# /. ! ~ . ' -: . MOHAN LAL & ANR. · v. GRAIN CHAl\IBER. LT~., MUZAFFARNAGAR & ORS

- **Citation:** [1968] 2 S.C.R. 252
- **Court:** Supreme Court of India
- **Decided:** 1968
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mohan-lal-anr-v-grain-chal-iber-lt-muzaffarnagar-ors-4315
- **Pages:** 15

## Headnote

/. !
~
. '
-: .
MOHAN LAL & ANR. ·
v.
GRAIN CHAl\IBER. LT~., MUZAFFARNAGAR & ORS.
November 15;.1967-
[J. c. sHA.u AND s. M. S1KRI, n.j ·
..
. '
·
Sugar (Futu;es .& - Optiorll) \ Pro.hibition Order, 1949-Notification · - B
making order applicable to gur-Compan:y settling outstanding contracts ...
in '•Juture.r• in gur at rate prevailing on •the day previous to notification~
Validity-Fnistratio,._contract Act, s. 56.
·
-
·
.
1rui1an·comp,;,ies Act, 19iJ; ss. 18, 86F, 861, 91B, ·Regulation. 9,i
Table A-Directors doing transactions tt'ith conzpany-Subsequent discovery of disqua!ification--Applicability of Regulation-Winding upC
Substratum when can be said to have disappeared.
The respondent-company, registered under . the Indian Compafl.ies Act
1913, was formed for the purpose of carrying on the business of .an exchange in various commodities including gur and started its business in
· 1931. Th-o Articles of Association of the Ccmpany . provided that . no
person could remain a member 0f ·the company who was found not to be
doing any transaction or business. through the company. The Board of
·Directors of the company on ~.farch 14, 1949, passed a. resolution saneo·
;
!
tioning transactions in 'futures' in gur.
Aii the directors present at ·the
meeting V.'ere those v.·ho carried on business in 'futures' in gur \Vith the
company and did after March 14, 1949 carry on that business. The
· company's business was devised on the basis of the Companies Act, 19'!3, ·
·as originally enacted, when there was no prohibition against a director
entering into transactions with the company. Even after the Amendments
to the Company's Act by Act 22 of 1936 which imposed disqualification· · E 1
· on directors entering: into transactions with their companies, the modus ~
operandi of· the business of the company continued _to remain the same
as it was previous1y.
.
The appeii~t-eompany qualified for membership of the respondentcompany and eiitered into dealing \Vith it in •futures' in gur and deposited
large amounts with the respondent in respect of their transactions.
On
li'ebruary -15,. 1950 the Government of India issued a notification amend·
ing the Sugar (Futures & Options) Prohibition Order and made it appli- .
cable to •futures' and Options in Gur. ·By that order no person could,
after th~ appointed day, enter into 'futul-e' in gur or. "pay or receive or
agree to pay or receive any margin in connection v.ith any such futures."
The Board of Directors of the respondent on February 15, 1950 resolve~ :
to settle outstanding: transactions at the prevailing rate on the closing
day of February' 14. 1950. The appellants then filed a petition for winding up of the Company. The High Court dismissed the petition.
Jn appeal to this Court it was contended that : (i) by virtue of the
notification dated_ February 15, , 1950, all outstanding ·transactions
in
'futures' in gur became void (ii) the resolution dated March 14, 1949,
which permitted the company to enter into transactions in •futures' in
gur was invalid since the directors who took part in the me~ting were disqualified under ss. 86J(l)(h) an& 91-B of the Indian Companies Act, ·
· . 1913, as amended by Act 22 of 1936 and the company had not incorpe>- .
. ' . rated in its Articles Regulation 94 of Table A. which validated acts done .
by directors when disqualifications attaching to them were subsequently
discovered; (iii) the resolution dated February 15, 1950 was not pas.sod
in the interests of the ~'!mpany and the resolution amounted to repudiation -
F
G
·f
•
\ \ ....
..
• •
J -
...
M~HAN LAL v. G~IN CHAMBER LTD. (Shah, J.)
253
·. \ .-
\
A
of the contracts by.the company; and (h•) by reason of-the-notification
. by the Government. the substratum of the company was destroyed and no
business could bo carried on by the company thereafter.
·
\
HELD : No case was made out for winding up of the company; ·
(i) Tho notification prohibiting transactions iri 'futures' in gur ope· .
· rates only prospectively.
Th

## Text

_Characters 0–38,999 of 43,516. This is a partial read: ask again with offset=38999 for what follows._

/. !
~
. '
-: .
MOHAN LAL & ANR. ·
v.
GRAIN CHAl\IBER. LT~., MUZAFFARNAGAR & ORS.
November 15;.1967-
[J. c. sHA.u AND s. M. S1KRI, n.j ·
..
. '
·
Sugar (Futu;es .& - Optiorll) \ Pro.hibition Order, 1949-Notification · - B
making order applicable to gur-Compan:y settling outstanding contracts ...
in '•Juture.r• in gur at rate prevailing on •the day previous to notification~
Validity-Fnistratio,._contract Act, s. 56.
