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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  2481 OF 2014

Darius Rutton Kavasmaneck  …Appellant

Versus

Gharda Chemicals Limited & Others …Respondents

J U D G M E N T

Chelameswar, J.

1. The first respondent is a company under the Companies  

Act, 1956 (hereinafter referred to as “the Act”).  Two appellants  

herein who are mother (since deceased) and son respectively  

are minority shareholders holding or otherwise controlling 17  

per cent of the equity in the first respondent company.

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HISTORY OF THE COMPANY

2. First respondent company is carrying on the business of  

“selling  chemical  process,  knowhow  and  of  manufacturing  

dyes, chemicals and textile auxiliaries” etc.    It all started as a  

family firm in the year 1962 known as M/s. Gardha Chemicals  

Industries.  The above-mentioned partnership was created by  

(1) the mother of the first appellant, (2) the husband of the  

first appellant, (3) a sister of the first appellant and the second  

respondent  -  the  brother  of  the  first  appellant.   The  

partnership deed contained a clause that none of the partners  

could sell his/her respective share in the firm without offering  

it first to the other partners.    

3. On  6th March,  1967,  a  private  limited  company  was  

incorporated with the principal object of taking over the assets  

and liabilities of the above-mentioned partnership as a going  

concern.   Article 57 of the Articles of Association contained  

restrictions on the rights of  all  the shareholders to transfer  

their shares.  Any shareholder desiring to sell his shares must  

offer his shares to the other shareholders of the company pro  

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rata to the holding of each of such other members respectively  

at a fair value.1

4. With effect from 17th August, 1988, the first respondent  

company became a public company (under Section 43A (1A) of  

1 57.   Save as aforesaid the following provisions shall apply to the transfer of shares –

(a) A member of the company may transfer a share to his lineal descendent, but save as aforesaid no  share shall be transferred to a person who is not a member of the company so long as any member   is willing to purchase the same at the fair value as hereinafter provided.

(b) The member proposing to transfer any shares (hereinafter called the proposing transferor) shall   give notice  in  writing (hereinafter  called  a  transfer  notice)  to  the  Company that  he  desires  to  transfer the same;

(c) Within the period of seven days from the receipt of a transfer notice as aforesaid the Company   shall offer to each of the existing members of the company respectively such number of the shares  included in the transfer notice as a pro rata or as nearly as may be to the holding of each member   respectively on the footing that if he desires to purchase any or all of such members of the said  shares at the fair value he shall within fifteen days of the offer be entitled to apply for the purchase   and transfer of the same and the company shall be bound, upon payment to the transferor of the fair  value of such shares, to transfer the shares of member applying;

(d) In case any member or members shall not have applied for the purchase and transfer of any or all   of the shares to which he is entitled, the company shall within seven days of the date at which the  offer closed, offer the untaken shares to such of the members as have applied for the purchase and  transfer of all the shares to which they were entitled by the terms of the original offer in proportion   as the holding of each of such members bears to the total number of shares held by them and they  shall be entitled within fifteen days of the offer to apply for the purchase and transfer of a pro rata   number of the said untaken shares and the company shall be bound, upon payment to the transfer of  the fair value of such shares, to transfer the shares to the member applying;

(e) The promising transferor shall be bound to execute a transfer in respect of any shares so sold and  in default thereof be deemed to have executed such a transfer.   The company shall thereupon cause   the names of the members who have purchased the shares to be entered in the Register as the   holders of such shares and thereafter the validity of the proceedings shall not be questioned by any  person;

(f) In case no member shall apply for any of the shares included in the transfer notice or in case any   are  untaken  after  the  compliance  with  the  foregoing  provisions  of  this  Article  the  intending  transferor shall have the right (which right shall endure for the period of one year from the date of  transfer notice) to sell and dispose of hi shares to any person and at any price and to apply for  registration of the transfer of the same and the company shall be bound to give effect to the transfer  of such shares accordingly.   

(g) For the purpose of this clause the fair value of the share shall be such sum, if any, as the auditors   for the time being of the Company shall certify as the fair value thereof provided that it expressly   declared that the fair value shall be (1) the amount of capital paid upon thereon plus (2) a sum  bearing the same proportion to the value as appearing in the company’s last balance sheet of any  reserve fund or other fund of the company as the capital paid up on all the shares of the company  for the time being issued plus or minus as the case may be, (3) a sum bearing the same proportion   to the value as appearing in the profit and loss account consisting of or representing undivided  

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the  Act)  as  its  turnover  exceeded  the  limit  prescribed  

thereunder:

“43A.        ****** ****** ******        ****** ****** ******

(1A)  Without prejudice to the provisions of sub-section (1), where the  average annual turnover of a private company, whether in existence at the  commencement  of  the  Companies  (Amendment)  Act,  1974,  or  incorporated thereafter, is not, during the relevant period, less than rupees  one  crore,  the  private  company  shall,  irrespective  of  its  paid-up  share  capital, become, on and from the expiry of a period of three months from  the last day of the relevant period during which the private company had  the said average annual turnover, a public company by virtue of this sub- section;

Provided  that  even  after  the  private  company  has  so  become  a  public  company, its articles of association may include provisions relating to the  matters  specified in clause (iii)  of sub-section (1) of Section 3 and the  number of its members may be, or may at any time be reduced, below  seven.”  

5. One  important  development  in  the  history  of  the  first  

respondent company relevant for the decision of the instant  

appeal is that on 2nd April, 2001 a notice was issued calling for  

extraordinary general meeting of the first respondent company  

scheduled to be held on 5th May, 2001.  The purpose of the  

said  meeting  was  to  adopt  a  resolution  for  amending  the  

Articles  of  Association  of  the  first  respondent  by  inserting  

clause  (d)  to  Article  3  thereof.   The  substance  of  the  said  

clause is to prohibit any invitation or acceptance of deposits  

from  persons  other  than  the  members,  directors  or  the  

profits or losses as the capital paid up on such share bears to the total capital paid up on all the   shares of the company for the time being issued.”

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relatives  of  the  members  or  the  directors  of  the  company.  

According to the respondents, such a proposal for amendment  

was necessitated to comply with the requirements of the newly  

inserted sub-section (d) of Section 3(1)(iii)2 which came to be  

inserted by Act 53 of 2000 w.e.f. 13.12.2000.  The appellant  

opposed the amendment of the Articles of Association and the  

amendment  could  not  be  carried  as  the  proposal  failed  to  

muster the requisite majority.

HISTORY OF THE LITIGATION:

6. In the month of May, 2009, certain reports appeared in  

the media that the second respondent was proposing to sell  

his shares in the first respondent company which were at that  

time  valued  at  approximately  1600  crores.   The  appellant,  

therefore,  filed  a  Company  Petition  No.  132/397-

98/CLB/MB/2009  (hereinafter  referred  to  as  the  Company  

Petition 132 of  2009) before the Company Law Board,  inter  

alia,  seeking  prohibitory  orders3 against  the  2nd and  3rd  

respondents  from  committing  breach  of  the  pre-emption  

2 3.(1)(iii)  - ‘private company’ means a company which has a minimum paid-up capital of one lakh rupees  or such higher paid-up capital as may be prescribed, and by its articles,-- …………

    (d)  prohibits any invitation or acceptance of deposits from persons other than its members,  directors or their relatives. 3  That this Hon’ble Bench be pleased to grant a permanent order and injunction restraining the 2nd/3rd  respondents  by themselves or  through their servants  and or  agents,  directly or  indirectly,  from selling,  transferring,  alienating,  dealing  or  disposing  the  shares  held,  directly  or  indirectly,  by  the  2nd/3rd  Respondents in the 1st Respondent to any person without first offering the same to the Petitioners at the fair   value quantified in accordance with Article 57(g) of the Articles of Association of the 1st Respondent.

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agreement contained in Article 57 of the Articles of Association  

referred  to  supra.   On  11th December,  2009,  ad-interim  

injunction  order  was  passed  by  the  Company  Law  Board  

restraining the second respondent from alienating his share  

without permission of the Company Law Board.    However,  

the Company Petition No. 132 of 2009 was heard finally and  

dismissed by an order dated 14th May, 2010.   

7. Aggrieved  by  the  same,  the  appellants  preferred  

Company  Appeal  No.24/2010  before  the  High  Court  of  

Bombay on 26th June, 2010.  The High Court summarized the  

decision of the Company Law Board as under:

“75. It is on this material that the company petition was placed before  CLB and heard accordingly.  The CLB firstly held that the first respondent  is a public company.  Once it is held to be a public company, then, its  shares are freely transferable and the issue was to whether any preemption  clause/article  restraining  transferability  of  shares  in  public  company  is  valid.  The Board held that the Article 57 does contain such restriction but,  the Board relying upon a judgment of this Court in the case of Western  Maharashtra Development Corporation Ltd. Vs. Bajaj reported in (2010)  154 Company Cases 593 (Bom) held that such an clause in the Articles of  Association will not be applicable to 1st respondent company.  Once it is  held to  be a  public  company,  its  shares  are  freely transferable  and the  Articles would not hold good as they are contrary to the statute.  Holding  that violation of such an clause in the Articles is not an act of oppression,  the petition came to be dismissed.”

The  said  appeal  was  finally  heard  and  dismissed  by  the  

impugned judgment dated 14th June, 2011.  

