Corporate Law Case Brief – Chandrakant Khare v Shantaram Kale

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Facts

  • The first meeting of the Aurangabad Municipal Corporation was held on May 6, 1983 at 2 PM and the polling for the offices of mayor, deputy mayor and members of the standing committee was supposed to be held at 2: 30 PM. But at 2: 30 PM, the opposition created chaos and demanded that the meeting to be adjourned at a later date.
  • When the situation was brought under control, the Municipal Commissioner announced that the meeting would continue and the elections would be held at 4.30 p.m. The petitioner filed a protest at 4.15 p.m. stating that the meeting had been adjourned by the Municipal Commissioner for the day and hence meeting can’t be held.
  • Subsequently Respondents 1 and 2 were declared elected as Mayor and Deputy Mayor respectively. The appellant filed a writ petition before the high court on the ground that the meeting in which the election was held was invalid. The High Court held that the meeting was not adjourned for the day or sine die, but was only postponed, to be held as soon as peace was restored on the very day and upheld the election of Respondents 1 to 8. Against the judgment of the High Court, the petitioner has filed the present special leave petition.

Issue

Whether the first meeting of the corporation presided over by the commissioner was adjourned for the day/adjourned sine die or was merely suspended?

Ratio

  • A chairman by himself cannot postpone a meeting. The proper course to adopt is to hold a meeting and then adjourn it to a more convenient date.
  • An adjournment will be within his competence in the case of a disorder but for no longer than he considers necessary and his decision should be communicated to the meeting at least to the extent to which it is possible for him to do so.
  • If the chairman adopts any other course, the members who can constitute a ‘quoram’ (the minimum number of members of an assembly or society that must be present at any of its meetings to make the proceedings of that meeting valid) may continue with the meeting and lawfully transact the announced business.
  • Adjournment is the act is postponing a meeting of any private or public body or any business until another time, or indefinitely, in which case it is an adjournment sine die. The word applies also to the period during which the meeting or business stands adjourned.
  • An Adjournment may be:
  1.   For an interval expiring on the day of the adjournment.
  2. For an interval expiring on some later date.
  3. For an indefinite time (i.e. sine die).
  4. Until a fixed time and date.
  5. To another place.

Holding

The first meeting of the Municipal Corporation fixed by the municipal commissioner was not adjourned or adjourned sine die but was only suspended and was to resume when peace and order was restored.

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Corporate Law Case Brief – LIC of India v. Escorts Ltd.

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FACTS

With an intention to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in shares of Indian companies, the Government of India decided to provide incentives to such individuals with prior permission of RBI.

Desiring to take advantage of the Non-Resident Portfolio Investment Scheme and to invest in the shares of Escorts Ltd., (an Indian company), thirteen overseas companies, twelve out of whose shares was owned 100% and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Ltd., designated the Punjab National Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as their broker for the purpose of such investment.

Escorts Ltd. sought detailed information from Punjab National Bank and the brokers about the names of investors and also whether the Reserve Bank of India has given permission to them. And Escorts didn’t register the transfer of share.

Life Insurance Corporation of India who along with other financial institutions held as many as 52% of the total number of shares in the company, issued a requisition dated 11.2.84 to the company to hold an extra ordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others in their place.

Union of India, the Reserve Bank of India and the Caparo Group Ltd. claimed that the requisition to hold the meeting was arbitrary, illegal, ultra vires etc.

ISSUE-

Whether LIC has right of issuing requisition notice to hold extra ordinary general meeting?

 HELD-

  1. New directors to continue as Managing Directors until the Board of Directors take a decision in the matter.
  2. The action of the Life Insurance Corporation of India in issuing the requisition notice to hold an extra ordinary general meeting of the Escorts Company Ltd. for the purpose of removing nine of the part time Directors of the company and for nominating nine others in their place is neither contrary to the provisions of section 284 of the Companies Act, 1956 nor ultra vires to the powers vested in the Life Insurance Corporation under section 6 of the Life Insurance Corporation of India Act.
  3. The holders of the majority of the stock of a Corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. This is the essence of corporate democracy.
  4. Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements to call an extra ordinary general meeting in accordance with the provisions of the Companies Act, 1956. He cannot be restrained from calling a meeting and he is not bound to disclose the 918 reasons for the resolution proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review.
  5. When a requisition is made by a shareholder calling for a general meeting of the company under the provisions of the companies Act validly to remove a director and appoint another, an injunction cannot be granted by the Court to restrain the holding of a general meeting.
  6. When the State or an instrumentality of the State ventures into the corporate world and purchases shares of a company it assumes to itself the ordinary role of a shareholder and dons the robes of a shareholder, with all the rights available to such a shareholder. Therefore, the State as a shareholder should not be expected to state its reasons when it seeks to change the management by a resolution of the company, like any other shareholder.
  7. The rights of a share holder are (i) to elect directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; and (vii) to share in the surplus on winding up.
  8. The Reserve Bank of India alone that has to decide whether permission may or may not be granted. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally before any Court. The Reserve Bank of India was not guilty of any malafides in granting permission to the Caparo Group of companies. Nor was it guilty of non-application of mind.
  9. There was a total and signal failure on the part of Punjab National Bank in the discharge of their duties as authorised dealers.

