Kuki Leather Private Ltd. And Others v. T.N.K Govindaraju Chettiar And Co. And Another

The Judgment of the Court was delivered by

R. Jayasimha Babu, J.:— Counsel contends that hypertechnicalities should be allowed to be urged in order to escape the consequences of an action which can only be described as a fraud being played on the statutory Tribunal, in this case, the Company Law Board. The appellants when faced with an application under section 235 of the Companies Act, 1956, for investigating into its affairs, made a submission before the Company Law Board through its counsel that the persons in charge of the company would buy the shares, which they had purported to allot to that applicant before the Company Law Board long after that applicant had informed the company that it did not desire to have the allotment as no share certificates had been sent to it for a long number of years after the payment of a sum of Rs. 25 lakhs to the company. The receipt of the sum of Rs. 25 lakhs was never disputed. Admittedly only a sum of Rs. 1 lakh had been repaid.

2. In order to avoid the affairs of the company being investigated and to avoid the likelihood of the allegation that monies had been diverted from the company to other companies under the control of those who were running this company being proved, and to prevent any fraudulent activities that might have been carried on by those in charge being brought out as a result of such investigation, the appellants through their counsel made an offer to purchase the shares which the company had allotted to the applicants before the Company Law Board, at par. For considering that offer, the matter was thereafter adjourned by the Company Law Board to enable the applicants to consider that offer. On January 22, 1999, the applicant through its counsel stated that his client was ready to sell the shares at par value to the respondents in the application before the Company Law Board, viz., the appellants herein or their nominees. On that day the Company Law Board proceeded to make an order as under:

In this petition filed under section 235, the chartered accountant for the company made a statement on December 7, 1998, that his clients would be interested in purchasing the shares allotted to the petitioners at par. On that day, counsel for the petitioner desired some time for consulting his clients on this proposal. Today, he made a statement that his client is prepared to sell the shares at par value to the respondent or their nominees.

“Accordingly, it has been agreed by counsel for both the sides that 2.4 lakh shares purported to have been allotted to the petitioners against the advance of Rs. 24 lakhs given by the petitioner to the company, will be purchased by the respondents or their nominees at par value and consideration for the same will be paid in one or more instalments within a period of six months, i.e, by July 31, 1999. Accordingly the petitioner will hand over blank transfer forms in respect of these shares on receipt of the first instalment. However, the company will register the transfer only when the final instalment is paid.

In view of this agreement between the parties the petition is disposed of without any order. Liberty to apply.” (page 498 of 109 Comp Cas).

3. The correctness of the statement made in that order was never in dispute. It is not the case of the appellants that they had not engaged counsel who made the statement or that the statement made by him is not a statement which he had been authorised to make. It was not their case that the statement was made under any bona fide mistake regarding any fact or any position in law. It was not their case that the respondents did not agree to sell the shares at par value or that they had not agreed to hand over blank transfer forms on receipt of the first instalment.

4. It is also not the case of the appellants that the proceedings under section 235 would continue even after that order and that either the appellants or the respondent may seek any directions regarding the investigation of the affairs of the company.

5. It is patent from the background in which the order came to be made, the contents of the order and the conduct of the parties in relation thereto subsequent to the order—the order not having been challenged by the appellants at any point of time before any forum including the Company Law Board itself by way of review or any other proceedings, that the order was meant to be a substitute for any order that the Company Law Board would have otherwise made on the prayer for the investigation into the affairs of the company. By persuading the Company Law Board to make the order, the company avoided the appointment of any inspectors to investigate into its affairs.

6. Having secured that benefit and having made a solemn promise before the Company Law Board which was reduced to writing by the Board and the correctness of that record not having been disputed at any point of time by any of the parties, the appellant long after that order came to be made chose to pretend as if no order had been made and it was under no obligation to purchase the shares which it had undertaken to purchase. It must be re-emphasized here that that order was at no point of time questioned in any legal proceedings by the appellants.

