Oriental Metal Pressing Works (P.)Ltd vs Bhaskar Kashinath Thakoor and Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 10 of 1960

Decision Date: 16 December 1960

Coram: A.K. Sarkar, Syed Jaffer Imam, Raghubar Dayal

In this case the Court recorded that Oriental Metal Pressing Works (P.) Ltd. was the petitioner and that Bhaskar Kashinath Thakoor together with another individual were the respondents. The judgment was rendered on 16 December 1960 by a Bench consisting of Justice A. K. Sarkar, Justice Syed Jaffer Imam and Justice Raghubar Dayal. The matter arose on appeal from a decree dated 24 February 1959 issued by the Bombay High Court in First Appeal No. 540 of 1958. The appeal was identified as Civil Appeal No. 10 of 1960. Counsel for the appellants, including the Attorney‑General for India and other senior lawyers, appeared before the Court, while the respondent failed to appear.

The Court noted that the substantive question involved the interpretation of section 312 of the Companies Act, 1956 in relation to section 255 of the same Act. The petitioner contended that the managing director of a private company, who was empowered by his agreement with the company and by the articles of association to appoint a successor by deed or by will, could validly designate a new managing director through his will. The managing director had died leaving a will that appointed one of the appellants as his successor from the date of his death. The High Court had previously held that the term “assignment” in section 312 included “appointment”, and consequently declared the appointment null and void.

The Supreme Court rejected that view. It held that section 312 could not be read in a manner that conflicted with the clear language of section 255, which expressly permits directors to be appointed by means other than a direct company resolution, subject to the numerical limits prescribed therein. The Court explained that the word “assignment” in section 312 was intended to cover the transfer of an office by a director, not the power of a director to appoint his own successor. It further observed that the proviso to section 86B of the earlier Companies Act provided no support for extending “assignment” to mean “appointment”. The Court also cited the authority in The Guardians of the Poor of the West Derby Union v. The Metropolitan Life Assurance Society, [1879] A. C. 647, to illustrate the proper construction of the term.

Consequently, the Court concluded that the appointment made by the deceased managing director through his will was valid and could not be declared void on the basis of section 312. The judgment therefore overturned the decision of the Bombay High Court and affirmed the right of the appointed successor to assume the office of managing director in accordance with the provisions of the company’s articles and the statutory framework.

In 1955 a private company was incorporated under the name Oriental Metal Pressing Works Ltd., hereinafter referred to as the Company, for the purpose of taking over the business previously conducted by Dadoba Tukaram Thakoor. On 7 July 1955 Dadoba transferred his business to the newly formed Company. On that same day the parties executed an agreement whereby Dadoba was appointed managing director of the Company for life and was granted the authority, by deed inter vivos, by will or by codicil, to appoint any person to act as managing director in his place and stead. These provisions were reproduced in Regulation 109 of the Company’s articles of association. The shareholding of the Company consisted of Dadoba, his brother, the respondent Bhaskar, and two sons of the latter – the appellant Govind and the respondent Harish. The first three shareholders were also directors, with Dadoba serving as managing director. This composition continued unchanged until Dadoba died on 14 January 1957. By his will, Dadoba purported to appoint the appellant Govind as managing director of the Company from the date of his death. Shortly after the death, a dispute arose between Govind and the respondent Bhaskar. Govind asserted that Bhaskar had ceased to be a director because he had failed to attend any directors’ meetings, and Govind also sought to co‑opt the appellant Bhalchandra as a director. Bhaskar, on the other hand, contended that he had not ceased to be a director and challenged the legality of Bhalchandra’s co‑option. Further, Bhaskar argued that Govind’s appointment as managing director under Dadoba’s will was void. Consequently, on 22 November 1957 Bhaskar instituted a suit in the City Civil Court of Bombay against the Company, Govind and Bhalchandra, and also against the respondent Harish, seeking the following declarations: (a) that Govind’s appointment as managing director was void; (b) that Bhalchandra’s appointment as director was illegal and ineffective; and (c) that Bhaskar was, and continued to be, a director of the Company. The learned judge of the City Civil Court accepted all of Bhaskar’s contentions and granted the declarations sought. The Company and the appellants Govind and Bhalchandra appealed this decision to the High Court at Bombay. The appeal was heard before a bench of two learned judges, who arrived at divergent conclusions, and therefore the matter was referred to a third learned judge of the same High Court. In the ultimate decision, the majority of the learned judges dismissed the appeal and affirmed the decree of the City Civil Court. Nevertheless, the High Court issued a certificate under Article 133(1)(c) of the Constitution, and the present appeal was filed by the Company, Govind and Bhalchandra on that basis. The respondents in this appeal are Bhaskar and Harish. It appears that while the appeal was pending in this Court, Bhaskar sold his holding in the Company to Govind and now has no interest in the Company or in the appeal. Consequently, no party has appeared to contest the appeal before this Court, with Harish apparently also uninterested in doing so.