·
-
·
.
1rui1an·comp,;,ies Act, 19iJ; ss. 18, 86F, 861, 91B, ·Regulation. 9,i
Table A-Directors doing transactions tt'ith conzpany-Subsequent discovery of disqua!ification--Applicability of Regulation-Winding upC
Substratum when can be said to have disappeared.
The respondent-company, registered under . the Indian Compafl.ies Act
1913, was formed for the purpose of carrying on the business of .an exchange in various commodities including gur and started its business in
· 1931. Th-o Articles of Association of the Ccmpany . provided that . no
person could remain a member 0f ·the company who was found not to be
doing any transaction or business. through the company. The Board of
·Directors of the company on ~.farch 14, 1949, passed a. resolution saneo·
;
!
tioning transactions in 'futures' in gur.
Aii the directors present at ·the
meeting V.'ere those v.·ho carried on business in 'futures' in gur \Vith the
company and did after March 14, 1949 carry on that business. The
· company's business was devised on the basis of the Companies Act, 19'!3, ·
·as originally enacted, when there was no prohibition against a director
entering into transactions with the company. Even after the Amendments
to the Company's Act by Act 22 of 1936 which imposed disqualification· · E 1
· on directors entering: into transactions with their companies, the modus ~
operandi of· the business of the company continued _to remain the same
as it was previous1y.
.
The appeii~t-eompany qualified for membership of the respondentcompany and eiitered into dealing \Vith it in •futures' in gur and deposited
large amounts with the respondent in respect of their transactions.
On
li'ebruary -15,. 1950 the Government of India issued a notification amend·
ing the Sugar (Futures & Options) Prohibition Order and made it appli- .
cable to •futures' and Options in Gur. ·By that order no person could,
after th~ appointed day, enter into 'futul-e' in gur or. "pay or receive or
agree to pay or receive any margin in connection v.ith any such futures."
The Board of Directors of the respondent on February 15, 1950 resolve~ :
to settle outstanding: transactions at the prevailing rate on the closing
day of February' 14. 1950. The appellants then filed a petition for winding up of the Company. The High Court dismissed the petition.
Jn appeal to this Court it was contended that : (i) by virtue of the
notification dated_ February 15, , 1950, all outstanding ·transactions
in
'futures' in gur became void (ii) the resolution dated March 14, 1949,
which permitted the company to enter into transactions in •futures' in
gur was invalid since the directors who took part in the me~ting were disqualified under ss. 86J(l)(h) an& 91-B of the Indian Companies Act, ·
· . 1913, as amended by Act 22 of 1936 and the company had not incorpe>- .
. ' . rated in its Articles Regulation 94 of Table A. which validated acts done .
by directors when disqualifications attaching to them were subsequently
discovered; (iii) the resolution dated February 15, 1950 was not pas.sod
in the interests of the ~'!mpany and the resolution amounted to repudiation -
F
G
·f
•
\ \ ....
..
• •
J -
...
M~HAN LAL v. G~IN CHAMBER LTD. (Shah, J.)
253
·. \ .-
\
A
of the contracts by.the company; and (h•) by reason of-the-notification
. by the Government. the substratum of the company was destroyed and no
business could bo carried on by the company thereafter.
·
\
HELD : No case was made out for winding up of the company; ·
(i) Tho notification prohibiting transactions iri 'futures' in gur ope· .
· rates only prospectively.
The prohibition . imposed a&ainst payment or
B · receipt or agreement to pay or receive margin is made in connection
with 'such futures" and the expression 'such futures" . mum !nnsaetions ·
in futuies to be entered into on .or after the date if the notification. No
express provision bas been made to invalidate outstanding traruactions in
'futures" and there are clear indications in the terms of tho notification
which show a contrary intention. [259 A-DJ
'
(ii) The resolution dated March 14, 1949 cannot be cballen;cd in
• C • view of Regulation 94 of Table A. By· the operation of s. 18 of the
Companies Act the Regulation must be deemed to be incorporated in the
Articles of Association Of the Company.
The Regulation was not ex·.
pressly excluded by the Articles; it was not excluded. by implication,
because, it was not inconsistent with any other express provision in the
Articles. There is no evidence that the directors -were awaro of the disqualification which would be incurred by enterin2 into transactions with
the company without tho express sanction of the direetors and by the
D
subsequent· discovery of such a disqualification the resolution was not
E
II
rendered invalid. [262 C-GJ
·
·
Section 91·B ·imposes a prohibition against a dirCctor voting on any
contract or arrangement in which be ·is "direetly or· indirectly concerned
or interested". By passing a resolution that tho company shall ccmmence
business in 'futures' in gur the directors were not voting on a contra.ct or
arrangement in which they were directly or indirectly concerned.
[:?62
H-263 BJ
.
.
.
.
.
.
(iii) In passini: the resolution dated February 15, 1950, the Board of
Directors _acted, _in the libht di the situation prevailing then, as prudent
businessmen for the protection of the interests of the company and its
· membcrS'.
