Case: Nanavati and Company Private Limited Vs. R.C. Dutt and Others

is direct demand with the manufacturers, it is possible that nothing or very little will be sold through the sole selling agent. In my case it will lead to conflict and litigation on the appropriate construction of this clause in juxtaposition to the other clauses which survive as a part of the contract. In that context we must think that, prima facie, the new clause reduces the sole selling agent to the position of a mere agent who may sell the goods as and when received from the manufacturers who are otherwise entitled to sell directly to various customers. Is it the intention of section 294 (5) to so amend the contract as neither to retain the appellant-company as a sole selling agent not the abolish the contract altogether What is done is a third thing altogether, viz. , the sole selling agent is reduced to the position of an ordinary agent. We do not think that the scheme of this section permits the mutilation of the contract in such manner as to change the character of the agency. The terms and conditions may be varied in such a manner as to make them no longer prejudicial to the company, but what is to be retained is a sole selling agency. That will be apparent from the provisions of clause (d) of section 294 (5) which says that from the date of the varied order the appointment of the sole selling agent shall be regulated with the terms and conditions varied by the Company Law Board. In terms, therefore, the sole selling agent has to remain a sole selling agent and there seems to be no objection to vary certain terms of the contract but his relationship with the company has to be regulated by the terms amended by the company Law Board. A reference to sub-section (6) of section 294 of the Act will also further illustrate the same position. Under sub-clause (a) of sub-section (6) where a company has more selling agents that one (by whatever name called) in any area or areas and it appears to the company Law Board that there is good reason so to do, they are entitled to call for information about the terms and conditions of appointment of various agents for the purpose of determining whether any of those selling agents should be declared as sole selling agent for that area. Clause (b) is similar to clause (b) of sub-section (5). Clause (c) of section 6 authorises the Central government to read the information supplied by the company having regard to the terms and conditions of appointment of any of selling agents and to other relevant features, and to declare that a particular selling agent be the sole agent of the company. The position, therefore is that under sub-section (5) a sole selling agent whose terms and conditions of appointment are prejudicial to the interest of the company, authority is given to change, amend or vary the terms and conditions in such a manner as to retain the sole selling agent with the terms and conditions in such a manner as to retain the sole selling agent with the terms and conditions which are no longer prejudicial to the interest of the company. In another case where there is in fact a sole selling agent but he is not so designated, but an appearance is put up that there are many agents of the company, power is again given to the Central Government to investigate into their position and declare a particular agent as a sole selling agent. The scheme, therefore, seems to be that where the sole selling agent is considered necessary for a company, the terms and conditions must be such as are not prejudicial to the company; otherwise those terms and conditions are liable to be interfered with by retaining the character of the sole selling agent as such. It is, therefore, clear that, in passing the present order and substituting with the new clause (12), the company Law Board has acted beyond the powers vested in it under sub-section (5) of section 294 of the Act. (71) FOR the purpose of this appeal we are not called upon to decide whether under sub-section (5) the Company Law Board could in fact terminate or cancel the appointment of a sole selling agent. That power may be assumed for the time being. However, in view of the compulsion on the sole selling agent to continue to function as such, and in view of the provisions of sub-section (4), we are of the view that transformation of a sole selling agent into just an ordinary agent is beyond the scope of section 294, sub-section (5) (c). (72) ANOTHER aspect of the question will be that the appellant-company was never made aware, apart from the consequences which can flow under section 294 (5) under which the appellant-company would be compelled to act as an ordinary agent and would cease to be the sole selling agent. For effecting such a change the proposed clause in the show-cause notice does not give enough notice to the party, who is being affected thereby. Consequently, no discussion was possible in the personal hearing on this subject. There is, therefore, another breach of the observance of the principles of natural justice in this case by taking action which was never brought to the notice of the party affected and without an opportunity to make representation and without giving hearing to that party on that subject. At this stage we might also make it clear that clause (12) appears to be an independent and severable clause and if we had not found any other defect in the order, it would have been possible to merely cancel or quash this clause, without interfering with the rest of the order passed by the Company Law Board. However, as we find that there are other grounds on which the order is defective we are inclined to quash it as a whole.