While the appeal was pending before this Court, the respondent Bhaskar transferred his shareholding in the Company to the appellant Govind and consequently no longer possessed any interest in the Company or in the appeal. As a result, no party appeared to contest the appeal, and the respondent Harish also seemed uninterested in presenting any opposition. In these circumstances, the questions of whether the respondent Bhaskar remained a director of the Company and whether the appellant Bhalchandra had been legally co‑opted as a director ceased to be live issues and were not addressed in the proceedings. The Court therefore expressed no opinion on either of those questions because they were no longer material to the appeal. An additional disadvantage was that the Court did not receive any arguments opposing the appeal. The lower courts had held that the appointment of the appellant Govind as managing director by the will of Dadoba was void under section 312 of the Companies Act, 1956. Section 312 reads: “Any assignment of his office made after the commencement of this Act by any director of a company shall be void.” The Companies Act became operative on 1 April 1956, and Dadoba executed his will and died after that date, making the appointment of Govind after the commencement of the Act. Therefore, the appointment was made after the Act came into force, and section 312 renders the assignment of the office by a director void. The provision, on its face, does not expressly state that an appointment made by a director of another person to replace him would be void. The High Court, however, interpreted the word “assignment” in the section to include “appointment,” and consequently held that such an appointment was also void.

The Court now needed to decide whether the High Court’s view that “assignment” includes “appointment” was a proper construction of section 312. Before analysing that issue, the Court observed that the High Court appeared to assume that the appellants had conceded that an inter‑ vivos appointment by a director constituted an assignment within section 312, while only denying that a testamentary appointment by will did so. The Attorney‑General, appearing for the appellants, clarified that no such concession had been made and expressly withdrew any suggestion of a concession. Because the appellant was entitled to withdraw the alleged concession, the Court found it unnecessary to consider the High Court’s reasoning that was based on that concession. The Court gave the High Court’s arguments a respectful and careful consideration, but concluded that it could not agree with them. The Court will set out its reasons for this conclusion later, but at this stage it wished to emphasize that, in its view, the language of section 312 does not support the High Court’s broader interpretation.

In this case, the Court observed that it was unnecessary to examine the argument raised before the High Court that the statutory provision merely prohibited a director from appointing his own successor and, assuming that the term “assignment” included the concept of appointment, did not bar a managing director from assigning his office or from appointing his successor—a course of action that Dadoba had undertaken. The Court held that even if the provision did not forbid a director from appointing his successor, which the Court did not agree with, nothing in the provision could be used to support the proposition that a managing director was powerless to appoint his own successor. The provision, as written, expressly declared that a director could not assign his office. The High Court had suggested that, besides its ordinary meaning of “transfer,” the word “assignment” might also be understood to mean “appointment.” However, on a plain reading of the language of the provision, the Court found it impossible to accept that “assignment” could be read to mean “appointment.” First, the provision refers to the “assignment of his office” by a director, and the pronoun “his” indicates that the office in question is one presently held by the director at the time of the alleged assignment. An appointment, by contrast, can be made only to a vacant office. Consequently, the Court inferred that by employing the word “his,” the Legislature intended to exclude from the scope of “assignment” any appointment by a director to the very office that he formerly occupied but did not hold at the moment of the appointment. Moreover, there was no doubt that the provision was meant to render void a transfer of a director’s office. If the intention had been merely to prevent a director from appointing his successor, the provision would have expressly said so and would not have used the term “assignment.” Therefore, even if the term “assignment” were capable of bearing the meaning of “appointment,” it would have to carry both the meanings of “transfer” and “appointment” within the same provision, a construction adopted by the High Court. The Court warned that such a construction would lead to an anomalous result, because transfer and appointment are fundamentally distinct concepts. Apart from the difficulties posed by the law of conveyance, which the High Court could not entertain in relation to the transfer of an office, a transfer inherently involves the passage of a thing from one party to another; a transfer cannot be imagined without the thing itself moving, even when that thing is an office. An “appointment,” on the other hand, involves no such passage; it simply entails placing a person into a vacant position. Accordingly, the acts that constitute a transfer and those that constitute an appointment are wholly dissimilar. It would be unusual for a statute, by employing a single word, to prohibit two completely different acts simultaneously. The Court concluded that a construction producing such a result could not be permitted.