Since, after the notification. no reverse transaction to protect
the company against loss, if a member failed to pay margin. was possible,
the company had to devise effective means to settle the· outstanding trans·
actions.
The resolution did not put an end to outstanding contracts; it
~erely fixed· the rate at which transactions were to be settled on the due
date, the possibility of any fresh transactions iii futures so lon,g .as the
notification remained in force being completely ruled out. The contracts,
if they were to be settled by payment of differences, could still be settled
on the due date at the rates fixed and it was open to the appellants to
deliver goods under the contract if they desired to do so. Imposition, by
the Central Government of a prohibition by its notification dated !\larch
l, 1950, restraining persons from offering and the Railway administra~
tion · from accepting for transportation·. by rail any cur except v.ith the
permit of the Central Government does not lead to frustration of the
contracts .. [263 C-H; 265 C-DJ
(iv) In the present case the. object for which the company was incorporated has not . substantially failed and ·it cannot be said that the
compariy could_ not. carry on its business except at ·a lqss nor that
its
asScts \\:ere ·insufficient to meet its liabilities. ·Primarily the circumstances
c'isting at the date of the petition must be taken into consideration· for
determining-
\vhcth~r .a case is made out for holding that it is iust and
equitable that the company should be wound up. [266 C, DJ
LISup: Cl/68-2
254
Sl'PREMf. COURT REPORTS
[1968] 2 sc.R
Civu. APPHLAIL .IURISLJICTION: Cini Appeals Nos. 114
A
:inJ I I 5 of I 965.
Appc;1I, lro111 1hc juJgmcm :111d dccr.-c d:11cJ :'vl:ty 7, 1958
uf lhc Allalwh:1t1 llid1 Court in Special Appeal< l':t•· .. 46 :iml •IX
111 1952.
~
,\'. I>. A:c1rJ...luu1is ;111d J. /'. ;Jg,i:ur11·11/. f1JJ
1111.: ;1pp\.'ll;1111 ....
1111
8
bo1h lhc appeal' l.
Shami Hh11slw11
anJ II. f'. M11hc1/11r11ri, fur 1hc n:sp,·;1Jcn1-
( in both the appeals).
Ti.Jc Judgment of the Cnt.rt w:i' ddivcrcJ l1y
Shah, J,
The Grain Chamber Ltd., Muzalfarnagar, a Company registered under the Indian Companies Acl. 1913 with a
shar~ capital of Rs. 1,00,000 divided into I ,!JOO 'hares of Rs. 100
each, was fom1ed for the purpo,c of carrying on business of an
exchange in ~rains, cotton, sugar, gur, pulses and other commodities.
By Art. 5 of its· Articles of Association no person or
firm could remain a member of the Company who was found not
to be dcing any transaction or business thn1ugh the Company
for a continuous period of six months.
By Art. 46 it was provided that a member of the Company who owned 10 shares of
th.: Company in his own name or in the name of the firm of which
he was a proprie10; or partner may be elected a di:ector of the
Company.
By Art. 51. until otherwise fixed, the quorum in the
mee1ings of directors was 10 be four.
In the years J 949 and 1950 the Company was carrying on
business principally in "futures" in g11r.
The method of carrying
on· bu>in~ss in "futures" was explained as follows by the parties
to the dispute in an agreed slatemcnt submitt~d before the Company Judge.
The transaction, for sale and purchase of gur have
to be in the units called 'Bijaks' of I 00 maunds. The buyer and
the seller who are members of the, Company negotiate transactions
or sak and purchase in gur through their respective brokers and
then approach the Company. The Company enters into two indep·~ndent contracts whereby the Company is the purcha>er from
one and is the seller to the ot~er at ra1cs agreed upon between
the seller and the buyer.
The seller has therefore to sell to the
Company a specified quantity and the buyer agrees 10 purchase
1he same quantity from 'the Company under an independent contract.
For the due performance of their conlrach, the buyer and
the ,cJkr <leposit with th.: Compnny rupee one per maund as Sai
and annas eight per ;naund as Clwok-'margin'. If there is a
ri'e in the price. the Company calls upor. the seller to pay the
difkrenC<'. and if he fails to deposit the difference demanded,
chc Company enters into a ,reverse tran.>ae1ion with a purchaser
c
D
I
'
G
H
...
•
8
c
D
G
H
MOHAN LAL v. GRAIN CHAMBER LTD. (Shah, J.)
i55
at the current rate of the day and squares up the transaction of
sale. 1hc purchaser is also entitled to withdraw from the Com~
pany the profit, he has made consequent on the nsc m pnce. . It
the seller is adjudged an insolvent or for any othctr reason 1s mcapable of perfonniog his obligations, the buyrr remains unaffected.
Even if the Company is unable to recover anything
from the seller, it bas still to pay to the buyer the profits earned
by !llm. Similarly if there is a fall in the price, the buyer b.as to
make good the difference.
If on the day fixed for delivery of
goods the parties intend to settle the transaction by paying and
receiving the difference, the Company fixes the rate at which the
transaction is to be settled and the transaction is settled at the
rate fixed by the Company. Both the buye; and the seller send
bills known as "Dailies" setting out the amounts paid and received
according to the rates fixed.