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds](17) HAVING heard the learned counsel on both the sides, we are not much impressed by the argument that the provisions of section 294 (5) of the Act are violative of the principles of article 14 of the Constitution. It was argued that the provisions of section 294 (5) are discriminatory and permit the Company Law Board to pick and choose some of the parties who may be having sole selling agency contracts to the exclusion of others who may be similarly circumstances. So far as the sole selling agency contracts are concerned, it was stated that it was a common type of contract which many companies may be having for selling their goods. There is no provision for making the Company Law Board aware of the various contracts which many companies may be having. There is also no provision by which contracts are required to be registered somewhere nor any provisions are to be found for the appointment of the officer who will examine such contracts and bring to the notice of the Company Law Board that the terms thereof appear to be prejudicial to the interest of the company. The expression prejudicial used in the section is also vague and does not convey any specific meaning. On the fact of it, therefore, an element of artificiality is prevalent in all these provisions and there does not seem to be any classification which can be justified on a rational ground. There are also not safeguards or guiding principles which are required to be observed by the Company Law Board before a decision is taken. According to Shri Bhat, this being prima facie al enquiry as it affects the contractual rights of the sole selling agent, the section indicates no settled norms which ought to be observed by the Company Law Board before it makes up its mind to pass a certain order. He points out that under the earlier part of section 294, a sole selling agent can be appointed by the company, but unless the appointment is approved in the first general body meeting held after the date on which the appointment is made, the appointment ceases to be valid. This is the effect of the provisions ofs (2) and (2a) of section 294 of the Act. It is, therefore, obvious that a solemn commercial contract has been entered into by the two willing parties which has been ratified by the general body of the shareholdersThe provisions being so uncertain would serve as a handle in the hands of unscrupulous companies to take the help of a sole selling agent for a time when it suits them and to avoid the contract by applying to the Company Law Board when the circumstances change and the help of a sole selling agent is no more needed. The principles on which such a challenge to the constitutionality of a provision can be considered have been laid down in various judgments of the Supreme Court and they seem to be now almost settledIn that case the state Government was given the right under section 5 (1) of the West Bengal Special Courts Act (X of 1950) to transfer any particular case relating to any offence alleged to have been committed by any accused to a special court for being tried. According to the procedure of that act, in cases where the State Government was of the opinion that it was necessary in the interest of speedy trial so to do, it could transfer any case under any offence to the special court. The provisions of section 5 (1) have been struck down as ultra vires and offending the provisions of article 14 of the Constitution. If the provisions of the West Bengal Special Courts Act are taken into account and the approach of the Supreme Court is considered in that behalf, we think that this judgment would be of no assistance to the present. In that case the only broad guideline to the State Government was to pick and choose any case relating to any offence and alleged to have been committed by any accused on the sole test of speedy justice. Speedier trial could be, in the circumstances, reason and motive for the legislation, but could not amount either to a classification of offences or cases. The necessity of speedier trial was considered too vague, uncertain and elusive criterion to form the basis of a valid and reasonable classification. The Act chose to bestow upon the State Government unrestrained power to select any case or offence for trial before a special tribunal and thereby withdraw the normal protection an accused has under the ordinary procedural law. This was considered highly discriminatory and it was further pointed out that not only a law but even a rule fell within the purview of the challenge under article 14 of the Constitution. We are not in a position to draw any analogy with the provisions considered by the Supreme Court and the provisions which are before us for our consideration. The challenge in that case succeeded because the Supreme Court held that there was no classification in the real sense of the term as it was not based on any characteristics which were peculiar to persons or to cases which were to be subjected to the special procedure prescribed by the Act(24) IN the light of these principles if the provisions of section 294 (5) are examined, we find that it is difficult to sustain the challenge under article 14 of the Constitution of India. The provisions ofsubsection (5) of section 294of the Act are obviously conceived of to eradicate one of the evilsn to the legislature. The principle on which this provisions has been enacted can be well imagined. There may be certain products manufactured by the companies which are in such great demand and which are in such short supply that selling of these articles poses no problem whatsoever. It is possible to imagine that in such a case needy customers would be knocking at the doors of the company to supply the goods. An average shareholder is neither vigilant nor well informed of all the prevailing conditions of the market. It may be that the shareholders on the basis of the information given to them agree to the sanction and approval of the appointment of a sole selling agent on certain terms and conditions. It may be