According to the appellants, the High Court held that –  

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“an  agreement  between  shareholders  of  an  unlisted  public  company  conferring  a  right  of  preemption  which  is  embodied  in  its  Articles  is  invalid and unenforceable.” - SLP

8. Elaborate submissions were made on either side dealing  

with the various provisions of the Companies Act as amended  

from time to time.  The learned counsel appearing on either  

side also submitted written briefs.   

9. According to the written brief submitted by the appellant  

the  question  that  arises  for  consideration  of  this  Court  is  

summarized as follows: -

Whether  on  and  after  the  bringing  into  force  of  the  Companies  (Amendment)  Act,  2000, the status and character  of Gharda Chemicals  Ltd. (R-1) continued to be as that of a “hybrid company” (Section 43A  company) and whether this company and its members are bound by the  terms of a preemption clause contained in Article 57 of the Articles of  Association?

In our opinion, the REAL QUESTION is not whether after the  

Amendment Act 53 of 2000, the first respondent continued to  

be  a  private  company  or  became  a  public  company,  But  

whether  the  amendment  made  by  the  Act  53  of  2000  to  

Sections 3 and 43A destroys the rights and obligations created  

by  Article  57  of  the  Articles  of  Association  of  the  first  

respondent company.

10. The  case  of  the  appellants  all  through  has  been  that  

notwithstanding the amendment of the Act by the Amendment  

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Act 53 of 2000, Article 57 of the Articles of Association still  

governs  the  rights  of  the  members  of  the  first  respondent  

Company.  

11. On  the  other  hand,  the  case  of  the  respondents  has  

always been and is  that  the  first  respondent  company is  a  

public company having had become so by the operation of law  

i.e.,  Section  43A(1)  and  it  cannot  now  become  a  private  

company.  There is nothing in the Amendment Act 53 of 2000  

which automatically renders a public company created under  

Section 43A to become a private company.  It is also the case  

of  the respondents that the failure to amend the Articles of  

Association to give effect to Section 3(1)(iii)(d)  ipso facto make  

the  first  respondent  a  public  company  thereby  rendering  

Article 57 inoperable.

12. We  shall  deal  with  those  arguments  later  in  the  

judgment.  Before dealing with these various arguments, we  

deem it appropriate to examine the relevant provisions of the  

Companies Act, and the various amendments made to the Act  

from time to time.

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SCHEME  OF  THE  RELEVANT  PROVISIONS  OF  THE  COMPANIES ACT:

13. The Companies Act, 1956, (hereinafter referred to as ‘the  

Act’) as it was originally enacted, contained only the definition  

of  a  ‘private  company’  under  Section  3(1)(iii)4 to  mean  a  

company5 [a defined expression under Section 3(1)(i)] which,  

by its articles  (a) restricts the right to transfer its shares, if  

any6,  (b) limits  the  number  of  its  members  to  fifty  and  (c)  

prohibits any invitation to public to subscribe for any shares  

or debentures for the company.   

14. Section 27(3) of the Act stipulates:

“In the case of a private company having a share capital, the  articles  shall contain  provisions relating to the matters  specified in sub-clauses (a), (b) and (c) of clause (iii) of sub- section (1) of section 3; and in the case of any other private  company, the articles shall contain provisions relating to  the matters specified in the said sub-clauses (b) and (c).”  

This sub-section makes it clear that to be a private company  

either with or without share capital the Articles of Association  

of  such  company  must  necessarily  provide  for  the  matters  4  3.(1)(iii)  - ‘private company’ means a company which, by its articles, -

(a)  restricts the right to transfer its shares, if any; (b) limits the number of its members to fifty not including –  

xxx xxx xxx xxx

5  3.  Definition of ‘company’, ‘existing company’, ‘private company’ and ‘public company’ – (1) In  this Act, unless the context otherwise requires, the expressions ‘company’, ‘existing  company’, ‘private  company’ and ‘public  company’ shall,  subject  to the provisions of  sub-section (2),  have the meanings  specified below –

(i)  ‘company’ means a company formed and registered under this Act or an existing company as   defined in clause (ii);  6 Section 12 of the Companies Act recognizes the possibility of the formation of two clauses of Companies,  companies “limited by shares” and companies “ limited by guarantee”.

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specified in Section 3(1)(iii) of the Act. In the case of a private  

company limited by share capital all  the three requirements  

specified in clauses (a), (b) and (c) of clause (iii) of sub-section  

(1) are to be provided.  In the case of a private company other  

than a company having share capital only matters specified in  

clauses  (b)  and  (c)  of  the  above  sub-section  are  to  be  

stipulated.   

15. Part-II  of  the  Act  deals  with incorporation of  company  

and matters incidental thereto.  A brief survey of the said Part  

insofar  as  it  is  relevant  for  the  purpose  of  this  case  is  

necessary.

16. Section 12 deals with the mode of forming incorporated  

companies,  either  public  or  private.   It  stipulates  that  an  

incorporated company may be formed by two or more persons  

in the case of a private company and seven or more persons in  

the case of a public company by subscribing their names to a  

memorandum  of  association  and  complying  with  other  

requirements of the Act in respect of registration.

17. Section 26 of the Act mandates inter alia that in the case  

of  a  private  company  limited  by  shares,  there  shall  be  

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registered  (along  with  the  memorandum),   

Articles  of  Association  signed  by  the  subscribers  of  the  

memorandum.  Such Articles  of  Association must prescribe  

the regulations for the company.

“Section 26. Articles prescribing regulations.—There may in  the case of a public company limited by shares, and there  shall in the case of an unlimited company or a company  limited by guarantee or a private company limited by  shares, be registered with the memorandum, articles  of  association  signed  by  the  subscribers  of  the  memorandum,  prescribing  regulations  for  the  company.”

18. The Act came to be amended by Act 65 of 1960.   By the  

said amendment, Section 43A came to be inserted in the said  

Act.  It originally contained eight sub-sections. Sub-Section (1)  

declared that any private company which has a share capital,  

of which twenty-five per cent of the paid-up share capital is  

held  by  “one  or  more  bodies  corporate”7 become  a  public  

company.  

19. The relevant part of sub-Section (1) reads as under:  

“43A.  Private  company  to  become  public  company  in  certain  cases -  (1)  Save  as  otherwise  provided  in  this  section, where not less than twenty-five per cent of the paid- up share capital of a private company having a share capital  

7 “Explanation – For the purposes  of this sub-section, “bodies  corporate” means public  companies,  or  private companies which had become public companies by virtue of this section.”

     but such an explanation was not there originally, but added by Act 31 of 1988.

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is held by one or more bodies corporate, the private company  shall,-

***** ***** ***** ***** ***** *****

become by virtue of this section a public company.”

20. Such companies popularly came to be called DEEMED  

PUBLIC  COMPANIES  (they  are  referred  to  by  the  learned  

counsel  for  the  appellant  as  “HYBRID  Companies”)  though  

Section 43A does not  use that  expression.   In our opinion,  

Section 43A only creates a new class of  PUBLIC companies  

-answering the description contained therein though they have  

and can retain all the attributes of a PRIVATE COMPANY as  

defined under Section 3(i)(iii). These companies are hereinafter  

referred  to  as  “HYBRID  Companies”  for  the  sake  of  

convenience.

21. Obviously,  the  question  of  private  companies  without  

share  capital  becoming  public  companies  does  not  arise.  

Bodies  corporate  cannot  hold  non-existent  shares  in  such  

private  companies.   Sub-Section  (1)  has  two  provisos.   An  

examination of the contents of the first proviso is relevant and  

necessary for the purpose of this case. We shall deal with the  

same separately.   

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22. Sub-section (2) mandates that within three months from  

the  date  on  which  a  private  company  becomes  a  public  

company by virtue of Section 43A(1), the company shall inform  

the Registrar that it has become a public company.   It also  

mandates  that  the  Registrar  shall  make  necessary  

consequential alterations of the records.   

23. The language and implication of sub-section (2) will  be  

examined later in the judgment.

24. We are not concerned with sub-Section (3).   Sub-Section  

(4)  contemplates the possibility  of  a  private  company which  

becomes public company by virtue of the operation of Section  

43A once  again becoming a private  company.   It  stipulates  

that any private company which becomes a public company by  

virtue of Section 43A(1) shall continue to be a public company,  

until  such time it becomes a public company in accordance  

with the provisions of the Act.  Such a re-conversion requires  

the approval of the Central Government.    

“(4) A private company which has become a public company  by  virtue  of  this  section  shall  continue  to  be  a  public  company  until  it  has,  with  the  approval  of  the  Central  Government and in accordance with the provisions of this  Act, again become a private company.”

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25. Sub-section  (5)  provides  for  penalties  for  defaults  in  

complying with the mandate of sub-Section (2).   Sub-Sections  

(6)  and (7)  were  omitted by  the  Amending Act  31  of  1988.  

Sub-Section (8) prescribes certain obligations attached to such  

public companies, the details of which may not be necessary.

26. By the Amendment Act 41 of 1974, sub-Sections (1A) and  

(1B)  came  to  be  inserted  in  Section  43A.    By  the  newly  

inserted sub-sections, the legislature declared that two more  

classes of private companies become public companies on the  

happening  of  the  events  specified  in  each  of  the  newly  

introduced sub-sections.

27. Sub-section (1A) declares that a private company whose  

“average annual turnover” “during the relevant period” is not  

less than Rs.1 crore becomes public company.

