BAJAJ AUTO LTD v. N. K. FIRODIA ETC & Anr.

!!A.TAJ AUTO V. N. X. FIRODIA 41 A B c D E G H in the management of the company. On the contraly, they advanced large sums of money and F was the gradual .arowth and prosperity of the company. It was therefore an abuse of ;the fiduciary power of the Directors to refuse to register the transfers ,of the shares. [53 D; 54 DJ largely responsible for {ii) Although the C0mpany's Articles of Association provided that the Directors might at their absolute and uncontrolled discretion decline to register any transfer of shares, such discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and pro pe>· consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors will act .for the paramount interest Of the company and for the general interest of the shareholders because the Directors are in a fid\Iciary position both towards the company and towards every shareholder. The Directors are therefore required to act bona fide and 1101 arbitrarily and not for any collateral motive. [ 46 Cl (iil) If the Articles permit the Directors to detiine to regilter transfer of shares without statin~ the reasons, the Court would not draw un they did not alw favourable inferences agamst the Dir0 ctors because reasons. Where however the Directors give reasons the Court would consider whether they were legitimate and whether the Directon pro ceeded on a right or wrong principle. As a result of the lntroductioa of section 111 (SA) in the Companies Act, 1956, two consequences follow. First, if the Articles permit the Directors not to disclose reuons for declining to register a transfer, the statute confera power to intern> gate the Directors and disclose the reasons. Secondly, if the Dhc!Dr• do not disclose reasons, presumption can be drawn against the Directors for non-disclosure of reasons in spite of being called upon to do so., [46 DJ Mis Harinagar Sugar Mills Ltd. v. Shyam Sundar lhunghunwola & Ors., [1962] 2 S.C.R. 339; Gr<enhalgh v. Arderne Cinemas Ltd., [1950] 2 A.E.R. 1120; Ex-parte Penney, L.R. 8 Ch. 446, Re. Bede Steam Shipping Company Ltd., (1917) 1 Ch. 123; Re. Bell Brothers Ltd., 7 TIIDCS Law Reports 689; Pender v. Lushington, L.R. 6 Ch. D. 70; &/want Transport Co. Ltd. Amraoti v. Y. H. Deshpande, A.I.R. 1950 Nag. 20; Re. Smith cl Fawcett Ltd., [1942] Ch. 304; Kaikhosro Muncherii Heera 'Mtl Neck & Ors. v. The Coor/a Spinning d: Weaving Company & Ors., I.L.R.. 16 Born. 80 and The Muir Mills Company Ltd. of Cawnpore v. T. H. Condon & Anr., I.L.R. 22 All. 410; referred to. CIVIL APPELLATE JURISDICTION : Civil Appeals Nas. 546, 547 and 692 to 1Q31 of 1970. Appeals by special leave from the orders dated March 14, 1970 of the Company Law Board, Department of Company Affairs, Ministry of Industrial Development, Internal Trade & Company Affairs, New Delhi in Appeals Nos. 4 to 7 of 1969 etc. C. K. Daphtary, A. K. Sen. L. M. Singhvi, S. Swa•up, B. Datra, l. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the appellant (in all the appeals). F. S. Nariman, A. B. Diwan, K. J. Merchant and I. N. Shroff, for respondent No. 1 (in all the appeals). L235Sup.CJ/71--4 42 SUPREME COURT REPORTS [1971]2 S.C.R. The Judgment of the Court was delivered by Ray, J. These appeals are by special leave against the order dated 14 March, 1970 made by the Company Law Board, Depart ment of Company Affairs, Ministry. of Industrial :Development, Internal Trade and Company Affairs, New Delhi, under section 111(3) of the Compani;s Act, 1956 directing the appellant com pany"to register transfer of 3643 shares forming the subject matter of these appeals. The respondents iii these appeals are Jaya Hind Industries Ltd. N. K. Firodia and other persons who will be referred to as the Firo.dia group. The appellant will be referred to as the Bajaj group. The Firodia group lodged in different lots 3643 shares o,f the Jaya .-Hind appellant for being transferred to different names. Industries Private Ltd. applied for transfer of 1500 shares. in their names. Firodia applied for transfer of 30 shares in his name. The other transfers were in the names of associates, nominees and friends of the Firodia group. The Board of the appellant refused to register transfer of the said shares at the Board meetings held on 23 May, 1968 in respect of 2532 shares and on 24 June, 1968 in respect of 1111 shares. The appellant communicated the said refusal to transfer the shares in the month of June, 1968. Thereafter, in the month of August, 1968 338 appeals were fiied before the Company Law Board in respect of refusal of the ~ppellant tu transfer 3643 shares. The Company Law Boar<! hy 1ts letter dated 16 January, 1969 asked the appellant to dis¢lose the reasons for refusal to register ·lf'ansfer of shares. The appel lant compan} gave three reasons for refusal to register transfer of the said 3643 shares. First, that Jaya Hind Industries Private Ltd. was