Act 31 of 1988 inserted sub-section (1 C) which
declares that any private company accepting deposits from "the
public other than its members, directors or their relatives"
(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
c i.e. 15.6.1988 or renews an existing deposit becomes a public
company. Even sub-section (1 C) has a proviso in terms which
are identical with the provisos to Section (1A) and (1 B). ·
"(1C) Where, after the commencement of the Companies
D a
(Amendment) Act, 1988 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
or
the date on which such acceptance renewal as the case
E may be, is first made after such commencement, become
a public company and thereupon all the provisions of this
seciion shall apply thereto:
Provided that even after the private company has so
become a public company, its articles of association may
F 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."
G 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.
H
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1139
33. It is also necessary to note that each of the above- A
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
B
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 C
private company becomes a public company by virtue of the
operation of any one of the four sub-Sections i.e. (1), (1A), (1 B)
and (1 C) of Section 43A; the Art_icles of Association of such
company may include provisions relating to the matters
specified in Section 3(1 )(iii). The provisos further declare that o
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 E
relate to the matters specified iri 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 public company
cannot have such stipulations, Section 43A expressly permit the F
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 G
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,
H
1140 SUPREME COURT REPORTS [2014] 11 S.C.R. ·
•
A "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
.8 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
C Companies Act in the sense that a private company is subject
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 voUtion of its member, such company becomes
subject to a more rigorous regulation of its activities by the
D 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
Assodation referable to matters specified in Section 3(1 )(iii)
E should still continue even after the company lost the exemptions
and privileges attached to a private company.
I
38. Section 43 of the Companies Act recognizes the
existence of such privileges and exemptions by declaring that
F 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 ft..ct and this
G Act shall apply to the Company as if it were not a private
c.ompany.•
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
H it a private company, but default is made in complying with any of those
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1141
39. Therefore, these four provisos give an option to the A .
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.
•• B
."(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
c
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 ~hich becomes a D
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'.
E
41. On receipt of such intimation, the Registrar is required
to make a change in the name of the company in his register
and is also required to make necessary alterations in the
'certificate of incorporation' issued to the company and its
'Memorandum of Association'.
F
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 Governmen~ on being satisfied that the failure to G
comply with the conditio'ns 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.
H
1142 SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A 42. Sub-section (2) does not obligate (;lither 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 2oeo which
8
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
C Companies (Amendment)
. I
Act, 2000."
The implication of the same requires a detailed
examination at a later stage of this judgment.
D 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
insertion of sub-section (2A) in Section 43A by the Companies
Amendment Act (Act 53 of 2000)-
E
" ......... 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."
F
45. The High Court also recorded a finding that the first
a
respondent company is publi9 company. 9 The High Court then
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 17th August
G 1988, then, the amimdment made in 2000 would be applicable and section
43A ceases to apply to it. That the words "On and Afte~', 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
H above, then. it is not necessary to deal with this contention any more.
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED. [J. CHELAMESWAR, J.]
1143
went on to examine whether there can be any restriction.on the A
shareholder's right lo transfer shares in a public company. The
High Court reached a conclusion thaf 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 B
its shareholders to transfer their shares.
"After 17th August 1988 and in any event after dated 13th
December 2000, the position has undergone a change and
Article 57 appearing in the Articles of Association would C
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 D
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."
E
46. Ari 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 F
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 canva·ssed only by relying on the definition of
the term 'listed public companies' appearing in section G
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 H
1144
,
SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A 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 publi.c company. The
broad distinction as noticed above, between the term,
'Private' and "Public" company, is enough to turn down this
B 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
C held-
. I • • .
"127. Onqe 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
D basis that the preemptive right is defeated by respondent
Nos.2 to 5 by their severai acts. of omission and
·commission. Once the. preemptive right itself is not in
existence by virtue of the statutory provisions in the fie!d.
then, there is no act of oppression. As held above, the plea
E 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:
F (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
G
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).
