# RAMESH B. DESAI v. BIPIN VADILAL MEHTA

- **Citation:** [2006] Supp. 3 S.C.R. 414
- **Court:** Supreme Court of India
- **Decided:** 2006
- **Case number:** Civil Appeal No. 4766 of2001
- **Bench:** Ashok Bhan, G.P. Mathur
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ramesh-b-desai-v-bipin-vadilal-mehta-21430
- **Pages:** 25

## Headnote

Companies Act, 1956 :
Sections 77 and 155-Petition for rectification of register of the company
C on the ground that its director committed fraud by purchasing shares in his
name ou/ of company's fi111ds-Respondent seeking swnmm)' dismissal of
petilion on !he ground of limitation--Company Judge dismissing the pelilionCorreclness of-Held: Company judge erred in 1hr01ring the petition at
preliminary stage as being barred by limitation-There is no finding on the
D point that petitioner had knoll'/ edge of transaclion earlier-Plea of limitation
is a mixed question of law and fact and necessarily required eridence about
the time when ji-aud l\'as discovered--Code of Civil Procedure, 1908, Order
6 Rule -I: Order 7, Rule I I; 01der 1-1, Rufe I-Limitation Act, Section /7 and
Article f 37.
E
Section 77-Purchase by Company of ifs own shares-Legality ofHeld: Not legal except when by way of reduclion of share capilal.
F
Civil Procedure Code-Applicability of, to proceedings under Companies
Acl-Hefd: Applicable by virtue of Rule 6 of Companies (Court) Rules.
Code of Civil Procedure, 1908 :
Order 7, Rule 11-Rejec/ion of plaint under-Scope of-Held: Avermenls
made in plain/ alone to be seen-Any affidavil filed in reply to petition cannol
be looked info.
Order 1-1, Rule 2-Preliminary issues-Mixed issues of law andfactG Jurisdiclion of Court lo t1y suil which involves mixed issue-Held: Where
decision of issue of law depend1 upon decision of fact, ii cannot he tried as
a preliminary issue.
Words and Phrases :
'Barred by law'-Occurring in Order 7, Rule I I(d) CPC-Held: Includes
H
414
'
RAMESH B. DESAI v. BIPIN VADILAL MEHTA
415
barred by limitation.
A
'Demurrer '-Meaning of-Discussed.
Limitation Act, I 963 :
Sections 17(J)(a), (b)-Applicability of-Belated petition for rectification B
of register of company on the ground that its director committed fraud by
purchasing shares in his name out of company's fimds-Held: S. J 7(J)(a) is
applicable and not S.17(J)(b).
'V' was the Managing Director ofSayaji Industries. He had two sons
'B' and 'S'. In order to distribute properties between sons, 'B' was C
entrusted 2 companies, Sayaji Industries and CV Mehta Ltd. In terms of
MOU dated 13.11.1982, 'B' was required to pay Rs.20 lacs, pursuant to
which control and management of Sayaji Industries were to be transferred
to him by making transfer of 13000 shares of Sayaji Industries in his name.
As 'B' was not in a position to depesit Rs.20 lacs, a scheme was devised
whereunder Sayaji Industries paid Rs.20 lacs by way of advance to Santosh D
Starch Ltd. The said Santosh Starch Ltd. paid an amount of Rs.20 lacs to
'B'. This amount was transferred to CV.Mehta Ltd. in order to get the
control of Sayaji Industries.
On 10.11.1987, petitioners who were shareholders of Sayaji E
Industries filed Company Petition for rectification of the register as
provided under Section 155 of the Companies Act on the ground that 'B'
utilized the funds of Sayaji Industries for the purpose of his shares which
was in violation of Section 77 of Companies Act and that they could not
detect fraud earlier and came to know about the same in May, 87 when a
criminal complaint was filed by Union of Sayaji Industries.
F
The respondents filed reply on 22.3.1988, in which they raised a
preliminary objection regarding limitation and contended that on the
preliminary issue, the main petition should be dismissed in limine. On
23.9.1995 respondents moved Company Application to dismiss the
Company Petition without going into merits of petition on the ground that G
the same is barred by limitation. Company Judge allowed the Application
holding that "there is not only no proof of fraud, but even the "averments
of fraud" made in the petition do not amount to the averments of fraud
in eye of law" within the meaning of Order VI Rule 4 CPC and dismissed
the petition as barred by the law of limitation. This order was upheld in H
416
SUPREME COURT REPORTS [2006) SUPP. 3 S.C.R.
A appeal by High Court. Hence the

## Text

_Characters 0–39,751 of 64,745. This is a partial read: ask again with offset=39751 for what follows._

A
RAMESH B. DESAI AND ORS.
\I,
BIPIN YADILAL MEHTA AND ORS.
JULY II, 2006
B
[ASHOK BHAN AND G.P. MATHUR, JJ.]
Companies Act, 1956 :
Sections 77 and 155-Petition for rectification of register of the company
C on the ground that its director committed fraud by purchasing shares in his
name ou/ of company's fi111ds-Respondent seeking swnmm)' dismissal of
petilion on !he ground of limitation--Company Judge dismissing the pelilionCorreclness of-Held: Company judge erred in 1hr01ring the petition at
preliminary stage as being barred by limitation-There is no finding on the
D point that petitioner had knoll'/ edge of transaclion earlier-Plea of limitation
is a mixed question of law and fact and necessarily required eridence about
the time when ji-aud l\'as discovered--Code of Civil Procedure, 1908, Order
6 Rule -I: Order 7, Rule I I; 01der 1-1, Rufe I-Limitation Act, Section /7 and
Article f 37.