On March 14, 1949, the Board of Directors of the Company
passed a resolution sanctioning transaction of business in "futures"
in gur for Phagun Sudi 15 Samvat 2006 (March 4, 1950) settlement. On August 9, 1949, Seth Mohan Lal and Company purchased one sha•e of the Company and qualified for membership.
They commenced dealing with the Company in "futures" in gur.
By December 1949 Seth Mohan Lal and Company-who will
hereinafter be called 'the appellants'-had entered into transactions with the Company which aggregated to 1136 lJiiaks of sale
of gur for the Paus/1 Sudi 15, 2006 delivery. The appellants also
claimed that they had entered into sale transactions in 2137 Bijaks
in the benami names of 'five other members.
In January 1950
d1ere were large fluctuations in the prices of g11r. and in order to
stabilise the prices, the directors of the Company passed a resolution in a meeting held on January 7, 1950, declaring that the
C:Ptnpany will not accept any settlement of transaction in excess
ofRs. 17/8/- per maund.
The sellers were required to deposit
margin money between the prices prevailing on that date and the
maximum rate fixed by the Company. The appellants deposited
in respect of their transactions Rs. 5,26,996/14/- as margin
money.
They claimed also to have deposited amounts totalling
R,, 7 lakhs odd in respect of their benami tran.1actions.
In exercise of the powers conferred by s. 3 of the Essential
Supplies (Temporary Powers) Act 24 of 1946, the Government
of India issued a notification on February 15, 1951), amending
the Sugar (Futures & Options) Prohibition Order, 1949, ;md
made it applicable to "futures" ·and options ln
~'H"
By that
Order entry into transactions in "futures" after the arpointed day
was prohibited. On the same day the Board uf Directors of I.he
Company held a meeting and resolved that the rat~s of r:11r which
prevailed at the close of the market on February 14, 1950, viz.,
256
StJPR,l!ME COURT REPORTS
[1968] 2 ~.CR
R>. 17; 6/ - per maund be fu.ed for settlement of rhc. contract' of
Phagun delivery.
It was recited in the resolution ihat five persons
including Lala Mohan Lal, partner of the .1ppcll:m1s, were presen1
"' the meeting on 'pedal invitation.
ln cl. 2 of rhc r~solutiun
it was recited that :is the Government had banned all forward
contrnus in g11r ir was resolved t~ take the prevailing marker rare
<lll the closing day of February 14, 1950, which was Rs. 17/6/-
pcr maund for Phagun delivery and to haw all outsranding transactions of Phag11n delivery settled at that iate.
Ent1ics were pcsted in the books of acwum of the Company
on the footiag that all outstanding transactions in 1utures in g11r
were sellled on February 15, 1950.
In the account of Mohan
Lal & Company an amount oi"Rs. 5,26,996/ 14/ - . srood to the
credit of the <\ppellants.
Against that amount Rs. 5,15,769/5/-
were debited as "loss adjusted'', and on February 15, 1950, an
amount of Rs. 11,227/9/- stood to their credit.
Similar entries
were posted in the accounts of other persons who had outstanding
transaclions in, gur.
On February 22, 1950, the appellant.> and. tl>eir partner
Mohan Lal filed a petition in the High Court of Judicature at
Allahabad for an order winding up the Company.
Diverse
grounds were set up in the petition. The principal ground; were
that the Company was unable to pay its debts. that it was just
an<l cquit~blc to wind up the Company, because th" dircctc.•s and
the officers of the Company were guilty of fraudulent :icts resulting in misappropriation of large funds, and that the s11b.1tratum
<lf the Company had disappeared, the business of the Company
having been completely destroyed.
(!n fcbruary 2~. 1951, anorhcr pe1i1i0n was filed by the
;ippcll:ini> and their partner Mohan Lal for an order winding up
the Company.
It purported to raise certain grounds which it was
submi11cd had 1101 been raised in the first petition and which had
arisen ;incc 1hc first pelition was instituted.
In the second peti1 ion ii was averred that by virtue of the noriiicatinn issued bv the
(ioverr.111ent. rhc forward contracls in gar had b~comc void. and
th~ ap;:cilants were en:itled to be repaid all 1he arnounts deposited
by them. that rhc outstanding conlracts slood re>cinded, and the
Cc>rnpany havin~ paid out large sums to its directors and other
sh;ircholders w~s nor in a posirion to meet irs liability to the
apFcll;,ints.
Brij Mohan Lal, J., held that the Compan~ was not unable to
P">' its debts and that it was not just and equitable to wind up
'11<· (.\impany on the grounds set out in the petirion.
Orders
Jl<hs~d by Hrij Mohan Lal, J., dismissing the μclitinns were confirmed by the High Coun of Allahabad in its appellate iurisdicB
c
D
E
F
G
H
A
B
c
D
MOHAN LAL v. GRAIN CHAMBER LTD. (Shah, }.)
257
tion.