“(1A) Without prejudice to the provisions of sub-section (1),  where the average annual turnover of a private  company,  whether in existence at the commencement of  the  Companies  (Amendment)  Act,  1974,  or  incorporated  thereafter,  is not, during the relevant period, less  than such amount as may be provided, the private  company  shall,  irrespective  of  its  paid-up  share  capital,  become, on and from the expiry of a period of three months  from the last  day of  the relevant period during which the  private  company had the said average annual  turnover,  a  public company by virtue of this sub-section :  

Provided that even after the private company has so become  a  public  company,  its  articles  of  association  may  include  

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provisions relating to the matters specified in clause (iii) of  sub-section (1) of section 3 and the number of its members  may be, or may at any time be reduced, below seven.”

28. The  amount  of  Rs.1  crore  mentioned  originally  in  the  

sub-section (1) is substituted by the Act 31 of 1988 with the  

words “such amount as may be provided”.

29. Sub-section  (1B)  declares  that  any  private  company  

holding not less than 25 per cent of the paid up share capital  

of a public company shall become a public company.   Both  

the sub-sections contain a proviso each, which are  ipsissima  

verba.   The  implications  of  such  provisos  along  with  the  

implication of the proviso to sub-Section (1) shall be examined  

later.   

“(1B) Where not less than twenty-five per cent of the paid-up  share capital of a public company, having share capital, is  held by a private company, the private company shall,-  

(a) on  and  from  the  date  on  which  the  aforesaid  percentage is first held by it after the commencement  of the Companies (Amendment) Act, 1974, or

(b) where the aforesaid percentage has been first so held  before  the  commencement  of  the  Companies  (Amendment) Act, 1974 on and from the expiry of the  period  of  three  months  from  the  date  of  such  commencement,  unless  within  that  period  the  aforesaid percentage is reduced below twenty-five per  cent  of  the  paid-up  share  capital  of  the  public  company,  

become, by virtue of this sub-section, a public company, and  thereupon  all  other  provisions  of  this  section  shall  apply  thereto :  

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Provided that even after the private company has so become  a  public  company,  its  articles  of  association  may  include  provisions relating to the matters specified in clause (iii) of  sub-section (1) of section 3 and the number of its members  may be, or may at any time be reduced, below seven.”

30. Sub-sections  (9)  to  (11)  of  Section  43A  came  to  be  

inserted by various amending acts.   The complete details of  

the contents of all these sections and their legislative history is  

not  necessary for  us except to note  that  in the explanation  

appended to sub-section (9), the expressions “relevant period”  

and  “turnover”  occurring  in  sub-Section  (1)  and  (1A)  are  

defined as follows:-

Explanation – For the purposes of this section, -

(i) “relevant  period”  means  the  period  of  three  consecutive financial years, -

(ii) Immediately preceding the commencement  of  the  Companies (Amendment) Act, 1974 ,or

(iii) A  part  of  which  immediately  preceded  such  commencement  and  the  other  part  of  which  immediately, followed such commencement, or

(iv) Immediately  following such commencement  or  at  any time thereafter;

(b)   “turnover”, of a company, means the aggregate value of  the realization made from the sale, supply or distribution of  goods or on account of  services rendered,  or both, by the  company during a financial year;

31. Act 31 of 1988 inserted sub-section (1C) which declares  

that any private company accepting deposits from “the public  

other  than  its  members,  directors  or  their  relatives”  

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(hereinafter  referred  to  as  “PUBLIC”  for  the  sake  of  

convenience)  pursuant  to  such  invitation  made  by  an  

advertisement after the commencement of the Amendment Act  

i.e. 15.6.1988 or renews an existing deposit becomes a public  

company.  Even sub-section (1C) has a proviso in terms which  

are identical with the provisos to Section (1A) and (1B).     

“(1C) Where,  after  the  commencement  of  the  Companies  (Amendment) Act, 1988 a private company accepts, after an  invitation is made by an advertisement, or renews, deposits  from the public, other than its members, directors or their  relatives, such private company shall, on and from the date  on which such acceptance or renewal as the case may be, is  first  made  after  such  commencement,  become  a  public  company  and thereupon all  the  provisions  of  this  section  shall apply thereto:

Provided that even after the private company has so  become  a  public  company,  its  articles  of  association  may  include provisions relating to the matters specified in clause  (iii)  of  sub-section  (1)  of  section 3  and the  number  of  its  members  may be,  or  may at  any  time  be,  reduced  below  seven.”  

32. Thus, it can be seen that by the date of amendment of  

Section 43A by the Act 53 of 2000 under Section 43A, there  

are four classes of private companies which are declared by  

the said section to become public companies on the happening  

of an event mentioned in each of the sub-sections.

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33. It  is  also  necessary  to  note  that  each  of  the  above-

mentioned four sub-sections contained a proviso.  The tenor of  

all the four provisos is identical.

“Provided that even after the private company has so become  a  public  company,  its  articles  of  association  may  include  provisions relating to the matters specified in clause (iii) of  sub-section (1) of section 3 and the number of its members  may be, or may at any time be reduced, below seven.”

34. Each  one  of  these  provisos  declare  that  even  after  a  

private company becomes a public company by virtue of the  

operation of any one of the four sub-Sections i.e. (1), (1A), (1B)  

and (1C) of  Section 43A; the Articles of  Association of such  

company  may  include  provisions  relating  to  the  matters  

specified in Section 3(1)(iii).  The provisos further declare that  

the number of members of such company “may be or may at  

any time be reduced, below seven”.  The implications of the  

provisos require an examination.    

35. The provisos permit  the  continuance  of  stipulations  in  

the  Articles  of  Association  of  such public  companies  which  

relate to the matters specified in Section 3(1)(iii).    In other  

words,  though the  companies  whose  Articles  of  Association  

provide  for  matters  specified  in  Section  3(1)(iii)  are  private  

companies,  and under  the  scheme of  the  Companies  Act  a  

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public company cannot have such stipulations,  Section 43A  

expressly permit the four classes of public companies to retain  

such Articles of Association.

36. Secondly, the relaxation under the proviso regarding the  

membership of such companies getting reduced below seven is  

meant to obviate the conflict with the requirement of Section  

12  which  requires  a  minimum  of  such  seven  persons  to  

constitute a public company.

37. The employment of the expression “may” in the clause,  

“its Articles of Association may include provisions relating to  

the  matters”  only  indicates  that  a  private  company  which  

becomes a public company by virtue of the operation of any  

one of the four sub-sections of Section 43A has choice  either  

to  retain  those  stipulations  in  its  Articles  of  Association  

relating to the matters specified under Section 3(1)(iii)  or to  

amend its Articles of Association either deleting all or some of  

the stipulations relating to matters specified in Section 3(1)(iii)  

from its Articles of Association. The reason is that a private  

company  has  certain  privileges  and  exemptions  under  the  

Companies Act in the sense that a private company is subject  

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to a lesser degree of  regulation under the provisions of  the  

Companies Act, than a public company.   The moment private  

company becomes a public company, either by operation of  

law  or  the  volition  of  its  member,  such  company  becomes  

subject to a more rigorous regulation of its activities by the  

various provisions of the Companies Act.  At the same time, a  

public company has certain advantages under law.  Therefore,  

it is for the company and its members to decide whether the  

restrictions  and  limitations  contained  in  the  Articles  of  

Association  referable  to  matters  specified  in  Section  3(1)(iii)  

should  still  continue  even  after  the  company  lost  the  

exemptions and privileges attached to a private company.

38. Section 43 of the Companies Act recognizes the existence  

of such privileges and exemptions by declaring that a private  

company  which  defaults  in  complying  with  any  one  of  the  

stipulations made in its Articles of Association relating to the  

matters specified under Section 3(1)(iii), such Company “shall  

cease to be entitled to the privileges and exemptions conferred  

on private companies by or under this Act and this Act shall  

apply to the Company as if it were not a private company.8

8 43.  Consequences  of  default  in  complying  with  conditions  constituting  a  company  a  private  company   -  Where the articles of a company include the provisions which, under clause (iii) of sub- section (1) of section 3, are required to be included in the articles of a company in order to constitute it a   

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39. Therefore,  these  four  provisos  give  an  option  to  the  

company either to retain the original Articles of Association or  

alter them, but there is no statutory compulsion to alter the  

Articles of Association.   Our view is fortified by the language  

of sub-Section (2) of Section 43A.

“(2) Within three months from the date on which a private  company  becomes  a  public  company  by  virtue  of  this  section, the company shall inform the Registrar that it has  become a public company as aforesaid, and thereupon the  Registrar  shall  delete  the  word "Private"  become the  word  "Limited" in the name of the company upon the register and  shall also make the necessary alterations in the certificate of  incorporation  issued  to  the  company  and  in  its  memorandum of association.”

40. It  only  obligates  a  private  company  which  becomes  a  

public company by virtue of the operation of Section 43A to  

inform the  Registrar  within  three  months  from the  date  on  

which  the  private  company  becomes  a  public  company,  

regarding the change in its status from ‘private’ to ‘public’.

41. On receipt of such intimation, the Registrar is required to  

make a change in the name of the company in his register and  

private company, but default is made in complying with any of those provisions, the company shall cease to  be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this   Act shall apply to the company as if it were not a private company :  

Provided that  the Central  Government,  on being satisfied  that  the  failure  to  comply with the  conditions was accidental or due to inadvertence or to some other sufficient cause, or that on other grounds  it is just and equitable to grant relief, may, on the application of the company or any other person interested   and on such terms and conditions as seem to the Central Government just and expedient, order that the  company be relieved from such consequences as aforesaid.