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1145
B) The High Court also opined that in view of the A
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 B
company under Section 43A" has "been abolished".
"112 ......... Sub-section 43A(11) which also was inserted
by Act 53 of 2000 from 13th December 2000, clarified
that nothing contained in section 43A, save and except
sub-section 2A shall apply on and after the commencement · C
of 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- D
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." E
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 F
Section 43A (1A) but ceased to be a private company. Since
its Articles of Association could not be amende~ 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 G
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.
H
1146 SUPREME COUR"( REPORTS [2014] 11 S.C.R.
•
A \ "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
proposed in the meeting held on 5th May 2001 was not
carried but in fact defeated. Once it was defeated, then,
B the first respondent whichi had become a public company
on 17th August 1988 continued with that status. It would be
of relevance to note that the resolution was moved in the
meeting held on ~th May 2001. That resolution was
defeated on that day. However, the Companies
c Amendment Act 2000 had come into effect already and to
be precise from 13th December 2000. On 13th December
2000, GCL was not a deemed public company but a public
company. Once it was a public company, then, the argument
of the appeUants that it continued to retain its fundamental
and basic character as a private company cannot be
D
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
E
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:
F
(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. H_ad the Parliament
intended to completely efface all Section 43A companies, the
G 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
H of clause (11) in Section 43A by the Companies (Amendment)
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
Act, 2000 which reads:
1147
A
"(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 B
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, c
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 D
includes a private company which had become a public
company by virtue ()f 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 E
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.
F
(iv) The insertion of sub-section (2A) into Section 43A was
required to provide an exit route on and after 13.12.2000 for
an existing hybrid company which ceased to attract the
operation of Section 43A(1) - (1 C). Prior to the 2000
amendment, where a hybrid company ceased to attract the
operation of the relevant sub-section of Section 43A which had G
rendered it a hybrid company with approval of the Central
Governmerit was mandatory in terms of sub-section 43A(4). The
2000 amendment removed the requirement for Central
Government approval.
H
1148 SUPREME COURT REPORTS [2014] 11 S.C.R. •
A (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
B Section 43A would be illogicat
I
(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
C 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 agrees
to be bound by the covenants in the Articles of Association
(Section 36 10). :rhe Articles are the foundation on the basis of
D which shareholders of the company deal with each other. In ttie
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
E 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,
F 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"
10. Section 36. Effect of memorandum and articles.-(1) Subject to the provisions
G 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
.coven~s--un 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
H memorandum or articles shall be a debt due fro~ him to the company.
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1149
that would mean a destruction of various Articles which thought A
permissible in a private company are illegal with regard to a
public company.
(vii) It is settled position that unless the contrary intention
appears, an enactment is presumed not to be intended to have
8
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.
c
· (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 D
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 E
made a provision by introducing sub-sections (3) and (5) 11
thereby pre-existing private companies were required 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 F
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
11. "(3) Every private company, existing on the commencement of the G
. Companies (Amendment) Act, 2000, with a paid-up capital of less than
one lakh rupees, shall within a period of two years from such
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." H
1150 SUPREME COURT REPORTS [2014] 11 S.C.R. •
A 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
B 13th 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.
c
(ii) Neither the definition iri Section 3(1) nor the other su~
sections of Section 3 carve out an exception from the operation
of clause (d) to companies existing on 13.12.2000; and do not
prescribe a time limit for insertion of the provisions to give
. 0 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).
E (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 Sec;tion -
43A(1C) was to treat such private companies to be public .
companies but that did not stop them from being 'pri~ate
F 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
G they did not incorporate the provisions of clause (d) in fheir
articles and stop accepting deposits from the public they were
to become 'public companies'.
. (iv) The appellant voted against the resolution to introduce
H (d) on 5th May 2001 and issued his letter dated 6th June 2001.
