Jasti Chelameswar, J.— The first respondent is a company under the Companies Act, 1956 (hereinafter referred to as “the Act”). Two appellants herein who are mother (since deceased) and son, respectively are minority shareholders holding or otherwise controlling 17% of the equity in the first respondent Company.
History of the Company
2. The first respondent Company is carrying on the business of “selling chemical process, know how and of manufacturing dyes, chemicals and textile auxiliaries”, etc. It all started as a family firm in the year 1962 known as M/s Gardha Chemicals Industries. The abovementioned partnership was created by (1) the mother of the first appellant, (2) the husband of the first appellant, (3) a sister of the first appellant and the second respondent, the brother of the first appellant. The partnership deed contained a clause that none of the partners could sell his/her respective share in the firm without offering it first to the other partners.
3. On 6-3-1967, a private limited company was incorporated with the principal object of taking over the assets and liabilities of the abovementioned partnership as a going concern. Article 57 of the articles of association contained restrictions on the rights of all the shareholders to transfer their shares. Any shareholder desiring to sell his shares must offer his shares to the other shareholders of the company pro rata to the holding of each of such other members respectively at a fair value.
4. With effect from 17-8-1988, the first respondent Company became a public company [under Section 43-A(1-A) of the Act] as its turnover exceeded the limit prescribed thereunder:
“43-A. (1-A) Without prejudice to the provisions of sub-section (1), where the average annual turnover of a private company, whether in existence at the commencement of the Companies (Amendment) Act, 1974, or incorporated thereafter, is not, during the relevant period, less than rupees one crore, the private company shall, irrespective of its paid-up share capital, become, on and from the expiry of a period of three months from the last day of the relevant period during which the private company had the said average annual turnover, a public company by virtue of this sub-section:
Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be reduced, below seven.”
5. One important development in the history of the first respondent Company relevant for the decision of the instant appeal is that on 2-4-2001 a notice was issued calling for extraordinary general meeting of the first respondent Company scheduled to be held on 5-5-2001. The purpose of the said meeting was to adopt a resolution for amending the articles of association of the first respondent by inserting clause (d) to Article 3 thereof. The substance of the said clause is to prohibit any invitation or acceptance of deposits from persons other than the members, Directors or the relatives of the members or the Directors of the company. According to the respondents, such a proposal for amendment was necessitated to comply with the requirements of the newly inserted sub-clause (d) of Section 3(1)(iii) which came to be inserted by Act 53 of 2000 w.e.f 13-12-2000. The appellant opposed the amendment of the articles of association and the amendment could not be carried as the proposal failed to muster the requisite majority.
History of the Litigation
6. In the month of May 2009, certain reports appeared in the media that the second respondent was proposing to sell his shares in the first respondent Company which were at that time valued at approximately Rs 1600 crores. The appellant, therefore, filed Company Petitions Nos. 132/397-98.CLB/MB/2009 (hereinafter referred to as “the Company Petition No. 132 of 2009”) before the Company Law Board, inter alia, seeking prohibitory orders against the second and third respondents from committing breach of the pre-emption agreement contained in Article 57 of the articles of association referred to supra. On 11-12-2009, ad interim injunction order was passed by the Company Law Board restraining the second respondent from alienating his share without permission of the Company Law Board. However, the Company Petition No. 132 of 2009 was heard finally and dismissed by an order dated 14-5-2010.
7. Aggrieved by the same, the appellants preferred Company Appeal No. 24 of 2010 before the High Court of Bombay on 26-6-2010. The High Court summarised 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377 the decision of the Company Law Board as under: (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 75)
“75. It is on this material that the company petition was placed before CLB and heard accordingly. CLB firstly held that the first respondent is a public company. Once it is held to be a public company, then, its shares are freely transferable and the issue was whether any pre-emption clause/article restraining transferability of shares in public company is valid. The Board held that Article 57 does contain such restriction but, the Board relying upon a judgment of this Court in Western Maharashtra Development Corpn. Ltd. v. Bajaj Auto Ltd. (2010) 154 Comp Cas 593 (Bom) held that such a clause in the articles of association will not be applicable to first respondent Company. Once it is held to be a public company, its shares are freely transferable and the articles would not hold good as they are contrary to the statute. Holding that violation of such a clause in the articles is not an act of oppression, the petition came to be dismissed.”
The said appeal was finally heard and dismissed by the impugned judgment dated 14-6-2011 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377.
8. According to the appellants, the High Court held that:
“an agreement between shareholders of an unlisted public company conferring a right of pre-emption which is embodied in its articles is invalid and unenforceable.” — SLP
9. Elaborate submissions were made on either side dealing with the various provisions of the Companies Act as amended from time to time. The learned counsel appearing on either side also submitted written briefs.
10. According to the written brief submitted by the appellant the question that arises for consideration of this Court is summarised as follows:
Whether on and after the bringing into force of the Companies (Amendment) Act, 2000, the status and character of Gharda Chemicals Ltd. (R-1) continued to be as that of a “hybrid company” (Section 43-A company) and whether this Company and its members are bound by the terms of a pre-emption clause contained in Article 57 of the articles of association?
In our opinion, the Real Question is not whether after Amendment Act 53 of 2000, the first respondent continued to be a private company or became a public company, but whether the amendment made by Act 53 of 2000 to Sections 3 and 43-A destroys the rights and obligations created by Article 57 of the articles of association of the first respondent Company.
11. The case of the appellants all through has been that notwithstanding the amendment of the Act by Amendment Act 53 of 2000, Article 57 of the articles of association still governs the rights of the members of the first respondent Company.
12. On the other hand, the case of the respondents has always been and is that the first respondent Company is a public company having had become so by the operation of law i.e Section 43-A(1) and it cannot now become a private company. There is nothing in Amendment Act 53 of 2000 which automatically renders a public company created under Section 43-A to become a private company. It is also the case of the respondents that the failure to amend the articles of association to give effect to Section 3(1)(iii)(d) ipso facto make the first respondent a public company thereby rendering Article 57 inoperable.
13. We shall deal with those arguments later in the judgment. Before dealing with these various arguments, we deem it appropriate to examine the relevant provisions of the Companies Act, and the various amendments made to the Act from time to time.
Scheme of the relevant provisions of the Companies Act
14. The Companies Act, 1956 (hereinafter referred to as “the Act”) as it was originally enacted, contained only the definition of a “private company” under Section 3(1)(iii) to mean a company [a defined expression under Section 3(1)(i)] which, by its articles (a) restricts the right to transfer its shares, if any, (b) limits the number of its members to fifty, and (c) prohibits any invitation to public to subscribe for any shares or debentures for the company.
