MADANLAL FAKIRCHAND DUDHEDIYA Vs. CHANGDEO SUGAR MILLS LIMITED

JUDGEMENT

(1.) (Majority Judgment:On Behalf Of Himself And Wanchoo J. )-The principal question which arises in this appeal relates to the construction of section 76 (1) and (2) of the Indian Companies Act, 1956 (I of 1956) (hereinafter called the Act) before the amendment of sub-section (2) in 1960. That question arises in this way. The appellant, Madanlal Fakirchand Dudhediya, and respondents Nos. 2 and 3 and the father of respondents Nos. 7 to 10 were the promoters of the 1st respondent Co., Shree Changdeo Sugar Mills Ltd. The said Co. was incorporated in 1939 as a Private Limited Company. It was, however, converted into a Public Ltd. Co. in 1944. At the time of the original incorporation of the Co. a Promoters Agreement was arrived at whereby the Co. agreed during its existence to pay a sum equal to 3 1/8 % every year out of its net profits to each of the four promoters. As a result of this agreement, the aggregate consideration payable every year to the promoters came to 12 1/2 % of the net profits of the Co. Article 3 of the Articles of Association of the Co. justified the making of this agreement. In 1941 the Co. came into financial difficulties and in consequence, on the 22nd April, 1941, a tripartite Agreement was arrived at between the Company, M/s. Ardeshir Hormusji Bhiwandiwalla and Co., and the Promoters. Under this agreement, it was agreed, inter alia, to appoint the said firm of Bhiwandiwalla and Co. or its nominee as the Managing Agents of the Co. for 10 years with an option to the Co. to extend the said period upon certain terms. At this time, the earlier agreement as to the payment of the promoters' commission was modified and the said commission payable to the promoters was reduced to 6 1/4 % and Art. 3 of the Articles of Association was accordingly amended. Three years later, disputes arose between the parties and they led to three suits filed on the original side of the Bombay High Court. All the said suits were compromised and decrees by consent were passed in them. One of the terms of the compromise was that the promoters' commission payable to the four promoters which was Rs. 1-9-0 to each of them and which came to 6 1/4 % in the aggregate payable to them under the agreement entered into between them and the Managing Agents shall remain in force as in the Agreement and the promoters' right of commission shall continue accordingly. Thus, as a result of the compromise, the promoters' commission which was payable to them under the earlier Agreement was saved.

(2.) After the Act came into force on the 1st of April, 1956, the appellant received a letter from respondent No. 1 informing him that respondent No. 1 had been advised that as from the date of the commencement of the Act, the agreement between the parties as to the payment of the promoter's commission had become illegal and void and that the 1st respondent would not, therefore, pay any more commissions after April, 1956. In October, 1956 the appellant received a notice from the 1st respondent that an extraordinary general meeting of the shareholders of the 1st respondent Co. was going to be held, inter alia, for the purpose of amending certain Articles of Association of the Co. One of the amendments proposed to be put before the said meeting was to delete Article 3 from the Articles of Association of the Co. On receipt of this notice, the appellant filed the present suit on the 13th December 1956. By his plaint, he claimed a declaration that the argument between the parties was valid and legal and he asked for an injunction restraining respondent No. 1 from passing any resolution deleting Article 3 of the Articles of Association of the respondent Co. or from taking any action on the basis that the said agreement had become illegal and void. Respondent No. 1 resisted this suit. It was urged on its behalf that as a result of the provisions of Section 76 (1) and (2) of the Act, the agreement in question had become void and could not be enforced. Respondents Nos. 2 to 10 are the other beneficiaries under the said agreement and they supported the appellant. The Learned Judge who tried the suit held that the defence raised by respondent No. 1 was well-founded and that the agreement in question having become void and unenforceable under the relevant provisions of the Act, no declaration could be granted or no injunction could be issued in favour of the appellant as claimed by him. In the result, the appellant's suit was dismissed with costs. The appellant then preferred an appeal challenging the correctness of the decision of the Trial Court. The Court of Appeal, however, agreed with the view taken by the learned Trial Judge and dismissed the appeal preferred by the appellant. The appellant then applied for and obtained a certificate from the High Court and it is with the said certificate that he has come to this Court by his present appeal. That is how the principal point which has been raised for our decision in the present appeal is about the construction of Section 76 (1) and (2).

(3.) Mr. Sastri contends that in coming to the conclusion that the appellant's claim to enforce the agreement in question in respect of the profits made by respondent No. 1 is affected by S. 76, the Courts below have misconstrued the provisions of the said section. It is conceded by Mr. Sastri that the promoters have so far received an aggregate amount of over Rs. 5,80,000 which is far in excess of the maximum amount now permissible under Section 76 (1). But is argument is that the statutory provision imposing the limit in regard to the payment of commission on which respondent No. 1 relies is inapplicable to a case where the said commission is claimed not out of capital but out of the profits of the Company.