2014 Supreme(SC) 771

SUPREME COURT OF INDIA
J. CHELAMESWAR, A.K. SIKRI, JJ.
Darius Rutton Kavasmaneck – Appellant
Versus
Gharda Chemicals Limited & Others – Respondents
CIVIL APPEAL NO. 2481 OF 2014
Decided on : 28.10.2014

MAIN POINTS
A private company without shares cannot become public company.
There is no statutory compulsion under section 43A to alter the Articles of Association.
A private company becoming public company can always revert back to private company with prior approval of Central Government.
HYBRID companies in existence on 13.12.2000 would continue as such.
Accepting deposits by companies was never prohibited but only regulated.
Companies in existence on 13.12.2000, choosing to modify Articles of Association incorporating section 3(1)(iii)(d) become private companies by virtue of Section 43(2A).
Supreme Court under Article 136 cannot examine a question of fact for the first time.

Headnote:(a) Companies Act, 1956 – Section 43A – A private company without shares cannot become public company. (Para 21)

       (b) Companies Act, 1956 – Section 43A(1), (1A), (1B), (1C); Proviso and 43A(2) – Provisos to each sub-section give an option to the company either to retain the original Articles of Association or alter them – No statutory compulsion to alter the Articles of Association – Even sub-section (2) not obligating company or Registrar to make any changes in the Articles of Association. (Para 39, 42)

       (c) Companies Act, 1956 – Section 43A(4) – Provision for a private company becoming public company to revert back to private company – Such possibility always recognised by Parliament as evidenced by existence of sub-section (4) in section 43A since inception – Reasons – Each one of the events stipulated under Section 43A sub-sections (1), (1A), (1B) and (1C) converting a public company into a private company is transient – Sub-section (4) makes such reversion subject to prior approval of Central Government – Instantly High Court missing provision of sub-section (4). (Para 52, 53)

       (d) Companies Act, 1956 – Section 43A – Amendment 2000 – Prior to amendment innumerable private companies would have become public companies (HYBRID) – High Court holding that after amendment only two categories of companies viz. private and public remained – According to High Court after 2000 amendment HYBRID companies ceased to exist – If this was the Parliamentary intention then section 43A would have been repealed – This has not been done – Section 111(14) still continues to make reference to Section 43A. (Para 55, 56, 68)

       (e) Companies Act, 1956 – Section 43A – Sub-section (11) inserted by 2000 amendment – Sub-section (11) would have no application to private companies coming into existence prior to 2000 amendment and remaining as such – Similarly sub-section would also have no application to private companies coming into operation after 2000 amendment – Sub-section (11) has consequences only for private companies becoming public by virtue of Section 43A(1C) accepting deposits from public because by insertion of clause (d) in section 3(1)(iii) private companies were required to incorporate prohibition against invitation or acceptance of deposits from PUBLIC in their Articles of Association – If High Court is right that only private and public companies remained after the amendment at by virtue of section 43A(1C) then HYBRID companies would become public companies overnight resulting in depriving the shareholders of collective right to freely transfer their shares – Would violate Fundamental Right under Article 19(4) of the Constitution – Therefore Parliament gave a window of two years in section 3(5) – Further theory of abolition of HYBRID companies would mean retrospectively taking away rights collectively enjoyed by share holders of such companies – HYBRID companies in existence on 13.12.2000 would continue as such. (Para 59, 60, 61, 62, 64, 66, 67, 69)

       (1971) 1 SCC 678; (1970) 1 SCC 248; (1972) 2 SCC 788; (1984) 3 SCC 281 – Relied upon

       (f) Companies Act, 1956 – Section 27(3), 43A(1C) and 3(1)(iii)(d) – Section 27(3), even after amendment 2000, requiring private companies having share capital to contain provisions relating to matters specified in clauses (a), (b) and (c) of Section 3(1)(iii) but not matters relating to clause (d) in their Articles of Association – Accepting deposits never prohibited under the Act – Such deposits only regulated by section 58A – Section 43A(1C) making a company accepting deposits from public, public company – However, even such public company can retain restrictions or limitations contemplated under Section 3(1)(iii) – By incorporating provision of section 3(1)(iii)(d) in article of association a private company becomes public company – By virtue of Proviso to section 43A(1C), on default of this stipulation the company shall revert back to be a private company but deprived of privileges and exemptions available to private company – Such private companies are to be treated as public companies for certain purposes – However, regulations created under section 43A(1), (1A), (1B) and (1C) are now done away by virtue of section 43A(11). (Para 73, 74, 75, 79, 80, 82)

       (g) Companies Act, 1956 – Section 43A and 3(1)(iii)(d) – Restriction imposed by section 3(1)(iii)(d) – Collective right of private companies to transfer shares freely never curtailed – Restriction under section 3(1)(iii)(d) not only in case of private companies in existence on 13.12.2000 attracting section 43A(1C) but also to private companies, which earlier attracted sub-sections (1), (1A) and (1B) – Section 3(1)(iii)(d), admittedly, is prospective – Articles of Association of a private company created on and after 13.12.2000 must contain a clause prohibiting the invitation and acceptance of deposits from PUBLIC. (Para 83, 84)

       (h) Companies Act, 1956 – Section 3(1)(iii) – Effect – Companies in existence on 13.12.2000, choosing to modify Articles of Association incorporating section 3(1)(iii)(d) become private companies by virtue of Section 43(2A) – Companies not doing so would still continue to be public companies governed by Section 43A(1C) [HYBRID Companies] – They can continue to have provisions in their Articles of Association referable to Section 3(1)(iii)(a), (b) & (c) – Failure of the first respondent company to amend its Articles of Association to give effect to clause (d) of Section 3(1)(iii) does not effect the operation of its Article 57. (Para 86, 88)

       (i) Code of Civil Procedure, 1908 – Section 11 r/w Order II, Rule 2 – Question of first respondent Company being a public company or a HYBRID company or a private company never in issue earlier – Court never examining this question of law – Appellants not precluded from raising the same in this appeal. (Para 94)

       (j) Constitution of India – Article 136 – Supreme Court under Article 136 cannot examine a question of fact for the first time. (Para 96)

       Facts of the case:

       Two appellants herein who are mother (since deceased) and son respectively are minority shareholders holding or otherwise controlling 17 per cent of the equity in the first respondent company.

       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 1600 crores. The appellant, therefore, filed a Company Petition before the Company Law Board, inter alia, seeking prohibitory orders, against the 2nd and 3rd respondents from committing breach of the pre-emption agreement contained in Article 57 of the Articles of Association.

       On 11th December, 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 was heard finally and dismissed.

       The appellants preferred Company Appeal before the High Court which was finally heard and dismissed.

       Finding of the Court:

       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 43A, the 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.

       Result: Appeal allowed. Matter remitted to High Court for limited purpose of deciding the question of whether the membership exceeding fifty rendered the company into a public company.