15. Section 27(3) of the Act stipulates:
“27. (3) In the case of a private company having a share capital, the articles shall contain provisions relating to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of sub-section (1) of Section 3; and in the case of any other private company, the articles shall contain provisions relating to the matters specified in the said sub-clauses (b) and (c).”
This sub-section makes it clear that to be a private company either with or without share capital the articles of association of such company must necessarily provide for the matters specified in Section 3(1)(iii) of the Act. In the case of a private company limited by share capital all the three requirements specified in sub-clauses (a), (b) and (c) of clause (iii) of sub-section (1) are to be provided. In the case of a private company other than a company having share capital only matters specified in sub-clauses (b) and (c) of the above sub-section are to be stipulated.
16. Part II of the Act deals with incorporation of company and matters incidental thereto. A brief survey of the said Part insofar as it is relevant for the purpose of this case is necessary.
17. Section 12 deals with the mode of forming incorporated companies, either public or private. It stipulates that an incorporated company may be formed by two or more persons in the case of a private company and seven or more persons in the case of a public company by subscribing their names to a memorandum of association and complying with other requirements of the Act in respect of registration.
18. Section 26 of the Act mandates inter alia that in the case of a private company limited by shares, there shall be registered (along with the memorandum), the articles of association signed by the subscribers of the memorandum. Such articles of association must prescribe the regulations for the company:
“26. Articles prescribing regulations.—There may in the case of a public company limited by shares, and there shall in the case of an unlimited company or a company limited by guarantee or a private company limited by shares, be registered with the memorandum, articles of association signed by the subscribers of the memorandum, prescribing regulations for the company.”
19. The Act came to be amended by Act 65 of 1960. By the said amendment, Section 43-A came to be inserted in the said Act. It originally contained eight sub-sections.
19.1 Sub-section (1) declared that any private company which has a share capital, of which twenty-five per cent of the paid-up share capital is held by “one or more bodies corporate” becomes a public company. The relevant part of sub-section (1) reads as under:
“43-A. Private company to become public company in certain cases.—(1) Save as otherwise provided in this section, where not less than twenty-five per cent of the paid-up share capital of a private company having a share capital, is held by one or more bodies corporate, the private company shall—
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become by virtue of this section a public company:”
Such companies popularly came to be called deemed public companies (they are referred to by the learned counsel for the appellant as “hybrid companies”) though Section 43-A does not use that expression. In our opinion, Section 43-A only creates a new class of public companies—answering the description contained therein though they have and can retain all the attributes of a private company as defined under Section 3(1)(iii). These companies are hereinafter referred to as “hybrid companies” for the sake of convenience. Obviously, the question of private companies without share capital becoming public companies does not arise. Bodies corporate cannot hold non-existent shares in such private companies. Sub-section (1) has two provisos. An examination of the contents of the first proviso is relevant and necessary for the purpose of this case. We shall deal with the same separately.
19.2 Sub-section (2) mandates that within three months from the date on which a private company becomes a public company by virtue of Section 43-A(1), the company shall inform the Registrar that it has become a public company. It also mandates that the Registrar shall make necessary consequential alterations of the records. The language and implication of sub-section (2) will be examined later in the judgment.
19.3 We are not concerned with sub-section (3). Sub-section (4) contemplates the possibility of a private company which becomes a public company by virtue of the operation of Section 43-A, once again becoming a private company. It stipulates that any private company which becomes a public company by virtue of Section 43-A shall continue to be a public company, until such time it becomes a private company in accordance with the provisions of the Act. Such a reconversion requires the approval of the Central Government:
“43-A. (4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company.”
19.4 Sub-section (5) provides for penalties for defaults in complying with the mandate of sub-section (2). Sub-sections (6) and (7) were omitted by the Amending Act 31 of 1988. Sub-section (8) prescribes certain obligations attached to such public companies, the details of which may not be necessary.
20. By the Amendment Act 41 of 1974, sub-sections (1-A) and (1-B) came to be inserted in Section 43-A. By the newly inserted sub-sections, the legislature declared that two more classes of private companies become public companies on the happening of the events specified in each of the newly introduced sub-sections.
20.1 Sub-section (1-A) declares that a private company whose “average annual turnover” “during the relevant period” is not less than Rs 1 crore becomes a public company:
“43-A. (1-A) Without prejudice to the provisions of sub-section (1), where the average annual turnover of a private company, whether in existence at the commencement of the Companies (Amendment) Act, 1974, or incorporated thereafter, is not, during the relevant period, less than such amount as may be prescribed, the private company shall, irrespective of its paid-up share capital, become, on and from the expiry of a period of three months from the last day of the relevant period during which the private company had the said average annual turnover, a public company by virtue of this sub-section:
Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be reduced, below seven.”
The amount of Rs 1 crore mentioned originally in sub-section (1-A) is substituted by Act 31 of 1988 with the words “such amount as may be prescribed”.
20.2 Sub-section (1-B) declares that any private company holding not less than 25% of the paid-up share capital of a public company shall become a public company. Both the sub-sections contain a proviso each, which are ipsissima verba. The implications of such provisos along with the implication of the proviso to sub-section (1) shall be examined later.
“43-A. (1-B) Where not less than twenty-five per cent of the paid-up share capital of a public company, having share capital, is held by a private company, the private company shall—
(a) on and from the date on which the aforesaid percentage is first held by it after the commencement of the Companies (Amendment) Act, 1974, or
(b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1974, on and from the expiry of the period of three months from the date of such commencement, unless within that period the aforesaid percentage is reduced below twenty-five per cent of the paid-up share capital of the public company,
become, by virtue of this sub-section, a public company, and thereupon all other provisions of this section shall apply thereto:
Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be reduced, below seven.”
21. Sub-sections (9) to (11) of Section 43-A came to be inserted by various amending Acts. The complete details of the contents of all these sections and their legislative history is not necessary for us except to note that in the Explanation appended to sub-section (9), the expressions “relevant period” and “turnover” occurring in sub-sections (1) and (1-A) are defined as follows:
“Explanation.—For the purposes of this section—
(a) ‘relevant period’ means the period of three consecutive financial years—
(i) immediately preceding the commencement of the Companies (Amendment) Act, 1974, or
(ii) a part of which immediately preceded such commencement and the other part of which immediately, followed such commencement, or
(iii) immediately following such commencement or at any time thereafter,
(b) ‘turnover’, of a company, means the aggregate value of the realisation made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;”
22. Act 31 of 1988 inserted sub-section (1-C) which declares that any private company accepting deposits from “the public, other than its members, Directors or their relatives” (hereinafter referred to as “public” for the sake of convenience) pursuant to such invitation made by an advertisement after the commencement of the Amendment Act i.e 15-6-1988 or renews an existing deposit, becomes a public company. Even sub-section (1-C) has a proviso in terms which is identical with the provisos to sub-sections (1-A) and (1-B).
