Present: 1. Shri S.
Balasubramanian, Vice-Chairman.
2. Shri K.K.Balu, Member.
IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)
AND
IN THE MATTER OF THE M/S AUROFOOD LIMITED HAVING ITS REGISTERED OFFICE
AT NO.2, LAURENT BAZAR STREET, PONDICHERRY - 605010
Central Government through
Department of Company Affairs
PRESENT ON BEHALF OF PARTIES:
1.
Shri M.L. Sharma, Joint Director
(Legal)
Department
of Company Affairs.
... for
Petitioner.
2. Shri T.V.
Padmanabhan, Advocate
... for Respondent.
3. Shri R.
Sargunaraj, Advocate
... for
Respondent.
O R D E R
S.
BALASUBRAMANIAN:
1.
The Central Government has filed this reference under Section 269(7) of the
Companies Act, 1956 (“the Act”) alleging that in the appointment of the joint
Managing Director and whole-time director, M/s Aurofood Limited has failed to obtain the
approval of the Central Government when these appointments were not in accordance with
Part I & II of Schedule XIII of the Act.
2.
According to the Central Government,
the Company had reappointed S/Shri S.M.
Patel, B.M. Patel and M.M. Patel as the Managing Director, Joint Managing Director and
Whole-time Director respectively for a period of five years with effect from 1.10.92 in
terms of resolution of the Board of Directors passed on 27.3.1993. As per this schedule in existence at that time,
the Company should have had adequate net profits during the financial year immediately
preceding the financial year in which the appointment was made and also to have adequate
net profits in any of the three financial years in four financial years immediately
preceding the preceding financial year. However,
in this Company, these conditions were not satisfied and therefore, in terms of Section
269(2), the Central Government approval should have been obtained in regard to the
appointment. Accordingly, this petition has
been filed for an appropriate decision and orders under Section 269(9) of the Act.
3.
In its reply the Company has contended
that Section 269 of the Act are applicable only to public companies or subsidiaries of
public companies having Rs.5 crores as paid-up capital.
Since this company’s paid-up capital was less than Rs.5 crores, provisions of
the Section are not applicable. Further
Section 269(2) is applicable only in case of public company or a private company which is
a subsidiary of a public company. The
respondent company is a private limited company and has become a deemed public company in
terms of Section 43A of the Act and as such it does not come under the purview of Section
269(2). Further the entire shares in the
Company are held by family members and therefore, there are no outside shareholders in the
Company. Moreover, the appointments have been approved by general body meeting held on
30.12.1993 by which time, Schedule XIII had undergone substantial changes and the
appointments were within the provisions of amended Schedule XIII. Accordingly, it has sought for dismissal of
the reference.
4.
Shri T.V. Padmanabhan, Advocate
appearing for the respondent submitted as follows:-
Section 269 has to be read as a whole.
If it is done so then it will be apparent that sub-section (1) makes it compulsory
for appointment of Managing Director in a company, which is a public company or a
subsidiary of a public company, having not less than Rs.5 crores as paid-up capital. Only in those cases, the provisions of
sub-section (2) will be attracted. That is,
the appointment should be in conformity with Schedule XIII or otherwise the approval of
the Central Government should be obtained. Since
in the present case, the Company did not have Rs.5 crores as paid-up capital and the
Company has on its own voluntarily appointed the Managing Director, Joint Managing
Director and a whole-time Director, the provisions of sub-Section (2) of Section 269 are
not attracted. Even otherwise, the provisions
of Section 269 are not applicable to the Company since it is legally a private company,
but deemed as a public company in terms of Section 43A of the Act. On the proposition that both sections have to be
read together and sub-sections cannot be read in isolation, he relied on AIR 1962 SC
1543, AIR 1960 SC 122 and AIR 1960 SC 47. Therefore, he contended that
unless the provisions of Section 269(1) are attracted in respect of a company, sub-section
(2) cannot be independently applied.