\Vith certificates granted by the High Court, these two
appeals have been preferred by the appclhnt's and their partner
J\fohan Lal.
The High Court held that by the notification dated February
15, 1950, the outstanding transactions of "futures" in gur did not
become void; that in fixing the rate of settlement by resolution
dated February 15, 1950, and settling tl1e transactions with the
other contracting parties at that rate the directors acted prudently
and in the interests of the Company and of the shareholders, and
in making payments to the parties on the basis of a settlement at
that rate the directors did not commit any fraudulent act or misapply the funds of the Company; that the case of the appellants
that apart from the transactions enter~d into by them in their
firm name, they had entered into other transactions benami in the
names of other firms, and that the Company had mala fide settled
those. transactions with those other firms was not proved; and that
the Board of Directors was and remained properly constituted
at all material times and no provision of the Companies Act wr.s
violated by the directors trading with the Co!T'.pany.
Counsel for the appellants contended (a) that by virtue of
the Notification issued by the Central Government on February 15,
1950, all outstanding "futures" in gur became void; (b) that the
resolution dated March.14, 1949, was void because there was
no GUOrum at the meeting of the Company; ( c) that the resolution
E' dated February 15, 1950 by the Board of Directors wa~ not passed
in the interests of the Company but to serve private interests of
the directors; (d) that the Company having rr?udiated the outstanding contracts, it was bound to refund the deposits received
from the members; and (e) that in any event, the substratum of
the Company ceased to exist, and the Company could not aft:r
the Government Notification carry on business in gur.
F
G
H
In support of his contention that by the order isued by the
Central Government on February 15, 1950, the outstanding
transactions in futures in gur became void, counsel for the appellants relied upon a press-note issued by the Government of India
relating to the amendments made in the Sugar (Futures and
Options) Prohibition Order. 1949. In the pres~-notc apparently
it was stated. that all transactions in "futures" in sJgar, gur, gw
1hakkar, and rab made before the commencement of the order
or remaining to be fulfilled shall be void and not enforceable by
law.
The. interpretatipn of the order depends not upon how the
draftsman of the press-note understood the notilicrition, but upon
the words used therein. The relevant clauses of the Order. aft~r
the amendment, read as follows :
"2( d) 'Future~ in sugar and gur' mean any agreement relating to the purchase or sale of sugar or f!Ur on
s1;~Rf.Ml' COllRT Rl'PORTS
(1968) 2 S.C.R
a forward basis and providing for delivery at some future
date and payment of margin on such date or dates, as
may be e~pressly or impliedly agreed upon by the parti6.
2 ( e) 'margin' means the difference between the
price specified in an agreement relating to the purchase
of or sale of sugar and gur and the prevailing market
price for the same quality and quantity of sugar or gur
on a particular day.
2 ( f) 'Option in sugar or gur' means an agreement
for the purchase or sale of a right to buy or a right to
sell or a right to buy and sell, any sugar or gur in future
and includes a reji-mandi and teji-mandi in any sugar.
3. On or after the appointed day no person shall-
( a) save with the permission of the Central Government in this behalf or of an officer authorised by the
Central ' Government in this behalf, enter into any
A
II
c
futures in sugar orgur, or pay or receive or agree to pay
D
nr receive any margin in connection with any such
futures.
( b) enter into any option in sugar or gur.
4. Any option in sugar or gur entered into before
the appointed day and remaining to be !>Crformcd
whether wholly or in part shall be void within the meaning of the Indian Contract f.ct. 1872. and shall not be
enforceable by law."
Hy cl. 3 (a) all persons are prohibited, save with the permission
of the .Central Government in that bcha!f from entering into
"futures" in sugar or gur : the clause also prohibits receipt or
payment of, or agrument to pay or receive any margin in connection with any such futures. The clause ill terms operates prospectively.
Clau.~e 3(b) prohibits options in gur and sugar. and
cl. ~ expressly invalidates options in sugar and gur entered into
before the appointed day and remaining to be performed whether
wholly or in part.
The contrast betwun the provision~ relatlng
to "fu:ures" and "options" is striking. 'While imposinJZ a prohibit ion on opt ions. the Central Government has also expressly provided 'hat all outstanding options shall be void. No such provi-
'ion is made in respect of outstanding "futures".
Couusel for
the :ippellants however contelldcd that when the Central C.i0vem111enr imposed a prohibition against payment or receipt. or agreornenr to pay or receive, any margin in connection with tlle outstanding "futures." the "futures" were also prohibited.
B•1t the
prohitii1ion impo.;ed a_gainst payment or receipt. or agreement to
E
F
H
I
c
0
E
F
c
H
MOHAN LAL v. Gl\AIN CHAMBER LTD. (Shah, J.)
259
pay or receive, margin is made in connection with such f~tures,
and the expression such "futures" means "futures" of the like or
~imilar kind previously mentioned, i.e., transactions in. "futur~s"
10 be entered into on or after February 15, 1950. If it was Ill·
tended by the Central Government to declare void out.;tandiri_g
1ransactions in "futures", the Central Government would spec1Jicully have imposed a prohibition against payment -Or receipt of,
11r agreement to pay or receive, margin in connection witg all
•·futures". A transaction in "future" in gur may be settled by payment of margin or by actual delivery,. and the Order does not prohibit the settlement of the transaction: by specific delivery of goods.
