Case: Bajaj Auto Ltd Vs. N. K. Firodia &amp; Anr. Etc

1. These appeals are by special leave against the order dated 14th March, 1970 made by the Company Law Board, Department of Company Affairs, Ministry of Industrial Development, Internal Trade and Company Affairs, New Delhi under Section 111 (3) ofthe Companies Act, 1956 directing the appellant company to register transfer of 3643 shares forming the subject matter of these appeals.2. The respondents in these appeals are Jaya Hind Industries Ltd., N K. Firodia and other persons who will be referred to as the Firodia group. The appellant will be referred to as the Bajaj group.3. The Firodia group lodged in different lots 3643 shares of the appellan1 for being transferred to different names Jaya Hind 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, 1968.4. Thereafter, in the month of August, 1968, 338 appeals were filed before the Company Law Board in respect of refusal of the appellant to transfer 3643 shares. The Company Law Board by its letter dated 16th January, 1969 asked the appellant to disclose the reasons for refusal to register transfer of shares. The appellant company 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 extent of 1/4th share in the Managing Agency remuneration receivable by Jamnalal Sons Private Ltd., from Bajaj Auto Ltd., and yet N. K Firodia chose to write to the Company Law Board against the extension of the Managing Agency of Jamnalal Sons Private, Ltd. The company further said that N. K. Firodia, according to the appellant company was their representatives 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 Firodias design was to create mischief. Secondly, the transfer of shares received from Jaya Hind Industries Private Ltd., was part of the design to acquire 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 a special resolution required for the management of the company, and, therefore, transfer should not be permitted. Thirdly, the purchase of shares by Jaya Hind Industries Private Ltd., was not with a view to bona fide investment but was with a male 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 21,500 shares. Transferring further shares to the names of Firodia group would obstruct the business of the appellant company 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 try to take control and/or obstruct the business and smooth working of the company and to injure the existing management. The appellant company concluded by saying that the Board of Directors came to the conclusion that it was in the interest of the company to refuse the said transfers.5. In order to appreciate whether the Directors used the discretion in proper exercise of their fiduciary power and the reasons were hone fide and legitimate in the interest of the company as a whole, it is necessary to refer to certain features of the case.6. In the year 1947 a joint venture business was entered into between Jaya Hind Industries Ltd., and Bachhraj Trading Corporation Ltd. In the month of March,1950, Bachhraj Trading Corporation suffered heavy losses and the joint venture was transferred to Bajaj Factories Ltd., with the consent of Jaya Hind Industries Ltd.7. In the year 1952 N. K. Firodia became a Director of Bachhraj Trading Corporation Ltd. In the month of April 1954, Jaya Hind Industries Ltd., acquired 1800 shares of the face value of Rs. 1,80,000 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 business of the joint venture from Bajaj Factories Ltd. In the year 1955 N. K. Firodia as a Director of Bachhraj Trading Corporation Ltd., applied to the Central Government for the manufacturing licence of scooters auto rickshaws and tempo three wheeler vehicles. In the year l 957 Bachhraj Trading Corporation Ltd. was granted the manufacturing licence of tempo three wheelers. In l958 Bajaj Tempo Private Ltd. was formed to manufacture tempo three wheeler vehicles and N. K Firodia was appointed the Managing Director of the same. In the year 1959 Bachhraj Trading Corporation Ltd. was granted licence to manufacture scooters and auto rickshaws. In the year 1960 the name of Bachhraj Trading Corporation Ltd. was changed to Bajaj Auto Private Ltd. Shares of Bajaj Auto Private Ltd. were offered to shareholders of Bachhraj Trading Corporation in proportion to their shareholding.8. Between the years 1954 and 1960, Java Hind Industries Private Ltd. of the Firodia group had provided substantial funds amounting to Rs. 4,36,000 to the appellant company in its former name. In the year 1960 there was a Managing Agency agreement between the appellant company and Jamnalal 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, their shareholders and friends subscribed for 371/2 per cent 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 Ltd., on 15th August, l960, by which the Managing Agents agreed to pay 25 per cent of the remuneration of the Managing Agency to the respondent company in consideration of services rendered to the appellant company. Gradually, the appellant company grew into a prosperous and very well developed automobile unit. Land was acquired buildings were constructed and machinery and equipment worth more than a crore of rupees was purchased and installed. The manufacturing activity of the appellant company made good progress and 90 per cent of the components of scooters and auto rickshaws were capable of being manufactured indigenously.9. 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 reappointment 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.10. 