Court asked RBI to look into matter and gave them power to take actions against Punjab National Bank as they think are necessary.

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Corporate Law Case Brief – World Phone India Pvt. Ltd v. WPI Group Inc USA

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Facts:

  • WPIPL, is a private company partly owned by WPI Group (43.75%), Mr. Viviek Dhir (43.75%)and Mr. Pankaj Patel (12.5%).
  • On 22nd September, the shares of Mr. Pankaj Patel were transferred to Mr. Vivek Dhir and his wife, Mrs. Malini Dhi, who was also appointed as an Additional Director.
  • On 31st October, in the Board Meeting, the Board of Directors of the company passed a resolution approving a rights issue of 1,49,303 equity shares in accordance with the Articles of the company. Mr. Aditya Ahluwalia had not been present for this meeting as he had not been in the country at that time.
  • The result of this transfer of shares was that the chairman of WPI Group, Mr. Aditya Ahluwalia was now a minority stakeholder in the company.
  • He, therefore, challenge the validity of the board meeting on the grounds of Clause 6.2 of the JVA entered between the Board Members giving an affirmative vote to Mr. Aditya Ahluwalia in all matters.

Issue:

  • Whether the provisions of an agreement, that are not inconsistent with the Act, but are also not part of the AoA, can be said to be applicable?

Analysis:

  • The legal position is that where the AoA is silent on the existence of an affirmative vote, it will not be possible to hold that a clause in an agreement between the shareholders would be binding without being incorporated in the AoA.
  • In the present case, although the JVA was entered into in 1999 itself, there was no move made by Mr. Aditya Ahluwalia or WPIGI to have the AoA amended at any point in time to incorporate the affirmative vote provided to WPIGI under Clause 6.2 of the JVA.

Holding:

  • The court held that even a provision in the Shareholders’ Agreement which is not contrary to the Articles of Association or the Companies Act, 1956 cannot be enforced against the company if it is not mentioned in the AoA.

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Corporate Law Case Brief – VB Rangaraj v. VB Gopalakrishnan

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Articles of Association

Facts: Family consisting of two brothers Baluswamy Naidu and Guruviah Naidu owning a Private company being the sole shareholders of the company, with equal distribution of shares among them. They entered into an oral agreement , that each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his shares, he would give the first option of purchase to the members of that branch and only if the offer so made was declined, the shares would be sold to others. There was a restriction on transfer of shares by way of a right of pre-emption which were not stated in the agreement. The restrictions are in the latter event the shares of the deceased member shall be first distributed among the existing members equally and if they are to be transferred to any new member, it would be done so with the consent of the majority of the existing members.

One of the son’s of Baluswamy Naidu sold the shares to sons of Guruviah Naidu . Hence the plaintiffs who are the other son’s of Baluswamy’s filed the present suit for :

(i)         a declaration that the said sale was void and not binding upon the plaintiffs

(ii)        an order directing defendants to transfer the said shares to the plaintiffs

(iii)       a permanent injunction restraining defendants from applying for registering the said shares in their names and from acting adversely to the interests of the plaintiffs on the basis of the transfer of the said shares.

Issue:

 Whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company.

Ratio:

The Articles of Association are the regulations of the company binding on the company and its shareholders and that the shares are a movable property and their transfer is regulated by the Articles of Association of the company.

“Whether under the Companies Act or Transfer of Property Act, the shares are, therefore, transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its Articles, if any.  A restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders.  The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in Articles.”

Judgement: The Trial Court holds that the sale of the said shares was invalid and not binding on the plaintiffs , and directed the defendants  to transfer the said shares to the plaintiffs, and granted permanent injunction . High Court Reversed the decision by Trial Court and held that

(i)         the sale of the shares by the defendant in favour of other two defendants was valid and the plaintiffs are not entitled to purchase the said shares.