that it was later on realised that there was hardly any need for the appointment of a sold selling agent or at any rate it was not necessary to appoint any on such liberal terms as to commission and other payments which are incorporated in the contract. The contract itself as a whole or certain terms thereof might be considered prejudicial to the interests of the company. This would depend on a variety of circumstances present and a high powered body like the Company Law Board may be in a position to discover which contracts appear to be prejudicial to the interests of the company and which do not. It may be noted that section 294 deals only with the sole selling agents and not with ordinary agents and dealers ors that may be appointed from time to time and whose terms and conditions could also be varied from time to time. The sole selling agent is recognised as a necessary institution but the terms and conditions on which advantage of that organisation could be taken must not be prejudicial to the interests of the company. Here is therefore the first distinguishable feature which becomes apparent of the face of the record, viz. , that the class of companies which are conceived of are those companies who have sold selling agents and whose terms and conditions of appointment are prejudicial to the interests of the company. This appears to us as a well defined class and should be understood as a classification to the exclusion of other companies, who do not either sole selling agents at all or whose terms of appointment are not prejudicial to the interests of the company. There is, therefore, a well recognised classification to be reckoned under section 294 (5)(25) THEN again we find that the guidelines are to be found within the provisions of clause (c) ofsubsection (5) of section 294of the Act. It is not every contract that is open for variation by the company Law Board, but unless a contract is found to be prejudicial, the Company Law Board does not seem to have any right or authority to interfere with the agreements of sole selling agents. A finding to be arrived at by the Company Law Board that a certain contract of a sole selling agent is prejudicial to the interests of the company is the very foundation of the jurisdiction of the Company Law Board. Whether a particular agreement of a sole selling agent could be described as prejudicial or not prejudicial would always depend upon the facts and circumstances of the case and various attending circumstances. The expression seems to be difficult to define but it is quite capable of being understood as providing a rational guideline for taking a decision on the facts and circumstances of the case. A selling agency and its utility as well as necessity are mattersn to the commercial world and the implications thereof could be easily deciphered by experienced persons. The question does not pose either complicated investigation or a position of any complex type. The simplest case that could be conceived of is where a commodity is in so short supply that before it is manufactured and comes out of the factory there are orders standing from buyers and the company finds if difficult to meet the pending orders. Throwing away sizable commission or rebate in favour of a sole selling agent in a case of this type might be at once styled as highly prejudicial to the interests of the company. There may be other cases where there is reasonable possibility of marketing a product but there is fair amount of competition. It isn that a large section of consumers usually accept goods which are generally available and are brought to their doors by canvassing by competent and able salesmen. In the circumstances mentioned in the second instance a competent and able sales organisation would be a welcome help and giving them enough rebate so that they would push their sales better would be conducive to the interests of the company and not at all prejudicial(26) WE are not attempting to analyse the entire market conditions which would suggest when a prejudice is caused and when it is not by the appointment of a sole selling agent. This discussion is aimed at only pointing out that though the section has used only one expression, viz. , the contract becoming prejudicial, it is still capable of providing a rational guideline for the exercise of the power by the Company Law Board. Even after reading the provisions of clause (d) ofsubsection (5) of section 294(29) LARGE number of cases were cited before us on either side to convince us that this would be eitherl or administrative function of the Company Law Board. The learned single judge has not decided this question but has proceeded on the assumption that the inquiry may be assumed to be. He, however, felt and in view of the case law then available rightly, whether an action is administrative or, it is enough if principles of natural justice are followed and full and proper hearing is given to a party. With that approach the facts of this case were examined and, as we pointed out earlier, a conclusion was reached that adequate and sufficient hearing was given to the appellant company in compliance of the observance of the principles of natural justice. However, there has been of late further thinking on the subject and it is no more a matter of doubt that whether an administrative or judicial action, it must always be preceded with the observance of the principles of natural justice. Apart from that, the dividing line between an administrative power and al power is quite thin and is being gradually obliterated as pointed out by the Supreme Court in A. K. Kraipak v. Union of India. For determining whether a power is an administrative power or al power one has to look to the nature of the power conferred, the person or persons on whom it is conferred, the framework of the law conferring that power, the consequences ensuing from the