a beneficiary to the e_xJ:ent of 1/4. share in the Managing Agency remuneration receivable bY Jamnalal Sons Private Ltd. from Bajaj Au.to ltd. and yet N. K. Firodia chose to write to the Company Law Board against the extension of the Managing Agency of hmnalal Sons Private Ltd. The company further said thnt N. K. Firoclia, according to the appellant company, was their representative and when N. K. Firodia acted in such a treacherous fashion and against the interest of the company and behind the back of the Board of Directors it became evident that Firodia's design was to create mischief. Secondly, the transfer ·of shares re ceived from Jaya Hind Industries Private Ltd. was part of design to-acquire interest in the company which was likely to re sult in a threat to the smooth functioning of the management of the company, and tg vote down the passing of a special resolution and, therefore, required for the management of the companY,. A B c D F G H BAJAJ AUTO V. N. K. FIRODIA (Ray, J.) 43 B transfer should not be permitted. Thirdly, the purchase of shares by Jaya Hind Industries Private Ltd. was riot with a vieV.: to b?na: fide investment but was with a mala fide purpose and evil design. It was said that the issued share capital of the company was 1 04 250 shares of Rs. 100 each. Firodia group was holding zi,500 shares. Transferring further · shares to the ·names of Firodia group would obstruct the business of the appellant com pany in the passing of special resolution which was required in the day to day business of the company. It was also said that from the investment point of view with a dividend of Rs. 10 per share on a paid up share of Rs. 100 the purchase price paid by Firodia group was artificial and could only be with a view to tFy to take control and/ or obstruct the busine11s and smooth working of the company and to injure the existing management. The ap pellant company concluded by saying that the Board of Direc tors came to the conclusion that it was in the interest of the com pany to refuse the said transfers. D In. order to appreciate whether the Directors used the discre tion in proper exercise of their fiduciary power and the reasons were bona fide and legitimate in the interest of the' company as a whole, · it is necessary to refer to certain features of the case. In the year 1947 a joint venture bus_iness was entered into between Jaya Hind Industries Ltd. and Bachhraj Trading Cor-. In the month of March,_ 1950, Bachhraj Trading poration Ltd. Corporation· suffered heavy losses and the joint venture was trans ferrec! to Bajaj Factories Ltd. with the consent of Jaya Hind Industries Ltd. · In the year 19S2 N. K. Firodia became a Director of Bachhraj. Trading Corporation Ltd. . In ihe mGoth of April, 11}54 Jaya Hind Industries Ltd. aCCJUired 1800 shares of the face value ~f Rs. l,80,000 of BachhraJ Trading Corporation Ltd .. at Rs. 36/8/ per share which together with 50 shares held by N. K. Firodia equalled 3/8ths of the share capital. In the month of May, 1954, Bachhraj Trading Corporation Ltd. again took over the busi- In the year 1tess of the joint venture from Bajaj Factories Ltd. 1955 N. K. Firodia as 11. Director of Bachhraj Trading C01'P,ora tion Ltd. applied to the Central Government for the manufaetur ing. licence of scooters, auto rickShaws and tempo three wheeler vehicles. In the year 1957. Bac~aj Tradµ!g Corporation Ud. was granted the manufacturing licence of tempo three wheelers. In 1958 Bajaj Tempo Private Ltd. was formed to manufacture tempo three wheeler vehicles and N. K. Firodia was appointed die In the year 1959 Bachhraj Man~ging Direct~ of the same. licence to manufacture Tradmg Corporation Ltd. was granted In. the year 1960 - the name of scooters and auto rickshaws. G H I SUPREME COU&T REPORTS [ 1971] 2 s.c.R. Bachhraj Trading c:_orp<>ration Ltd. was changed to Bajaj Auto Private Ltd. Shar~s of Bajaj Auto Private Ltd. were offered to shareholders of Bachhraj Trading Corporation in proportion to their shareholding. Between the years 1954 and 1960 J aya Hind Industries Private Ltd. of the Firodia group had provided. substantial funds amount ing to Rs. 4,36,000 to the appellant company in its former name. ln the year 1960 there was a Managing Agency agreement bet ween the appellant company and J amnalal Sons Private Ltd. for .a period of five years. In 1960 when the appellant was converted into a public limited company and Firodia was appointed as its .Chief Executive, the respondent company of the Firodia group by themselves, subscribed for their shareholders and friends 3 7i % of the shares offered to the then existing shareholders of the appellant company. An agreement was entered into between Jamnalal Sons Private Ltd. Managing Agents of the appellant .company and the respondent Jaya Hind Industries Private Ltci. on 15 August, 1960 by which the Managing Agents agreed to pay .25 % of the remuneration of the Managing Agency to the respon ·dent company in consideration of services rendered to the appel lant company. Gradually, the appellant company grew into a prosperous and very well developed automobile unit. Land wa& .acquired, buildings we{e constructed and machinery and equip ment worth more than a crore of rupees was purchased and instal led. The manufacturing activity of the appellant company made .good progress and 90% of the components of scooters and auto rickshaws were capable of being manufactured indigenou~ly. In the month of June, 1965 the appellant company applied to the Central Government for re-appointment of Jamnalal Sons Private Ltd. as Managing Agents of the appellant company for a period of 10 years. The Central Government on 11 August, 1965 sanctioned the said re-appointment of Managing Agents for the period commencing 16 August, 1965 and ending 31 March, 1968, viz., for an approximate period of three years. The appellant company entered into an agreement with the Managing Agents on similar terms. In the month of August, 1967 Kamalnayan Bajaj of the Bajaj group proposed at the Board meeting of the appellant that an application should be made to extend the term of the Managing Agency. Firodia of the respondent compaµy group opposed any In. the month of December, 1967 the appellant such extension. applied to the Company Law Board for exten;ion of the term of Managing Agency of Jamna!al Sons Private Ltd. for a period of 7 ·years so that the Managing Agents would have a term of 1 O years commencing 16 August, 1965. The Jetter of the appellant A B c D E F G I A B c D E G H BAJAJ AUTO V, N, K. FIRODIA (Ray, /.) 45 company was signed by the Secretary. In the month of March, 1968 Firodia came to know about the said letter and wrote to the Chairman of the Company Law Board that there was neither any resolution of the general meeting of the company for such extension nor any publication of such appointment. Firodia said that the appellant company contravened, in particular, the pro visions contained in sections 326 and 640B of the Companies Act, 1956. The Company Law Board, however, approved of the extension of the Managing Agency for a period of two years from 31 March, 1970. The a~pellant company was· converted into a public limited company in 1960 and the share capital was increased from Rs. 9,90,000 to Rs. 70,00,000. In the month of February and March, 1967 the capital of the appellant company was increased by issue of right shar~s. By the end of February,' 1968 out of the issued share capital of 1,04,250 shares the BajaJ group held about 28,600 shares the Firodia group 23,400 shares and the general public about 52,250 shares. The Bajaj group however alleged that in February, 1968 they held 31500 shares and the Firodia group had 21735 shares. Bajaj group bought about 16,230 shares up to the maximum · value of Rs. 411 per share. It may be mentioned here that out of the said 16,230 shares the Bajaj group bought about 4000 shares frotn the Life Insu:ance Corporation Ltd. and the Unit Trust of India. The Bajaj group obtained transfer of the . said 16,230 shares in thei_r names. The Firodia group, on the other hand, from the month of April, 1968 onwards lodged in difierent lots 3643 shares of the appellant company for being transferred to their names. The Board declined to register any transfer respect of the said 3 643 shares. In the month of March, 1968 It is also necessary to know about the antecedents and activi ties of Firodia in relation to the affairs of the appellant company. When the joint venture was started in the year 1946 between Bachhraj Trading Corporation Ltd. and the respondent company Firodia was in actual charge of the joint venture. In tilt year 1950 Firol)ia went to Germany and obtained representation from Vidal and Sohn Tempo Works Hamburg, Germany in connection with the manufacture of tempo three wheeler vehicles. In 1952 Firodia became a Director of Bachhraj Trading Corporation Ltd. Firodia thereafter Sllbmitted a scheme for the mahufacture of scooters and auto rickshaws and obtained a licence for Baclihraj Trading Cor~ poration Ltd. in that behalf. The Firodia group acquired shares of the face value of Rs. 1,80,000 in Bachhrai Trading Corporation in the year 1954 and helped its rehabilitation after it suffered heavy losses. The Firodia group provided funds to the extent of lits. 4,36,000 to the Bujaj group during the years 1954 and 1960. SUPREME COURT REPORTS (1971] 2 S.C.R. When the appellant company became a public limited company in A the year 1960 the Firodia group subscribed for 37!