E
Section 77-Purchase by Company of ifs own shares-Legality ofHeld: Not legal except when by way of reduclion of share capilal.
F
Civil Procedure Code-Applicability of, to proceedings under Companies
Acl-Hefd: Applicable by virtue of Rule 6 of Companies (Court) Rules.
Code of Civil Procedure, 1908 :
Order 7, Rule 11-Rejec/ion of plaint under-Scope of-Held: Avermenls
made in plain/ alone to be seen-Any affidavil filed in reply to petition cannol
be looked info.
Order 1-1, Rule 2-Preliminary issues-Mixed issues of law andfactG Jurisdiclion of Court lo t1y suil which involves mixed issue-Held: Where
decision of issue of law depend1 upon decision of fact, ii cannot he tried as
a preliminary issue.
Words and Phrases :
'Barred by law'-Occurring in Order 7, Rule I I(d) CPC-Held: Includes
H
414
'
RAMESH B. DESAI v. BIPIN VADILAL MEHTA
415
barred by limitation.
A
'Demurrer '-Meaning of-Discussed.
Limitation Act, I 963 :
Sections 17(J)(a), (b)-Applicability of-Belated petition for rectification B
of register of company on the ground that its director committed fraud by
purchasing shares in his name out of company's fimds-Held: S. J 7(J)(a) is
applicable and not S.17(J)(b).
'V' was the Managing Director ofSayaji Industries. He had two sons
'B' and 'S'. In order to distribute properties between sons, 'B' was C
entrusted 2 companies, Sayaji Industries and CV Mehta Ltd. In terms of
MOU dated 13.11.1982, 'B' was required to pay Rs.20 lacs, pursuant to
which control and management of Sayaji Industries were to be transferred
to him by making transfer of 13000 shares of Sayaji Industries in his name.
As 'B' was not in a position to depesit Rs.20 lacs, a scheme was devised
whereunder Sayaji Industries paid Rs.20 lacs by way of advance to Santosh D
Starch Ltd. The said Santosh Starch Ltd. paid an amount of Rs.20 lacs to
'B'. This amount was transferred to CV.Mehta Ltd. in order to get the
control of Sayaji Industries.
On 10.11.1987, petitioners who were shareholders of Sayaji E
Industries filed Company Petition for rectification of the register as
provided under Section 155 of the Companies Act on the ground that 'B'
utilized the funds of Sayaji Industries for the purpose of his shares which
was in violation of Section 77 of Companies Act and that they could not
detect fraud earlier and came to know about the same in May, 87 when a
criminal complaint was filed by Union of Sayaji Industries.
F
The respondents filed reply on 22.3.1988, in which they raised a
preliminary objection regarding limitation and contended that on the
preliminary issue, the main petition should be dismissed in limine. On
23.9.1995 respondents moved Company Application to dismiss the
Company Petition without going into merits of petition on the ground that G
the same is barred by limitation. Company Judge allowed the Application
holding that "there is not only no proof of fraud, but even the "averments
of fraud" made in the petition do not amount to the averments of fraud
in eye of law" within the meaning of Order VI Rule 4 CPC and dismissed
the petition as barred by the law of limitation. This order was upheld in H
416
SUPREME COURT REPORTS [2006) SUPP. 3 S.C.R.
A appeal by High Court. Hence the present appeal.
Allowing the appeal, the Court
HELD: 1.1. A limited company cannot purchase its own shares
except by way of reduction of capital with the sanction of the court.
B
(427-H)
c
1.2. It is well-settled legal principle that any valuable consideration
paid out of the company's assets will make a transaction amounting to a
purchase and therefore is invalid. (428-C-D(
Trevor v. Whitworth, (1887) 12 AC 409, relied on.
British and American Trustee and Finance Corporation v. Couper, 1894
AC 399, referred to.
Buckley on the Companies Act - 14th edn., Palmer's Company Law -
23rd edn.; Guide To The Companies Act by rl. Ramaiya 16th Edn., referred
D to.
2. In view of Rule 6 of the Companies (Court) Rules, the provisions
of the Code of Civil Procedure will be applicable in proceedings under
the Companies Act. (428-D-E)
E
Sangramsingh P. Gaekwad v. Shantadevi P. Gaekwad, (2005( 11 SCC
314, relied on.
Major S.S. Khanna v. Brig. F.J. Dillon, AIR (1964) SC 497, referred
to.
3. The Code of Civil Procedure does not confer jurisdiction upon the
F Court to try a suit on mixed issue of law and fact as a preliminary issue
and where the decision on issue of law depends upon decision of fact, it
cannot be tried as a preliminary issue. (429-CJ
4. The plea raised by the contesting respondents is in fact a plea of
demurrer. Demurrer is an act of objecting or taking exception or a protest.