exercise of that power and the manner in which that power is expected to be exercised. That in a welfare State like India which is regulated and controlled by the rule of law it is inevitable that the jurisdiction of the administrative bodies is increasing at a repaid rate. However, if it is expected that the rule of law should not lose its vitality, the authorities and bodies which are being created, whether administrative or, should all discharge their functions in a fair and just manner(31) WE will at once point out that when an attempt was made to raise certain grounds conducive to the development of this point, it was opposed by Mr. Joshi on behalf of the respondents. After hearing the counsel on both the sides, we are rejecting that objection. Mr. Joshis objection on behalf of respondents Nos. 1 to 4 is that the petition pleads that the impugned order isl in its nature. There is no pleading that the order is bad because it does not incorporate reasons therein. This is aground which should not be allowed to be taken by adding to the pleading. So far as the technicality of amendment of the petition is concerned, we are now rejecting the application. While indicating our mind during arguments it was equally made clear at the Bar that even apart from the amendment of pleadings if, on the basis of the case law and on the facts and circumstances as they exist, it is possible for the appellant company to raise that challenge by way of a pure question of law, it would be permitted to be argued. In fact an argument has been raised before us on these lines and we are called upon to consider whether the impugned order could be declared as void simply because it does not contain any reasons therefor. Such a conclusion could be possible only if it is held that it is al order and further nothing beyond the order is expected to be examined by the courts(33) WE need not probe this point any further. The reason will become apparent in the further part of our judgment. However, since Mr. Bhat wanted to argue that the absence of a speaking order is fatal in al proceedings he brought to our notice the above judgments. Before such an argument was to be made there was an obstacle in his way that this was not specifically pleaded in the petition. We find that there is good authority not only in the cases falling under the Civil Procedure Code, section 100, but also in appeals arising out of writ matters that the high Courts and the Supreme Court have permitted arguments on pure questions of law when no new facts need be pleaded or proved. In other words, if what is pleaded itself leads to the raising of a question of law, it is not the requirement of the pleading that the law should be pleaded. For instance, in the case of Bhagat Ram Patanga v. State of Punjab, the matter reached the Supreme Court after a Full Bench of five judges of the Punjab and Haryana High court answered the reference made to it. It appears that in this case the matter commenced before a single judge. The matter then went in appeal to a Division Bench which referred certain points to a Full Bench. All the three judges of the Full Bench in turn again referred those points to a further larger Bench of five judges. At the appeal, for the first time, the appellant raised a contention that the proceedings initiated against him are(34) THE facts before us clearly show that the order in question is being pointed out in the petitions al order. If that is a point of dispute, the further argument relating to the necessity of incorporating reasons in the order now affords a point of law from the subsequent judgments of the Supreme Court. These judgments were not available to the parties at the time when the petition was presented or when it was argued before the learned single judge. We do not think that the raising of this point should be prevented on the technical plea that want of reasons has not been specifically pleaded in the petition(35) BEFORE we again go to some of the cases on which reliance is placed for pointing out that the proceedings under section 294 (5) arel proceedings it would be appropriate to point out the broad distinction betweenl order and an administrative order. In Radeshyam kharev. State of Madhya Pradesh, the Supreme Court observed that there seem to be three requisites in order that the act of a body may be said to bel act, viz. , that the body of persons, (1) must have legal authority, (2) to determine questions affecting the rights of parties, and (3) must have the duty to act judicially. It is the third condition which really distinguishes an administrative order from one which is. Even for an administrative order the body of persons must be invested with powers and sometimes an administrative order can have much more for reaching effects than thel orders. Affecting the civil rights of persons can be a common feature of orders administrative as well as. Where there is a duty cast under the Act to act judicially the order would tend to be. The his not to suggest that it is only in the case ofl matters that there is a need to act in a fair and just manner. Approach on the basis of observance of principles of natural justice is common to both. That being a necessary approach for the just decision of a controversial point whether the administrative tribunal or theIt is now well settled that the need to act judicially could be seen from the express provisions of the Act itself or could be inferred from the implied provisions as also from the nature of the power, the nature of the body of persons who are invested with it and consequences that must follow from the exercise thereof, etc. In other words, if there is an imperative need to act judicially, from the necessary implication and from the provisions and the attending circumstances, the functions to be performed would have to be held. In a case falling under section 294 (5) the