% 'of the shares and assisted in procuring subscription to the shares offered to the public. J amnalal Sons Private Ltd. the Managing Agents of the appe113illt agreed to pay 25% of their remm1eration of the Manag- ing Agency tci the respondent company of the Firodia group in consideration of the services rendered. B Article 52 of the appell<IJlt company provided that the Direc tors might at their absolute ~nd uncontrolled discretion decline to register any transfer of shar~s. Discretion does not mean a bare · affirmation or negation of a proposal. Discretion inlplies just and proper consideration of the proposal in the facts and circumstances · of the case. for the paramount interest tjf the company and for the general in terest of the shareholders b¢cause the Directors are in a fiduciary position both towards the cc1mpany and towards every shareholder. The Directors are therefore required to act bona fide and not arbi- . trarily and not for any collateral motive. In .the exercise pf that discretion the Directors will act C If the Articles permit the Directors to decline to register trans fer of shares without stating the reasons the Court would not draw unfavourable inferences against the Directors because they did not give reasons. In other words, the court will assume that the Direc- tors acted reasonably and bona fide and. those who allege to the contrary would have to prove and establish the same by evidence. Where however the Directors gave reasons the Court would consi der whether they were legitimate and whether the Directors pro ceeded on a right or wrong principle. As a result of the introduc tion of section 111(5A) in the Companies Act, 1956 two consequences follow. First, if. the Articles permit the Directors not to disclose reasons for declining to register a transfer the sta tute confers power to interrogate the Directors and disclose the reasons. Secondly, if the Directors do not disclose reasons pre sumption can be drawn against the Directors for non-di5closure of ·reasons in spite of being called upon to do so. In the present appeals, the reasons of the Directors have to be tested from three poi11ts of view. First, whether the Directors acted in the interest of the company; secondly, whether they acted on a wrong principle; and, thirdly, whether they acted with an oblique motive or for a collateral purpose. This Court in MI s Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwa/a & Ors(1) said that "the discretion of the Directors would be i!lullified if it were established that thP, Directors acted- oppressively, capriciously or The decision in corruptly or in some other way ma/a fide". Harinagar Sugar Mills Ltd. ( 1) related to a case under the Com {i) [1962] 2 S.C.R. 339. D E F G H BAJAJ AUTO V, N. K. FIRODJA (Ray, J.) 4 7 panies Act, 1956 prior to the introduction of section 111 (SA) That is why if the Directors under the Articles were not to disclose reasons it was said that the Court would presume where the Direc tors refused to register the transfer of shares that their power of absolute discretion was exercised bona fide unless corrupt or ma/a fide motives were affirmatively pleaded and proved. It would be for the aggrieved tra11Sferor to show that the refusal to register transfer was exercised ma/a fide and not in the interest of the company and thereby the presumption of bona fide would be displaced. The words 'bonafide and for the benefit of the company as " whole' have been considered in some English decisions. Reference may be made to the decision in Greenhalgh v. Arderne Cinemas Ltd. (1) where Evershed, M.R. said that if a resolution had the effect "to discriminate between the majority shareholders and thL· minority shareholders so as to give the former advantage of which the later were deprived", the resolution could be attacked on grounds of elements of dishonesty or impropriety. The acts of the Directors would have to be scrutinised as to whether they were the honest opinion of the Directors acting for the company as a whole. Mellish, L.J. in Ex-parte Penney(') said that the Director' would have no right to force a particular shareholder to continu~ as a shareholder and not to allow him to transfer shares at all be cause .that would be an abuse of their power. Lord Cozens-Hardy, M.R. in Re. Bede Steam Shipping Company Ltd.(') said that the personal objections to a transferee were where the transferee would be a quarrelsome person or he would be an unreasonable person or he would be acting in the interest of a rival company. The Direc-· tors there had power to refuse to register transfer of shares if "in their opinion it is contrary to _the interest of the company that the proposed transferee should be a member In that case there were disputes between the Elder brothers who were Directors. One of the Eldey Brothers sold his two shares to a clerk of his and anothe1· share to his house-keeper. The other Director said that the company was really a family concern and therefore the shares should not be transferred singly or in small lots to outside persons having no interest in, or knowledge, of shipping. thereof". ) 'Ln Bede Steam Shipping Co.