G It is a pleading by a party to a legal action that assumes the truth of the
matter alleged by the opposite party and sets up that it is insufficient in
law to sustain his claim or that there is some other defect on the face of
the pleadings constituting a legal reason why the opposite party should
not be allowed to proceed further. (429-D)
H
O.N. Bhatnagar v. Smt. Rukibai Narsindas and Ors., (1982) 2 SCC 244;
RAMESH B. DESAI v. BIPIN V ADI LAL MEHTA
417
Roop Lal Sathi v. Nachhattar Singh Gill, [1982) 3 SCC 487; Abdulla Bin Ali A
and Ors. v. Galappa and Ors., [1985) 2 SCC 54; Exphar Sa and Anr. v.
Eupharma Laboratories Ltd. and Anr., [2004) SCC 688; Indian Mineral &
Chemical Co. and Ors. v. Deutsche Bank, [2004) 12 SCC 376 and Popat and
Kotecha Property v. State Bank of India Staff Association, [2005) 7 SCC 510,
referred to.
B
5.1. The principle is well settled that in order to examine whether
the plaint is barred by any law, as contemplated by sub-rule (d) of Order
VII Rule 11 CPC, the averments made in the plaint alone have to be seen
and they have to be assumed to be correct. It is not permissible to look
into the pleas raised in the written statement or to any piece of evidence. C
Applying the said principle, the plea raised by the contesting respondents
that the Company Petition was barred by limitation has to be examined
by looking into the averments made in the Company Petition alone and
any affidavit filed in reply to the Company Petition or the contents of the
affidavit filed in support of Company Application filed by the respondents
seeking dismissal of the Company Petition cannot at all be looked into.
D
[430-F-H[
5.2. A plea of limitation cannot be decided as an abstract principle
of law divorced from facts as in every case the starting point of limitation
has to be ascertained which is entirely a question of fact. A plea of
limitation is a mixed question of law and fact. The question whether the E
words "barred by law" occurring in Order VII Rule ll(d) CPC would
also include the ground that it is barred by law oflimitation. This principle
would be equally applicable to a Company Petition. Therefore, unless it
becomes apparent from the reading of the Company Petition that the same
is barred by limitation the petition cannot be rejected under Order VII p
Rule ll(d) CPC. [431-H; 432-A, DJ
Balasaria Construction Pvt. Ltd. v. Hanuman Seva Trust and Ors., in
CA No. 4539/2003 decided by Supreme Court on 8.1 t.2005, relied on.
6.1. Undoubtedly, Order VI Rule 4 CPC requires that complete G
particulars of fraud shall be stated in the pleadings. The particulars of
alleged fraud, which are required to be stated in the plaint, will depend
upon the facts of each particular case and no abstract principle can be
laid down in this regard. In natural course of events it looks quite probable
that a third party may not come to know that the Company had advanced
H
418
SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.
A money to Mis. Santosh Starch Products on 13.11.1982 and M/s. Santosh
Starch Products gave Rs.20 lacs to 'B' and his family members on the same
day and the said money was utilized for purchasing the shares. It is
noteworthy that 1\1/s. Santosh Starch Products is a supplier of Mis. Sayaji
Industries Ltd. and in such circumstances the payment of money by Sayaji
B Industries Ltd. to Mis. Santosh Starch Products could not have raised any
suspicion. At any rate accepting the version given in the Company Petition
as correct and without taking into consideration any plea raised in the
affidavits filed in reply thereto or any other material or evidence, it is
absolutely clear that having regard to the provisions of Section 17(1) of
the Limitation Act, the limitation for filing the Company Petition had not
C · begun to run until May, 1987 when the petitioners claim to have got
knowledge of the alleged fraud committed by the respondents in utilizing
the funds of the Company for purchase of its shares, which is a clear
. violation of Section 77 of the Companies Act. Thus the Company Petition
cannot be thrown out at the preliminary stage as being barred by
limitation and the view to the contrary taken by the Company Judge and
D also by the Division Bench is clearly erroneous in law.
(432-E-H; 433-H; 434-AI
6.2. It is important to point out that apart from Ramesh B. Desai
there are 8 other shareholders who had filed the Company Petition. There
E is not even a slightest inkling in the impugned judgments of the High Court
that the other 8 petitioners had acquired knowledge of the transaction
much earlier. The approach adopted by the High Court is clearly illegal
as no finding on the point of knowledge could have been recor•Jed until
the parties had been given opportunity to lead evidence and in such
circumstances dismissal of the Company Petition at a preliminary stage
F on the finding that it was barred by limitation is clearly erroneous in law.
ln the facts and circumstances of the case the plea raised in the Company
Petition cannot be held to be wanting in compliance of Order VI Rule 4
CPC. (434-G-H; 435-A(
Bishundeo Narain and Anr. v. Seogeni Rai and Ors., AIR (1951) SC
G 280; Bijendra Nath Srivastava v. Mayank Srivastava and Ors., (1994( 6 SCC
117; Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors.,
[2005] 11 SCC 314; Syed Shah Gu/am Ghouse Mohiuddin and Ors. v. Syed
Shah Ahmad Mohiuddin Kamisul Quadri and Ors., AIR (1971) SC 2184;
Kasturi Lakshmibayamma v. Sabnivis Venkoba Rao and Ors., AIR (1970) AP
H 440 and Jn Re Marappa Goundar, AIR (1959) Madras 26, held inapplicable.