In this case the Court held that section 255 of the Companies Act allows a portion of the board of a public company—specifically, not more than one‑third of the total number of directors—and all of the directors of a private company to be appointed without a resolution of the company in a general meeting, provided that the company’s articles of association contain a provision to that effect. Consequently, the statutory scheme expressly authorises appointments of directors by means other than a general meeting. The Court reasoned that, subject to the numerical limitation fixed by the section, the articles may validly confer upon any person, including a person who already occupies a directorship, the power to appoint additional directors. The Act therefore expressly permits such a conferment of appointment power.

However, the Court explained that for a director to exercise the power to appoint another director, a vacancy must first exist in the board. Such a vacancy may arise if the incumbent director resigns, if the incumbent dies, or if the term of office of the incumbent comes to an end. The statute thus contemplates that a director, by virtue of a vacancy created through his own resignation, death, or expiry of term, may appoint a successor to fill that vacancy. The Court further observed that there is nothing unlawful in a director’s will providing for the appointment of a successor in the event of the director’s death. The Court cautioned against interpreting section 312 in a manner that would clash with the clear provisions of section 255. If the word “assignment” in section 312 were read to include “appointment,” it would effectively prohibit a director from naming a successor, a result inconsistent with the authority granted by section 255. Accordingly, the Court concluded that the term “assignment” in section 312 does not carry the meaning of “appointment.”

The High Court had previously expressed the view that, unless “assignment” were read to include “appointment,” the purpose of the statute would be frustrated. It was argued that the intent of the provision was to restrain a director from installing a person in his place by any act of his own. This perspective was supported by a passage stating that the new Companies Act seeks to eliminate the serious problems that had arisen from the principle of perpetual management of companies in the past. The High Court feared that interpreting section 312 narrowly—so that “assignment of his office” would only signify a transfer of the office and not the appointment of a successor—would permit a director to perpetuate his control by selecting his own replacement, a situation the Act purportedly aimed to prevent. The Court, however, found no indication that the legislation intended to forbid a director from appointing his successor. The enactment of section 255, which explicitly permits such appointments, demonstrates that the legislature did not regard the power to appoint successive directors, even in a private company, as an evil needing suppression.