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 company group opposed any such extension. In the month of December 1967, the appellant applied to the Company Law Board for extension of the term of Managing Agency of Jamnalal Sons Private Ltd., for a period of 7 years so that the Managing Agents would have a term of 10 years commencing 16 August, 1965. The letter of the appellant 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 provisions contained in Sections 326 and 640B ofthe 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, 1970.11. The appellant 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 months of February and March, 1967 the capital of the appellant company was increased by issue of right shares. By the end of February, 1968 out of the issued share capital of 1,04,250 shares the Bajaj group held about 58,600 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 31,500 shares and the Firodia group had 21,735 shares. In the month of March, 1968 the 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 from the Life insurance Corporation Ltd., and the Unit Trust of India. The Bajaj group obtained transfer of the said 16,230 shares in their names. The Firodia group, on the other hand, from the month of April, 1968 onwards lodged in different lots 3643 shares of the appellant company for being transferred to their names. The Board declined to register any transfer in respect of the said 3643 shares.12. It is also necessary to know about the antecedents and activities 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 the year 1950 Firodia 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 submitted a scheme for the manufacture of scooters and auto rickshaws and obtained a licence for Bachhraj Trading Corporation Ltd., in that behalf. The Firodia group acquired shares of the face value of Rs. 1,80,000 in Bachhraj Trading Corporation in the year 1954 and helped its rehabilitation after it suffered heavy losses. The Firodia group provided funds to the extent of Rs. 4,36,000 to the Bajaj group during the years 1954 and 1960. When the appellant company became a public limited company in the year 1960 the Firodia group subscribed for 371/2 per cent of the shares and assisted in procuring subscription to the shares offered to the public. Jamnalal Sons Private Ltd., the Managing Agents of the appellant agreed to pay 25 per cent of their remuneration of the Managing Agency to the respondent company of the Firodia group in consideration of the services rendered.13. Article 52 of the appellant company provided that the Directors might at their absolute and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper 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 fiduciary position both towards the company and towards every shareholder. The Directors are therefore required to act bona fide and not arbitrarily and not for any collateral motive.14. If the Articles permit the Directors to decline to register transfer 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 Directors 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 consider whether they were legitimate and whether the Directors proceeded on a right or wrong principle. As a result of the introduction of Sec. 111 (5-A) inthe Companies Act, 1956 two consequences follow. First, if the Articles permit the Directors not to disclose reasons for declining to register a transfer the statute confers power to interrogate the Directors and disclose the reasons. Secondly, if the Directors 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.

Court's reasoning:
In the present appeals, the reasons of the Directors have to be tested from three points 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 collateralpurpose.This Court in M/s. Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala, (1962) 2 SCR 339   = (AIR 1961 SC 1669  ) said that"the discretion of the Directors would be nullified if it were established that the Directors acted oppressively, capriciously or corruptly or in some other way male fide".On this evidence it is apparent that Firodia wrote to the Company Law Board in the larger interest of the company. Firodias allegations were against the Managing Agents. Firodia was justified in opposing reappointment of the Managing Agents without a specific resolution of the share-holders of the company and without 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, 1968.29. The Directors had a hostile feeling against Firodia and they had the dominant desire to keep Firodia out of the company. The Directors did not act in the interest of the company and their discretion was tainted by unfair conduct and unjustifiable attitude against Firodia.30. The second reason given by the appellant company was that the Firodia 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 a special resolution will not be passed is not a legitimate reason. The shareholders will bestow their 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 Directors 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 personal interest and not in the bona fide general interest of the company.31. The third reason given by the appellant company was that the shares were being acquired by the Firodia group not with a view of bona fide investment but with a male fide purpose and evil design of obstructing the business of the appellant company. Acquisition or transfer of shares under the Articles in the present case does not suffer from any restrictive impediment like preemption 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 management of the company. On the contrary, the Firodia group advanced large sums of money. Firodia was largely responsible for the gradual growth of the appellant company and for the prosperity of the company. It was therefore an abuse of the fiduciary power of the Directors to refuse to register transfer of shares.Counsel on behalf of the appellant contended that of the seven Directors only Kamalnayan 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 bona fide nor did they act in the general interest of the company. On the contrary, they acted upon a wrong principle and for the oblique motive of squeezing out Firodia The inescapable conclusion is that the Directors acted arbitrarily and unjustifiably.