• DARIUS RUTTON KAVASMANECK v. GHAROA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1151
Therefore, estopped from arguing that the first respondent is a 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 14th November
8
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. C
(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 13th
December 2000,it cannot be a deemed public company. D
(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 tn the case of
Vodafone International Holdings B. V. v. Union of India, (2012)
s sec 613. E
EXAMINATION OF THE· CORRECTNESS OF THE
CONCLUSIONS OF THE HIGH COURT:
(A)
F
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 G
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
H
1152 SUPREME COURT REPORTS (2014] 11 S.C.R.
•
A 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
8
private company (which becomes a public company by virtue
of operation of Section43A) once again reverting back to its
status of a private company.
53. The reasons are obvious. Each one of the events
C stipulated under Section 43A sub-sections (1), (1A), (18) and
(1 C) 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
D 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
E 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(18), 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
F ·paid-up shares of a public company; If the private company
(becoming a public company, by virtue of operation of Section
43A sub-section (18), 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/
G event which converted the private company into a public
company ceases to exist. Such company can always 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.
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1153
(8) A
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 B
Section 43A (HYBRID companies) ceased to exist. The
correctness of this conclusion is required to be examined.
55. Obviously, from j960 to 2000, innumerable private
companies would have become public companies (HYBRID)
by virtue of the operation of the various sub-sections of Section C
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 D
that such a statute never existed, and 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 E
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 F
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 G
(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?.
H
1154 SUPREME COURT REPORTS [2014) 11 S.C.R.
•
A 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.
31.12.2000); and (ii) private companies which came into
B existence after the abovementioned date.
j
58. Insofar as the first of the abovementioned two
categories is concerned they can further be categorized into
(i) private companies which remaine_d as such, and (ii) private
C companies which became public companies by virtue of
operation of Section 43A.
59. Insofar ·as private companies which came into
existence prior to 13.1.2.2000 and remained as such witho_ut
falling into the net of Section 43A and private coryipanies which
D 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 43A1only visit the second category
. E 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
F operation of Section 43A(1 C), that is, those privat~ 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 $ection SBA. Though such private companies were
G treated as public companies by virtue of Section 43A(1C) they
were entitled to continue those stipulations dea.ling 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
H company to contain a prohibition against any invitation or
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED (J. CHELAMESWAR, J.)
1155
acceptance of deposits from PUBLIC in such company's A
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
B
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 their Articles of C
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 D
private company and protected by virtue of proviso to Section
43A(1 C) 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 E
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 F
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 G
India, the inference which is obvious from the 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.
H
1156 SUPREME COURT REPORTS [2014111 s.c.R:
•
A & 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
B 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
c 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 occllrring 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
0
read a restriction on the collective right of 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
E 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
F 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
G Amendment Act i.e. 13.12.2000: By Section 3(5) 12 it is declared
that companies failing to comply with the newly introduced
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
H by the Registrar.
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1157
obligation "shall be deemed to be defunct" companies and their A
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. B
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 C
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 D
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 E
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 F
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 G
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
H
1158 SUPREME COURT REPORTS [2014] 11 S.C.R.
••
A 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
8 as offending constitutional provisions in the context of the
existing situation cannot become valid by being made
retrospective. Past virtue (constitutional) cannot be made
to wipe out present vice (constitutional) by making
retrospective laws."
C 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 .
D 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
E 43A(1C) are concerned which were in existence on 13.12.2000
would continue as HYBRID Companies.
(C) .
70. The other conclusion of ihe High Court that the failure
F of the first respondent company to amend its Articles of
Associatio·n to give effect to cl,ause (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.
G
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
H
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1159
respondent company to have shares wh.ose transferability is A
subject to limitations and restrictions contained in Article 57 of
its Articles of Association.
72. Originally, Section 3(1)(iii) stipulated - to be a privat~
company a company's Articles of Association are required to
contain certain stipulations with regard to the matters specified B
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 C
companies also or only to those which come into existence
subsequent to th!l commencement of the Act 53 of 2000?