“43-A. (1-C) Where, after the commencement of the Companies (Amendment) Act, 1988 a private company accepts, after an invitation is made by an advertisement, or renews, deposits from the public, other than its members, Directors or their relatives, such private company shall, on and from the date on which such acceptance or renewal, as the case may be, is first made after such commencement, become a public company and thereupon all the provisions of this section shall apply thereto:
Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be, reduced below seven.”
23. Thus, it can be seen that by the date of amendment of Section 43-A by Act 53 of 2000 under Section 43-A, there are four classes of private companies which are declared by the said section to become public companies on the happening of an event mentioned in each of the sub-sections. It is also necessary to note that each of the abovementioned four sub-sections contained a proviso. The tenor of all the four provisos is identical:
“Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be reduced, below seven.”
Each one of these provisos declare that even after a private company becomes a public company by virtue of the operation of any one of the four sub-sections i.e (1), (1-A), (1-B) and (1-C) of Section 43-A, the articles of association of such company may include provisions relating to the matters specified in Section 3(1)(iii). The provisos further declare that the number of members of such company “may be, or may at any time be reduced, below seven”. The implications of the provisos require an examination.
24. The provisos permit the continuance of stipulations in the articles of association of such public companies which relate to the matters specified in Section 3(1)(iii). In other words, though the companies whose articles of association provide for matters specified in Section 3(1)(iii) are private companies, and under the scheme of the Companies Act a public company cannot have such stipulations, Section 43-A expressly permits the four classes of public companies to retain such articles of association. Secondly, the relaxation under the proviso regarding the membership of such companies getting reduced below seven is meant to obviate the conflict with the requirement of Section 12 which requires a minimum of such seven persons to constitute a public company.
25. The employment of the expression “may” in the clause, “its articles of association may include provisions relating to the matters” only indicates that a private company which becomes a public company by virtue of the operation of any one of the four sub-sections of Section 43-A has choice either to retain those stipulations in its articles of association relating to the matters specified under Section 3(1)(iii) or to amend its articles of association either deleting all or some of the stipulations relating to matters specified in Section 3(1)(iii) from its articles of association. The reason is that a private company has certain privileges and exemptions under the Companies Act in the sense that a private company is subject to a lesser degree of regulation under the provisions of the Companies Act, than a public company. The moment private company becomes a public company, either by operation of law or the volition of its member, such company becomes subject to a more rigorous regulation of its activities by the various provisions of the Companies Act. At the same time, a public company has certain advantages under law. Therefore, it is for the company and its members to decide whether the restrictions and limitations contained in the articles of association referable to matters specified in Section 3(1)(iii) should still continue even after the company lost the exemptions and privileges attached to a private company.
26. Section 43 of the Companies Act recognises the existence of such privileges and exemptions by declaring that a private company which defaults in complying with any one of the stipulations made in its articles of association relating to the matters specified under Section 3(1)(iii), such company “shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act and this Act shall apply to the company as if it were not a private company”.
27. Therefore, these four provisos give an option to the company either to retain the original articles of association or alter them, but there is no statutory compulsion to alter the articles of association. Our view is fortified by the language of sub-section (2) of Section 43-A.
“43-A. (2) Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the Registrar that it has become a public company as aforesaid, and thereupon the Registrar shall delete the word ‘Private’ before the word ‘Limited’ in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association.”
It only obligates a private company which becomes a public company by virtue of the operation of Section 43-A to inform the Registrar within three months from the date on which the private company becomes a public company, regarding the change in its status from “private” to “public”. On receipt of such intimation, the Registrar is required to make a change in the name of the company in his register and is also required to make necessary alterations in the “certificate of incorporation” issued to the company and its “memorandum of association”. Sub-section (2) does not obligate either the company or the Registrar to make any changes in the articles of association. No other provision of the Companies Act is brought to my notice which creates such an obligation.
28. Sub-section (11) was inserted by Act 53 of 2000 which is the bone of contention in the instant appeal and reads as follows:
“43-A. (11) Nothing contained in this section, except sub-section (2-A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000.”
The implication of the same requires a detailed examination at a later stage of this judgment.
Decision of the High Court
29. The High Court noted the history of Sections 3(1)(iii) and 43-A of the Act and recorded a finding that in view of the insertion of sub-section (2-A) in Section 43-A by the Companies (Amendment) Act, 2000 (Act 53 of 2000): (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 112)
“112. … the concept of deemed public company under Section 43-A and introduced by the Companies (Amendment) Act has now been abolished based on the recommendation of the working group of the Companies Act, 1956.”
30. The High Court also recorded a finding that the first respondent Company is a public company. The High Court then went on to examine whether there can be any restriction on the shareholder's right to transfer shares in a public company. The High Court reached a conclusion that in view of the subsequent statutory amendments made in 1988 and 2000 to the Companies Act, Article 57 of the articles of association of the first respondent Company would no longer govern the rights of its shareholders to transfer their shares:
“121. … After 17-8-1988 and in any event after dated 13-12-2000, the position has undergone a change and Article 57 appearing in the articles of association would no longer be the governing article. It is not necessary to then consider the argument as to whether the said article is void or not. That article must give way to the statutory provision. If the shares of public company are freely transferable, then, the statutory provisions in that behalf will take such effect notwithstanding anything to the contrary contained in the articles of association of such company. The overriding effect given to the Act by Section 9 cannot be ignored and brushed aside as desired by the appellants.” (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 121)
31. An alternative argument of the appellants that in view of the fact the shares of the first respondent Company are not listed shares, there can be a right of pre-emption, is rejected by the High Court:
“121. … Their alternate argument that assuming that GCL is public company, its shares being non-listed, there can be a right of pre-emption, is equally unsound and not tenable. There is no distinction made in the Act of this nature. That argument is canvassed only by relying on the definition of the term ‘listed public companies’ appearing in Section 2(23-A). The definition itself clarifies that a public company which has any of its securities listed in any of the recognised stock exchange will be termed as listed public company. Nonetheless it remains a public company and merely because its shares are not listed in any recognised stock exchange does not mean that there is any restriction on their transfer. They are and continue to be freely transferable as they are shares of a public company. The broad distinction as noticed above, between the term ‘private’ and ‘public’ company, is enough to turn down this alternate argument.” (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 121)
32. The High Court also rejected the other submission of oppression and mismanagement pleaded by the appellants as the basis of the plea of oppression and mismanagement is the existence of legally valid pre-emption clause. The High Court held: (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 127)
“127. Once all these arguments and contentions are dealt with, then, other part of submissions of Mr Samdani on oppression of minority also fail. They are raised on the basis that the pre-emptive right is defeated by Respondents 2 to 5 by their several acts of omission and commission. Once the pre-emptive right itself is not in existence by virtue of the statutory provisions in the field, then, there is no act of oppression. As held above, the plea of mismanagement has been given up and has not been pursued.”