(ii)        the agreement was not binding on the company and the shareholders.

(iii)       the company was not bound in law to register the said shares in the plaintiffs’ names.

The oral agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member’s right to transfer his shares which are contrary to the agreement. They are, therefore, not binding either on the shareholders or on the company.

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Corporate Law Case Brief – Boreland’s Trustee v. Steel Bros. Co. Ltd.

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This case is a U.K company law case which concerns its issues relating to the enforceability of a company’s constitution and the nature of the company’s share.

Facts:

  • Mr Borland was a shareholder. He turned bankrupt and the company he was working for had a pre-emption rule that upon a shareholder’s bankruptcy, his shares would be transferred to the manager or the directors at the fair value price and not at the current value price.
  • The current value price is the current true value of the share which is above par to the fair value price.
  • Borland’s trustee argued that the article which was imposed by the company upon a shareholders bankruptcy was invalid and fraud as a shareholder upon turning bankrupt was forced to part his shares at a value below the current value and it went against the bankruptcy laws of the state.
  • He requested an injunction against the article of parting shares or share transfer at anything below the current value.
  • He argued against Steel Brothers limited on two major grounds. They are
  • 1) Absolute Ownership
  • 2) Rule Against Perpetuity
  • Rule Against Perpetuity – The rule basically says any interests that may be vested in a particular share or property is forbidden in the future. Thus he states that since his shares are transferred to the manager or the director of the company, his future rights are taken away in the share or the property and this is the sole reason he frames his second argument on.

Issues:

  • The issue, in this case, was whether the pre-emption rule created by the company relating to a shareholders bankruptcy went against the bankruptcy laws and was eventually void?

Judgment

  • The judge, in this case, Farwell J rejected the argument put forward by Borland’s Trustee and held that the article was valid.
  • The grounds on which the judge held its decision was that
  • 1) The transfer could be made because the contract engendered in the articles of association is always prior to the rights contained in a share or the shareholder.
  • Also, he held that this rule was fair and it was a fair agreement for the business of the company. They were binding equally on all shareholders and there was nothing put forward by any other shareholder about such a fraudulent rule of a share transfer and thus nothing against the bankruptcy laws.

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Corporate Law Case Brief – Lakshmanaswami Mudaliar v. L.I.C.

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Facts:

  • At an Extraordinary General Meeting of the shareholders of the United India Life Assurance Company Ltd., a resolution was passed, among other matters sanctioning a donation of Rs. 2 lakhs from out of the Share.
  • On July 1, 1956, the Life Insurance Corporation Act came into force by the provisions of which on the appointed day all the assets and liabilities appertaining to the controlled business of an insurer vested in the Life Insurance Corporation.
  • BY s. 15(l)(a) of the Life Insurance Corporation Act power was given to the Corporation to apply to the Tribunal for relief in respect of payments made by the insurers, during the five years preceding the date of vesting, not reasonably necessary for the purpose of the controlled business.
  • The Corporation applied to the Tribunal for relief in respect of the payments of Rs. 2 lakhs by the Company to the appellants on the ground that the said payment was ultra vires the powers of the company and was not reasonably necessary for the purpose of the controlled business. The Tribunal ordered the appellants to restore the sum of Rs. 2 lakhs to the Corporation.
  • Then a special leave application was filed to the Supreme Court in appeal of the matter decided in the tribunal.

 Issues:

  • Whether the plaintiff consented to the subletting of parts of the demised premises and if so, when and to what effect ?

Holding:

  • An act of the company is ultra vires, if it is not:
    • Essential for the fulfilment of the objects stated in the Memorandum
    • Incidental or consequential to the attainment of its objects
    • Which the company is authorized to do by the company Act, in course of its business.
    • Where a company does an act which is ultra vires, no legal relationship or effect ensues therefrom. Such an act is absolutely void and cannot be ratified even if all shareholders agree.
    • The bearers of the company who were responsible for passing the resolution ultra vires the company are personally liable to make good, the amount belonging to the company which was unlawfully disbursed in pursuance of the resolution.
    • Section 13 of the Company Act (1956), required to specify the main object of the company and object ancillary to the attainment of the main object.
    • It was held that the Memorandum of Association of a company must be read fairly and its import derived from a reasonable interpretation of the language which its employs. Where a particular act has not been provided for in the Memorandum of Association, the directors cannot seek recourse to the Articles of Association to imply that such business falls within its objects.
    • The Memorandum of Association has to be read with the Articles of Association, where the terms are ambiguous or silent. This process may explain the provisions of the Memorandum itself but cannot extend to the scope.