If the plea for the appellants be accepted, the Central Government may be attributed a somewhat singular intention of permitting outstanding futures in gur to be carried out by giving
nnd taking actual delivery of goods contracted for, but not by
payment and receipt of margin. If it was intended to invalidate
transactions in futures which were outstanding on February 15,
1950, an express provision to that effect could have been made.
No such provision has been made, and there are clear indications
in the terms of the notification which show a contrary intention.
Prohibition against payment or receipt of margin money under
transactions entered into after February 15, 1950 is not redundant : it was enacted presumably with a view to maiqtain control
over the transactions made with the sanction of the Central Government.
But, said counsel for the appellants, the resolution dated
March 14, 1949, which permitted the Company to enter into
transactions in "futures" in gur was invalid, because the directors
who took part in the meeting were disqualified under ss. 861(1) (h)
and 91B of the Indian Companies Act, 1913, and the Company
could ·not retain money paid in pursuance of unauthorised transactions.
It was resolved unanimously in the meeting of the
Board of Directors convened on March 14, 1949, that forward
transactions in 1:ur for Phagun Sudi · 15, San.vat ?006, i.e.,
March 4, 1950 "may be started according to the rules" laid down
therein. Jt was said that the resolution which authorised transactions of "futures" in gur in the manner in which the Company
was carrying on its business entailed disqualification of the Directors and as the Directors were disqualified there was no quorum
and no proper resolution and therefore all transactions entered
into and any payment made pursuant to that resolution were invalid and the Company was bound to refund the amounts paid
by 1'1e appellants from time to time. The Company had 11 directors : out of these 9 directors were carrying on business with the
Company. It appears that at the meeting dated March 14, 1949
all the directors present were those who carried on business in
"futures" in gur with the Company. and did after March 14, 1949,
:? GO
Sl'PRFME COURT REPORTS
[1968] 2 S.C . .<
carry on that business.
Under the Indian Companies Ad, 1913.
'" originally enacted, there was no prohibition against a director
entering into transactions with the Company, and on that footing
th~ scheme of the Company's business was devi~ed. Under the
A rt ides or Association no person could remain a member of the
Company who was found not to he doing any tran>action or busincs< through the Company continuously for six monrhs, and a
person could he elected a Ji rector· if he held I 0 shares in his own
name or in the name of the firm of which he was a proprietor or
a partner.
A director of the Company had therefore to hold
Im shares and had to carry on bt1'incss with the Company.
If he
ceased to do business for a period of six months he ceased to be
a member of the Company. and on that account ceased also to be
a director of the Company. The Articles of Association prescribed
diverse contingencies in which a director was to vacate his office.
but carrying on business with the Company was nol made a ground
of disqualification.
The Company had started business in the y~ar 193 I. In 1936.
sc\eral important amendments were made in the Indian Companies Act 1913.
By s. 86F which was incorporated by Act 21.
of 1936. it was provided :
"Except with the consent of the directors. a director
,,f the company, or the fim1 of which he is a partner or
any partner of such firm, or the private company of
which he is a member or director, shall not •!nter- into
any contracts for the sale. purchase or sup_ply of goods
and materials with the company.
"
Section 861 enumerated the condition' or situations in which the
office of director was vacated.
Insofar as the section is material
it pre. ides :
"( 1) The oftice of a director shall he vacated if-
( h) he acts in contravention of section 86F.
Section 91 B which was inserted by Act 11 of I 914 a, modified
hy Act 22 of 1936 hy the first sub-section provided :
"~o uircctor shall. as a director. vote on any contract or arra:igcmclll in which he· is ~ithel' directly or
indirectly concern-:d or interested nor shall his presence
count for the purpose of fonning a quorum at the time
of any such vote: and if he doe, so vote. hi; vote shall
1101 he counted : .,
II
c
))
F
I·
G
II
A
ll
c
D
F
G
II
MOHAN LAL V. GRAIN CHAMBER LTD. (Shah, J.)
261
After the amendment of the Indian Companies Act by Act 22 of
I 936 the Rules of the Company were not modified and the Company 'apparently carried on business in the same manner in which
it was originally carrying on its business.
It appears that the
directors were oblivious of the requirements rif s. 86F and of the
provisions of s. 861 and s. 91B, and the modus operandi of the
business continued to remain the same as it was previously.
On
the terms of s. 86F( 1) all directors of the Company were prohibited, unless the directors consented thereto, from entering into
ccntracts for the sale, purchase or supply of goods and materials
with the Company. On behalf of the Company it was urged that
by the resolution dated March 14, 19..,9, the directors resolved
generally to sanction all transactions of the directors for the sale
and purchase in commodities in which the Company carried on
business, and on that account notwithstanding the prohibition contained in s. 86F, the directors did not vacate their office. Counsel
for the appellants urgeci that the consent of the directors contemolated by s. 86F is consent in respect of each specific contract
to be entered into and no general consent can be given by the
directors authorising a director or directors of the Company to
sell, purchase or supply goods and materials to the Company.
