Arjun Prasad vs Shantilal Shankarlal Shah and others

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 201 and 202 of 1961

Decision Date: 22 December 1961

Coram: K.C. Das Gupta, Raghubar Dayal

In this case the Supreme Court of India examined an appeal brought by Arjun Prasad against Shantilal Shankarlal Shah and others, together with a connected appeal. The judgment was delivered on 22 December 1961 by a bench comprising Justice K.C. Das Gupta and Justice Raghubar Dayal. The petitioner was identified as Arjun Prasad and the respondents as Shantilal Shankarlal Shah and others. The decision is reported in 1962 AIR 1192 and 1962 SCR Supplement (2) 402. The issues concerned provisions of the Indian Companies Act, 1913, notably sections 3 and 153, the General Clauses Act, 1897 section 3(42), and clause 10 of the Letters Patent.

After a winding‑up order had been made against a company, the Company Judge issued a direction to proceed under section 153 of the Indian Companies Act, 1913. At the meeting of the unsecured creditors a resolution was moved and passed by those creditors who were present either in person or by proxy, achieving both a majority in number and a three‑fourths majority in value. The appellant, claiming to represent two creditor companies, cast votes on behalf of those companies in support of the resolution. No creditor who opposed the resolution raised any objection at the meeting to the validity of the votes cast on behalf of the two corporate creditors.

When the matter came before the Company Judge, an objection was raised that the votes cast by the appellant on behalf of the two creditor companies were invalid because section 153(2) required creditors to be present either in person or by proxy, and a corporation could not be considered present “in person”. The Company Judge rejected the objection on two grounds: first, that the objection was raised at a very late stage; and second, that the appellant’s physical presence at the meeting amounted to the companies being present “in person”, and therefore the votes were valid.

The respondents appealed to the Patna High Court. A Division Bench of that High Court rejected the contention that an appeal from the order of the Company Judge could be taken only to the Supreme Court, holding instead that an appeal lay to the High Court under clause 10 of the Letters Patent. On the merits the High Court set aside the order of the Company Judge.

The Supreme Court held that (1) the word “Court” in section 153(7) of the Indian Companies Act, 1913, refers to the court exercising original jurisdiction, so an appeal from the Company Judge’s order lies to the High Court under clause 10 of the Letters Patent; (2) although the General Clauses Act, 1897 defines a company as a “person”, the term “person” in a statute does not automatically include a company for the purpose of being present “in person” at a meeting unless a special statutory provision expressly provides otherwise; and (3) in the present case the votes cast by the appellant were not valid in law, and because the validity of those votes affected the required three‑fourths value majority, the defect could not be ignored even though the objection was raised late.

The Court observed that a physical person cannot be present “in person” at any place, and therefore a vote cast by a natural person on behalf of a company does not satisfy the statutory requirement that the company itself be present in person. The Court further held that, in the present case, the votes cast by the appellant were not valid under the law. It was admitted that, had those votes been invalid, the required majority of three‑fourths in value prescribed by section 153(2) of the Indian Companies Act, 1913, would not have been achieved. Consequently, the Court concluded that no further judicial action could be taken in the matter. The Court also stated that the delay in raising the objection to the votes did not give the Court any authority to disregard the legal defect in those votes. The judgment was delivered in the civil appellate jurisdiction concerning Civil Appeals Nos. 201 and 202 of 1961, which were appeals from the judgment and decree dated 16 May 1958 of the Patna High Court in L.P. As. Nos. 13 and 14 of 1957. Counsel for the appellants included A. V. Viswanatha Sastri, R. K. Garg, M. K. Ramamurthi, D. P. Singh and S. C. Agarwala, while the Attorney‑General for India, M. C. Setalvad, represented the State. Counsel for the respondents comprised B. P. Rajgarhia and K. K. Sinha. The judgment was pronounced on 22 December 1961 by Justice Das Gupta.