RAMESH B. DESAI v. BIPIN VADILAL MEHTA [G.P. MATHUR. J.]
419
7. Section 17(1)(b) will apply when the plaintiff or applicant is claiming any A
kind of right or title to any moveable or immoveable property etc. The
petitioners are not claiming any right or title over the shares of the Company,
which according to them were purchased out of the funds of the Company
hence, the case is covered by Section 17(1)(a) of the Limitation Act and not
by Section l7(1)(b). (437-A)
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4766 of2001.
From the Judgment and Order dated 10.3.2000 of High Court of Gujarat
at Ahmedabad in O.J. Appeal No. 9/1996.
B
Soli J. Sorabjee, Pritesh Kapoor, Hemantika Wahi and S. Sanjanwala for C
the Appellants.
Iqbal Chagla, V.A. Bobde, Sudhir Nanavati, Mihir Joshi, Uday U. Lalit
(N.P.), Sunil Gupta, Huzefa Ahrnadi, Devang S. Nanavati, Saurin Mehta,
Anshuman Mohapatra, Nakul Diwan, Riaz Chagla, V.D. Khanna (for J.M.
Nanavati Associates), Rutwik Panda, Jatin Zaveri, Prantap Kalra, Naresh K. D
Sharma, Bina Gupta, Inklee Barooah, lndrani Mukherjee and Sumita Hazarika
for the Respondents.
The Judgment of the Court was delivered by
G.P. MATHUR, J. This appeal, by.special leave, has been preferred E
against the judgment and order dated 10.3.2000 of a Division Bench of High
Court of Gujarat by which the appeal preferred against the order dated 12.3.1996
of the learned Company Judge, was dismissed and the order of the learned
Company Judge dismissing the Company Petition No. 35of1988, was affirmed.
2. The appellants had filed the Company Petition No. 35 of 1988 for
rectification of the register of the company Mis. Sayaji Industries Ltd.
(hereinafter referred as to "the Company") as provided by Section 155 of the
Companies Act. The respondent Nos. 1 and 2, viz., Bipin Vadilal Mehta and
Priyam Bipinbhai Mehta moved Company Application No. 113of1995 before
F
the learned Company Judge to dismiss the Company Petition No. 35of1988, G
without going into the merits of the petition, on the ground that the same is
barred by limitation. This application was allowed by the learned Company
Judge by the judgment and order dated 12.3.1996 and the said order was
affirmed in appeal by a Division Bench of the High Court by the judgment
and order dated 10.3.2000, which are subject-matter of challenge in the present H
420
SUPREME COURT REPORTS (2006] SUPP. 3 S.C.R.
A appeal.
3. The Company Petition No. 35 of 1988 was filed by Ramesh B. Desai
and 8 others, who are shareholders of the Company, which is a public limited
company. The allegations made in the company petition are as follows. Vadilal
Lallubhai Mehta was the Chairman and Managing Director of the Company.
B He had two sons, viz., Bipin Vadilal Mehta and Suhas Vadilal Mehta (for short·
"Bipinbhai and Suhasbhai") and four daughters, who are all married. The
family owned several properties. Besides shares in the Company, there was
HUF Trust and other private limited companies under control of the said
family. A Memorandum of Understanding (MOU) was executed by the family
C members on 30.1.1982 and the main object thereof was to entrust the
management of some of the companies to Bipinbhai and some to Suhasbhai.
It was decided that the management of Mis. Sayaji Industries Ltd. and Mis.
C. V. Mehta Private Ltd. was to be entrusted to Bipinbhai while other companies
such as Mis. Industrial Machinery Manufacturers Pvt. Ltd., Mis. C. Doctor
and Company Pvt. Ltd., Mis. Mehta Machinery Manufacturers Pvt. Ltd. and
D Mis. Oriental Corporation Pvt. Ltd., were to remain with Suhasbhai. Clause I 0
of MOU provided that Bipinbhai should deposit Rs.40 lacs and odd with
Mis. C.V. Mehta Pvt. Ltd. in order that the latter could pay back the debts
which it owed to Suhasbhai and his family members and family concerns. This
amount of Rs.40 lacs and odd was the consideration for getting the controlling
E interest and management of Mis. Sayaji Industries Ltd. and Mis. C.V. Mehta
Pvt. Ltd. Though under the terms of the MOU the said amount of Rs.40 lacs
and odd was to be paid by Bipinbhai immediately, but he could not do so as
he could not arrange the necessary funds. The result of non-payment by
Bipinbhai was that he could not get the control and management of Mis.
Sayaji Industries Ltd. and Mis. C.V. Mehta Pvt. Ltd. in January, I 982 as was
F contemplated by the MOU dated 30. I .1982. A modified MOU was accordingly
executed on 13.11.1982 whereunder it was provided that Bipinbhai would pay
the entire amount in two instalments, one in the sum of Rs.20 lacs pursuant
to which the control and management of Mis. Sayaji Industries Ltd. were to
be transferred to him by making the transfer of 13,000 shares of the Company
G in his name and in the names of his family members. The balance amount of
Rs.19 lacs and odd was to be deposited by Bipinbhai with Mis. C.V. Mehta
Pvt. Ltd. within a period of 24 months from the date of the agreement. This
was necessary as Mis. C.V. Mehta Pvt. Ltd. held 9,000 equity shares of
Mis. Sayaji Industries Ltd. Acquisition and control of Mis. C. V. Mehta Pvt.
