# • [2014) 11 S.C.R. 1119 DARIUS RUTION KAVASMANECK v. GHARDA CHEMICALS LIMITED & OTHERS

- **Citation:** [2014] 11 S.C.R. 1119
- **Court:** Supreme Court of India
- **Decided:** 2014-10-28
- **Case number:** Civil Appeal No. 2481 of 2014
- **Bench:** J. Chelameswar, A.K. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/2014-11-s-c-r-1119-darius-rution-kavasmaneck-v-gharda-chemicals-limited-others-29390
- **Pages:** 49

## Headnote

A
B
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. 57Company 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
0 company's Articles of Association. [Para 61] [1154-F-H;
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 1121
CHEMICALS LIMITED
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]
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
B
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

## Text

_Characters 0–39,786 of 95,511. This is a partial read: ask again with offset=39786 for what follows._

•
[2014) 11 S.C.R. 1119
DARIUS RUTION KAVASMANECK
v.
GHARDA CHEMICALS LIMITED & OTHERS
(Civil Appeal No. 2481 of 2014)
OCTOBER 28, 2014
[J. CHELAMESWAR AND A.K. SIKRI, JJ.]
A
B
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. 57Company 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
0 company's Articles of Association. [Para 61] [1154-F-H;
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 1121
CHEMICALS LIMITED
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]
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
B
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
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
F
H
1122
SUPREME COURT REPORTS.
[2014)11 S.C.R.
A contemplated under Section 3(1)(iii). [Para 74; 75] [1159F-G; 1160-A-B, E, F]
1.5. Notwithstanding the fact that the Parliament
thought it necessary for the State to impose a higher
8 degree of control over the affairs of the management of
such private companies inviting and accepting deposits
from PUBLIC, Parliament did not think it necessary to
restrict the collective right of the members of a private
company to impose restrictions on the right of individual
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 subG 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
1123
CHEMICALS LIMITED
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 subsections (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-FG]
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
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)
E
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.
F
G
.
'
Case Law 'Reference:
2012 (1) SCR 573
Referred to
Para 50
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
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
1125
CHEMICALS LIMITED
Shyam Divan, Shriraj Dhruv, Manasi Kumar, Mahesh
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,
Kamna Sagar (For Parekh & Co.), Sonali Jaitley, Ms. Neha
Jain, P.V. Yogeswaran for the respondents.
A
B
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
. (2014] 11 S.C.R.
I
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.
B
(a)
c (b)
(c)
D
(d)
E
F
(e)
G
(f)
H
57.
Save as aforesaid the following provisions shall apply to the transfer
of shares -
·
·
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.
'
The member proposing to transfer any shares (hereinafter called the
proposing transferor) shall give notice in writing (hereinafter called a transfer
notice) to the Company that he desires to transfer the same;
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
. 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;
In case any member or members shall not have applied for the purchase
and transfer of any or all of the shares to which he is entitled, the company
shall within seven days of the date at which the offer closed, offer the
untaken shares to such of the members as have applied for the purchase
and transfer of all the shares to which they were entitled by the terms of
the original offer in proportion as the holding of each of such members·
bears to the total number of shares held by them and they shall be entitled
within fifteen days of the offer to apply for the purchase and transfer of a
pro rata number of the said untaken shares and the company shall be
bound, upon .payment to the transfer of the fair value of such shares, to
transfer the shares to the member applying;
,1,,
The promising transferor shall be bound to execute a transfer in respect
of any shares so sold and in default thereof be deemed to have executed
such a transfer.
The company shall thereupon cause the names of the
members who have purchased the shares to be entered in the Register
as the holders of such shares and thereafter the validity of the proceedings
shall not be questioned by any person;
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
•
• DARIUS RUTION KAVASMANECK v. GHARDA
1127
CHEMICALS. LIMITED [J. CHELAMESWAR, J.]
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. ••••••
*'*****
******
******
......
-·-
(1A) Without prejudice to the provisions of sub-section (1),
where the average annual turnover of a private company,
whether in existence at the commencement of the
Companies (Amendment) Act, 1974, or incorporated
thereafter, is not, during the relevant period, less than
rupees one crore, the private company shall, irrespective
of its paid-up share. capital, become, on and from the
expiry of a period of three months from the last day of the
relevant period during which the private company had the
said average annual turnover, a public company by virtue
of this sub-section;
Provided that even after the private company has so
become a public company, its articles of association may
include provisions relating to the matters specified in
transfer notice) to sell and dispose of hi shares to any person and at any
price and to apply ·for registration of the transfer of the same and the
company shall be bound to give effect to the transfer of such shares
accordingly.
(g)
.For the purpose of this clause the fair value of the share shall be such
sum, if any, as the auditors for the time being of the Company shall certify
as the fair value thereof provided that it expressly declared that the fair value
shall be (1) the amount of capital paid upon thereon plus{2) a sum bearing
B
c
D
E
F
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,-- .......... ..
H