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is  also  required  to  make  necessary  alterations  in  the  

‘certificate  of  incorporation’  issued  to  the  company  and  its  

‘Memorandum of Association’.

42. Sub-section (2) does not obligate either the company or  

the  Registrar  to  make  any  changes  in  the  Articles  of  

Association.    No  other  provision  of  the  Companies  Act  is  

brought to my notice which creates such an obligation.

43. Sub-section (11) was inserted by Act 53 of 2000 which is  

the  bone  of  contention  in  the  instant  appeal  and  reads  as  

follows:-

“(11)  Nothing contained in this section, except  sub-section  (2A),  shall  apply  on  and  after  the  commencement  of  the  Companies (Amendment) Act, 2000.”

The implication of the same requires a detailed examination at  

a later stage of this judgment.

DECISION OF THE HIGH COURT:

44. The High Court noted the history of Sections 3(1)(iii) and  

43A of  the  Act  and  recorded  a  finding  that  in  view  of  the  

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insertion of sub-section (2A) in Section 43A by the Companies  

Amendment Act (Act 53 of 2000)–

“……… the concept of deemed public company under section  43A and introduced by the Companies (Amendment) Act has  now been  abolished  based  on  the  recommendation  of  the  working group of Companies Act, 1956.”

45. The  High  Court  also  recorded  a  finding  that  the  first  

respondent company is a public company9.  The High Court  

then went on to examine whether there can be any restriction  

on  the  shareholder’s  right  to  transfer  shares  in  a  public  

company.  The High Court reached a conclusion that in view of  

the  subsequent  statutory  amendments  made  in  1988  and  

2000  to  the  Companies  Act,  Article  57  of  the  Articles  of  

Association of the first respondent company would no longer  

govern the rights of its shareholders to transfer their shares.

“After  17th August 1988 and in any event after  dated 13th  December 2000, the position has undergone a change and  Article 57 appearing in the Articles of Association would no  longer be the governing article.  It is not necessary to then  consider the argument as to whether the said article is void  or not.  That article must give way to the statutory provision.  If the shares of public company are freely transferable, then,  the statutory provisions in that behalf will take such effect  notwithstanding anything to the contrary contained in the  Articles  of  Association  of  such  company.   The  over-riding  effect given to the Act by section 9 cannot be ignored and  brushed aside as desired by the appellants.”

9   117.   Therefore,  in  my view,  once  the  first  respondent  is  a  public  company  as  evidenced  by the  certificate referred to above, with effect from 17th August 1988, then, the amendment made in 2000 would  be applicable and section 43A ceases to apply to it.  That the words “On and After”, are used makes no   difference as far as present case4 is concerned.  In the present case, the status of the first respondent as a   public company remains and it is now academic to find out whether  it  was a deemed public company  earlier as contended.  Once the law makes only a broad categorization as noticed above, then, it is not   necessary to deal with this contention any more.

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46. An alternative argument of the appellants that in view of  

the fact the shares of the first respondent company are not  

listed shares, there can be a right of preemption, is rejected by  

the High Court.   

“Their alternate argument that assuming that GCL is public  company, its shares being nonlisted, there can be a right of  preemption, is equally unsound and not tenable.  There is no  distinction made in the Act of this nature.   That argument is  canvassed only by relying on the definition of the term ‘listed  public  companies’  appearing  in  section  2(23A).   The  definition itself  clarifies  that  a public  company which has  any of  its  securities  listed  in  any of  the  recognized  stock  exchange  will  be  termed  as  listed  public  company.  Nonetheless  it  remains  a  public  company  and  merely  because  its  shares  are  not  listed  in  any  recognized  stock  exchange does not mean that there is any restriction on their  transfer.  They are and continue to be freely transferable as  they are shares of a public company.  The broad distinction  as  noticed  above,  between  the  term ‘Private’  and  “Public”  company, is enough to turn down this alternate argument.”

47. The  High  Court  also  rejected  the  other  submission  of  

oppression and mismanagement pleaded by the appellants as  

the basis of the plea of oppression and mismanagement is the  

existence of legally valid preemption clause.  The High Court  

held–  

“127. Once all  these arguments and contentions are dealt  with,  then,  other  part  of  submissions  of  Mr.  Samdani  on  oppression of minority also fail.  They are raised on the basis  that the preemptive right is defeated by respondent Nos.2 to  5 by their several acts of omission and commission.  Once  the preemptive right itself is not in existence by virtue of the  statutory  provisions  in  the  field,  then,  there  is  no  act  of  

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oppression.  As held above, the plea of mis-management has  been given up and has not been pursued.”

48. The reasons which led to the above extracted conclusions  

of the High Court are as follows:

   A) Section 43A prior to its amendment by Amendment  

Act 53 of 2000 only provided for various situations in which a  

private company becomes a public company by operation of  

law but not vice-versa.

“112. … In other words, this section permitted a private  company to become a public company in certain cases and  once  the  word  private  is  deleted  it  becomes  a  public  company.   However,  there  was  nothing  which  permitted such public company to again become  private  company  and  that  is  achieved  by  insertion of section 43(2A).

   B) The  High  Court  also  opined  that  in  view  of  the  

declaration contained under sub-section (11) of section 43A,  

which was inserted by the Amendment Act 53 of 2000, the  

entire Section 43A becomes inoperative w.e.f. 13.12.2000 (the  

day on which the Amendment Act came into force) except for  

sub-section  (2A).   Thereby  “the  concept  of  deemed  public  

company under Section 43A” has “been abolished”.  

“112. …….. Sub-section 43A(11) which also was inserted by  Act  53  of  2000  from  13th December  2000,  clarified  that  nothing  contained  in  section  43A,  save  and  except  sub- section 2A shall  apply on and after the commencement of  

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Companies (Amendment) Act 2000.  In other words, whole of  section 43A except for one sub-section viz., sub-section 2A  ceases  to  apply  after  the  commencement  of  Companies  (Amendment) Act, 2000.  ……………….  Thus, section 43A  itself became inapplicable by virtue of sub-section 11.  The  effect of all this is that the concept of deemed public  company under section 43A and introduced by the  Companies (Amendment) Act  has now been abolished  based  on  the  recommendation  of  the  working  group  the  Companies Act, 1956.”

     C) The  High  Court  held  that  though  the  first  

respondent  company  was  initially  incorporated  as  a  private  

company, it became a public company (in the language of the  

High  Court  ‘a  DEEMED  public  company’)  by  virtue  of  the  

operation  of  Section  43A  (1A)  but  ceased  to  be  a  private  

company.   Since  its  Articles  of  Association  could  not  be  

amended  to  give  effect  to  the  newly  inserted  clause  (d)  of  

Section  3(1)(iii)  (introduced  by  Act  53  of  2000  w.e.f.  

13.12.2000),   therefore,  its  status  as  ‘DEEMED  public  

company’  itself  lapsed  w.e.f.  13.12.2000  and  thereafter  the  

first respondent company would only be a public company but  

not either a private company or a DEEMED public company  

whose Articles of Association could contain restrictions on the  

transfer of shares of its members.   

“115. It is clear from the factual position that the attempt to  amend the Memorandum and Articles of Association of the  first  respondent  was  unsuccessful.   The  said  resolution  

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proposed  in  the  meeting  held  on  5th May  2001  was  not  carried but in fact defeated. Once it was defeated, then, the  first respondent which had become a public company on 17th  August  1988  continued  with  that  status.   It  would  be  of  relevance  to  note  that  the  resolution  was  moved  in  the  meeting held on 5th May 2001.  That resolution was defeated  on that day. However, the Companies Amendment Act 2000  had  come  into  effect  already  and to  be  precise  from 13th  December 2000.  On 13th December 2000, GCL was not a  deemed public company but a public company. Once it was  a public company, then, the argument of the appellants that  it continued to retain its fundamental and basic character as  a  private  company  cannot  be  accepted.   The  status  is  conferred by law.  The status was sought to be changed or  amended by moving an amendment to insert an additional  clause (d) was defeated, then, there is no scope to alter the  status of the respondent No.1 company by either terming it  as a deemed public company or a public company retaining  the fundamental and basic character of a private company.  Both these concepts are unknown to law.”

49. SUBMISSIONS BY THE APPELLANTS:

(i) On a plain reading of  sub-Section (11),  it  is clear that  

Section 43A is retained on the statute book and not deleted by  

the Companies (Amendment) Act, 2000.  Had the Parliament  

intended to completely efface all Section 43A companies, the  

surest manner would have been to delete Section 43A from the  

statute.  The retention of Section 43A is an extremely strong  

indicator of the legislative intention to continue recognition of  

existing “hybrid companies” even after 13.12.2001.

(ii) This legislative intention is made clear by the insertion of  

clause  (11)  in  Section  43A by  the  Companies  (Amendment)  

Act, 2000 which reads:

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“(11). Nothing contained in this section, except sub-section  (2A),  shall  apply  on  and  after  the  commencement  of  the  Companies (Amendment) Act, 2000.”

The expression “nothing contained in this section .. shall apply  

on and after”, coupled with the retention of Section 43A on the  

statute book, clearly indicates that the legislature did not want  

the regime of hybrid companies to lapse w.e.f. 13.12.2000.