Ltd. and thereby 9,000 equity shares of Mis. Sayaji Industries Ltd. would
H have been possible only after payment of the said amount. It is further
RAMESH B. DESAI v. BIPIN VADILAL MEHTA [G.P. MATHIJR, J.]
421
averred in the company petition that Bipinbhai was not in a position to pay A
or deposit Rs.20 lacs without which he could not have got the controlling
interest in Mis. Sayaji Industries Ltd. He, therefore, devised a scheme
whereunder the Company, viz., Mis. Sayaji Industries Ltd. paid an amount of
Rs.20 lacs by way of advance to Mis. Santosh Starch Products by means of
three cheques of Rs.IO lacs and Rs.5 lacs (both dated 13.11.1982) and third B
cheque of Rs.5 lacs dated 25.11.1982, all drawn on Punjab National Bank,
Maskati Market Branch, Ahmedabad. The said Mis. Santosh Starch Products
paid an amount of Rs.20 lacs to Bipinbhai and his family by means of three
cheques of Rs. 7 lacs, 6 lacs and 7 lacs all dated 13 .11.1982 and drawn on the
same branch of Punjab National Bank. The aforesaid amount paid through
cheques was deposited in the personal account of Bipinbhai and his family C
members on the same day. This whole amount of Rs.20 lacs was transferred
to Mis. C.V. Mehta Pvt. Ltd. in order to get control of the company Mis.
Sayaji Industries Ltd. as per the MOU. The specific case of the petitioners
in the company petition is that the funds of the company amounting to Rs.20
lacs were utilized by Bipinbhai in paying the said amount to Mis. C.V. Mehta
Pvt. Ltd. for the purpose of acquiring the shares of Mis. Sayaji Industries Ltd. D
and thereby he became the director of the said company. This camouflage was
adopted only to ensure that the violation of Section 77 of the Companies Act,
which provision imposes a restriction on a company to buy its own shares
unless the consequent reduction of capital is effected and sanctioned in
pursuance of Section I 00 to I 04 or Section 402 of the Companies Act, would E
not be known. The aforesaid devise of payment of advance by the Company
to Mis. Santosh Starch Products also violated Article 20 of the Articles of
Association. Bipinbhai had thus devis~d a scheme whereunder funds of the
company were directly used for the purpose of acquiring shares of the
company and also that of Mis. C.V. Mehta Pvt. Ltd., which in tum was
holding substantial shares of Mis. Sayaji Industries Ltd. The company had F
no knowledge of the devise adopted by Bipinbhai nor the company had
authorized these transactions by passing any resolution of the Board and the
Company never reetified the action· of Bipinbhai. Bipinbhai was inducted in
the management of the company on 18.11.1982 and payment of cheque by the
Company to Mis. Santosh Starch Products on 25.11.1982 represented act of G
the Company itself and clearly showed that the funds of the company were
being utilized in order to benefit Bipinbhai and his family members. The
transactions whereunder shares of Mis. C. V. Mehta Pvt. Ltd. were acquired
related to the period when Bipinbhai had been inducted in the management
of the Company. The manner of acquiring the control of Mis. C.V. Mehta Pvt.
Ltd. was violative of Section 77(2) of the Companies Act as it was only a H
422
SUPREME COURT REPORTS (2006) SUPP. 3 S.C.R.
A devise for the ultimate control of shares of Mis. Sayaji Industries Ltd. It was
also averred in the petition that Article 20 of the Articles of Association of
the Company stipulates that "none of the funds of the company shall be
employed in the purchase of shares of the company". The transaction devised
by Bipinbhai in order to purchase the shares and get control of the company
is also contrary to Article 20 of the Articles of Association of the Company
B and, therefore, it is void. It was further pleaded in the company petition that
the petitioners could not detect the fraud earlier. They came to know about
the same in detail in the month of May, 1987 when a criminal complaint was
filed by some office bearers of the union of the Company before a criminal
court at Naro!. After making enquiries and collecting information the petitioner
C No. 1 gave a notice dated 14.6.1987 to the respondents to make rectification
in the register of the Company. It was accordingly prayed in the Company
Petition that directions may be issued to the respondents to rectify the
register of the Company in accordance with Section 155 of the Companies Act
and the names of Bipinbhai Vadilal Mehta, Smt. Nirmaiben Bipinbhai Mehta
and Priyambhai Bipinbhai Mehta may be deleted from the register of the
D Company.