( 8 the power of the Direc-/i tors was to refuse to register the transfer of share to any person of whom the Directors did not approve as transferee. The Direc tors in declining to register the transfer gave two reasons. First, . that there would be increase in expenditure if the body of share- · holders who numerically increased and secondly the individuals· who were neither related to the founders family nor ccnnected in (I) [1950] 2 A.ER. 1120. (2) LR. 8 Ch. 446. (3) [1917] I Ch. 123. B c D E F G H 48 SUPREME COURT REPORTS [1971] 2 S.C.R. business with the company would become members by the pro posed transfer. Neither of these reasons was held to touc!). the fitness of the transferees. The real power of the Directors in re fusing registration of transfer was on the ground of personal ob jections to the transferees. The apprehension on the part of the Directors iu the increase in the number of shareholders was there fore found to be an abuse of power. It was found that the Direc tors in refusing registration to transfer thought of the proposed transferees as mere nominees who could adopt the attitude of the transferor who had disagreed with the Directors of the company. The Directors did not look at the relevant circumstances in which they were placed, namely, their status, their occupation, and, in particular, whether the transferees were interested in any private business competing with the company. A c Reference may be made to an old decision in Re. Bell Bro thers Ltd.( 1) as an illustration of the power of the Directors to refuse registration of transfer. The relevant Article in the case conferred discretionary power on the Of Bell Brothers( 1) Directors to refuse registration of transfer of shares on the Fund D that the Directors did not approve of the transferee. Chitty, J. said in relation to the Directors' power that the Directors muat act in good faith and in the interest of the company and with due re gard to the right of a shareholder to transfer his shares and they must fairly consider the question of the transferee's fitness at a Board meeting. The Directors in that case were not required to S disclose reasons. Three propositions can be extracted from that case. First, where the Directors do not assign any reason because of the Articles it is competent for those who seek to have the trans- fer registered to show affirmatively by proper evidence that the Directors had not duly exercised their power. Secondly, if rea sons are given by the Directors and the reasons are legitimate the court will not overrule the Directors decision merely because the · court itself would not have come to the same conclusion. Thirdly, if the reasons are not legitimate, the court would hold that the power had not been duly exercised. An example would be where the Directors said that they rejected the transfer because the trans feror's object was to increase the votinjf power in respect of his shares by splitting them among his nommees. p G In the case of Bell Brothers( 1 two Bell brothers John and Lowthian and the members of their families were shareholders in Bell Brothers. John ·died leaving a will and the beneficiaries under the will were his widow and children. The will provided for the widow an annuity. The will contained a general trust for conversion. . John's shares were sold to provide a fund to meet ) H (J) 7 Times Law Reports 689. BAJAJ AUTO V, N. K. FIRODIA (Ray, J.) 49' A B c D E F G H the annuity. Hodgson purchased those shares. The Directors were Lowthian, his son Hugh and his son-in-law. High was an execu tor trustee under the will of John and as such was one of the trans ferors of the shares of John. The shares of the testator were in the names of Hugh, the nephew and Charles, the son of the testator as executor trustees. The shares being registered in two names, Hugh as th~ first on the register had the right to vote. Hugh had on the one hand expressed !he opinion to sell the shares in the true interest of the beneficiaries and on the other hand as a Director opposed the sale to Hodgson on the ground that the shares should be held by the members of the Bell family. The Directors did not aliow registration either in the name of Hodgson or his nominees. It has been well-settled since the decision in Pender v. Lushing ton ( 1 ) that the Directors are not entitled to look behinld the register for any purpose. They do not take notice of trust. Similarly, they cannot say that the transferee i.s the nominee of some one whom th~y consider objectionable. The accent is always on personal ob jections to the transferee. The solicitors of the Directors in the case of Bell Brothers gave the real reason for refusal of registration that Hodgson was holder of shares in a rival company. Chitty, 1. said that the Directors Qarefully abstained from stating what their personal objection to Hodgson was and put forward