(iii) Apart  from retaining Section 43A on the  statute  book,  

Section 111(14) of the companies Act, 1956 also remained in  

the  statute  after  the  Companies  (Amendment)  Act,  2000.  

Section 111(14) reads:

“In this  section  “company”  means a  private  company and  includes  a  private  company  which  had  become  a  public  company by virtue of Section 43A of this Act.”  

The justification for retaining a specific reference to Section  

43A  in  Section  111  is  that  the  status  of  deemed  public  

companies  continued  to  be  recognized  even  after  the  2000  

amendment.  Had the Parliament’s intention been otherwise,  

Section 43A itself  and all  references in  the  Companies  Act,  

1956  to  Section  43A  would  have  been  deleted  by  the  

legislature.

(iv) The insertion of  sub-section (2A)  into Section 43A was  

required to provide an exit route on and after 13.12.2000 for  

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an  existing  hybrid  company  which  ceased  to  attract  the  

operation  of  Section  43A(1)  -  (1C).   Prior  to  the  2000  

amendment,  where a  hybrid company ceased to  attract  the  

operation of the relevant sub-section of Section 43A which had  

rendered  it  a  hybrid  company  with  approval  of  the  Central  

Government was mandatory in terms of  sub-section 43A(4).  

The  2000 amendment  removed  the  requirement  for  Central  

Government approval.

(v) Each  of  the  sub-sections  of  Section  43A  contained  a  

specific  clarificatory  proviso  which  preserved  the  essential  

character  and  status  of  a  private  company.   Therefore,  to  

construe Section 43A subsequent to 13.12.2000 to destroy the  

essential  character  and status of  the companies covered by  

Section 43A would be illogical.

(vi) A  “Company”  is  a  legal  vehicle  for  more  than  one  

person/collection  of  persons  to  come together  and form an  

enterprise. The basic terms on which such persons would join  

together would be contained in the Memorandum & Articles of  

Association of such a company, creating rights and obligations  

including  the  conditions  subject  to  which  shares  are  to  be  

held.  When a person becomes a member of  a company he  

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agrees  to  be  bound  by  the  covenants  in  the  Articles  of  

Association (Section 3610).  The Articles are the foundation on  

the basis of which shareholders of the company deal with each  

other.  In the case of a company such as the Respondent No.1,  

the application of Section 43A did not in any manner disturb  

the existing arrangements among the shareholders but added  

on certain regulatory requirements. Assuming (whilst denying)  

that  Section  43A  stood  effectively  “repealed”  on  and  after  

13.12.2000, there is nothing to suggest that the intention of  

the  legislature  was  to  completely  disrupt  the  foundational  

arrangement amongst shareholders across the country in tens  

of  thousands of  private limited companies.  In other words,  

assuming  there  was  a  repeal,  the  status  of  every  deemed  

public company reverts back to a private company and not a  

public company.   Should the status of every hybrid company  

subsequent to the 2000 amendment be regarded as “public”  

that  would  mean  a  destruction  of  various  Articles  which  

thought  permissible  in  a  private  company  are  illegal  with  

regard to a public company.

10 Section  36.  Effect  of  memorandum  and  articles.—(1)  Subject  to  the  provisions  of  this  Act,  the  memorandum and articles shall, when registered, bind the company and the members thereof to the same   extent  as  if  they  respectively  had  been  signed  by  the  company  and  by  each  member,  and  contained  covenants on its and his part to observe all the provisions of the memorandum and of the articles.

(2)   All   money payable by any member to the company under the memorandum or  articles shall be a debt due from him to the company.

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(vii) It  is settled position that unless the contrary intention  

appears, an enactment is presumed not to be intended to have  

a retrospective operation.  The amendment to the definition of  

a  “private  company”  affects  its  status  and  would  affect  

substantive  vested  rights  acquired  over  decades.   An  

amendment  which  affects  alteration  in  status/substantive  

vested  rights  is  always  presumed  to  be  prospective  in  

operation.

(viii) By the Amendment Act of 2000, two prospective changes  

were introduced in the definition of a “private company” – first  

regarding such a company having a minimum paid up capital  

of one Lakh and  second  that such a company in its Articles  

must also include a fourth prohibition (d) regarding invitation  

or  acceptance  of  deposits  from  persons  other  than  its  

members, directors or their relatives.   Consequently, whilst no  

fresh  private  company  could  be  incorporated  after  the  

Amendment Act of 2000, unless it met with the new amended  

definition,  for  existing  private  companies,  the  2000  

Amendment made a provision by introducing sub-sections (3)  

and (5)11 thereby pre-existing private companies were required  11 “(3) Every  private company,  existing on the commencement  of  the Companies  (Amendment)  Act,   2000, with a paid-up capital of less than one lakh rupees, shall within a period of two years from such  

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to increase their paid up capital within a period of two years to  

meet with the minimum threshold of Rupees One Lakh now  

introduced by the Amendment Act of 2000, no provision was  

contained for  pre-existing private companies to amend their  

Articles of Association to introduce the new sub-clause (d) in  

its  Articles.   Thus,  the existing  private  companies  were not  

required  to  amend  their  articles  by  introducing  the  fourth  

clause (d) in its Articles to retain their character of a private  

company.

50. SUBMISSIONS BY THE RESPONDENTS:

(i) With the introduction of the Amendment Act of 2000 on  

13th December 2000, an existing private company that does  

not have clause (d) in its articles becomes a public company.  

Any other construction of the amendment would result in the  

creation  of  two  classes  of  private  companies  leading  to  

discriminatory results.

(ii) Neither the definition in Section 3(1) nor the other sub-

sections of Section 3 carve out an exception from the operation  

commencement, enhance its paid-up capital to one lakh rupees.

(5) Where a private company … fails to enhance its paid up capital in the manner specified  in sub-section (3) ….., such company shall be deemed to be a defunct company within the meaning of  section 560 and its name shall be struck off from the register by the Registrar.”

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of clause (d) to companies existing on 13.12.2000; and do not  

prescribe a time limit  for  insertion of  the provisions to give  

effect  to clause  (d)  in the Articles  of  Association.  Therefore,  

such non-inclusion necessarily led to the result (by operation  

of  law)  that  all  such private  companies  become full-fledged  

public  companies  on  13.12.2000  until  they  amended  their  

articles to include the provisions of clause (d).

(iii) Section  43A  (1C)  was  introduced  to  regulate  the  

unhealthy practice of  accepting deposits  from the public by  

private  companies.   The  only  legal  consequence  of  Section  

43A(1C)  was  to  treat  such  private  companies  to  be  public  

companies  but  that  did  not  stop  them  from  being  ‘private  

companies’ who accepted deposits from the public.  Parliament  

wanted to  remedy the malpractice  or  ‘mischief’  of  collecting  

deposits by private companies and it did so by the addition of  

clause  (d)  to  Section  3(1)(iii)  on  13.12.2000  so  as  to  

mandatorily prohibit acceptance of deposits from the public.  

If they did not incorporate the provisions of clause (d) in their  

articles and stop accepting deposits from the public they were  

to become ‘public companies’.

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(iv) The appellant voted against the resolution to introduce  

(d) on 5th May 2001 and issued his letter dated 6th June 2001.  

Therefore, estopped from arguing that the first respondent is a  

private company.

(v) The fact that the first respondent is a public company  

and Article  57 is  invalid  has been conclusively  held by the  

Bombay High Court vide an earlier Order dated 14th November  

2008 – which is a judgment in rem and has attained finality.

(vi) The appellant  applied for  transfer  of  5  shares –  which  

resulted in the total members exceeding 50.  The fact that the  

total members have exceeded 50 is  admitted.  Thus, the first  

respondent cannot claim to be a private company.

(vii) After  the  Amendment  Act  of  2000,  S.  43A  stands  

abolished; Sub-section 2A is merely ministerial and a surplus;  

As  first  respondent  is  not  a  private  company  after  13th  

December 2000,it cannot be a deemed public company.

(viii) Article  57  offends  the  principle  of  free  transferability  

under S. 111A(2) which was recognized under S. 22A of the  

SCRA and is recognized by this Hon’ble Court in the case of  

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Vodafone International Holdings B.V. v. Union of India, (2012) 6  

SCC 613.  

EXAMINATION  OF  THE  CORRECTNESS  OF  THE  CONCLUSIONS OF THE HIGH COURT:  

(A)

51. When the High Court recorded that “there  was  nothing  which  

permitted such public company (companies covered under Section 43A,  

emphasis  supplied)  to  again  become  private  company’,  obviously,  

Section 43A, sub-section (4) escaped the attention of the High  

Court.   Sub-section  (4)  is  on  the  statute  book  since  the  

inception of Section 43A.  At the cost of repetition, I reproduce  

it.

“(4)  A private company which has become a public company  by  virtue  of  this  section  shall  continue  to  be  a  public  company  until  it  has,  with  the  approval  of  the  Central  Government and in accordance with the provisions of this  Act, again become a private company.”

52. Parliament always recognized the possibility of a private  

company  (which  becomes  a  public  company  by  virtue  of  

operation  of  Section  43A)  once  again  reverting  back  to  its  

status of a private company.   