33. The reasons which led to the above-extracted conclusions of the High Court are as follows:
33.1 Section 43-A prior to its amendment by Amendment Act 53 of 2000 only provided for various situations in which a private company becomes a public company by operation of law but not vice-versa:
“112. … In other words, this section permitted a private company to become a public company in certain cases and once the word private is deleted it becomes a public company. However, there was nothing which permitted such public company to again become private company and that is achieved by insertion of Section 43(2-A).” (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 112)
(emphasis supplied)
33.2 The High Court also opined that in view of the declaration contained under sub-section (11) of Section 43-A, which was inserted by Amendment Act 53 of 2000, the entire Section 43-A becomes inoperative w.e.f 13-12-2000 (the day on which the Amendment Act came into force) except for sub-section (2-A). Thereby “the concept of deemed public company under Section 43-A” has “been abolished”:
“112. … sub-section (11) of Section 43-A which also was inserted by Act 53 of 2000 from 13-12-2000, clarified that nothing contained in Section 43-A, save and except sub-section (2-A) shall apply on and after the commencement of the Companies (Amendment) Act, 2000. In other words, whole of Section 43-A except for one sub-section viz. sub-section (2-A) ceases to apply after the commencement of the Companies (Amendment) Act, 2000. … Thus, Section 43-A itself became inapplicable by virtue of sub-section (11). The effect of all this is that the concept of deemed public company under Section 43-A and introduced by the Companies (Amendment) Act has now been abolished based on the recommendation of the working group the Companies Act, 1956.”
33.3 The High Court held that though the first respondent Company was initially incorporated as a private company, it became a public company (in the language of the High Court “a deemed public company”) by virtue of the operation of Section 43-A(1-A) but ceased to be a private company. Since its articles of association could not be amended to give effect to the newly inserted sub-clause (d) of Section 3(1)(iii)(introduced by Act 53 of 2000 w.e.f 13-12-2000), therefore, its status as “deemed public company” itself lapsed w.e.f 13-12-2000 and thereafter the first respondent Company would only be a public company but not either a private company or a deemed public company whose articles of association could contain restrictions on the transfer of shares of its members:
“115. It is clear from the factual position that the attempt to amend the memorandum and articles of association of the first respondent was unsuccessful. The said resolution proposed in the meeting held on 5-5-2001 was not carried but in fact defeated. Once it was defeated, then, the first respondent which had become a public company on 17-8-1988 continued with that status. It would be of relevance to note that the resolution was moved in the meeting held on 5-5-2001. That resolution was defeated on that day. However, the Companies (Amendment) Act, 2000 had come into effect already and to be precise from 13-12-2000. On 13-12-2000, GCL was not a deemed public company but a public company. Once it was a public company, then, the argument of the appellants that it continued to retain its fundamental and basic character as a private company cannot be accepted. The status is conferred by law. The status was sought to be changed or amended by moving an amendment to the articles of association. Once that amendment to insert an additional sub-clause (d) was defeated, then, there is no scope to alter the status of Respondent 1 Company by either terming it as a deemed public company or a public company retaining the fundamental and basic character of a private company. Both these concepts are unknown to law.” (Jer Rutton Kavasmanek case 2011 SCC OnLine Bom 702, (2011) 4 Bom LR 2487, (2011) 166 Comp Cas 377, SCC OnLine Bom para 115)
34. Submissions by the appellants
34.1 On a plain reading of sub-section (11), it is clear that Section 43-A is retained on the statute book and not deleted by the Companies (Amendment) Act, 2000. Had Parliament intended to completely efface all Section 43-A companies, the surest manner would have been to delete Section 43-A from the statute. The retention of Section 43-A is an extremely strong indicator of the legislative intention to continue recognition of existing “hybrid companies” even after 13-12-2001.
34.2 This legislative intention is made clear by the insertion of sub-section (11) in Section 43-A by the Companies (Amendment) Act, 2000 which reads:
“43-A. (11) Nothing contained in this section, except sub-section (2-A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000.”
The expression “nothing contained in this section … shall apply on and after”, coupled with the retention of Section 43-A on the statute book, clearly indicates that the legislature did not want the regime of hybrid companies to lapse w.e.f 13-12-2000.
34.3 Apart from retaining Section 43-A on the statute book, Section 111(14) of the Companies Act, 1956 also remained in the statute after the Companies (Amendment) Act, 2000. Section 111(14) reads:
“111. (14) In this section ‘company’ means a private company and includes a private company which had become a public company by virtue of Section 43-A of this Act.”
The justification for retaining a specific reference to Section 43-A in Section 111 is that the status of deemed public companies continued to be recognised even after the 2000 Amendment. Had Parliament's intention been otherwise, Section 43-A itself and all references in the Companies Act, 1956 to Section 43-A would have been deleted by the legislature.
34.4 The insertion of sub-section (2-A) into Section 43-A was required to provide an exit route on and after 13-12-2000 for an existing hybrid company which ceased to attract the operation of Sections 43-A(1) to (1-C). Prior to the 2000 Amendment, where a hybrid company ceased to attract the operation of the relevant sub-section of Section 43-A which had rendered it a hybrid company with approval of the Central Government, was mandatory in terms of sub-section 43-A(4). The 2000 Amendment removed the requirement for the Central Government approval.
34.5 Each of the sub-sections of Section 43-A contained a specific clarificatory proviso which preserved the essential character and status of a private company. Therefore, to construe Section 43-A subsequent to 13-12-2000 to destroy the essential character and status of the companies covered by Section 43-A would be illogical.