These appeals concerned the proper method by which a creditor company may legitimately exercise its voting right at a meeting of creditors convened under the provisions of section 153 of the Indian Companies Act, 1913. The issue arose in connection with a meeting of the creditors of Gaya Sugar Mills Ltd. On 14 November 1951, the Company Judge of the Patna High Court issued an order for the winding up of Gaya Sugar Mills Ltd. Subsequently, on 6 October 1953, the learned judge ordered that action be taken under section 153 of the Companies Act. The Chairman appointed to conduct the meeting, Mr. G. C. Banerjee, held separate meetings for debenture‑holders, secured creditors, and unsecured creditors. In his report on the meeting of the unsecured creditors, he recorded that thirty unsecured creditors attended either in person or by proxy, and that a resolution proposed by the Standard Vacuum Oil Company and seconded by Shri K. C. Agarwal was passed by a majority both in number and by three‑fourths in value. At this meeting, a person named Arjun Prasad claimed to represent two creditor companies—Bhandani Bros. and Hindustan Coal Company Ltd.—and cast votes on behalf of those companies in favor of the resolution. No creditor who opposed the resolution raised any objection to the validity of those votes during the meeting, and the Chairman proceeded on the basis that the votes were lawfully cast. It was not contested that, if those votes were deemed invalid, the requisite three‑fourths majority in value would not have been attained. When the application was finally heard before the Court, an objection was raised on behalf of the creditors who opposed the scheme, challenging the validity of the votes cast by Arjun Prasad on behalf of the two companies.

In this case the creditors who had opposed the scheme contended that the votes cast by Arjun Prasad on behalf of the two creditor companies—Bhandani Brothers and the Hindustan Coal Company—were not valid, and therefore the required three‑fourths majority in value had not been achieved. The Company Judge held that the objection could not be entertained because the parties had offered no satisfactory explanation for why the challenge to the validity of the votes had not been raised earlier, and consequently the objection was deemed untimely. On the merits, however, the Judge concluded that the resolution passed by the creditor companies authorising Arjun Prasad to attend the unsecured‑creditors’ meeting of Gaya Sugar Mills Ltd. and to vote on their behalf was sufficient under law to deem his presence at the meeting as the attendance of the companies “in person” and his votes as the valid votes of those companies. Accordingly, the Judge dismissed the objection. On appeal, a Division Bench of the Patna High Court reversed that decision, holding that the delay in raising the objection did not justify overlooking the legal defect in the votes and that, as a matter of law, the votes cast by Arjun Prasad were not the valid votes of Bhandani Brothers or the Hindustan Coal Company. The High Court also rejected the contention that no appeal lay to it from the Company Judge’s order. Consequently, the learned Judges set aside the Company Judge’s order with respect to this aspect of the case. Nonetheless, the High Court issued a certificate stating that, considering the nature and value of the dispute, the case satisfied the conditions of Article 133(1)(a) of the Constitution and was therefore suitable for appeal to this Court. On the basis of that certificate, the present appeals were filed. Three points were raised before the Court by counsel representing the appellants. The first point asserted that, based on the Company Judge’s decision, an appeal should be directed to this Court rather than to the High Court. The second point argued that the objection concerning the validity of the votes, which had not been raised earlier, should not be permitted for the first time during the arguments at the final hearing of the application. The third point maintained that the votes were in fact valid. Regarding the first point, it was noted that subsection 7 of section 153, inserted in 1936, provides that an appeal shall lie from any order made by a court exercising original jurisdiction under the section to the authority empowered to hear appeals from that Court’s decisions. It was therefore undisputed that an appeal was available from the order dated 6 October 1953 made by the Company Judge. The remaining controversy concerned whether that appeal lay to this Court or to the High Court, i.e., which authority was empowered to hear the appeal.