53. The  reasons  are  obvious.  Each  one  of  the  events  

stipulated under Section 43A sub-sections (1), (1A), (1B) and  

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(1C) which have the effect of converting a public company into  

a private company is transient.  For example, if we take a case  

falling  under  sub-section  (1)  of  Section  43A,  i.e.  a  private  

company becoming a public company by virtue of the fact that  

25% of its shares are held by one or more bodies corporate; it  

is  always  possible  that  at  some  point  of  time  such  bodies  

corporate  decide  to  disinvest  either  completely  or  partially  

(thereby reducing their holding to less than 25%) their shares  

of  such private company.  In such a case, the event or the  

condition which is essential to convert a private company into  

a  public  company  under  Section  43A  (1)  ceases  to  exist.  

Similarly, take the case falling  under Section 43A(1B), i.e. a  

private company becoming a public company by virtue of the  

fact that such a private company holds not less than 25% of  

paid-up shares of a public company;  If the private company  

(becoming a public company, by virtue of operation of Section  

43A sub-section (1B),  disinvest  its  shares  either  entirely  or  

partially (thereby reducing the  holding to less than 25%) in  

the  share  capital  of  that  public  company,  once  again  the  

condition/event which converted the private company into a  

public company ceases to exist.   Such company can always  

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revert  back  to  its  original  status  of  a  private  company.  

However,  sub-section (4) stipulates that such a reversion to  

the  original  status  is  subject  to  the  prior  approval  of  the  

Central Government.

(B)

54. The  High  Court  recorded  a  finding  that  after  the  

amendment to the Companies Act by Act 53 of 2000, only two  

classes  of  companies  remained,  i.e.  private  and  public  

companies  and  the  third  class  of  public  companies  under  

Section  43A  (HYBRID  companies)  ceased  to  exist.   The  

correctness of this conclusion is required to be examined.

55. Obviously,  from  1960  to  2000,  innumerable  private  

companies would have become public companies (HYBRID) by  

virtue of the operation of the various sub-sections of Section  

43A.  If the Parliament really wanted to do away with HYBRID  

companies, the best way would have been to repeal Section  

43A.  Because  it  is  a  settled  principle  of  statutory  

interpretation  that  the  repeal  of  an  enactment  effaces  the  

repealed  statute  from  the  statute  book  ab  initio  thereby  

creating a fiction in law that such a statute never existed, and  

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never created in any legal consequences except for rights and  

obligations which emanated from various acts and omissions  

covered by the statute and are saved by the express provisions  

under the repealed act or by virtue of  the provisions of  the  

General  Clauses  Act.   Therefore,  by  repealing  Section  43A,  

Parliament  could  have  put  an  end  to  the  existence  of  all  

HYBRID companies.  We are aware that there can be other  

technics by which the same result can be achieved.  Therefore,  

it is required to be examined whether the Act 53 of 2000 refers  

to achieve the same result.  It does not repeal Section 43A.  

Sub-section  (11)  which  came  to  be  inserted  by  the  said  

amendment in Section 43A only declares:-

“(11). Nothing contained in this  section,  except sub-section (2A), shall  apply on and after the commencement  of the Companies (Amendment)  Act, 2000.”

56. What exactly is the meaning of sub-section (11) is to be  

examined?   

57. There  must  be  innumerable  private  companies  in  this  

country.   For  the  purpose  of  our  analysis,  they  can  be  

classified into two categories, (i) private companies which came  

into existence prior to the Amendment Act 53 of 2000 (w.e.f.  

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31.12.2000);  and  (ii)  private  companies  which  came  into  

existence after the abovementioned date.  

58. Insofar as the first of the abovementioned two categories  

is  concerned they can further be categorized into (i)  private  

companies which remained as such, and (ii) private companies  

which  became  public  companies  by  virtue  of  operation  of  

Section 43A.

59. Insofar as private companies which came into existence  

prior to 13.12.2000 and remained as such without falling into  

the net of Section 43A and private companies which came into  

existence  after  13.12.2000,  sub-section  (11)  of  Section  43A  

would have no application.

60. The legal consequences emanating from insertion of sub-

section  (11)  in  Section  43A  only  visit  the  second  category  

mentioned  above  i.e.  private  companies  which  came  into  

existence prior to 13.12.2000 but became public companies by  

virtue of operation of Section 43A.

61. Of  them,  we  are  only  concerned  with  those  private  

companies  which  became  public  companies  by  virtue  of  

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operation of Section 43A(1C), that is, those private companies  

which had accepted deposits from PUBLIC.  Mere acceptance  

of  the  deposits  from  PUBLIC  prior  to  13.12.2000  did  not  

contravene any law.  Such acceptance was only regulated by  

virtue of Section 58A.  Though such private companies were  

treated as public companies by virtue of Section 43A(1C) they  

were entitled to continue those stipulations dealing with the  

matters  specified  under  Section  3(1)(iii)(a)(b)&(c).   It  is  only  

w.e.f.  13.12.2000,  Section  3(1)(iii)  of  the  Act  came  to  be  

amended by inserting sub-clause (d) which obligates a private  

company  to  contain  a  prohibition  against  any  invitation  or  

acceptance  of  deposits  from  PUBLIC  in  such  company’s  

Articles of Association.

62. What  happens  to  those  private  companies  (obviously  

there must be innumerable) which existed prior to 13.12.2000  

and had also invited and collected deposits from PUBLIC as  

they  were  legitimately  entitled  to  do  so  prior  to  the  

amendment?   If  the  conclusion of  the  High Court  that  the  

concept of DEEMED public company is abolished is correct,  

all those private companies should become public companies  

(not  HYBRID/DEEMED  public  companies)  overnight  until  

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their Articles of Association are amended.  As a consequence  

thereof,  their  respective  shareholders  lose  a  vested  right  

flowing out of the Articles of Association (created by a contract)  

which they collectively enjoyed till 13.12.2000 to restrict the  

right of individual shareholders to freely transfer their shares.  

Such  a  collective  right  by  definition  inheres  in  the  

shareholders of a private company and protected by virtue of  

proviso to Section 43A(1C) notwithstanding the fact that such  

companies  were  treated  as  public  companies  prior  to  

13.12.2000.   To  deprive  the  shareholders  of  HYBRID  

companies  such  a  collective  right  would  be  too  drastic  a  

change  overnight  without  giving  any  option  or  time  to  the  

HYBRID  company  and  its  members  to  retain  the  basic  

character of the company as a private company.   

63. Though, in theory, it is open to the legislature to create  

such  a  situation,  whether  the  Parliament  intended  such  a  

drastic  course  of  action  is  the  question.  It  must  be  

remembered  that  in  the  ultimate  analysis  a  company  is  a  

voluntary association of its members who have a fundamental  

right  to  form  associations  under  Article  19(1)(c)  of  the  

Constitution of India, the inference which is obvious from the  

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text of the Constitution and also on cumulative reading of the  

decisions of this Court in  Damyanti Naranga v. The Union  

of  India  & Others,  (1971)  1  SCC 678,  Rustom Cavasjee  

Cooper  v. Union  of  India, (1970)  1  SCC  248,  Bennett  

Coleman  & Co.  &  Others  v.  Union  of  India  & Others,  

(1972)  2  SCC  788.  The  fundamental  right  to  form  an  

association implies the right to form the association on such  

terms and conditions agreed upon by its members, so long as  

such terms and conditions are not in conflict with any law or  

public  policy.   No  doubt,  the  State  can,  by  law,  impose  

restrictions on such rights on the basis of the considerations  

mentioned  in  Article  19(4),  but  such  restrictions  must  be  

reasonable.

64. The destruction of the collective rights of the members of  

the  companies  mentioned in  para  62,  in  our  view,  would  

require, at the least, an express provision of law and such a  

provision  must  be  a  ‘reasonable  restriction’  within  the  

meaning of that expression occurring in Article 19(4).  In the  

absence  of  any  express  provision  which  takes  away  the  

fundamental right of the shareholders of a private company,  

we are inclined to read a restriction on the collective right of  

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the shareholders of a private company to restrict the right of  

the individual shareholders to freely transfer their shares.  

65. Our view is supported by the parliamentary practice and  

history of the amendments made to the Companies Act itself.

66. Under the Act 53 of 2000 when the definition of private  

company  is  amended  by  inserting  a  clause  by  which  

requirement of  having a “minimum paid up share capital of  

one lakh rupees or  such higher  paid up capital  as may be  

prescribed  by  its  articles”  is  introduced  for  the  first  time,  

Parliament  also  gave  a  window  of  2  years  for  the  private  

companies existing on the date of the commencement of the  

Amendment  Act  i.e.  13.12.2000.    By  Section  3(5)12 it  is  

declared  that  companies  failing  to  comply  with  the  newly  

introduced  obligation  “shall  be  deemed  to  be  defunct”  

companies  and  their  names  “shall  be  struck  off  from  the  

register”.   Parliament not only gave a window period to the  

existing companies to take steps to comply with the amended  

law but also provided expressly for the consequences to follow  

on the failure to comply with the law.

12 Section 3(5) – Where a private company or a public company fails to enhance its paid-up capital in the  manner specified in sub-section (3) or sub-section (4),  such company shall be deemed to be a defunct   company within the meaning of section 560 and its  name shall  be struck off from the register  by the  Registrar.