Such a general resolution without considering the merits of each
individual contract would, it was urged, amount to repealing the
provisions of s. 86F. Strong reliance was placed upon the judgment of the Bombay High Court in Walchandnagar Industries Ltd.
and others v. Ratanchand Khimchand Motishaw(').
It is not necessary for the purpose of this ;;ase to decide
whether in any given set of circumstances a general consent may
be given by the Board of Directors, to a director or directors to
enter into contracts for sale or purchase or supply of goods and
materials with the Company so as to avoid the prohibition contained in s. 86F of the Indian Companies Act, for, in our view.
the resolution dated March 14, 1949, cannot be challenged in
view of Regulation 94 of -Table A which, for reasons to be presently mentioned must be deemed to be incorporated in the Articles
of Association of the Company.
Regulation 94 of Table A in the First Schedule is not one
of the obli~atory regula~ions which is to be deemed by s. 17 (2)
of the Indian Companies Act 1913 to be incomorated in the
Articles of Association.
Sectk :1 18 provides :
'
"In the case of a company limited by shares and
registered after the commencement of this Act, if articles
are not r~gistered, or, if articles are registered, insofar
as the articles do not exclude or modify the regulations
(I I I.LR. [1953] Born, 623,
26~
Sl'PRFME COUl\T REPORTS
[ 1968] 2 S.C.R.
in Table A in the Fir't Schedule those regulations shall,
so far as applical-!e. be the regulations of the company
in the same manner and to the same extent as if thcv
were contained in duly registered article>."
·
The respondent Company is limited by shares and was registercJ
after the commencement of the Indian Companies Act, 1913:
the Company has adopted special Article> of Assoc:ation, but
there is no Article which excludes or modifies Regulation 94 of
Table A. and by the operation of s. 18 of the Act that Regulation must be deemed to apply in the same manner and to the
same extent as if it was contained in the registered articles of 1he
CompaDy. We are unable to hold that
because the Companv
has not incorporated regulation 94 of Table A in its Articles of
Association, an intention to exclude the applicability of the regu·
lation to the Company may be inferred,
Regulation 94 of
Table A is not expressly excluded by the Articles of the Company : that is common ground. It is not excluded by implication : for it is not inconsistent with any other express provision
in the Memorandum of the Articles of Association. It, therefore.
follows that Regulation 94 must be deemed to be incorporated
in the Articles of Assoc:ation of the Company. That Regulation
provided :
"All acts done by any meeting of the directors or
of a committee of directors, or by any person acting as
a director shall, notwithstanding that it be
afterwards
discoverd that there was some defect in the appoint·
ment of any such directors or persons acting as aforc-
'aid. or that they or any of them were disqualified, be as
valid as if every such person had been duly appointed
:ind was qualified to ~ a director."
There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of
'ale or purchase or supplv of goods with the Comoany without
the express sanction of the directors.
Bv the subsequent dis·
covery that they had incurred disqualification. hccau'e they had
entered into contracts with the Companv for s.1lc or purchase or
supply of .r.oods. the resolution passed by them is not rendered
invalid.
It. is. in the view we !1ave taken. unneccss:1rv to decide
whether s. RO of lhe Indian Companie, Act 19D ·also r.rants
protection to acts done by directors who arc
sub<;equcntly discovered to he disqualified.
Section 91B imposes a prohibition against a director voting
on any contract or arrangement in which he i~ either directly or
indirectlv concerned or interested. But the directors of the Comran:• are nnt shown to have voted on any existing contract or
A
H
c
D
E
F
G
II
A
ll
c
D
E
F
r;
H
MOHAN LAL v. GRAIN CHAMBER LTD. (Shah, J.)
263
arrangement.
At the meeting dated March 14, 1949, they resolved that the Company shall commence business in "futures"
in gur according to the rules setforth in the resolution. There~y
the directors were not voti.ng on a contract or arrangement m
which they were directly or indirectly concerned or interested.
It must then be considered whether the resolution of February
15. 1950, was passed by the Board of Directors with a view dishonestly to make profit for themselves and for others ·,yho were
purchasers, and to cause loss to the appellants.
Jn the light of
the situation prevailing on February 15, 1950, in our judgment,
the Board of Directors acted, in passing the resolution, as prudent
businessmen for the protection of the interests of the Company
<tnd the members. Since the promulgailon of the Sugar and Gur
(Futures and Options) Prohibition Order, 1950, if any member
of the Company failed to pay the maqtln, the Company could
not enter into a reverse transaction. That was prohibited. Whereas the outstanding transactions were valid, a very important sanction which the Company could impose against the member who
failed to pay the margin became ineffective.
It was therefore
necessary in the interest of the Company to dev~se an effective
s.:heme for settlement of those transactions.