their solicitors to assign the reason for it. The Directors who had an opportunity of exercising their power attempted to exercise it upon a wrong principle and therefore their power was gone. It is quite likely that if the Directors had given eyidence of their real reason the Court might have accepted it as legitimate. The decision in the case of Bell Brothers(') illustrates that where the Directors have the power to refuse registration of the transfer of shares, their exercise of power on a wrong principle will vitiate the exercise of the pc;wer. It follows that where the Directors have uncontrolled and abso lute discretion in regard to declining registration of transfer of shares, the Court will consider if the reasons are legitimate or the Directors have acted on a wrong principle or from corrupt motive. If the Court found that the Directors gave reasons which were legi timate, the Court would not overrule that decision merely on the ground that the Court would not have come to the same conclu sion. Reference may be made to the decision in Ba/want Trans port Co. Ltd. Amraoti v. Y. H. Deshpande(') which is a Bench decision of the Nagpur High Court. Sapate was a shareholder in theocoI;Jpany and owned 31 shares. One of his shares was sold by public auction and was purchased by Deshpande. Deshpande ap plied for registration. The Article in the Nagpur case conferred (I) LR. 6 Ch. D. 70. (2) 7 Times Law Reports 6~9 (3) A.LR. 1950 Nag. 20· \ 'So . SUPREME COURT REPORTS [1971 J2 S.C.R. .absolute and uncontrolled discretion on the Directors to refuse to A register transfer where in the opinion of the Directors it was not in the interest of the company to admit the proposed transferee to .meinbership.. The evidence in that case was that Deshpande was the lawyer of Sapate. Sapate was quarrelling with the company . . Sapate also joined a rival concern. The Directors decision in those surrounding circumstances was found to be a legitimate exercise of the power of the Directors in the interest of the company. I The decision in Re. Smith & Fawcett Ltd. (1) indicates the ·extent to which the court upholds the exercise of absolute and un controlled discretion of the Directors to refuse to register any trans- In that case there were two .Directors who held the . ler of shares. shares m equal numbers. One died. The other Directi>r refused to register the transfer of shares in the names of the executors of the deceased Director except in respect of a part of the holding and upon the condition that the balance be transferred to the surviving Director: It was found to be a justifiable act of the Director in the. interest of the company. In the old Bombay decision in Kaikhosro Muncherji Heera 'Md Neck & Ors. v. The Coor/a Spinning & Weaving Company & Ors( 1 ) the Board of Directors might decline to register any trans fer of shares, unless the transferees were approved by the Boaid. A shareholder became insolvent. His share vested in the Official .(\ssiguee. The Official Assignee sold the shares. The purchaser applied for registration. The Directors declined to approve . of the. transferees unless the transferees would pledge themselves not to oppose a certain chang~ in the mode of remunerating the Agents of the company, which the Directors desired to effect, arid which they believed would be very advantageous to the company. Innay be mentioned here .,that the purchaser of the shares required the · Official Assignee to register transfer in the names of the two nomi nees who were already the holders of shares in the company. The ' company,, however, did not take any objection to the nominees in their personal capacity. The Directors acted on wrong principlo and in abuse of power in insisting on obtaining a pledge from the transferees not to oppose change in remuneration of the 'Managing Agents. . A Bench decision of the Allahabad High Court in The Muir Mills Company Ltd. of Cawnpore v. T. H. Condon & Anr.(8 ) related to the absolute power of the Directors to refuse registration 'Jilte of transfer of shares on personal objections to the transferee. Muir Mills in that case disallowed the transfers on the ground that the transferees were subordinates of McRobcrt, the Managing (l) 1942 Ch. 304. (3) l.L. R. 22 All. 410. (2) I.L.R. 16 Born 80. c D E :r G H BAJAJ AUTO v: N. K. FIRODIA (Ray, J.) 51 A B c 0 E F G B Direclor of Cawnpore Mills. There was personal animosity bet ween Johnson, the Managing Director of the Muir Mills and McRobert. The Directori of the Muir Mills came to a conclu sion that McRobert should not add to his voting power and 'harass the management'. It was found to be abuse of fiduciary discre tionary power of the Directors when they wanted to safeguard the Directors personal interest against McRobert. The first reason of the appeliant company for the refusal of re gistration of transfer of the shares was that