34.6 A “company” is a legal vehicle for more than one person/collection of persons to come together and form an enterprise. The basic terms on which such persons would join together would be contained in the memorandum and articles of association of such a company, creating rights and obligations including the conditions subject to which shares are to be held. When a person becomes a member of a company he agrees to be bound by the covenants in the articles of association (Section 36). The articles are the foundation on the basis of which shareholders of the company deal with each other. In the case of a company such as Respondent 1, the application of Section 43-A did not in any manner disturb the existing arrangements among the shareholders but added on certain regulatory requirements. Assuming (whilst denying) that Section 43-A stood effectively “repealed” on and after 13-12-2000, there is nothing to suggest that the intention of the legislature was to completely disrupt the foundational arrangement amongst shareholders across the country in tens of thousands of private limited companies. In other words, assuming there was a repeal, the status of every deemed public company reverts back to a private company and not a public company. Should the status of every hybrid company subsequent to the 2000 Amendment be regarded as “public” that would mean a destruction of various articles which thought permissible in a private company are illegal with regard to a public company.
34.7 It is settled position that unless the contrary intention appears, an enactment is presumed not to be intended to have a retrospective operation. The amendment to the definition of a “private company” affects its status and would affect substantive vested rights acquired over decades. An amendment which affects alteration in status/substantive vested rights is always presumed to be prospective in operation.
34.8 By the Amendment Act of 2000, two prospective changes were introduced in the definition of a “private company”—first regarding such a company having a minimum paid-up capital of one lakh and second that such a company in its articles must also include a fourth prohibition (d) regarding invitation or acceptance of deposits from persons other than its members, Directors or their relatives. Consequently, whilst no fresh private company could be incorporated after the Amendment Act of 2000, unless it met with the new amended definition, for existing private companies, the 2000 Amendment made a provision by introducing sub-sections (3) and (5) thereby pre-existing private companies were required to increase their paid-up capital within a period of two years to meet with the minimum threshold of rupees one lakh now introduced by the Amendment Act of 2000, no provision was contained for pre-existing private companies to amend their articles of association to introduce the new sub-clause (d) in its articles. Thus, the existing private companies were not required to amend their articles by introducing the fourth clause (d) in their articles to retain their character of a private company.
35. Submissions by the respondents
35.1 With the introduction of the Amendment Act of 2000 on 13-12-2000, an existing private company that does not have clause (d) in its articles becomes a public company. Any other construction of the amendment would result in the creation of two classes of private companies leading to discriminatory results.
35.2 Neither the definition in Section 3(1) nor the other sub-sections of Section 3 carve out an exception from the operation of sub-clause (d) to companies existing on 13-12-2000; and do not prescribe a time-limit for insertion of the provisions to give effect to sub-clause (d) in the articles of association. Therefore, such non-inclusion necessarily led to the result (by operation of law) that all such private companies become full-fledged public companies on 13-12-2000 until they amended their articles to include the provisions of sub-clause (d).
35.3 Section 43-A(1-C) was introduced to regulate the unhealthy practice of accepting deposits from the public by private companies. The only legal consequence of Section 43-A(1-C) was to treat such private companies to be public companies but that did not stop them from being “private companies” who accepted deposits from the public. Parliament wanted to remedy the malpractice or “mischief” of collecting deposits by private companies and it did so by the addition of sub-clause (d) to Section 3(1)(iii) on 13-12-2000 so as to mandatorily prohibit acceptance of deposits from the public. If they did not incorporate the provisions of sub-clause (d) in their articles and stop accepting deposits from the public they were to become “public companies”.
35.4 The appellant voted against the resolution to introduce clause (d) on 5-5-2001 and issued his letter dated 6-6-2001. Therefore, he is estopped from arguing that the first respondent is a private company.
35.5 The fact that the first respondent is a public company and Article 57 is invalid has been conclusively held by the Bombay High Court vide an earlier order dated 14-11-2008 2008 SCC OnLine Bom 1245, (2011) 166 Comp Cas 292 which is a judgment in rem and has attained finality.
35.6 The appellant applied for transfer of 5 shares which resulted in the total members exceeding 50. The fact that the total members have exceeded 50 is admitted. Thus, the first respondent cannot claim to be a private company.
35.7 After the Amendment Act of 2000, Section 43-A stands abolished; sub-section (2-A) is merely ministerial and a surplus; As first respondent is not a private company after 13-12-2000, it cannot be a deemed public company.
35.8 Article 57 offends the principle of free transferability under Section 111-A(2) which was recognised under Section 22-A of the SCRA and is recognised by this Hon'ble Court in Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613.
Examination of the correctness of the conclusions of the High Court
(A)
36. When the High Court recorded that “there was nothing which permitted such public company (companies covered under Section 43-A, emphasis supplied) to again become private company”, obviously, Section 43-A sub-section (4) escaped the attention of the High Court. Sub-section (4) is on the statute book since the inception of Section 43-A. At the cost of repetition, I reproduce it:
“43-A. (4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company.”
37. Parliament always recognised the possibility of a private company (which becomes a public company by virtue of operation of Section 43-A) once again reverting back to its status of a private company. The reasons are obvious. Each one of the events stipulated under Section 43-A sub-sections (1), (1-A), (1-B) and (1-C) which have the effect of converting a public company into a private company is transient. For example, if we take a case falling under sub-section (1) of Section 43-A i.e a private company becoming a public company by virtue of the fact that 25% of its shares are held by one or more bodies corporate; it is always possible that at some point of time such bodies corporate decide to disinvest either completely or partially (thereby reducing their holding to less than 25%) their shares of such private company. In such a case, the event or the condition which is essential to convert a private company into a public company under Section 43-A(1) ceases to exist. Similarly, take the case falling under Section 43-A(1-B) i.e a private company becoming a public company by virtue of the fact that such a private company holds not less than 25% of paid-up shares of a public company; if the private company (becoming a public company, by virtue of operation of Section 43-A sub-section (1-B), disinvest its shares either entirely or partially (thereby reducing the holding to less than 25%) in the share capital of that public company, once again the condition/event which converted the private company into a public company ceases to exist. Such company can always revert back to its original status of a private company. However, sub-section (4) stipulates that such a reversion to the original status is subject to the prior approval of the Central Government.
(B)
38. The High Court recorded a finding that after the amendment to the Companies Act by Act 53 of 2000, only two classes of companies remained i.e private and public companies and the third class of public companies under Section 43-A (hybrid companies) ceased to exist. The correctness of this conclusion is required to be examined.
39. Obviously, from 1960 to 2000, innumerable private companies would have become public companies (hybrid) by virtue of the operation of the various sub-sections of Section 43-A. If Parliament really wanted to do away with hybrid companies, the best way would have been to repeal Section 43-A. Because it is a settled principle of statutory interpretation that the repeal of an enactment effaces the repealed statute from the statute book ab initio thereby creating a fiction in law that such a statute never existed, and never created in any legal consequences except for rights and obligations which emanated from various acts and omissions covered by the statute and are saved by the express provisions under the repealed Act or by virtue of the provisions of the General Clauses Act. Therefore, by repealing Section 43-A, Parliament could have put an end to the existence of all hybrid companies. We are aware that there can be other techniques by which the same result can be achieved. Therefore, it is required to be examined whether Act 53 of 2000 refers to achieve the same result. It does not repeal Section 43-A. Sub-section (11) which came to be inserted by the said amendment in Section 43-A only declares:
“43-A. (11) Nothing contained in this section, except sub-section (2-A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000.”