4. Though the Company Petition was filed on 10.11.1987 but after nearly
8 years on 20.3.1995 an application being Application No. 113 of 1995 was
filed by Bipinbhai and Priyambhai Mehta (respondent Nos. 2 and 3 in the
E Company Petition) praying that the Company Petition be dismissed as barred
by limitation, without going into the merits of the petition. The application
was moved on the ground that the Company Petition had been filed on
10.11.1987 seeking rectification of the register and for deletion of names of
respondents Nos. 2 to 11 in accordance with Section 155 of the Companies
Act. The rectification had been sought in respect of shares registered in the
F names of the respondents on 17 .11.1982 and as the limitation for moving such
a petition was three years from the date of transfer of shares, the period of
limitation expired on I 7 .11.1985 and consequently the company petition was
barred by limitation. It was submitted that the petition under Section 155 of
the Companies Act, which confers power on the court to decide the title, is
G in fact a suit and it was only a summary proceeding in place of a suit and,
therefore, the period of limitation applicable for a suit would also apply to
such a petition. No application for condoning the delay would be maintainable
and the claim is extinguished on the expiry of period of limitation. Assuming
that the company petition is to be construed as an application, even then the
petition was barred in view of Article 137 of the Limitation Act. The knowledge
H of the proceedings was not relevant for the !JUrpose of Article 13 7 because
RAMESH B. DESAI v. BIPIN VADILAL MEHTA (G.P. MA THUR, J.]
423
for the purpose of such Article, limitation would start running from the date A
the right accrues and the date of acquiring knowledge cannot extend the
period of limitation. It was also submitted that the petitioners had asserted
in the Company Petition that they came to know about the transfer of shares
and other details in the month of May, 1987 when a criminal complaint was
filed but the said complaint had in fact been filed on 18.6.1987 whereas the
petitioners had given notice on 17.6.1987. It was further submitted that the B
petitioners in the Company Petition had filed a separate application for
condoning the delay and since no order had been passed on the same, there
was no valid petition in the eyes of law.
5. The appellant No. I Ramesh B. Desai (petitioner No. l in the Company C
Petition) filed reply on the grounds, inter alia, that the application was not
maintainable as the same had been filed when the Company Petition had
already been notified for final hearing and was on the final hearing board. The
Company Petition had been filed in September, 1987 on which notice had been
is.sued and respondent Nos. 2 and 3 in the Company Petition filed their
detailed affidavit and reply on 22.3.1988 and the company also filed reply on D
the said date. In their reply the contesting respondents rnised a preliminary
objection regarding limitation and contended that on the preliminary issue the
main petition shouid be dismissed in limine. The said preliminary objection
was raised at the time of hearing and after considering the objections the
learned Company Judge considered it appropriate to admit the main petition E
as far back as on 24.6.1988. It was also submitted that by the order of the
learned Company Judge dated 17.2.1995 the Company Petition had already
been fixed for final hearing and in view of the said order the Company
Application No. 1l3 of 1995 moved by the contesting respondents was not
maintainable at that stage and was liable to be dismissed. It was also submitted
that the contesting respondents wanted that the issue regarding limitation F
should be heard as a preliminary issue which cannot be done in law. The
respondents had committed serious fraud on the shareholders and also on the
company and company's funds had been fraudulently utilized to purchase its
own shares, which is violative of Section 77 of the Companies Act. Whether
there is a fraud committed or not and whether in the circumstances of the case G
delay can be condoned or not and what is the point of time for commencement
of limitation, are questions of fact and such questions cannot be tried as a
preliminary issue as they require evidence. It was specifically asserted in para
4 of the affidavit filed in reply that the question of limitation involved in the
petition is not a pure question of law as the same had to be decided on the
basis of fraud, which will be question of fact and the company court will have H
424
SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.
A to decide whether the petitioners in the company petition had got the
knowledge of the fraud and, if so, at what stage. This being a purely factual
matter could not be decided as a preliminary issue as the whole matter had
to be heard. That apart there being clear averments of fraud in the Company
Petition, under law, the limitation would start running only from the date the
fraud was discovered.
B
6. As mentioned earlier the learned Company Judge allowed the Company
Application No. 113 of 1995 and dismissed the Company Petition as being
barred by law of limitation. The appellants preferred an appeal against the
decision of the learned Company Judge before the Division Bench of the High
C Court but the same was also dismissed on 10.3.2000.
7. Mr. Soli J. Sorabjee, learned senior counsel for the appellants, has
submitted that the Code of Civil Procedure shall be applicable in proceedings
before the learned Company Judge. Sub-rule(!) of Order XIV Rule 2 CPC lays
down that notwithstanding that a case may be disposed of on a preliminary
D issue, the Court shall, subject to the provisions of sub-rule (2), pronounce
judgment on all issues. Sub-rule (2) of Order XIV Rule 2 CPC lays down that
where issues both of law and of fact arise in the same suit, and the Court is
of opinion that the case or any part thereof may be disposed of on an issue
of law only, it may try that issue first if that issue relates to (a) the jurisdiction
of the Court, or (b) a bar to the suit created by any law for the time being
E in force. Learned counsel has submitted that the grounds on which a plaint
can be rejected are given in Order VII Rule I l(d) CPC and the plea raised by
the contesting respondents was one as contemplated by clause ( d) of the said
Rule, which lays down that the plaint shall be rejected where the suit appears
from the statement in the plaint to be barred by any law. The plea raised by
.F the contesting respondents in the Company Application was a plea of demurrer
where only the allegation made in the company petition had to be seen and
after assuming the averments made in the petition to be true and correct it
had to be seen whether the petition was barred by any law including that of
limitation. The learned counsel has elaborated his arguments by submitting
that the petitioners in the Company Petition had clearly averred and taken a
G plea of fraud that they could not get knowledge of the fact that the funds
of the company were utilized by Bipinbhai and his family members in buying
the shares of the Company and they got knowledge of the same only in May,
1987 and in this view of the matter the provisions of Section 17 of the
Limitation Act are clearly attracted and the limitation shall not begin to run
H till the date the petitioners discovered the fraud or got knowledge of the same.