information, as we pointed out earlier, is of a very limited type and no particular kind of investigation or inquiry with evidence, etc. , seems to be necessary. Immediately thereafterbut in view of the principles which the courts have developedafter hearing the party affected, an opinion is permitted to be formed. In a process of this type conceived of by clause (c) under consideration, it is difficult to read that there is either express or implied provision for acting judicially. No elaborate investigation is called for nor seems to be necessary. However, the Board must hear those who are going to be affected and that hearing would be in the observance of the principles of natural justice. We may here point out that the principles of natural justice are not codified law but ared rules which are developed by the courts from time to time. The Supreme Court has pointed out in A. K. Kraipaks case that the concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules, viz. , (1)no one shall be a judge in his own case (nemo debt esse judex propria cause), and (2) no decision shall be given against a party without affording him a reasonable hearing (audit alteram partem). Very soon, thereafter, a third rule was envisaged and that is that(38) IN this limited sense a just decision by observance of certain rules of code of conduct is not to be confused with the requirement of a law to act judicially. Unless that is writ large either expressly or by necessary implication by the provisions of law, it may not be possible to infer that the inquiry contemplated is. Looked at from that point of view and looking to the purpose and function ofsubsection (5) of section 294we find it difficult to persuade ourselves that the enquiry that the Company Law Board must make before forming the opinion could be described as al one. On the material already collected as per clause (a) or (b) and after hearing the parties on that material, the Company Law Board has to form an honest and unbaised opinion and if that opinion really is that the existing terms and conditions of the sole selling agent are prejudicial to the interest of the company, it has at once to take a step which will bring about a condition contemplated by the last portion of clause (c) ofsubsection (5) of section 294In both these cases the provisions of the company law which was under consideration was section 237 of the Act. We do not think that either of the cases can be usefully considered for the interpretation of section 294 (5) of the Act for the simple reason that there is one distinct feature in the section under consideration which was absent in section 237. Section 237 of the Act deals with the investigation of the companys affairs in certain cases. The final result of the investigation, whatever that be, does not seem to bind any one nor does in affect the rights of any party. If at all any action is contemplated, civil, or criminal, as a result of the investigation conducted under section 237, the matter has to be taken to a court of law. However, section 294 (5) of the Act directly affects the civil rights of a sole selling agent like they and we do not think, therefore, that the conclusions of the Supreme Court that the orders under section 237 of the Act are administrative in character can have any relevance while discussing the provisions of section 294 (5)That was a judgment under section 326 if the Act relating to the approval of the Central Government to the appointment, etc. , of the managing agents under certain circumstances. These provisions were construed by the Supreme Court and their Lordships held that the enquiry under that section is. The reasons seem to be obvious. A plain look at the provisions of section 326 will show that the Central Government is called upon to accord its approval to the appointment or reappointment of the managing agent only if the conditions mentioned in clauses (a), (b) and (c), of(2) of section 326 existed. Out of these clauses, particularly clause (b) of(2) requires the Central government to form its opinion as to whether the managing agent proposed is a fit and proper person to be appointed or reappointed and that the conditions which are proposed are fair and reasonable. It is clear that the suitability of a person to be appointed as a managing agent, would depend upon the consideration of all the material that may be available about the person concerned. That person will have a right to lead evidence and disprove certain allegations which are being otherwise made against him. If he is made aware of the facts which are against him and that seems to be necessary in any fair enquiry, he will lead evidence to disprove what is being alleged against him, or he might point out the circumstances under which these events occurred and the need to appreciate them in the correct perspective. There is, therefore, no doubt on the face of it that the section calls for a judicial disposal of the dispute. It may be that the enquiry is by the Company Law Board and the only party is the person whose status to be appointed as a managing agent is under enquiry. We do not think that the provisions of section 326 could be said to be comparable to the provisions of section 294. It is stated at the Bar that except for this litigation there has been no occasion to consider the provisions of section 294. As we find that neither section 326 nor section 237 of the Act was comparable to the provisions of section 294 (5), we must decide the question raised before us by looking at the section, its implication and the real import of the provision in the light of the broad principles which are well establishedThe learned trial judge has come to the conclusion that they somehow appears to have obtained all the material on which the Company Law Board acted. The learned judge does admit that a part of the material, which was in fact