In this case the Court examined which authority was empowered to hear appeals from the decisions of the Court that exercised original jurisdiction under the Companies Act. The term “Court” could only refer to the Court exercising original jurisdiction, that is, the Company Judge who acted under section 3 of the Companies Act. Section 3 provides that the Court having jurisdiction under the Act shall be the High Court having jurisdiction in the place where the registered office of the company is situated. Consequently, the authority authorized to hear appeals from appealable decisions of a Single Judge of the Patna High Court, when that Judge is exercising original jurisdiction, is the High Court and not this Court, as made clear by clause 10 of the Letters Patent. From this reasoning the Court concluded that the appeal from the order of the Company Judge dated 6 October 1953 lay before the High Court and not before this Court, and therefore the first point raised on behalf of the appellant lacked substance.

The Court then turned to the second contention, which was that the objection to the validity of the votes should not be entertained for the first time at the final hearing of the application. The Court found this argument equally untenable. It observed that the opposing creditors had indeed been negligent in failing to draw the Chairman’s attention to what they considered a defect in the voting on behalf of the two creditor companies, namely Bhandani Brothers and Hindustan Coal Co., and that they were likewise negligent in not bringing the matter to the Court’s notice at the earliest opportunity. Nevertheless, the Court held that such negligence or laches on the part of some creditors could not excuse the Chairman or the Court from complying with the statutory requirements. If, as a matter of law, the two votes cast by Arjun Prasad on behalf of those creditor companies were not validly cast, the three‑fourths majority required by section 153, sub‑section 2, would not exist, and the Court could not proceed under section 153. The Court could not simply ignore the fact that, if the votes were invalid, the requisite majority was not achieved, merely because the defect had not been earlier pointed out. Accordingly, despite the deplorable delay by the opposing creditors, the Court determined that the delay was not a sufficient ground to refuse to entertain the objection.

The principal issue in dispute, as identified by the Court, concerned whether the resolutions passed by Bhandani Brothers and Hindustan Coal Company, which authorised Arjun Prasad to attend the meeting on their behalf and to vote on their behalf, rendered Arjun Prasad’s votes valid. The Court referred to the language of section 153(2) of the Companies Act, which requires a majority in number representing three‑fourths in value of the creditors or members present either in person or by proxy at the meeting in order to approve any compromise or arrangement. The Court’s analysis therefore focused on the validity of the proxy authorisations and the consequent effect on the required majority.

Section 153(2) of the Indian Companies Act provided that if a majority in number representing three‑quarters in value of the creditors, or the class of creditors, or the members, or the class of members, who were present either in person or by proxy at a meeting, agreed to any compromise or arrangement, such compromise or arrangement would, if sanctioned by the Court, become binding on all the creditors or the class of creditors, on all the members or the class of members, as the case may be, and also on the company itself. In the case of a company that was in the course of being wound up, the arrangement would additionally bind the liquidator and the contributories of the company.

The statutory language required that the agreement be obtained from a majority in number representing three‑quarters in value of those who were actually present at the meeting, whether they were present in person or by proxy. The Act expressly excluded from consideration the agreement of any creditor who was not present at the meeting either in person or by proxy. Consequently, any creditor, whether a corporation or a natural person, could participate in the meeting through a proxy, while a natural person could also attend the meeting in person.

The Court examined whether a corporation could attend a meeting “in person.” It observed that, absent a specific statutory provision permitting a corporation to be present in person, a company, which is not a physical person, could not be said to be present in person at any place. Although the General Clauses Act of 1897 defined a company as a “person,” and therefore the word “person” in statutes generally included companies, that definition did not aid in interpreting the phrase “to be present in person.” The difficulty of a company being present in person could be resolved only by a statute or rule that expressly authorised such presence.