RAMESH B. DESAI v. BIPIN VADILAL MEHTA [G.P. MATHUR, J.]
425
Mr. Sorabjee has also submitted that at any rate the plea raised by the A
petitioners involved adjudication into questions of fact, which could not have
been done until the parties got opportunity to lead evidence and the learned
Company Judge committed manifest error of law in deciding the issue of
limitation as a preliminary issue and recording a finding against the petitioners
even before they had got an opportunity to lead evidence.
B
8: Mr. Iqbal Chagla, learned senior counsel for the respondents, has
supported the judgment of the learned Company Judge and also of the
Division Bench and has submitted that the expression "a bar to the suit
created by any law for the time being in force" occuring in sub-rule (I )(b) of
Order XIV Rule 2 CPC contains within its ambit a plea relating to the bar of C
limitation. The learned counsel has elaborated his contention by submitting
that Section 3 of the Limitation Act mandates that subject to the provisions
contained in Sections 4 to 24, every suit instituted, appeal preferred, and
application made after the prescribed period shall be dismissed although
limitation has not been set up as a defence and sub-rule (d) of Order VII Rule
11 also says that the plaint shall be rejected where the suit appears from the D
statement in the plaint to be barred by any law. In view of these provisions,
it has been submitted that the Company Petition was rightly dismissed as the
transaction in shares in question took place on 13. I 1.1982 and as the period
of limitation by virtue of Article 137 of the Limitation Act is only three years,
the Company Petition which was filed in May, I 987, was clearly barred by E
limitation. The learned counsel has further submitted that the petitioners
could not take any advantage of Section I 7 of the Limitation Act as the
Company Petition did not contain full particulars of the alleged fraud which
is mandatory in view of Order VI Rule 4 CPC nor any averment has been made
therein that the knowledge of right or title on which the petition is founded
was concealed by the fraud of the contesting respondents. Mr. Chagla has F
also submitted that transfer of shares had taken place as father Vadilal Lallubhai
Mehta wanted that the control of two companies, viz., Mis. Sayaji Industries
Ltd. and Mis. C.V. Mehta Pvt. Ltd. should vest with Bipinbhai and some other
companies, viz., Mis. Industrial Machinery Manufacturers Pvt. Ltd., Mis. C.
Doctor and Company Pvt. Ltd., Mis. Mehta Machinery Manufacturers Pvt.
Ltd. and Mis. Oriental Corporation Pvt. Ltd. should vest with Suhasbhai and G
the particulars of the arrangement so made was recorded in MOU dated
30.1.1982 and the modified MOU dated 13.11.1982. The fact that Suhasbhai
supported the petitioners of the Company Petition clearly demonstrated that
he had turned dishonest and wanted to deprive Bipinbhai of the control of
the two companies, which he had got after transfer of shares in his name. The H
426
SUPREME COlJRT REPORTS [2006] SUPP. 3 S.C.R.
A whole thing had been done in the knowledge of the father Vadilal Lallubhai
Mehta, who was the chairman and also his two sons and thus the High Court
had rightly held that the petition was barred by limitation.
9. Before examining the contentions raised by the learned counsel for
the parties it will be useful to refer to the relevant statutory provisions and
B the basic principles, which are involved in the case. The Company Petition
has been filed seeking rectification of the register of members as contemplated
by Section 155 of the Companies Act. This provision has been deleted by
Section 21 of the Companies (Amendment) Act, 1988 (Act 31 of 1988) with
effect from 3 1.5 .1991 and has been incorporated in a modified form in Section
111. Prior to its omission the said Section stood as under: -
c
D
E
F
G
"155. Power of Court to rectify register of members-{!) If
(a)
the name of any person
(i)
is without sufficient cause, entered in the register of members of
a company, or
(ii) after having been entered in the register, is, without sufficient
cause, omitted therefrom; or
(b) default is made, or unnecessary delay takes place, in entering on
the register the fact of any person having become, or ceased to be,
a member;
the person aggrieved, or any member of the company, or the company,
may apply to the Court for rectification of the register.
(2) The Court may either reject the application or order rectification of
the register, and in the latter case, may direct the company to pay the
damages, if any, sustained by any party aggrieved.
In either case, the Court in its discretion may make such order as
to costs as it thinks fit.
(3)
On an application under this section, the Court
(a)
may decide any question relating to the title of any person who
is a party to the application to have his name entered in or
omitted from the register, whether the question arises between
members or alleged members, or between members or alleged
members on the one hand and the company on the other hand;
and
H
(b) generally, may decide any question which it is necessary or
;.
RAMESH B. DESAI v. BIPIN VADILAL MEHTA [G.P. MATHUR, J.]
427
expedient to decide in connection with the application for A
rectification.
(4) From any order passed by the Court on the application, or on any
issue raised therein and tried separately, an appeal shall lie on the
grounds mentioned in section JOO of the Code of Civil Procedure, 1908
(5of1908)-
B
(a)
If the order be passed by a District Court, to the High Court;
(b) If the order be passed by a single Judge of a High Court consisting
of three or more Judges, to a Bench of that High Court.