(d) prohibits any invitation or acceptance of deposits from persons other
than its members, dir.ectors or their relatives.
·
•
•
'.
DARIUS RUTION KAVASMANECK v. GHARDA
1129
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
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.
E
F
.G
H
9. According to the written brief submitted by the appellant
the question that arises for consideration of this Court is
summarized as follows: -
Whether on and after the bringing into force of the
Companies (Amendment) Act, 2000, the status and
character of Gharda Chemicals Ltd. (R-1) continued to be
as that of a "hybrid company" (Section 43A company) and
. whether this company and its members are bound by the
terms of a preemption clause contained in Article 57 of the
Articles of Association?
In our opinion, the REAL QUESTION is not whether after
the Amendment Act 53 of 2000, the first respondent continued ·
to be a private company or became a public company, But
whether the amendment made by the Act 53 of 2000 to
Sections 3 and 43A destroys the rights and obligations created
by Article 57 of the Articles of Association of the first
respondent company.
•
DARIUS RUTION KAVASMANECK v. GHARDA
1131
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
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
'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, -
(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,
F
G
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.
B
c
14. Section 27(3) of the Act stipulates:
"In the case of a private company having a share capital,
the articles shall contain provisions relating to the matters
specified in sub-clauses (a), (b) and (c) of clause (iii) of
sub-section (1) of section 3; and in the case of any other
private company, the articles shall contain provisions
relating to the matters specified in the said sub-clauses
(b) and (c)."
This sub-section makes it clear that to be a private
0 company either with or without share capital the Articles of
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 subsection 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.
G
H
16. Section 12 deals with the mode of forming
the expressions 'company', 'existing company', 'private company' and
'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
companies " limited by guarantee".
•
DARIUS RUTTON KAVASMANECK v. GHARDA
1133
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
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."
18. The Act came to be amended by Act 65 of 1960. By
the said amendment, Section 43A came to be inserted in the
said Act. It originally contained eight sub-sections. sub-Section
(1) declared that any private company which has a share
capital, of which twenty-five per cent of the paid-up share capital
is held by "one or more bodies corporate"7 become a public
company.
E
F
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 paidup 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
1135
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
24. We are not concerned with sub-Section (3). SubA
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 reconversion 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. Subsection (8) prescribes certain obligations attached to such
public companies, the details of which may not be necessary.
26. By the Amendment Act 41 of 1974, sub-Sections (1A)
E
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.
"(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
G
H
A
B
c
1136
SUPREME COURT REPORTS
I
[2014] 11 S.C.R.
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
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
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.
'
F
G
H
"(1 B) Where not less than twenty-five per cent of the paidup share capital of a public company, having share capital,
. is held by a private company, the private company shall,-
(a)
on and from the date on which the aforesaid
percentage is· first held by it after the
commencement of the Companies (Amendment)
· Act, 1974, or . 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
•
• DARIUS RUTION KAVASMANECK v. GHARDA
1137
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
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,
become, by virtue of this sub-section, a public company,
and thereupon all other provisions of this section shall
apply thereto :
B
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."
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
D
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
•.
1138
SUPREME COURT REPORTS
[2014] 11 S.C.R.
A
. (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
D
E
F
G
H
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
(Amendment) Act, 1988 a private company accepts, after
an invitation is made by an advertisement, or renews,
deposits from the public, other than its members, directors
or their relatives, such private company shall, on and from
the date on which such acceptance or renewal as the case
may be, is first made after such commencement, become
a public company and thereupon all the provisions of this
seciion shall apply thereto:
Provided that even after the private company has so
become a public company, its articles of association may
include provisions relating to the matters specified in
clause (iii) of sub-section (1) of section 3 and the number
of its members may be, or may at any time be, reduced
below seven."
32. Thus, it can be seen that by the date of amendment of
Section 43A by the Act 53 of 2000 under Section 43A, there
are four classes of private companies which are declared by
the said section to become public companies on the happening
of an event mentioned in each of the sub-sections.
•
•
DARIUS RUTTON KAVASMANECK v. GHARDA
1139
CHEMICALS LIMITED [J. CHELAMESWAR, J.]
33. It is also necessary to note that each of the aboveA
mentioned four sub-sections contained a proviso. The tenor of
all the four provisos is identical.
"Provided that even after the private company has so
become a public company, its articles of association may
include provisions relating to the matters specified in
clause (iii) of sub-section (1) of section 3 and the number
of its members may be, or may at any time be reduced,
below seven."
B
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
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
four classes of public companies to retain such Articles of
Association.
36.