The Court also rejected the reliance placed on the English case of In re Kelantan Coco, Limited and Reduced. In that case, the Court dealt with a petition for reduction of capital and had to determine whether a quorum existed at a confirmatory meeting. The articles of association of the company required two members personally present to constitute a quorum. The Court held that a representative appointed under section 68 of the Companies (Consolidation) Act, 1908, who was present on behalf of a shareholder, satisfied the requirement of personal presence. The provision under section 68 was analogous to section 80 of the Indian Companies Act, 1913, which allowed a company that was a member of another company to act as its representative at a meeting of that other company. However, that decision concerned the presence of a member of a company, not the presence of a creditor company, and therefore did not settle the question of whether a creditor corporation could be present in person.

The Court noted that the Companies Act, 1956, introduced a provision whereby a company that was a creditor of another company could, by a resolution of its directors, authorise a person to act as its representative at any meeting of the creditors of the latter company. The authorised person would be entitled to exercise all the rights and powers of the creditor company, including the right to vote by proxy, under sections 187(1)(b) and 187(2). Nevertheless, no such provision existed in the Companies Act, 1913, which governed the present dispute. Accordingly, the Court found it unnecessary to consider whether, under the 1956 provision, attendance by an authorised representative would amount to attendance of the creditor company “in person.” The matter had to be decided according to the provisions of the 1913 Act, which did not contain any rule allowing a creditor company to be present in person at a meeting.

The Companies Act, 1956 allows a company that is a creditor of another company to pass a resolution of its directors authorising any person it considers appropriate to act as its representative at any meeting of the creditors convened under the Act. By virtue of sections 187(1)(b) and 2, a person so authorised may exercise all rights and powers of the company, including the right to vote by proxy. No comparable provision is contained in the Indian Companies Act, 1913. Consequently, it is unnecessary to consider whether, under the newer provision, the presence of a person authorised in this way would amount to the creditor company being “present in person” at a creditors’ meeting, because the present dispute is governed solely by the provisions of the Indian Companies Act, 1913 and not by the later enactment. When the Companies Act was amended in 1936, section 246 was added, empowering the High Court to make rules concerning the procedure for holding meetings of creditors and members in connection with proceedings under section 153 of that Act. Exercising this authority, the Patna High Court framed a series of rules. Rule 144 provides that a creditor or contributor may cast a vote either in person or by proxy. Rules 145 through 153 address various matters relating to proxies, and Rule 150 specifically prescribes the method for granting a proxy when the creditor is a corporation. In the present case, neither Bhandani Brothers nor the Hindustan Coal Company furnished a proxy in accordance with Rule 150. Accordingly, the rules contain no support for the argument advanced by Mr Sastri that a directors’ resolution authorising a director or another individual to represent the company at a creditors’ meeting creates a legal status of that individual being “present in person” on behalf of the company.

Mr Sastri further contended that, because the management of a company’s affairs rests with its directors and the directors may delegate any of their powers among themselves, the attendance of Arjun Prasad at the creditors’ meeting should be construed as the attendance of all the directors and, therefore, as the company being “present in person.” The Court, however, observed that the Indian Companies Act, 1913 provides no provision that permits a company to be deemed present in person at a meeting of creditors. Moreover, the resolutions passed by the two creditor companies did not appear to delegate the directors’ powers to Mr Sastri or to any other person, including Arjun Prasad. On this basis, the Court agreed with the High Court’s finding that the votes cast by Arjun Prasad on behalf of Bhandani Brothers and the Hindustan Coal Company were not valid. Accordingly, the appeals were dismissed, costs were awarded, and a single set of hearing fees was ordered.

In this case the Court recorded that the appeals filed by the parties were dismissed. The dismissal meant that the Court did not grant any relief to the appellants and that the order previously rendered by the lower tribunal continued to be effective. By dismissing the appeals, the Court indicated that it found no basis to overturn or modify the earlier decision. Consequently, the earlier findings and directions remained binding on the parties. The Court’s statement that the appeals were dismissed therefore signified the final resolution of the dispute in the manner already determined by the subordinate court. No further procedural steps were ordered, and the parties were left with the operative effect of the original judgment as it stood before the appeal.