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67. One more reason for our inability to accept the theory of  

abolition  of  HYBRID  companies  is  that  –  if  accepted,  the  

Amendment  Act  53  of  2000  would  have  the  effect  of  

retrospectively taking away the rights collectively enjoyed by  

the shareholders (of private companies which became HYBRID  

companies) from 1956 onwards.  In this context, it is worth  

remembering  the  words  of  this  Court  in  K.C.  Arora  &  

Another v. State of Haryana & Others, (1984) 3 SCC 281 at  

294:

“The legislation is pure and simple, self-deceptive, if we may  use such an expression with reference to a legislature-made  law.  The  legislature  is  undoubtedly  competent  to  legislate  with retrospective effect to take away or impair any vested  right  acquired under  existing  laws but  since  the laws are  made under a written Constitution, and have to conform to  the dos and don’ts of the Constitution, neither prospective  nor  retrospective  laws  can  be  made  so  as  to  contravene  fundamental rights. The law must satisfy the requirements  of the Constitution today taking into account the accrued or  acquired rights of the parties today. The law cannot say, 20  years  ago  the  parties  had  no  rights,  therefore,  the  requirements of the Constitution will be satisfied if the law is  dated  back  by  20  years.  We  are  concerned  with  today’s  rights  and  not  yesterday’s.  A  legislature  cannot  legislate  today with reference to a situation that obtained 20 years  ago and ignore the march of events and the constitutional  rights accrued in the course of the 20 years. That would be  most arbitrary, unreasonable and a negation of history. ...  Today’s equals cannot be made unequal by saying that they  were unequal 20 years ago and we will restore that position  by  making  a  law  today  and  making  it  retrospective.  Constitutional  rights,  constitutional  obligations  and  constitutional consequences cannot be tampered with that  way. A law which if made today would be plainly invalid as  offending  constitutional  provisions  in  the  context  of  the  existing  situation  cannot  become  valid  by  being  made  

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retrospective. Past virtue (constitutional) cannot be made to  wipe  out  present  vice  (constitutional)  by  making  retrospective laws.”

68. Apart from that, it is rightly pointed out by the appellant  

– if Parliament really wanted to put an end to the existence of  

all the HYBRID Companies, Parliament should have deleted all  

reference to the HYBRID (Section 43A) companies in the Act.  

But  Section  111(14)  still  continues  to  make  reference  to  

Section 43A.

69. Therefore,  we  are  of  the  opinion  that  the  concept  of  

HYBRID (Section 43A) companies is not altogether abolished.  

At  least  insofar  as  the  Companies  falling  under  Section  

43A(1C) are concerned which were in existence on 13.12.2000  

would continue as HYBRID Companies.

(C)

70. The other conclusion of the High Court that the failure of  

the  first  respondent  company  to  amend  its  Articles  of  

Association  to  give  effect  to  clause  (d)  of  Section  3(1)(iii)  

rendered the first respondent company to cease to be a private  

company, in our opinion, is irrelevant for the decision on the  

REAL question in this case.

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71. The REAL question is not whether the failure to amend  

the  Articles  of  Association by  the  first  respondent  company  

rendered the first respondent company (which is otherwise a  

private  company)  a  public  company,  but  whether  such  a  

failure destroyed the collective right of the members of the first  

respondent company to have shares whose transferability is  

subject to limitations and restrictions contained in Article 57  

of its Articles of Association.  

72. Originally,  Section  3(1)(iii)  stipulated  -  to  be  a  private  

company a company’s Articles of Association are required to  

contain  certain  stipulations  with  regard  to  the  matters  

specified in clause (a), (b) and (c).  By virtue of the Act 53 of  

2000  w.e.f.  13.12.2000  a  private  company’s  Articles  of  

Association  are  required  to  contain  additional  stipulations  

relating  to  the  matter  contained  in  clause  (d)  also.  The  

question  is  whether  the  newly  introduced  requirement  is  

applicable to existing private companies also or only to those  

which come into existence subsequent to the commencement  

of the Act 53 of 2000?

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73. Section  27(3)  mandates  that  the  articles  of  a  private  

company having share capital (such as the one on hand) shall  

only contain provisions relating to matters specified in clauses  

(a),  (b) and (c) of Section 3(1)(iii) but not matters relating to  

clause (d).   In other words, though the Parliament chose to  

introduce clause (d) in Section 3(1)(iii) (by an amendment in  

the  year  2000),  did  not  think  it  necessary  to  make  a  

corresponding amendment to Section 27(3).  Whether such an  

omission  is  accidental  or  by  a  design  is  required  to  be  

examined?  If it is by a design what is the purpose sought to  

be achieved of such a design requires an examination?   

  74. The Companies Act never prohibited the acceptance of  

deposits.   Prior  to  the  Amendment  Act  of  2000,  there  has  

never been a provision in the Companies Act which altogether  

prohibited companies either public or private from inviting or  

accepting deposits.   Section 58A(1)13 of  the Act,  (which was  

introduced  by  Act  41  of  1974)  for  the  first  time  made  a  

provision enabling the Central Government to prescribe “the  

limits up to which, the manner in which and the conditions  

13 Section 58A. Deposits not to be invited without issuing an advertisement.—(1)  The Central Government   may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which   and the conditions subject to which deposits may be invited or accepted by a company either from the  public or from its members.

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subject  to  which deposits  may be  invited  or  accepted by  a  

company either from the public or from its members”.  The  

remaining  sub-sections  of  Section  58A  make  various  

stipulations regarding the method and manner of inviting and  

accepting (after the insertion of the Section)  deposits or the  

renewal of deposits taken prior to introduction of the Section  

and  the  penalties  for  the  failure  to  comply  with  the  

stipulations  contained  in  the  said  Section  -  the  details  of  

which are not necessary for the present purpose.  But even  

Section  58A  did  not  prohibit  the  acceptance  of  deposits.  

Irrespective of the fact whether a company accepting deposits  

is a private company or a public company, the invitation or  

acceptance of such deposits is only made to strict regime of  

regulations under Section 58A.

75. Then  came,  in  1988,  Section  43A(1C),  which  only  

declared  that  a  private  company either  accepting  deposits  

from or renewing existing deposits (made either after or prior  

to 15.6.1988 respectively) collected from “persons other than  

its members, directors or their relatives” (hereinafter for the  

sake of convenience referred to as “PUBLIC”) shall become a  

public company.  But under the proviso to sub-section (1C),  

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even after becoming a public company, such a Company can  

retain  either  restrictions  or  limitations  contemplated  under  

Section 3(1)(iii).   

76. Therefore,  the  question  is-what  is  the  effect  of  the  

insertion of clause (d) in Section 3(1)(iii)?   

Prior to 1988  :    

77. Whether  a  Company should  accept  deposits  from  

PUBLIC or not is a policy choice only of the company and its  

members.  Even prior to the introduction of Section 3(1)(iii)(d)  

& Section 43A (1C), the members of a private company could  

have  either  permitted  or  prohibited  the  company  from  

accepting  deposits  from  PUBLIC  or  stipulated  conditions  

subject  to  which  deposits  could  be  taken.  If  a  company’s  

internal  policy  prohibited  the  acceptance  of  deposits  from  

PUBLIC  and  contrary  to  such  internal  policy  deposits  are  

collected from PUBLIC it was always open to the members of  

the  company  to  deal  with  the  situation  and  the  persons  

violating the company’s policy.   

78. In 1988, the Parliament thought it necessary to provide  

for  a more rigorous control  and scrutiny of  the activities of  

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accepting  deposits  from  PUBLIC  by  private  companies  and  

introduced sub-section (1C) of Section 43A, thereby enabling  

the State to have a greater control over such activity of such  

private companies by treating them as public companies.  The  

regulations, control and supervision to which the management  

of public companies is subjected to under the Act is higher in  

degree compared to the regulations, control and supervision to  

which the management of a private companies is subjected to  

under  the  Act.  The  control  contemplated  under  Section  

43A(1C)  is  in  addition  to  the  regulations  and  supervision  

brought in by virtue of Section 58A.   

Before the amendment Act 53 of 2000:  

79. If a private company chose to incorporate a stipulation  

not  to  accept  deposits  from  PUBLIC,  it  is  a  matter  of  its  

internal policy.  But if it incorporated such a stipulation and  

defaulted in compliance with such stipulation, the Company  

only ceased “to be entitled to the privileges and exemptions  

conferred on a private company by or under the Act” and the  

“Act  shall  apply  to the company as if  it  were not  a private  

company” – by virtue of the operation of Section 4314 which  14 Section 43. Consequences of default  in complying with conditions constituting a company a private  company.—Where the articles of a company include the provisions which, under clause (iii) of sub-section  (1) of section 3, are required to be included in the articles of a company in order to constitute if a private   company, but default is made in complying with any of those provisions, the company shall cease to be   entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act   

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only creates a legal fiction.  Section 43 does not declare that  

such companies do become public companies unlike Section  

43A.  On the other hand, the proviso to Section 43 enables the  

Central  Government  to  condone  the  lapse  of  such  private  

companies.

“Proviso to Section 43:  

Provided that the Central Government on being satisfied that  the failure to comply with the conditions was accidental or  due to inadvertence or to some other sufficient cause, or that  on other grounds it is just and equitable to grant relief, may,  on  the  application  of  the  company  or  any  other  person  interested and on such terms and conditions as seem to the  Central  Government  just  and  expedient,  order  that  the  company be relieved from such consequences as aforesaid.”

80. Notwithstanding the fact that the Parliament thought it  

necessary for the State to impose a higher degree of control  

over the affairs of the management of such private companies  

inviting and accepting deposits from PUBLIC, Parliament did  

not  think  it  necessary  to  restrict  the  collective  right  of  the  

members of a private company to impose restrictions on the  

right  of  individual  shareholders  to  freely  transfer  their  

respective shares.  Therefore, the proviso to sub-section (1C) of  

Section  43A.   For  that  matter,  in  none  of  the  four  

contingencies  contemplated under  Section 43A(1),  (1A),  (1B)  

and  (1C),  Parliament  thought  it  necessary  to  restrict  such  

shall apply to the company as if it were not a private company.