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Corporate Law Case Brief – Ashbury Rly. Carriage & Iron Company v. Riche

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Facts:

  • In this case the objects set out in the company’s memorandum were “to make and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents.” The Directors of the Company entered into a contract with Riches for financing a construction of a railway line in Belgium. The Contract was ratified by all the members of the company, but later on it was repudiated by the Company. Riche sued the company for the breach of contract.

Issue:

  • Whether the contract was valid and if not, whether it could be ratified by the members of the company?

Held:

  • The contract was beyond the objects as defined in the objects clause of memorandum and therefore it was void, and
  • The Company had no capacity to ratify the Contract.
  • The contract of employment with Mr Riche was ultra vires for the words in the objects clause
  • ‘to make sell or lend on hire….. all kinds of railway plant …. to carry on the business of  mechanical engineers and general contractors’ DID NOT extend to the construction of an actual railway line.
  • An ultra vires act or contract is void because the Company lacks the capacity to make such contract, how can they have capacity to ratify it. If the shareholders are permitted to ratify an ultra vires act or contract, it will be permitting to do the Act which Parliament is prohibiting to do so.
  • The Company incorporated under the Companies Act has power to do only those things which are authorized by its object clause of its memorandum and anything not so authorized (expressly or impliedly) is ultra vires the company and cannot be ratified or made effective even by unanimous agreement of the members.
  • The Directors were made personally liable.

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Corporate Law Case Brief – Royal British Bank v. Turquand

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1) BACKGROUND:

– Doctrine of Constructive notice

  • The Memorandum of Association of a Company has to be lodged with the Registrar of Companies.
  • This is available for public inspection, people doing business with the Company are free to inspect the document to see if there is any limitation of powers or limitations placed on the nature of the business.
  • This created a problem- outsiders are deemed to know any limitation placed on the Directors of the Company.
  • Therefore if later, it was found that there was some irregularity within the Company in respect of any decisions, outsiders dealing with the Company are deemed to be aware of it.

2) FACTS:

  • Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. It was incorporated under the Joint Stock Companies Act 1844.
  • The company had given a bond for £2000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary.
  • The company alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow what had been authorised by a company resolution.
  • A resolution had been passed but not specifying how much the directors could borrow.

The Company claimed that there was no resolution passed authorising the issue of the bond and that therefore the Company was not liable

3) HELD:

The Court held that the Company was entitled to sue on the bond. As the requirement for the resolution was a matter of internal regulation for the Company and the Bank could not know whether such resolution had in fact been passed, it was entitled to presume that the resolution had indeed been passed.

The rule is also known as the Indoor Management rule.

4) TURQUAND RULE OR THE INDOOR MANAGEMENT RULE:

The rule in Turquand’s case is a presumption of regularity. In other words, a person dealing with the Company is entitled to presume that all the internal procedures of the Company have been complied with. This is a practical approach to solving problems facing outsiders because an outsider would have difficulty to discover what is going on in the Company.

To summarize the above points-

  1. If an officer of the Company has exceeded his authority as given to him by the Articles of Association.
  2. There has been some non-compliance with an internal procedure
  3. The outsider may presume that the internal procedure had been complied with.

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Corporate Law Case Brief – Ramana Dayaram Shetty v. International Airports Authority of India

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Facts:

  • The International Airport Authority of India invited tenders by a public notice for putting up and running a second class restaurant and two snack bars at the International Airport, Bombay.
  • THE NOTICE STATED IN:

PARAGRAPH (1): Tenders were invited from registered second class hoteliers having at least five years’ experience for putting up and running a second class restaurant and two snack bars at the Bombay Airport for a period of three years.

PARAGRAPH (8): Acceptance of the tender would rest with the Airport Director who does not bind himself to accept any tender and reserves to himself the right to reject all or any of the tenders received without assigning any reasons therefor.

Out of the six tenders that were received, only the tender of the 4th respondents was complete and had offered the highest amount as license fee. All the other tenders were rejected because they were incomplete.

  • The conditions of paragraph (1) of the tender notice were not satisfied by the fourth respondent. He was therefore called upon by the authorities for production of documentary evidence.
  • The fourth respondent reiterated that it had considerable experience of catering for various reputed commercial houses, clubs, messes and banks and that they had Eating Houses Catering Establishment (Canteen) Licence. Satisfied with the information given by the fourth respondents, the first respondent accepted their tender on the terms and conditions set out in its letter.