40. What exactly is the meaning of sub-section (11) is to be examined?
41. There must be innumerable private companies in this country. For the purpose of our analysis, they can be classified into two categories: (i) private companies which came into existence prior to the Amendment Act 53 of 2000 (w.e.f 31-12-2000); and (ii) private companies which came into existence after the abovementioned date.
41.1 Insofar as the first of the abovementioned two categories is concerned they can further be categorised into (i) private companies which remained as such, and (ii) private companies which became public companies by virtue of operation of Section 43-A.
41.2 Insofar as private companies which came into existence prior to 13-12-2000 and remained as such without falling into the net of Section 43-A and private companies which came into existence after 13-12-2000, sub-section (11) of Section 43-A would have no application.
42. The legal consequences emanating from insertion of sub-section (11) in Section 43-A only visit the second category mentioned above i.e private companies which came into existence prior to 13-12-2000 but became public companies by virtue of operation of Section 43-A. Of them, we are only concerned with those private companies which became public companies by virtue of operation of Section 43-A(1-C), that is, those private companies which had accepted deposits from public. Mere acceptance of the deposits from public prior to 13-12-2000 did not contravene any law. Such acceptance was only regulated by virtue of Section 58-A. Though such private companies were treated as public companies by virtue of Section 43-A(1-C) they were entitled to continue those stipulations dealing with the matters specified under Sections 3(1)(iii)(a), (b) and (c). It is only w.e.f 13-12-2000, Section 3(1)(iii) of the Act came to be amended by inserting sub-clause (d) which obligates a private company to contain a prohibition against any invitation or acceptance of deposits from public in such company's articles of association.
43. What happens to those private companies (obviously there must be innumerable) which existed prior to 13-12-2000 and had also invited and collected deposits from public as they were legitimately entitled to do so prior to the amendment? If the conclusion of the High Court that the concept of deemed public company is abolished is correct, all those private companies should become public companies (not hybrid/deemed public companies) overnight until their articles of association are amended. As a consequence thereof, their respective shareholders lose a vested right flowing out of the articles of association (created by a contract) which they collectively enjoyed till 13-12-2000 to restrict the right of individual shareholders to freely transfer their shares. Such a collective right by definition inheres in the shareholders of a private company and protected by virtue of proviso to Section 43-A(1-C) notwithstanding the fact that such companies were treated as public companies prior to 13-12-2000. To deprive the shareholders of hybrid companies of such a collective right would be too drastic a change overnight without giving any option or time to the hybrid company and its members to retain the basic character of the company as a private company.
44. Though, in theory, it is open to the legislature to create such a situation, whether Parliament intended such a drastic course of action is the question. It must be remembered that in the ultimate analysis a company is a voluntary association of its members who have a fundamental right to form associations under Article 19(1)(c) of the Constitution of India, the inference which is obvious from the text of the Constitution and also on cumulative reading of the decisions of this Court in Damyanti Naranga v. Union of India (1971) 1 SCC 678, Rustom Cavasjee Cooper v. Union of India (1970) 1 SCC 248 and Bennett Coleman & Co. v. Union of India (1972) 2 SCC 788. The fundamental right to form an association implies the right to form the association on such terms and conditions agreed upon by its members, so long as such terms and conditions are not in conflict with any law or public policy. No doubt, the State can, by law, impose restrictions on such rights on the basis of the considerations mentioned in Article 19(4), but such restrictions must be reasonable.
45. The destruction of the collective right of the members of the companies mentioned in para 43, in our view, would require, at the least, an express provision of law and such a provision must be a “reasonable restriction” within the meaning of that expression occurring in Article 19(4). In the absence of any express provision which takes away the fundamental right of the shareholders of a private company, we are (sic not) inclined to read a restriction on the collective right of the shareholders of a private company to restrict the right of the individual shareholders to freely transfer their shares.
46. Our view is supported by the parliamentary practice and history of the amendments made to the Companies Act itself.
47. Under Act 53 of 2000 when the definition of private company is amended by inserting a clause by which requirement of having a “minimum paid-up share capital of one lakh rupees or such higher paid-up capital as may be prescribed by its articles” is introduced for the first time, Parliament also gave a window of 2 years for the private companies existing on the date of the commencement of the Amendment Act i.e 13-12-2000. By Section 3(5) it is declared that companies failing to comply with the newly introduced obligation “shall be deemed to be defunct” companies and their names “shall be struck off from the register”. Parliament not only gave a window period to the existing companies to take steps to comply with the amended law but also provided expressly for the consequences to follow on the failure to comply with the law.
48. One more reason for our inability to accept the theory of abolition of hybrid companies is that—if accepted, the Amendment Act 53 of 2000 would have the effect of retrospectively taking away the rights collectively enjoyed by the shareholders (of private companies which became hybrid companies) from 1956 onwards. In this context, it is worth remembering the words of this Court in K.C Arora v. State of Haryana (1984) 3 SCC 281:
“22. … ‘52. The legislation is pure and simple, self-deceptive, if we may use such an expression with reference to a legislature-made law. The legislature is undoubtedly competent to legislate with retrospective effect to take away or impair any vested right acquired under existing laws but since the laws are made under a written Constitution, and have to conform to the dos and don'ts of the Constitution, neither prospective nor retrospective laws can be made so as to contravene fundamental rights. The law must satisfy the requirements of the Constitution today taking into account the accrued or acquired rights of the parties today. The law cannot say, 20 years ago the parties had no rights, therefore, the requirements of the Constitution will be satisfied if the law is dated back by 20 years. We are concerned with today's rights and not yesterday's. A legislature cannot legislate today with reference to a situation that obtained 20 years ago and ignore the march of events and the constitutional rights accrued in the course of the 20 years. That would be most arbitrary, unreasonable and a negation of history. … Today's equals cannot be made unequal by saying that they were unequal 20 years ago and we will restore that position by making a law today and making it retrospective. Constitutional rights, constitutional obligations and constitutional consequences cannot be tampered with that way. A law which if made today would be plainly invalid as offending constitutional provisions in the context of the existing situation cannot become valid by being made retrospective. Past virtue (constitutional) cannot be made to wipe out present vice (constitutional) by making retrospective laws.’”