(5) The provisions of sub-sections (1) to (4) shall apply in relation to C
the rectification of the register of debenture-holders as they apply in
relation to the rectification of the register of members."
Section 77 of the Companies Act imposes restrictions on purchase by company,
or loans by company for purchase, of its own or its holding company's
shares. Relevant part of sub-sections (I) and (2) of this Section read as D
under:-
"77. Restrictions on purchase by company, or loans by company for
purchase, of its own or its holding company's shares.-{!) No
company limited by shares, and no company limited by guarantee and
having a share capital, shall have power to buy its own shares, unless E
the consequent reduction of capital is effected and sanctioned in
pursuance of sections I 00 to I 04 or of section 402.
(2) No public company, and no private company which is a subsidiary
of a public company, shall give, whether directly or indirectly, and
whether by means of a loan, guarantee, the provision of security or
otherwise, any financial assistance for the purpose of or in connection F
with a purchase or subscription made or to be made by any person
of or for any shares in the company or· in its holding company:
Provided
that
....................................... " (omitted as not relevant)
I 0. The vexed question of the legality of the purchase by a limited
company of its own shares was set at rest 'by the decision of the House of
Lords in Trevor v. Whitworth, (1887) 12 AC 409, since which it has been clear
law that a limited company cannot purchase its own shares except by way
G
of reduction of capital with the sanction of the court. (see Buckley on the
Companies Act - 14th edn. p.1499). In the same decision it was also held that H
428
SUPREME COURT REPORTS [2006] SUPP. 3 S.C.R.
A even express authority in the memorandum to the contrary was unavailing.
The main reasons for this prohibition were that such a purchase could either
amount to "trafficking" in its own shares, thereby enabling the company in
an unhealthy manner to influence the price of its own shares on the market,
or it would operate as a reduction of capital which can only be effected with
the sanction of the court and in the manner laid down in the statute (See
B Palmer's Company Law 23rd edn. p. 440). In the Guide To The Companies
Act by A. Ramaiya (16th edn. p.951) apart from Trevor v. Whitworth (supra),
British and American Trustee and Finance Corporation v. Couper, (1894) AC
399, has also been referred as a leading authority on the subject. Reference
has also been made to several decisions rendered by the superior courts in
C Australia and New Zealand wherein it has been unequivocally held that "a
transaction which upon examination can be seen to involve a return of capital,
in whatever form, under whatever label, and whether directly or indirectly, to
a member, is void". It is, therefore, well settled legal principle that any valuable
consideration paid out of the company's assets will make a transaction
amounting to a purchase and, therefore, invalid.
D
E
11. It m'!y be mentioned here that in view of Rule 6 of the Companies
(Court) Rules, the provisions of the Code of Civil Procedure will be applicable
in proceedings under the Companies Act (See Sangramsingh P. Gaekwad v.
Shantadevi P. Gaekwad, [2005] I I SC(; 314).
12. Sub-rule (2) of Order XIV Rule 2 CPC lays down that where issues
both of law and of fact arise in the same suit, and the Court is of opinion that
the case or any part thereof may be disposed of on an issue of law only, it
may try that iss'.le first ifthat issue relates to (a) the jurisdiction of the Court,
or (b) a bar to the suit created by any law for the time being in force. The
p provisions of this Rule came up for consideration before this Court in Major
S.S. Khanna v. Brig. F.J. Dillon, AIR (1964) SC 497, and it was held as
G
H
under:-"
Under 0. 14 R. 2 where issues both of law and of fact arise in the
same suit, and the Court is of opinion that the case or any part thereof
may be disposed of on the issues of law only, it shall try those issues
first, and for that purpose may, if it thinks fit, postpone the settlement
of the issues of fact until after the issues of law have been determined.
The jurisdiction to try issues of law apart from the issues of fact may
be exercised only where in the opinion of the Court the whole suit may
be disposed of on the _issues of law alone, but the Code confers no
RAMESH B. DESAI v. BIPIN VADILAL MEHTA [G.P. MATHUR, J.)
429
jurisdiction upon the Court to try a suit on mixed issues of law and A
fact as preliminary issues. Normally all the issues in a suit should be
tried by the Court: not to do so, especially when the decision on
issues even of law depends upon the decision of issues of fact, would
result in a lop-sided trial of the suit."
Though there has been a slight ame~dment in the language of Order XIV Rule B
2 CPC by the Amending Act, 1976, but the principle enunciated in the above
quoted decision still holds good and there can be no departure from the
principle that the Code confers no jurisdiction upon the Court to try a suit
on mixed issue of law and fact as a preliminary issue and where the decision
on issue of law depends upon decision of fact, it cannot be tried as a C
preliminary issue.
13. The plea raised by the contesting respondents is in fact a plea of
demurrer. Demurrer is an act of objecting or taking exception or a protest. It
is a pleading by a party to a legal action that assumes the truth of the matter
alleged by the opposite party and sets up that it is insufficient in law to D
sustain his claim or that there is some other defect on the face of the
pleadings constituting a legal reason why the opposite party should not be
allowed to proceed further. In O.N Bhatnagar v. Smt.