important portion of the material, was not made available by the Company Law Board to the appellant. However, a conclusion has been reached that they has acted in close collaboration with respondent No.y and there is ground to infer that they must have received all the material from respondent no.. So far as the present petition is concerned, it appears that respondents Nos. 1 to 3 have placed on record the material that was available to them(45) OUT of this material two important documents do not seem to have been made available to the. When the Registrar of Companies wrote to respondent No.y on the basis of the complaint of the shareholders, a reply was sent by respondent No.y to the Registrar of Companies. That correspondence was ultimately referred to the Company Law Board. However, neither the letter of the shareholders addressed to the Registrar of Companies nor the reply of the respondent No.y to the registrar of Companies was made available to the appellant either by the Company Law Board or by respondent No.. Shri Bhat points out that the Company Law Board calls for certain information from respondent No., but the full text of that letter was never made available to they by respondent No. 5. They sent only some extracts and on the strength of those extracts they sent a reply to the Company Law Board annexing along with it its auditedt and accounts. Undoubtedly that was a letter under section 294 (5) (a) and even the extract sent to the appellant by the respondent No.y aware that the Company Law Board was making enquiry into the matter under section 294 (5)(48) WE must not forget that thee notice was not an independent document but it had direct relation to the terms and conditions in the original agreement which were sought to be varied under the powers vested in the Company Law Board under section 294 (5). There was one case of sales directly to be made by the manufactures contemplated by clause (12) of the original agreement and even in respect of that sale they was entitled to its 5% rebate. Read in that context the proposal of the Company Law Board, prima facie, shows that in respect of those sales effected under clause (12) the appellant will not be entitled to its rebate. However, while giving the explanation respondent No.y seems to enlarge the basis of the proposal and makes a query whether the proposed amendment is to be understood as a free right of sale tos also with no liability to pay rebate to the, the sole selling agent. This approach suggested in the reply of respondent No.y has ultimately been accepted by the Company Law Board while passing the final order. The, prima facie, is not aware of this suggestion of respondent No.y which is directly against the interest of they and also against the avowed terms of its agreement. While furnishing information to the Company Law Board, respondent No.y in its earlier reply has pointed out that they has already earned a rebate of Rs. 13 lakhs over a period of 3 to 4 years. It has also suggested there that if this rebate was not payable to the(56) THESE are all the circumstances on record so far as the facts are concerned. From the proximity of time when the replies are given and from the fact that the representative of they was present at the personal hearing, we are not in a position to conclude that the appellant and respondent No.y were acting in close collaboration or hand in glove. It may be that they is introduced by respondent No. 5 as sole selling agent and it is normally the management of the company which makes contracts and places them before the general body of the shareholders. However, at a point of time when the Company Law Board was seized of the enquiry it is difficult to say that the interest of they of the management thereof were not in conflict with each other. Those in management of the company are fully aware of the various provisions of the Act and the interference that is possible in the management of the company. If at all, we find that their attitude exhibited in their conduct and return is not to oppose the proposed amendment very seriously not to support them. In on place they point out that the commission agreed is reasonable and they has set out a sales organisation which seems to be necessary. In an earlier reply they pointed out that Rs. 13 lakhs were paid as commission and that amount could have been saved and the companys financial position would have improved. They also suggest that a free hand in sales be given without any rebate to. It is, therefore, difficult for us to see that there was collaboration between the two and that the entire material which was available to the Company Law Board was also made available to they for making a representation. If that is so, then undoubtedly, there has been a failure of the observance of the principles of natural justice because sufficient and adequate opportunity has not been made available to they to present its case. We have also not means to verify what precisely took place at the oral hearing as the pleading do not disclose specifically the points that could have been raised and discussed. We do not have the advantage of being able to examine the notes of the hearing that took place as none of them has been produced along with the affidavit of respondents Nos. 1 to 3. We find in the case of Bhagat ram Patanga v. State of Punjab, the Full Bench of five judges of the High Court of Punjab and haryana had the advantage of examining the entire file of the Government which dealt with the subject and the examination of which satisfied the learned judges that natural justice appeared to have been done. In the absence of similar material before us, judging from the pleadings and the material available to us we are inclined to hold that the main points that must have weighed against the appellant were not specifically brought to the notice of they so as to enable the