49. Apart from that, it is rightly pointed out by the appellant, if Parliament really wanted to put an end to the existence of all the hybrid companies, Parliament should have deleted all reference to the hybrid (Section 43-A) companies in the Act. But Section 111(14) still continues to make reference to Section 43-A.
50. Therefore, we are of the opinion that the concept of hybrid (Section 43-A) companies is not altogether abolished. At least insofar as the companies falling under Section 43-A(1-C) are concerned which were in existence on 13-12-2000 would continue as hybrid companies.
(C)
51. The other conclusion of the High Court that the failure of the first respondent Company to amend its articles of association to give effect to sub-clause (d) of Section 3(1)(iii) rendered the first respondent Company to cease to be a private company, in our opinion, is irrelevant for the decision on the real question in this case. The real question is not whether the failure to amend the articles of association by the first respondent Company rendered the first respondent Company (which is otherwise a private company) a public company, but whether such a failure destroyed the collective right of the members of the first respondent Company to have shares whose transferability is subject to limitations and restrictions contained in Article 57 of its articles of association.
52. Originally, Section 3(1)(iii) stipulated — to be a private company a company's articles of association are required to contain certain stipulations with regard to the matters specified in sub-clauses (a), (b) and (c). By virtue of Act 53 of 2000 w.e.f 13-12-2000 a private company's articles of association are required to contain additional stipulation relating to the matter contained in sub-clause (d) also. The question is whether the newly introduced requirement is applicable to existing private companies also or only to those which come into existence subsequent to the commencement of Act 53 of 2000?
53. Section 27(3) mandates that the articles of a private company having share capital (such as the one on hand) shall only contain provisions relating to matters specified in sub-clauses (a), (b) and (c) of Section 3(1)(iii) but not matters relating to sub-clause (d). In other words, though Parliament chose to introduce sub-clause (d) in Section 3(1)(iii)(by an amendment in the year 2000), did not think it necessary to make a corresponding amendment to Section 27(3). Whether such an omission is accidental or by a design is required to be examined? If it is by a design what is the purpose sought to be achieved of such a design requires an examination?
54. The Companies Act never prohibited the acceptance of deposits. Prior to the Amendment Act of 2000, there has never been a provision in the Companies Act which altogether prohibited companies either public or private from inviting or accepting deposits. Section 58-A(1) of the Act (which was introduced by Act 41 of 1974), for the first time made a provision enabling the Central Government to prescribe “the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members”. The remaining sub-sections of Section 58-A make various stipulations regarding the method and manner of inviting and accepting (after the insertion of the section) deposits or the renewal of deposits taken prior to introduction of the section and the penalties for the failure to comply with the stipulations contained in the said section — the details of which are not necessary for the present purpose. But even Section 58-A did not prohibit the acceptance of deposits. Irrespective of the fact whether a company accepting deposits is a private company or a public company, the invitation or acceptance of such deposits is only made to strict regime of regulations under Section 58-A.
55. Then came, in 1988, Section 43-A(1-C), which only declared that a private company either accepting deposits from or renewing existing deposits (made either after or prior to 15-6-1988, respectively) collected from “persons other than its members, Directors or their relatives” (hereinafter for the sake of convenience referred to as “public”) shall become a public company. But under the proviso to sub-section (1-C), even after becoming a public company, such a company can retain either restrictions or limitations contemplated under Section 3(1)(iii).
56. Therefore, the question is — What is the effect of the insertion of sub-clause (d) in Section 3(1)(iii)?
Prior to 1988
57. Whether a company should accept deposits from public or not is a policy choice only of the company and its members. Even prior to the introduction of Section 3(1)(iii)(d) and Section 43-A(1-C), the members of a private company could have either permitted or prohibited the company from accepting deposits from public or stipulated conditions subject to which deposits could be taken. If a company's internal policy prohibited the acceptance of deposits from public and contrary to such internal policy deposits are collected from public it was always open to the members of the company to deal with the situation and the persons violating the company's policy.
58. In 1988, Parliament thought it necessary to provide for a more rigorous control and scrutiny of the activities of accepting deposits from public by private companies and introduced sub-section (1-C) of Section 43-A, thereby enabling the State to have a greater control over such activity of such private companies by treating them as public companies. The regulations, control and supervision to which the management of public companies is subjected to under the Act is higher in degree compared to the regulations, control and supervision to which the management of a private companies is subjected to under the Act. The control contemplated under Section 43-A(1-C) is in addition to the regulations and supervision brought in by virtue of Section 58-A.
Before the Amendment Act 53 of 2000
59. If a private company chose to incorporate a stipulation not to accept deposits from public, it is a matter of its internal policy. But if it incorporated such a stipulation and defaulted in compliance with such stipulation, the company only ceased “to be entitled to the privileges and exemptions conferred on a private company by or under the Act” and the “Act shall apply to the company as if it were not a private company”—by virtue of the operation of Section 43 which only creates a legal fiction. Section 43 does not declare that such companies do become public companies unlike Section 43-A. On the other hand, the proviso to Section 43 enables the Central Government to condone the lapse of such private companies:
Proviso to Section 43
“Provided that the Central Government, on being satisfied that the failure to comply with the conditions was accidental or due to inadvertence or to some other sufficient cause, or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any other person interested and on such terms and conditions as seem to the Central Government just and expedient, order that the company be relieved from such consequences as aforesaid.”
60. Notwithstanding the fact that Parliament thought it necessary for the State to impose a higher degree of control over the affairs of the management of such private companies inviting and accepting deposits from the public, Parliament did not think it necessary to restrict the collective right of the members of a private company to impose restrictions on the right of individual shareholders to freely transfer their respective shares. Therefore, the proviso to sub-section (1-C) of Section 43-A. For that matter, in none of the four contingencies contemplated under Sections 43-A(1), (1-A), (1-B) and (1-C), Parliament thought it necessary to restrict such collective right of the shareholders of a private company. Such private companies are to be treated as public companies for certain purposes.
61. If a private company choses not to incorporate the prohibition, such as the one contemplated under Section 3(1)(iii)(d), and accepts deposits from the public then such collection of deposits is regulated by Section 58-A. If it choses to incorporate a stipulation but fails to comply with the same, it would attract the consequences mentioned in Section 43 which consequences are also avoidable under the proviso to Section 43.
62. It must be remembered that the kind of control which Parliament sought to impose on private companies which earlier attracted sub-sections (1) to (1-B) of Section 43-A is now thought clearly not necessary by Parliament. An inference obvious from Section 43-A(11) whatever be the other implications of those sub-sections.