In this case the Court observed that the Companies Act does not disapprove of a person who possesses the power to appoint a succession of directors, and that, in the context of a private company, such a power may even extend to appointing every director of the company. The Court explained that a person who can do so would be described as exercising “perpetual management”, and that the statutory scheme therefore does not treat perpetual management as an evil that must be prevented. The Court further reasoned that if perpetual management by an outsider is not regarded as harmful, then perpetual management by a director of the company cannot be characterised as an evil either. To illustrate this point, the Court referred to the facts before it: the appellant, Dadoba, exercised what the Court called “perpetual management”. However, the entire undertaking of the company was essentially a largesse from Dadoba, who owned nearly forty‑three percent of the share capital. The Court found it inconceivable that such perpetual management by a substantial shareholder would have operated to the detriment of the company. Consequently, the Court could not accept the proposition that the object of the Act, or of section 312, was to prevent a director from appointing his successor. In light of the clear language of section 255, the Court held that it was incorrect to say, as the High Court had done, that sections 254 and 317 of the Act implied that perpetual management must be avoided. Section 254 merely provides that a corporation or an association of persons is not eligible to act as a director; this restriction is not based on a concern about perpetual management. Rather, it reflects the requirement that the persons who constitute a corporation or association must change from time to time, so that even if such an entity were appointed as a director, there would be no continuous, unchanging management. The Court further explained that the rationale behind section 254 is that the office of director involves a degree of trust, and that a natural person is more readily identifiable as the party responsible for any breach of that trust than a corporate body. Turning to section 317, the Court noted that it limits the appointment of a managing director to a term not exceeding five years at a time. However, section 315 makes section 317 inapplicable to private companies, and therefore section 317 cannot be invoked to support an argument that the Act seeks to prevent a private company from being under perpetual management. Even in the case of a public company, section 317 does not forbid perpetual management, because it only bars a single appointment of a managing director for more than five years, while permitting re‑appointment after the term expires. The Court concluded that the Act does not intend, by virtue of section 317, to prevent a managing director from being re‑appointed indefinitely, and that section 317 deals with managing directors, not with ordinary directors, which are the subject of section 312. Another argument that has to be dealt with is that if section 312 does

In this part of the case the Court examined whether section 312 of the Companies Act prevented a director from appointing a successor, and whether a director could avoid the effect of that provision by simply naming a person as his successor rather than formally transferring the office. The Court observed that the question was largely academic because a director could lawfully appoint a successor only if the company’s articles of association authorised such an appointment, and, in the case of a public company, only within the limits prescribed by section 255. The Court explained that an appointment made in accordance with the articles did not constitute an evasion of section 312, since the legislature could not have intended to forbid a move that was expressly permitted by another provision of the same Act. Conversely, any appointment made outside the authority granted by the articles was completely ineffective; it was not a genuine appointment and therefore did not amount to an evasion of section 312. The Court then turned to an argument that relied on the first proviso to section 86B of the Companies Act of 1913. The principal portion of that old provision was similar to the present section 312, declaring that an assignment of a director’s office to another person under a contract with the company was void unless approved by a special resolution. Under the new Act, however, such an assignment was rendered void outright, even if the company passed a special resolution approving it. The proviso to the 1913 provision provided that if a director appointed an alternate director to act for him during an absence of at least three months from the district where directors normally met, and if that appointment received the board’s approval, the appointment would not be treated as an assignment of office within the meaning of the section. The High Court had held that the proviso indicated that, in certain circumstances, a director’s appointment of another person could be regarded as an “assignment,” and that, because the new Act was a consolidating statute, it should be presumed to continue the policy of the earlier law, thereby treating “assignment” as encompassing “appointment” for the purposes of section 312. The Attorney‑General counter‑argued that the new Act contained no such proviso, and therefore the rule of construction applied by the High Court — which allowed a proviso to expand the meaning of a main provision — could not be applied. He noted that the substance of the old proviso had been enacted as an independent provision, namely section 313, and that this departure from the earlier arrangement demonstrated that the new Act was not intended to preserve the previous policy.

