VINOD KUMAR Vs. UNION OF INDIA AND OTHERS

JUDGEMENT

(1.) The writ petition under consideration is concerned with certain orders passed under s. 408 of the Companies Act, 1956, in respect of M/s. National Rayon Corporation Ltd. The petitioner before the court is a shareholder of the company. He holds 1,100 equity shares in the capital of the company; the total issued equity capital is 5,50,917 shares of Rs. 100 each. Undoubtedly, the company in question is a successful industrial enterprise with an impressive record as is revealed from its annual reports for various years. Except in the years 1976 and 1977, the company has made substantial profits and except in those years, the shareholders have been getting good dividends. All parties before us are agreed that on 11th July, 1977, the Company Law Board had to pass an order under s. 408 of the Companies Act, 1956, appointing certain Government directors in view of what happened in the years 1976 and 1977. As far as the parties before this court are concerned, it is also the common case that the "Kapadias" were in control of the company at that time and the order passed on 11th July, 1977, was necessitated by the manner in which they had been managing the company. It may be mentioned here that, even earlier, there were Government directors appointed under s. 408 of the Act, but at that time, this Sec. allowed only two Government directors to be appointed. The Sec. was substantially amended by Act, 41, of 1974, to enable the Central Govt. to appoint as many directors as it thought necessary to effectively safeguard the interests of the company or its shareholders or in the public interest. The amendment was effective from 1st February, 1975, and hence, after that date, it is possible for the Government to appoint as many directors as it likes. In fact, by the order dated 11th July, 1977, as many as eight directors were appointed; these are respondents Nos. 5 to 12 before us. There were in addition three directors representing shareholding of financial institutions and there were there other shareholder directors. These are respondents Nos. 13 to 17 mentioned in the petition. When the petition was initially filed, the grievance of the petitioner was that a notice dated 27th May, 1980, had been issued concerning the question whether the order under s. 408 of the Act should be extended but this had not been served on the shareholders, except on some major shareholders, like the Unit Trust of India, General insurance Corporation of India, I. C. I. C. Ltd. and the Life Insurance Corporation. The petition has since been amended because, after the petition had been filed, the Company Law Board passed an order under s. 408 on 7th July, 1980, which merely extended the appointment of the previous Government directors for one month. Then on 6th August 1980, another order was passed by the Company Law Board extending the period again for one month. Then on 7th August, 1980, the Central Govt. Board to pass orders under s. 408 of the Act. Finally, on 9th September, 1980, the Central Govt. passed a new order appointing eight new directors as Government directors. This order appointed completely a different set of persons who have been added as respondents Nos. 22 to 29, in the amended petition.

(2.) We are concerned in this petition with the order passed by the Company Law Board extending the term of office of the previously appointed eight Government directors, and then the order of the Central Govt. appointing eight new persons to be Government directors for a further period of these years.

(3.) Undoubtedly, the power under s. 408 of the Act as it now stands is not unlimited. The power to appoint depends on the satisfaction of certain pre -conditions. The power to appoint enables a person being appointed as director for three years on any one occasion. The case of the petitioner is that whatever the situation might have been in July, 1977, when the initial order was passed, there had been a substantial change due to the fact that eight Government directors had been running the company as the majority on the Board, for a period of three years. Therefore, the situation when the question arose as to whether the order should be extended was quite different. At the same time, even the regular shareholder -directors, which numbered seven, were dominated by the financial institutions. According to the position as it now exists, it is common ground that there are 15 directors represent the financial institutions. The remaining three represent the ordinary shareholders. Even if the Government directors were not there, the majority on the Board would be of the financial institutions. In short, the case of the petitioner is that there has been a radical change in the circumstances during the period 1977 to 1980 and the question whether Government directors should or should not be appointed, and how many should be appointed, has to be considered from a different standpoint, as the situation which existed when the initial order was passed in 1977, no longer exists.