7. The respondent having waited for the appellants to pay a sum of Rs. 25 lakhs and have the shares transferred to its name in vain, it applied to the Company Law Board under regulation 47. The Company Law Board directed the parties to file an application before it under section 634A of the Act which was done. After hearing the parties on that application the Board made the order on May 12, 2000 (since reported in T.N.K Govindaraju Chettiar and Co. Ltd. v. Kuki Leather Pvt. Ltd., [2002] 109 Comp Cas 493 (CLB), wherein it held that the appellants themselves had shown their willingness to comply with the order by writing letters to the petitioners, that the order was not vitiated by reason of lack of jurisdiction in the Company Law Board to make the order, that the order was not a nullity and as that the order was, in fact, an executable order. The Board directed the appellants to comply with the order within 60 days and in the case of the appellants' failure to do so, gave liberty to the respondents in this appeal to move the Board for passing an order in terms of section 634A.

8. That order of the Company Law Board was challenged before a learned single judge of this court by way of an appeal filed under section 10F of the Companies Act. That appeal having proved unsuccessful, the company and those who were in control of it Syed Salim and K. Anandkumar, the persons who had agreed to purchase the shares are now before us in appeal under the letters patent.

9. Mr. Mayilswamy, learned counsel appearing for the appellants submitted that the order made by the Company Law Board is not an executable order and that even if it be regarded as an order made by applying the principles contained in Order 23, rule 3 of the Code of Civil Procedure, that order was not one which was in writing and signed by the parties and, therefore, would not bind the parties. It was also his further submission that the Company Law Board had no jurisdiction to make the order as the scope of the proceedings under section 235 was limited to the question of granting or refusing the prayer for investigating into the affairs of the company.

10. The facts already set out dearly show that the appellants derived a great advantage by making the statements they did through their counsel before the Company Law Board and persuaded the respondents to agree to the proposal, and after the agreement came to be recorded, the Company Law Board did not and was not required to proceed further in the matter regarding investigation into the affairs of the company. The investigation which the respondents had sought into the affairs of the company was thus successfully avoided. It is now not open to the appellants to turn round and claim that their actions should not be regarded as binding on them and that the technicalities of the Code of Civil Procedure should be imported in order to defeat the justice of the case. Acceptance of the arguments now advanced for the appellants would clearly result in justice being defeated and fraud allowed to be perpetrated by parties and their counsel on the adjudicatory forum. It would also cause grave doubts on the credibility of the statements made by the lawyers before the adjudicatory forum, which statements are normally relied upon by such forums as statements which are meant to be acted upon, and when acted upon to result in orders which would bind counsel and the parties represented by such counsel.

11. The arguments advanced by counsel for the appellants, though they may superficially appear to be attractive, the arguments, if accepted would undermine the cause of justice and put the stamp of approval of the court to conduct which can only be described as fraudulent.

12. It is in that background that the arguments advanced for the appellants are required to be examined.

13. The submission that the order of January 22, 1999 is not an order at all is not a submission that can be accepted. The order made by the Company Law Board on that date was in a proceeding properly brought before it. The cause title sets out that there was a proceeding under section 235 pending before it to which the appellants and the respondents were parties. In the course of that proceeding counsel for the appellants, obviously on the instructions of his clients, had made a statement on December 7, 1998, that his clients would be interested in purchasing the shares allotted to the respondents in this appeal at par, and on that date consented to the agreement being recorded by the Board, that agreement having been communicated to the Board by counsel who appeared for the parties. That offer was accepted by the respondents and the order was made subsequently. The names of counsel who appeared for the parties on that date were also set out. It was in the light of that agreement that the Company Law Board proceeded to state that the petition is: disposed of without any further order. The order made by the Company Law Board on that day resulted in the disposal of the petition before it. The direction given for the disposal after recording the agreement was in itself the order, as the proceeding before the Board could not be brought to a conclusion without an order being made. The reason for disposal of the matter without any orders on the prayer made for appointment of persons to investigate the affairs of the company was the agreement which the parties had reached and had reported to the Company Law Board, which the Board reduced to writing and made part of the order.