Firodia acted in a treacherous fashion against the interest of the company and behind the back of the Board of Directors. The evidence is that the Managing Agents of the Bajaj group in the year 1965 failed to obtain from the Government approval of an extension of term for 10 years. The Government sanctioned the term for about three years which was to expire on 31 March, 1968. In the month of August, 1967 when Kamalnayan Bajaj of the Bajaj group pro posed an extension of the term of the Managing Agents Firodia represented to the Board that Firodia was opposed to the same. No application for extension of the term of Managing Agents was made at that time. The appellant however behind the back of Firodia wrote to the Company Law Board in the month of Decem ber, 1967 and though Firodia was the Chief Executive the letter was signed by the Secretary and kept conceale-0 from Firodia. ·Firodia came to know of the letter, in the month of March, 1968 and he wrote to the Company Law Board that the company had made "false statement" in the application for extension of the term, namely, that the appellant company gave a wrong impression that it had received p_ermission to increase its production to 60,000 scooters per year whereas in fact no such permission had been granted. Firodia also pointed out that the appellant suggested that its progress was because of the Bajaj group and made no reference to Firodia who was the Chief Executive of the appellant. In 1965 the appellant asked for appointment of the Managing Agents for ten years. The Company Law Board approved of the appointment upto 31 March, 1968. It is true that there was a resolution of the appellant company in the year 1965 for the ap pointment of the Managing Ag~nts for a period of ten years. That resolution of 1965 after the appointment of the Managing Agents for a term of less than three years and, in particular, after an agree ment had been entered into bt:tween the appellant company on the one hand and the Managing Agents on the other in that behalf. was exhausted, and spent its force and could not be said to have either a life of its own for 10 years or to spring into actiOn in the year 1968 for a mival of the resolution to enable the appellant compmy to ask for appointment of Managing Agents for a period of 1even years on the basis of any resolution. Firodia rightly 52 SUPREME COURT REPORTS [1971] 2 S.C.R. protested against the absence of any resolution of the shareholders A and ~o against the absence of any publication of proposal for appomtment of Managing Agents for seven years, Firoclia further more rightly cavilled against the total obscuration of his name or of any reference to his activities in relation to the affairs of the company and the contrary suggestion in the letter that the pros perity of the appellant company was an account of Kamalnayan B Bajaj. This aspect is important to show that the allegations of Firoclia were against the Managing Agents and further that Firodia .was acting in the larger interest of the company whereas the Managing Agents were actuated by their personal motives ,-Of pre servation and aggrandisement of their power. The letter written by the appellant to the Company Law Board was not circulated c to thi> shareholders. Firodia came to know about the letter and that is why he informed the Company Law Board of the state of affairs. On this evidence it is apparent that Firoclia wrote to the Com pany Law Board in the larger interest of the company. Firocli~'s allegations were against the Managing Agents. Firoclia was justi fied in opposing re-appointment of the Managing Agents without a specific resolution of the shareholders of the company and with- out a public notice to the shareholders to represent their views in the matter. The Bajaj group acted behind the back of Firodia and wanted to steal a march. The real motive of the Bajaj group .was revealed first by imposing restrictions in the month of March, 1968 on the powers of Firodia as Chief Executive of the appellant' company and secondly by the resolution in the month of May, 1968 to terminate the services of Firodia as Chief Executive. The refusal to register the transfers was at the meetings of the Board held in the months of May and June, 1968. The Directors had a hostile feeling against Firoclia and they had the dominant desir~ to keep Firodia out of the company. The Directors did not act in the interest of the company and their dis., cretion ·was tainted by unfair conduct and unjustifiable attitude against Firodia. The second reason given by the appellant company was that the Firoclia group acquired the shares with a design . of acquiring interest in the company which was likely to result in a threat to the smooth functioning of the management of the company and to vote down the passing of the special resolution. There are well recognised safeguards as to notice and content for passing special resolution. Special resolutions are for limited purposes and are not matters of daily occurrence or of daily routine administration. The mere apprehension that special resolutions will not be passed is not a legitimate reason. The shareholders will bestow their D E F. G H ' A B c D BAJAJ AUTO V, N, K. FlllODIA (Ray, J.) 53 intention on matters forming the subject matter of resolution. Passing of special resolutions will depend upon the mandate of the shareholders. It is manifest that the reason given by the Direc tors was a camouflage to cover their collateral and corrupt motive of preserving the hegemony of the Bajaj group. 