63. Even during the period when Section 43-A operated, Parliament never thought of curtailing the collective right of the members of the private companies to have restriction on the rights of individual shareholder to freely transfer shares. Therefore, to believe that such restriction is now sought to be imposed only in the case of those private companies in existence on 13-12-2000, which had earlier attracted Section 43-A(1-C), but not in the case of private companies, which earlier attracted sub-sections (1), (1-A) and (1-B), would be illogical.
64. The insertion of sub-clause (d) in Section 3(1)(iii) is admittedly only prospective. Therefore, on and after 13-12-2000, if anybody proposes to create a private company, the articles of association of such company must contain a clause prohibiting the invitation and acceptance of deposits from public.
65. For all the abovementioned reasons, we are unable to agree with the submission of the respondents that by the Amendment Act 53 of 2000 and more particularly sub-section (11) of Section 43-A, Parliament intended to curtail or destroy the collective right of the shareholders of a hybrid company to impose restrictions on the rights of the individual shareholders to have unfettered right of transfer of their shares. Such a restriction which, in our view, constitutes a restriction on the fundamental rights under Article 19(1)(c), requires a more express legal authority and cannot be brought in by inference.
66. The effect of the amendment to Section 3(1)(iii) is: insofar as the private companies in existence on 13-12-2000 are concerned, if they chose to make provisions in their articles of association to give effect to the mandate of Section 3(1)(iii)(d), they become private companies w.e.f such date they make such provision by virtue of Section 43-A(2-A) of the Act. If they do not make such an amendment, they would still continue to be public companies governed by Section 43-A(1-C)(hybrid companies) and can continue to have provisions in their articles of association referable to Sections 3(1)(iii)(a), (b) and (c).
67. Here, an argument of the respondent that such an interpretation of sub-section (11) creates “two classes of private companies and would have discriminatory results” is required to be answered. In our view, the argument is based on a wrong premise. It proceeds on the basis that hybrid companies created prior to 13-12-2000 are private companies. We have already held that hybrid companies are public companies which in law are entitled to retain some features of the private companies if the shareholders chose to retain them. Therefore, the question of discrimination does not arise.
68. Therefore, in our opinion, the failure of the first respondent Company to amend its articles of association to give effect to sub-clause (d) of Section 3(1)(iii) does not affect the operation of its Article 57.
69. That leaves us with two more questions raised by the respondents herein. They are contained in submissions in paras 35.4, 35.5 and 35.6 noted earlier in the judgment. In fact, submissions in paras 35.4 and 35.5 are interconnected. The substance is that in view of the fact that the appellants herein opposed the resolution to amend the articles of association of the first respondent Company to bring them in tune with the newly inserted sub-clause (d) of Section 3(1)(iii), they are estopped from arguing that the first respondent Company is not a public company and secondly in view of the judgment of the Bombay High Court dated 14-11-2008 in Percy Rutton Kavasmanek v. Gharda Chemicals Ltd. 2008 SCC OnLine Bom 1245, (2011) 166 Comp Cas 292 “to which the appellants herein were originally the parties but withdrew from the said company petition later” where the Bombay High Court held as follows: (SCC OnLine Bom para 8)
“8. … Insofar as the present petitioners are concerned as a matter of fact they are free to deal with the shares held by them. In that, the shares are now freely transferable. Indeed, when the petition was presented at the relevant time, Respondent 1 Company was a private limited company. As a result, there was restriction in the transfer of shares. However, it is common ground that now Respondent 1 Company has become a public limited company—as a result of special resolution moved in the extraordinary general meeting dated 5-5-2001, having been defeated. Having acquired the status of a public limited company, the restriction on the right to transfer the shares which was applicable to private limited company, would naturally get diluted.”
The appellants are precluded to argue that the first respondent Company is not a public company.
70. Both the submissions are required to be rejected. The submission based on the principle of estoppel is required to be rejected in view of my conclusion that the hybrid companies contemplated under Section 43-A(1-C), which were in existence on 13-12-2000 would continue to be in existence.
71. It is already concluded earlier in this judgment that the requirement of amending the articles of association pursuant to the Amendment Act 53 of 2000, insofar as such companies are concerned, is only optional on the part of the shareholders. The fact that the shareholders of a hybrid company exercised option not to amend the articles of association thereby converting a hybrid company into a private company does not prevent such shareholders from advancing an argument that the first respondent Company is not a public company but still a hybrid company.
72. The second submission is that the judgment in Percy Rutton Kavasmanek v. Gharda Chemicals Ltd. 2008 SCC OnLine Bom 1245, (2011) 166 Comp Cas 292 is binding upon the appellants on the ground that they were parties to the said company petition earlier and withdrew from the same unconditionally and, therefore, they are precluded from arguing anything contrary to the conclusion recorded therein.
73. The principles of law which preclude a party to a civil litigation from agitating certain issues are contained in Section 11 and Order 2 Rule 2 of the Code of Civil Procedure, 1908. Section 11 deals with the principle of res judicata and it prohibits a court from trying any suit or issue in which the matter directly and substantially in issue in a former suit has been heard and finally decided.
74. The question whether the first respondent Company is a public company or a hybrid company or a private company was never directly and substantially in issue in Company Petition No. 77 of 1990. The parties to the said company petition proceeded on the basis that in view of the fact that an amendment to the articles of association to give effect to the newly inserted sub-clause (d) of Section 3(1)(iii) could not be carried on, the first respondent Company became a public company. Therefore, the Court never examined that question of law. Hence, it cannot be said that the appellants are precluded from raising such a question of law in the instant appeal.
75. We therefore, do not propose to examine the question as to what is the effect of the appellant's withdrawal from the abovementioned company petition.
76. The only other submission of the respondent which requires to be dealt with is regarding the transfer of five shares of the appellant which, according to the respondents, resulted in the membership of the first respondent Company exceeding fifty thereby rendering the first respondent a public company. Unfortunately, though the High Court noted the submission at para 9, it did not record any finding in this regard. We, therefore, decline to examine this question. This Court cannot be converted into a court which enquires into the questions of fact for the first time.
77. In view of the fact the High Court, though noted the contentions of the respondent herein, failed to record any conclusion thereon, we deem it appropriate to remit the matter to the High Court only for the purpose of considering the abovementioned submissions of the respondent and take appropriate decision. We order accordingly.
78. This appeal stands allowed.
Order of the Court
79. In view of the order remitting the matter to the High Court, we deem it appropriate that the interim order passed earlier on 22-7-2011 SLP (C) No. 16994 of 2011 by this Court will continue till the disposal of the matter by the High Court. The High Court is requested to dispose of the matter expeditiously in view of the long pendency of the matter.