73. Section 27(3) mandates that the articles of a private
company having share capital (such as the one on hand) shall D
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 E
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 F
of deposits. Prior to the Amendment Act of 2000, there 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
G
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. H
1160 SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A introduced by Act 41of1974) 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 subject to which
deposits may be invited or accepted by a company either from
the public or from its members". The remaining sub-sections
B 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
c 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, 1he invitation or
acceptance of such deposits is .only made to strict regime of
regulations under Section 58A.
0
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
E 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 (1 C),
even after becoming a public company, such a Company can"
retain either restrictions or limitations contemplated under
F 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:
G '
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 ihtroduction of Section 3(1 )(iii)(d)
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [~. CHELAMESWAR, J.]
1161
& Section 43A (1C), the members of a private company could A
have either permitted or prohibited the company from
accepting deposits from PUBLIC or stipulated conditions
a
subject to which deposits could be taken. If company's
internal policy prohibited the acceptance of deposits from
PUBLIC and contrary to such internal policy deposits are B
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 C
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 D
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 E
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 F
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 G
company" - by virtue of the operation of Section 43 which only
creates a legal fiction. Section 43 does not declare that such
companies do become public companies unlike Section 43A.
H
1162 SUPREME COURT REPORTS [2014] 11 S.C.R. •
A On the other ·hand, the proviso to Section 43 14 enables the
Central Government to condone the lapse of such private
companies.
"Proviso to Section 43:.
B Provided that the Central _Government on being satisfied
that the failure to comply with the conditions was accidental
or due io 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
C 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
0
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
E . 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), (18) and (1C),
Parliament thought it necessary to restricfsuch collective right
F of the shareholders of a private company. Such private
companies are to be treated i:is public companies for certain
purposes.
14. Section 43. Consequences of default in complying with conditions
G constituting a company a private company.-Where the articles of a company
include the provisions which, under c1a·use (iii) of sub-section (1) of section
3, are required to lie 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 e_ntitled 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.
H
\
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1163 -
81. If a private company chooses not to incorporate the A
prohibition, sueh as the one contemplated under Sect\on
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 B
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 (1 B) of Section 43A is now C
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, D
the Parliament never thought of curtailing the collective right of
. the members of the private companies to have restriction on .
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 E
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 (18), would be illogical.
'
84. The insertion of clause (d) in Section 3(1)(iii) is F
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.
G
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
H
1164 SUPREME COURT REPORTS [2014] 11 S.C.R.
•
A 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 shares.
Such a restriction Which, in our view, constitutes a restriction
on the fundamental rights under Article 19(1)(c), requires a more
B express legal authority and carinot 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
c 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
D 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 !;!Ub-section (11) creates "two classes of
private companies and would have discriminatory results" is
E 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.
We have already held that HYBRID companies are public
companies which in law are entitled to retain some features of
F the private companies if.the shareholders choose. to retain them.
Therefore, the question of discrimination does not arise. ·
r88. Therefore, in our opinion, the failure of the first
respQndent company to amend its Articles of Association to
G 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)
H
• DARIUS RUTION KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1165
and (v) are interconnected. The substance is that in view of the A
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 B
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 withdrew from the said
company petition later" where the Bombay High Court held as
follows: c
"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 D
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 5th May 2001 E
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.
F
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 estoppal is required to
be rejected in view of my conclusion that the HYBRID G
companies contemplated und!lr 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 H
1166 SUPREME COURT REPORTS r20141 11 s.c.R.·
•
A to the Amendment Act 53 of 2000, insofar as such companies
are concerned, is only optional on the part of the shareholders.
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
B 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.77of1990 is binding upon the appellants
C 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.
D 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
E directly and substantially in issue in a former suit has been
heard and finally decided.
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
F 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.
G 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
H
• DARIUS RUTTON KAVASMANECK v. GHARDA
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
1167
as to what is the effect of the appellant's withdrawal fron:i the A
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
8
in the membership of the first respondent company exceeding
fifty thereby rendering the first respondent a public company.
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 C
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 D
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.
E
Nidhi Jain Appeal allowed.
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