The Attorney‑General observed that the policy of the old Act was not continued in the new legislation. He further explained that the proviso in the old Act, in substance, provided that a director’s appointment of an alternate director might, in certain circumstances, be deemed to be an assignment. By using the term “deemed,” the proviso, he said, made clear that such an appointment was not an actual assignment of office but only a fictional one taken for legal purposes. He argued that this fictional assignment could arise only in cases that fell strictly within the scope of the proviso and could not be extended by implication to any other situation. The Court regarded these submissions as arguments of considerable weight. The Attorney‑General then turned to section 313 of the new Act, which has replaced the first proviso to section 86B of the old Act. Section 313 confers on the board, and not on the individual director who wishes to be absent, the power to appoint an alternate director. Consequently, the new Act contains no provision that “deems” an appointment to be an assignment, as existed in the 1913 Act. Therefore, an argument based on the old proviso to section 86B cannot be raised under the present statute. Moreover, the Court found that the old proviso does not indicate that Parliament intended the word “assignment” in the main part of the section to include the word “appointment.” The rule of construction on which the High Court relied was quoted as follows: “It is a well‑established principle of construction that when one finds a proviso to a section, the presumption is that but for the proviso the enacting part of the section would have included the subject‑matter of the proviso.” Applying this rule, the Court held that, at most, section 86B could be interpreted to mean that an appointment of an alternate director by a director who intends to be absent would have been an assignment but for the existence of the proviso. Extending this principle to deem every appointment of a successor by a director to be an assignment under the main part of the section would be an unwarranted expansion. In the Court’s view, just as section 312 of the new Act does not treat an appointment of a successor as an assignment, the main part of section 86B of the old Act likewise did not consider such an appointment to be an assignment by the director. The old Act’s section 83B contained provisions substantially similar to those in section 255 of the new Act, and the reasons that led the Court to conclude that “assignment” does not include “appointment” in section 312 also support the same conclusion for section 86B. If the enacting part of the statute does not expressly prohibit a director from appointing his successor, that prohibition cannot be read into the provision by relying on a proviso. The Court may, in this context, refer to the observations of Lord Watson in The Guardians of the Poor of the West Derby Union v. The Metropolitan Life Assurance Society, which emphasize that a proviso cannot create substantive provisions absent from the operative part of the legislation.

In referring to the authority of West Derby Union v. The Metropolitan Life Assurance Society (1) the Court quoted, “I am perfectly clear that if the language of the enacting part of the statute does not contain the provisions which are said to occur in it, you cannot derive these provisions by implication from a proviso.” The Court observed that the proviso to the old provision might have been enacted ex abundanti cautela, or alternatively it might have been intended to forestall an argument that the appointment of alternate directors could be used to evade the main requirement of section 86B. Since the power to appoint alternate directors was not conferred by the old Act but had to be created by the articles of association, the Court noted that it was not improbable for such an argument to be raised. Consequently, the Court concluded that the proviso to section 86B of the old Act does not support the contention that, in section 312 of the new Act, the term “assignment” should be read to include “appointment.” The Court then turned to discuss the policy underlying section 312 of the new Act. It recalled that, under section 255 of that Act, a specified number of directors in a public company must be appointed by the company at a general meeting. The same rule applies to a private company, except where the articles of association provide otherwise. From this, the Court inferred that the legislative policy was that, to a certain extent, directors should be appointed by the shareholders, and that those directors are intended to serve as the shareholders’ chosen representatives. The Court warned that if a director who had been appointed by the company were allowed to assign his office, the successor would not be a shareholder‑chosen representative, and the purpose of the statute would be frustrated. Accordingly, the Court stated that section 312 prohibits a director from assigning his office in order to prevent that undesirable outcome. However, where a director is appointed by means other than a general meeting of the shareholders, the shareholders do not participate in that appointment and the director is not a shareholder‑chosen representative; therefore the shareholders have no right to influence the appointment of his successor. The Court found no statutory policy that would be undermined by such a director appointing his own successor, and thus held that section 312 was not intended to cover that situation. In the case before it, the Court observed that Dadoba possessed authority under the articles of association to appoint a person to succeed him as managing director. Exercising that authority, Dadoba appointed the appellant Govind to hold the position of managing director after Dadoba’s death. The Court noted that this power of appointment was expressly recognised and legal under section 255 of the new Act. For the reasons set out above, the Court concluded that…

The Court observed that the exercise of the power to appoint a successor in accordance with the company’s articles of association did not run afoul of section 312 of the Companies Act. Consequently, the Court held that the appellant, Govind, had been lawfully and validly designated as the managing director of the Company. On that basis, the Court formally declared that Govind’s appointment to the office of managing director was valid and effective. In addition, the Court set aside the earlier decisions of the lower Courts that had concluded that Govind had not been properly appointed to the position. The Court noted that it had not been invited to examine any other portion of the judgment that was under appeal, and therefore it refrained from interfering with any other aspects of that judgment. The Court further observed that no application for costs had been filed by either party, and accordingly it made no order regarding the award of costs. Accordingly, the appeal was allowed, and the order to set aside the lower Courts’ findings concerning the appointment was entered. The judgment was concluded without any further directives or ancillary orders.