14. The argument that the agreement would not bind as it was not signed by the parties presumes that Order 23, rule 3 of the Code of Civil Procedure in all its rigour, applies to proceedings before the Company Law Board. While it is no doubt true that the safeguards in-built into this provision are meant to promote justice and to minimise possible challenges to the compromise recorded by the court, that provision cannot be read as laying down the only possible way in which the settlement agreed to between the parties should be recorded by the Company Law Board. It is not in dispute that Order 23, rule 3 of the Code of Civil Procedure does not in terms apply to the proceedings before the Company Law Board. It is not the case of the appellants that the Board had wrongly recorded what it did record. The appellants had no grievance at all against the record made on that date and do not have any grievance even now with regard to its accuracy and authenticity. There is, therefore, no difficulty in proceeding on the basis that that order did record an agreement which the parties had voluntarily reached and that the parties had undertaken to perform the obligations which they were required to perform as recorded in that order. The fact that the agreement was not signed by the parties in this background does not in any manner vitiate that order as embodying a compromise properly arrived at between the parties and which was capable of being made into a decree which was executable.

15. The submission that the Board had no jurisdiction at all to make the kind of order that was made on that date is also a submission which is required to be rejected. Counsel rightly does not dispute that the Company Law Board can direct the purchase of shares in proceedings under sections 397 and 398 of the Companies Act. While the proceedings that was initiated was one under section 235, that fact by itself is not to be regarded as placing an embargo on orders other than that warranted under section 235 being made, if parties to the proceedings agree to such an order and such agreement is not against public policy, is not illegal and is not violative of any of the provisions of the Companies Act or any other law and it is not an agreement which itself is beyond the competence of the Board to record under the provisions of the Companies Act It is not the case of the appellants that the proceedings recorded on January 22, 1999, are against public policy or illegal or an agreement which the Company Law Board is prohibited from recording under any of the provisions of the Companies Act or under any other law. The submission that the order is vitiated by reason of total lack of jurisdiction in the Company Law Board, therefore, cannot be accepted.

16. Counsel referred to us P. Ramanatha Iyer's Law Lexicon and to what is stated therein as to what is meant by “jurisdiction of the subject matter”. It is stated in the Lexicon that the “jurisdiction of the subject matter” always comes from the law and that it cannot be waived nor conferred by the consent of the parties or their counsel. There is however no right in any counsel or any party to mislead the adjudicatory forum or to play fraud upon it. The solemn agreement properly reported to and recorded by the adjudicatory forum which is not against public policy and is not violative of the provisions of the law and existence of which agreement is not in dispute, is an agreement which binds and is not one which can be regarded as vitiated on the ground that the jurisdiction cannot be conferred on the forum by parties or through counsel.

17. Learned counsel invited our attention to the case of Gurpreet Singh v. Chatur Bhuj Goel., (1988) 1 SCC 270 : AIR 1988 SC 400, which was a case of compromise of a suit. The court therein emphasized that the compromise must be reduced to writing and signed by the parties. That was a case to which the provisions of the Code of Civil Procedure were admittedly applicable unlike the present case where Order 23, rule 3 of the Code of Civil Procedure in terms does not apply, although the principle that the conclusion of contested proceedings by way of compromise agreed to between the parties is a permissible mode for putting an end to the proceedings, would apply to the proceedings before the Company Law Board as well.

18. Counsel also invited our attention to the case of Kiran Singh v. Chaman Paswan, AIR 1954 SC 340, wherein it was held that a decree passed by the court without jurisdiction is a nullity and its invalidity could be set up whenever and wherever it is sought to be enforced or relied upon even at the stage of execution and even in collateral proceedings. We have already held that the order made by the Company Law Board, which order under section 634A of the Companies Act is deemed to be a decree, is not an order made without jurisdiction and is not a nullity. We must strongly deprecate the attempt of the appellants to avoid carrying out a solemn promise made through their responsible counsel to the Company Law Board by seeking to raise hypertechnical pleas when faced with the demand for compliance with the terms of that order. Although we have considered the submission made by counsel and examined those submissions, we make it clear that the appellants are not entitled in law to urge any of those grounds, as allowing the appellants to do so successfully would mean closing eyes by the court to a fraud played by a party and counsel on the Company Law Board. As stated by us earlier, no counsel or litigant has a right to play fraud on the court or the Tribunal and any attempt to do so must be discouraged and should invite the heaviest penalties.

19. We do not find any merit in this appeal and the same is dismissed with costs quantified at Rs. 3,000.