Again in view of
the im1iosition of severe restrictions by the Government on transport of gur by rail or by mechanised transport, it w,as well-nigh
impossible for the members to give or take delivery of f?Ur.
It
was therefore resolved that all outstanding contracts shall be
settled at the rate prevailing on the evening of February 14, 1950.
It may be recalled that on January 7, 1950, the Board of Director' had resolved, because the prices of gur were spiralling that
all outstanding transactions in gur will be settled at the rate of
Rs. 17181- per maund whatever may be tht price ruling at the
date of settlement. The appellants had sold l, 123 Bijaks of gur
at an average ~·ate of Rs. 12/13/9 per maund, and those transactions in "futures" were not invalidated by the notification issued
by the Government.
But since no reverse transaction to protect
the Company against Joss, if c member failed to pay margin, was
possible. the only practical way out was to provide for ~ettling the
outstanding transactions.
This the Board of Directors did by
taking the rate which was prevailing in the evening of February
14, 1 <l50, as the rate of settkment of all the outstandina transactions.
The resolution, however, did not put an end t; the out-
'tanding contracts as on February 15, 1950: the resolution merely
fixed the rate at which the transactions were to be settled on the
due date. the pcssibi\ity of any fresh transactions in futures so
long as the Order remained in force being completely ruled out.
It may be noticed that the appellants' representative was present
at the meeting. and he was apparently heard. Whether or not
he agreed to the passing of the resolution is immaterial.
But
we ore unable to hold that the resolution was passed with a view
264
SUPREME COURT REl'ORTS
[1%8] 2 S.C.R.
10 benefit the directors : it appears that the resolution ·.vas passed
with a view to protect the interests of the Company and its member~.
But it was urged that simultaneously large amounts were intended to be paid to the members who had purchase contracts
outstanding, and for that purpose it was resolved to borrow
money from the Allahabad Bank and the Central Bank of India
Ltd. This, it was urged, disclosed -anxiety on the part of the directors to appropriate to themselves the liquid tunds and to deprive
the appellants of the benefit of any fall in the prices after February 15, 1950. It is true that in the books of account of the Comrany the transactions were shown to hav~ been settled as on
February 14, 1950.
But we agree with the High Court that the
entries in the books of account of the Company were not in
accordance with the resolution, and no imimation was given to
any of the members of the Company that the transactions were
rn closed.
There is no clear evidence about the dates on which
payments were made to the purchasers in respect of their outstanding transactions.
But that in our judgment is not material.
It appears from the agreed statement filed before the Company
Judge that if the seller made a deposit to cm·er the rise in prices,
the purchaser was entitled to withdraw fro111 the Cotnpany the
profit which he had made under his cross transaction, even before
the date of setrlemcnt. It was clearly contemplated that when· a
seller deposited the difference between the price at 11·hich he had
agreed to sell gur, for future delivery the ruling
~ate being
higher than the rate at which he had agreed to sell, it was open
to the purchaser to approach the Company and to call t:i><Jn it
to pay him the profit.
Whether or not this right was strictly enforced is irrelevant. · It appears from Ext. D-10 that as many as
133 persons having sale transactions had made deposits of diverse
amounts with the Company aggregating to Rs. 36,38,932/2/9.
The purchasers under the corresponding transactions were entitled
to withdraw the profits earned by them out of the deposits so made.
By allowing the purchasers to withdraw thz amounts which they
were entitled to under the business rules of the Company after the
c<>ntracts were frozen. the directors of the Company acted according to the mies and not comrary thereto.
The attitude of the appellants in respect of the outstanding
contracts since February 15. 1950, has also an important bearing.
On February 23. 1950, the
mana~ement •Jf
the
Company
addressed a letter inforrninj! the apoellants that in the interests and
for the benefit of the trade. the BoJrd of Director~ had passed
a resolution on February 15. 1950, to settle the outstanding transactions at the rate prevailing in the market on February 14, 1950.
That resolution. it wa:; •t:-.:cd. w~; for the benefit of the appellants.
A
B
c
D
[
F
G
H
I
'
A
ll
c
D
E
F
G
MOHAN LAL \'. GRAIN CHAMBER LID. (Shah, J.) 265
but if the appellants wanted to deHver the goods, they should i~ti
mate the date and place on which they were prepared to give
delivery of goods according to tlh; lllltstanding contra,;ts on
Phagw1 Sudi l 5, Sam\'111 200(1 111 terms. uf the rules and. bye-laws
of the Company.
The <tppdlants dcmed .havmg received this
letter.
But we arc un.1blc to accept that denial.
On March 1,
1950, the appellants wrote a letter stating that because of the
notification issued by the Central Government the perfonr,ancu
of the contracts had become impossible, and that the Company
was liable to refund all the amounts deposited with int!!rest
thereor,, and that the illegal settlement dated Febniary 15, l 950,
amounted to repudiation of the contracts by the Company and
those
coll!racts stood rescinded.
The appellants apparently
insisted that the transactions becan~e impossibic of performance
in view o[ the prohibition contained in the notification published
by the Central Government, and contended that the resolution
amounted to repudiation of the contracts by the Company.