He also pointed out that since the appointment had been approved in the
general body on 30.12.1993 as required in terms of Schedule XIII by which time there had
been substantial changes in the provisions of Schedule XIII, there had been no violation
of provisions of Section 269 even if it is deemed that the provisions of these sections
are applicable in the present case.
5.
Taking us through the amendments to
Schedule XIII which came into effect with effect from 15.6.1988, the learned counsel
pointed out that this Schedule has undergone substantial changes/amendments over a period
of time and with each such amendment, there has been substantial liberalisation in the
quantum as well as other conditions of remuneration. By the amendment carried out through
a notification dated 14.7.1993, the remuneration payable has been made substantial and
even the requirement of adequacy of profits has been dispensed with. Thus, on the day when the general body approved
the appointment, it was in accordance with the provisions of the amended Schedule XIII and
therefore the question of seeking the approval of the Central Government did not arise. Accordingly, he sought dismissal of the reference.
6.
The Central Government, through Joint
Director (Legal) has filed a written submission, according to which, the provisions of
Section 269 are applicable to a deemed public company also, in as much as in Needle
Industries case (51 CC 743), the Supreme Court has said that a
deemed public company has to be treated on par with that of a public company and that even
though at the time when the general body approved the appointment, the provisions of
Schedule XIII had been amended yet since the appointment was effected from a date when the
approval of the Central Government was required in terms of the then existing provisions,
the reference is maintainable.
7.
We have considered the matter carefully. The
Central Government reference is as follows:-
“AND WHEREAS in terms of the information furnished by the company (Annexure
III) the company had not earned net profits or had earned inadequate net profits during
the years 1988-89 to 1991-92 as is evident from the table below:
Year
Net Profit u/s 198
Managerial
Percentage of
(Rs. Lakhs)
Remuneration
managerial
remuneration to
net profits
1988-89
50.22
12.82
25.53
1989-90
86.13
11.06
12.84
1990-91
(3.44)
9.93
-
1991-92
17.33
10.22
58.97
AND WHEREAS the company had inadequate net profits during the financial year
immediately preceding the financial year in which the appointment was made and also did
not have adequate net profits in any of the three financial years in the four financial
years immediately preceding the preceding financial year, the company did not satisfy the
condition laid down in clause (f) of para 1 of Part I of Schedule XIII to the Companies
Act, 1956, as applicable on the date of appointment;
AND WHEREAS the company, by making the
aforesaid appointments without obtaining approval of the Central Government has violated
the provisions of sub-section (2) of Section 269 and of Schedule XIII;”
8.
The
complaint of the Central Government is based on the provisions of Schedule XIII, Part I(f)
which at the relevant time read as follows:-
“If the Company had not
suffered loss or had adequate profits during the financial year immediately preceding the
financial year in which the appointment is made (hereinafter referred to as the preceding
financial year) or any of the three financial years in the four financial years
immediately preceding the preceding financial year.”
9.
The appointments impugned in the petition were made effective from 1.10.92, i.e. in
the year 1992-93. According to the reference,
in the preceding financial year, i.e. 1991-92, the Company did not have adequate profit
and that it did not have adequate net profit in any of the four financial years
immediately preceding the preceding financial year. From
the statement of profit referred to in the reference, we find that except in the year
1990-91, when the Company incurred a loss of Rs.3.44 lakhs in other years it had earned
profit. Whether the profits earned by the
Company are adequate or not it is a material one and the Central Government has not
referred to any guidelines or instructions in working out whether the profits earned by
the Company are adequate or not. Since the
entire reference is based on inadequacy of profits and in the absence of any yardstick
determining whether the profit is adequate or not and considering the fact that in the
preceding financial year, i.e., 1991-92, the Company had not suffered loss, we are not
inclined to arrive at a decision that the Company had
acted in contravention of provisions of Section 269(9).
Accordingly, the reference is answered in the negative.
10. Since
the matter has been decided on the basis of the facts in the reference, we are not
considering the various legal submissions made by the learned counsel for the respondents. The reference is accordingly disposed of.
(K.K.
BALU)
(S.
BALASUBRAMANIAN)
Dated this the 31st day of July, 2001