Arguments of the Appellant:

The Airport Authority was bound to give effect to the most important condition of eligibility and acceptance of the tender by the first respondent was in violation of the standard or norm of eligibility set up by the first respondent.

Arguments of the Respondent:

  1. The grading is given by the Bombay City Municipal Corporation only to hotels or restaurants and not to persons running them and, therefore there could be no second grade hotelier.
  2. The notice setting out the conditions of eligibility having had no statutory force.
  3. The Airport Authority reserved to itself the right to reject all or any of the tenders without assigning any reasons and, therefore, it was competent to it to reject all the tenders or negotiate with any person it considered fit to enter into a contract

Held:

  • Once the norms and standards are laid down by any executive authority he cannot go back from the standards established. It is the very essence of the rule of administrative law which was taken from the enunciation of Mr. Justice Frankfurter in Viteralli v. Seton where the learned judge held that “an executive agency must be rigorously held to the standards by which it professes its action to be judged”. This principle was later adopted by Supreme court in S. Ahluwalia v. Punjab and by Mathew, J. in Sukhdev v. Bhagatram.
  • Every action of the executive government must be informed with reason and should be free from arbitrariness.
  • Judgment of Mathew, J. in Punnan Thomas v. State of Kerala where it was held that

a government cannot lay down arbitrary and capricious standards for the choice of persons with whom alone it will deal”.

  • Judgment of Ray, J. in Erusian Equipment and Chemicals Ltd. v. State of West Bengal where it was held

when the government is dealing with the public, whether by way of giving jobs or entering into a contract, or granting license or quotas or other forms of largesse, it cannot act arbitrarily at its sweet will but it has to follow according to the norms and standards which is not arbitrary, irrational or irrelevant. The power and discretion of the government in awarding jobs, granting licenses, quotas, etc. must be in conformity with the rational, relevant and non-discriminatory standards or norms, and if the government departs any time its action is liable to be struck down unless it is proved that the action of government is based on some valid principle which is not irrational, unreasonable and discriminatory.

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Corporate Law Case Brief – Mysore Paper Mills Ltd. v. Mysore Paper Mills Officer’s Association

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FACTS:

The Respondent joined the services of the Appellant Company. The Company transferred him to the regional office in Calcutta. The Respondent challenged this order stated that this transfer was made to prevent him from becoming an Executive Member of the Appellant Company’s Officer’s Association.

ISSUE:

(i) Is the present Writ Petition maintainable against the Appellant Company? Is the Company considered “State or other authority” within Article 12 of the Constitution of India?

ANALYSIS:

  • Section 617 of the Companies Act, 1956 defines “Governmental Company”.
  • Section 617: Definition of” Government company”. For the purposes of 3 this Act] Government company means any company in which not less than fifty- one per cent. of the 4 paid up share capital] is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments 5 and includes a company which is a subsidiary of a Government company as thus defined].
  • If the Appellant Company falls within the ambit of the above definition, it is said to be ‘State or other authorities’ under Article 12 of the Constitution.
  • The Court also stated that the tests to determine whether a corporation is an instrumentality or agency of the Government laid down in Ajay Hasia and International Airport Authorities case are not conclusive but merely indicative which have to be used with care and caution, because while stressing the necessity of a wide meaning to be placed on the expression “other authorities”, it must be realized that it should not be stretched so far as to bring in every autonomous body which has some nexus with the government within the sweep of the expression.
  • The appellant-company in the present case is a Government company as envisaged in Section 617 attracting Section 619 of the Companies Act as more than 97% of the share capital has been contributed by the State Government and the financial institutions controlled and belonging to the Government of India.
  • The appellant-company with important public duties obligating to undertake, permit, sponsor rural development and for social and economic welfare of the people in rural areas by undertaking programmes to assist and promote activities for the growth of national economy which are akin and related to the public duties of the State.
  • 5 out of the 12 directors are Government and departmental persons, besides other elected directors also are to be with the concurrence and nomination of the Government and the various other form of supervision and control.
  • The above mentioned points show that the State Government has deep and pervasive control of the Appellant Company and its day-to-day administration confirm that the position of the Appellant Company is nothing but an instrumentality and agency of the State Government and the physical form of company is merely a cloak or cover for the Government.

Holding:

The Appellant Company falls within the ambit of “State and other authorities” under Article 12 of the Constitution. Appeals fail and stand dismissed.

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