'The motive is corrupt because the Bajaj group acted for their p:rsonal interest and not in the bonafide general interest of the company. The third reason given by the appellant company was that the shares were being acquired by the Firodia group not with a view of bonafide investment but with a malafide purpose and evil design of obstructing the business of the appellant company. Acquisi tion or transfer of shares under the Articles of the present case does not suffer from any restrictive impediment like pre-emption or personal objections to the transferees. There is no evidence that the transferees belonged to a rival concern. Equally, there is no evidence that the Firodia group ever obstructed in the manage ment of the company. On the contrary, the Firodia group advanc ed large sums of money. Firodia was largely responsible for the gradual growth of the appellant company and for the prosperity It was therefore an abuse of the fiduciary power of the company. of the Directors to refuse to register transfer of shares. The Bajaj · group obtained transfer of 16230 shares in their favour in the month of Marci), 1968. The Bajaj group purchased shares in the market at a maximum value of Rs. 411 per share. The holding of the Bajaj group prior to the acquisition of the said 16230 shares was 28600 shares or according to the Bajaj group 31,500 shares. The Firodia group on the other hand prior to the pro posed transfer had 23,400 shares or 21,735 shares according to the Bajaj group. The general public held 52,250 shares. Thjs was the position in the month of February, 1968. The Bajaj group by the acquisition of 16230 shares would have a numerical strength of 44830 shares whereas the Firodia group would be hav ing 26863 shares if the proposed transfers were allowed by the Directors. The Bajaj group paid Rs. 411 per share. The Firodia group paid roughly about Rs. 200 per share. Firodia.was not on the Board of Directors of the appellant company. The Bajaj group In the year 1967 the Firodia and their friends were the Directors. group lodged 4243 shares for transfer in their names and the trans fers were registered. Again, in the month of February, 1968 when the Firodia group lodged 68 shares with the appellant company for transfer, the appellant company accepted the said transfer. It is, therefore, revealed that after the appellant came to know that Firodia wrote to the Company Law Board in the month of March, 1968 that the Directors of the appellant company developed anti pathy against Firodia. The refusal to register the shares was a sequel to the termination of the appointment of Firodia as Chief E F G H • 54 SUPREME COURT REPORTS (1971] 2 S.C.R. Executive and it is manifest that the Directors acted for collateral reasons and in their own interest. Counsel on behalf of the appellant contended that of the seven Directors only ·Kamalayan Bajaj belonged to the Bajaj family and each Director was an independent industrialist and could not be described to be of Bajaj_ group. Neither the status and wealth of the Directors nor their lack of relationship with the Bajaj family could be decisive as to whether they exercised their discretion on correct principle or without any corrupt motive. The Firodia group alleged that Kamalnayan Bajaj was an arbitrator in the family dispute of Ramnath A. Podar and that Shriyans Prasad Jain was a close associate of Kamalnayan Bajaj. Irrespective of these allegations, we have already indicated that the Directors failed to exercise their discretion properly by refusing to register transfer of shares on wrong principles and for corrupt and oblique motives. The discretion of the Directors is to be tested as the opinion of fair and sensible men in the interest of the company. In the present case, the Directors did not act bonalide nor did they act in the general interest of the company. On the contrary, acted upon a wrong principle and for the oblique motive of s-queez ing out Firodia. The inescapable conclusion is that the Directors acted arbitrarily and unjustifiably. A B c D Fer these reasons we are of opinion that the appeals fail. They are dismissed with costs. The respondents will be allowed one set of hearing fees. E R.K.P.S. Appeals dismissed. \