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collective right of the shareholders of a private company.  Such  

private companies are to be treated as public companies for  

certain purposes.

81. If  a  private  company  chooses  not  to  incorporate  the  

prohibition, such as the one contemplated under Section 3(1)

(iii)(d),  and  accepts  deposits  from  the  public  then  such  

collection of deposits is regulated by Section 58A.  If it chooses  

to incorporate a stipulation but fails to comply with the same,  

it  would  attract  the  consequences  mentioned  in Section 43  

which consequences are also avoidable under the proviso to  

Section 43.  

82. It must be remembered that the kind of control which the  

Parliament  sought  to  impose  on  private  companies  which  

earlier attracted sub-sections (1) to (1B) of Section 43A is now  

thought clearly not necessary by the Parliament.  An inference  

obvious  from  Section  43A(11)  whatever  be  the  other  

implications of those sub-sections.

83. Even during the period when Section 43A operated, the  

Parliament never thought of  curtailing the collective right of  

the members of the private companies to have restriction on  

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the rights of individual shareholder to freely transfer shares.  

Therefore, to believe that such restriction is now sought to be  

imposed  only  in  the  case  of  those  private  companies  in  

existence on 13.12.2000, which had earlier attracted Section  

43A(1C),  but  not  in  the  case  of  private  companies,  which  

earlier  attracted  sub-sections  (1),  (1A)  and  (1B),  would  be  

illogical.

84. The insertion of clause (d) in Section 3(1)(iii) is admittedly  

only prospective.  Therefore, on and after 13.12.2000, if any  

body  proposes  to  create  a  private  company,  the  Articles  of  

Association  of  such  company  must  contain  a  clause  

prohibiting  the  invitation  and  acceptance  of  deposits  from  

PUBLIC.

85. For  all  the  abovementioned  reasons,  we are  unable  to  

agree  with  the  submission  of  the  respondents  that  by  the  

Amendment Act 53 of 2000 and more particularly sub-section  

(11)  of  Section  43A,  the  Parliament  intended  to  curtail  or  

destroy the collective right of  the shareholders of a HYBRID  

company to impose restrictions on the rights of the individual  

shareholders  to  have  unfettered  right  of  transfer  of  their  

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shares.  Such a restriction which, in our view, constitutes a  

restriction  on the  fundamental  rights  under  Article  19(1)(c),  

requires a more express legal authority and cannot be brought  

in by inference.  

86. The effect of the amendment to Section 3(1)(iii) is:  insofar  

as the private companies in existence on 13.12.2000, if they  

choose to make provisions in their Articles of Association to  

give effect to the mandate of Section 3(1)(iii)(d), they become  

private companies w.e.f. such date they make such provision  

by virtue of Section 43(2A) of the Act.  If  they do not make  

such an amendment, they would still  continue to be public  

companies governed by Section 43A(1C) [HYBRID Companies]  

and  can  continue   to  have  provisions  in  their  Articles  of  

Association referable to Section 3(1)(iii)(a), (b) & (c).

87. Here,  an  argument  of  the  respondent  that  such  an  

interpretation  of  sub-section  (11)  creates  “two  classes  of  

private companies and would have discriminatory results” is  

required to be answered.  In our view, the argument is based  

on a wrong premise.  It proceeds on the basis that HYBRID  

companies created prior to 13.12.2000 are private companies.  

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We  have  already  held  that  HYBRID  companies  are  public  

companies which in law are entitled to retain some features of  

the  private  companies  if  the  shareholders  choose  to  retain  

them.  Therefore, the question of discrimination does not arise.

88. Therefore,  in  our  opinion,  the  failure  of  the  first  

respondent company to amend its Articles of  Association to  

give effect to clause (d) of Section 3(1)(iii) does not effect the  

operation of its Article 57.

89. That  leaves us  with  two more questions  raised by  the  

respondents herein.  They are contained in submissions (iv),  

(v) and (vi) noted earlier in the judgment.  In fact, submissions  

(iv) and (v) are interconnected.  The substance is that in view  

of the fact that the appellants herein opposed the resolution to  

amend  the  articles  of  association  of  the  first  respondent  

company to bring them in tune with the newly inserted clause  

(d) of Section 3(1)(iii), they are estopped from arguing that the  

first  respondent  company  is  not  a  public  company  and  

secondly in view of the judgment of the Bombay High Court  

dated  14.11.2008  in  Company  Petition  No.77  of  1990  “to  

which  the  appellants  herein  were  originally  the  parties  but  

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withdrew  from  the  said  company  petition  later”  where  the  

Bombay High Court held as follows:

“Insofar as the present Petitioners are concerned as a matter  of fact they are free to deal with the shares held by them.  In  that, the shares are now freely transferable.  Indeed, when  the  Petition  was  presented  at  the  relevant  time,  the  Respondent No.1 Company was a Private Limited Company.  As a result, there was restriction in the transfer of shares.  However,  it  is  common  ground  that  now  the  Respondent  No.1 Company has become a Public Limited Company as a  result  of  Special  Resolution  moved  in  the  Extra  Ordinary  General Meeting dated 5th May 2001 having been defeated.  Having acquired the status of a Public Limited Company, the  restriction  on  the  right  to  transfer  the  shares  which  was  applicable to Private Limited Company, would naturally get  diluted.

The  appellants  are  precluded  to  argue  that  the  first  

respondent Company is not a public company.

90. Both the submissions are required to be rejected.  The  

submission based on the principle of estoppel is required to be  

rejected in view of my conclusion that the HYBRID companies  

contemplated under Section 43A(1C), which were in existence  

on 13.12.2000 would continue to be in existence.

91. It is already concluded earlier in this judgment that the  

requirement of amending the Articles of Association pursuant  

to the Amendment Act 53 of 2000, insofar as such companies  

are concerned, is only optional on the part of the shareholders.  

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The fact that the shareholders of a HYBRID company exercised  

option  not  to  amend  the  Articles  of  Association  thereby  

converting a HYBRID company into a private company does  

not prevent such shareholders from advancing an argument  

that the first respondent company is not a public company but  

still a HBRID company.

92. The second submission is that the judgment in Company  

Petition No.77 of 1990 is binding upon the appellants on the  

ground that  they were parties to the said company petition  

earlier  and  withdrew  from  the  same  unconditionally  and,  

therefore, they are precluded from arguing anything contrary  

to the conclusion recorded therein.   

93. The principles of  law which preclude a party to a civil  

litigation from agitating certain issues are contained in Section  

11 and Order II Rule 2 of the Code of Civil Procedure, 1908.  

Section  11  deals  with  the  principle  of  res  judicata and  it  

prohibits a Court from trying any suit or issue in which the  

matter directly and substantially in issue in a former suit has  

been heard and finally decided.

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94. The question whether the first respondent Company is a  

public company or a HYBRID company or a private company  

was  never  directly  and  substantially  in  issue  in  Company  

Petition  No.77  of  1990.   The  parties  to  the  said  company  

petition proceeded on the basis that in view of the fact that an  

amendment to the Articles of Association to give effect to the  

newly  inserted  clause  (d)  of  Section  3(1)(iii)  could  not  be  

carried  on,  the  first  respondent  company  became  a  public  

company.  Therefore, the Court never examined that question  

of  law.   Hence,  it  cannot  be  said  that  the  appellants  are  

precluded from raising such a question of law in the instant  

appeal.

95. We therefore, do not propose to examine the question as  

to what is  the effect  of  the appellant’s  withdrawal  from the  

abovementioned company petition.

96. The  only  other  submission  of  the  respondent  which  

requires to be dealt with is regarding the transfer of five shares  

of the appellant which, according to the respondents, resulted  

in the membership of the first respondent company exceeding  

fifty thereby rendering the first respondent a public company.  

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Unfortunately, though the High Court noted the submission at  

para  9,  it  did  not  record  any  finding  in  this  regard.   We,  

therefore, decline to examine this question.  This Court cannot  

be converted into a Court which enquires into the questions of  

fact for the first time.

97. In  view  of  the  fact  the  High  Court,  though  noted  the  

contentions  of  the  respondent  herein,  failed  to  record  any  

conclusion thereon, we deem it appropriate to remit the matter  

to  the  High  Court  only  for  the  purpose  of  considering  the  

abovementioned  submissions  of  the  respondent  and  take  

appropriate decision.   We order accordingly.   

98. This appeal stands allowed.

………………………….J.                                                           (J. Chelameswar)

………………………….J.       (A.K. Sikri)

New Delhi; October 28, 2014

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IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.  2481 OF 2014

Darius Rutton Kavasmaneck  …Appellant

Versus

Gharda Chemicals Limited & Others …Respondents

O R D E R

In  view  of  the  order  remitting  the  matter  to  the  High  

Court, we deem it appropriate that the interim order passed  

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earlier  on  22.7.2011  by  this  Court  will  continue  till  the  

disposal of the matter by the High Court.

The  High  Court  is  requested  to  dispose  of  the  matter  

expeditiously in view of the long pendency of the matter.

....................................J. (J. CHELAMESWAR)

....................................J. (A.K. SIKRI)

NEW DELHI OCTOBER 28, 2014.

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