ORDER
S. Balasubramanian, Chairman
1. In this petition filed under Section 397/398 of the Companies Act, 1956 (“the Act”), alleging acts of oppression and mismanagement in the affairs of M/s Kero Rajendra Monolithics Limited (the company), we passed an order on June 29, 1998, incorporating therein the terms of settlement of the disputes between the parties arrived at in the hearing on June 24, 1998. This consent order was based on a draft order signed by one A.K. Chattopadhayay, authorised representative of the respondents and one Shri Sanjay Kumar Gupta, authorised representative of the petitioners. This consent order stipulates certain acts to be done by the respondents within a set time-frame. By an application, C. A. No. 192 of 1998 filed on August 10, 1998, the respondent-company sought for recalling the consent order on various grounds. The main ground is that A. K. Chattopadhayay, a practising company secretary who represented the respondents, did not have any authority to enter into any terms of settlement and that in the hearing held on June 24, 1998, he was only instructed to seek adjournment of the hearing and as such the said order is not binding on the respondents. When this application was pending, the petitioners filed an application, C.A. No. 265 of 1998, on November 9, 1998, in which they have sought for various reliefs, inter alia, including direction to the respondents to comply with the consent terms as recorded in our order dated June 29, 1998, or in default for appointment of a special officer to take charge of the assets of the company and dispose them of to satisfy all the claims of the petitioners as per the consent order.
2. Before dealing with the applications, it is appropriate to give a gist of the consent order : There are 11 clauses in the consent order. The first clause deals with the refund of Rs. 20,84,800 paid by the petitioners as application money. The second clause deals with the refund of Rs. 56,53,400 being the value of shares held by the petitioners at par value of Rs. 10 each by the company and consequent reduction in the share capital. The third clause provides for payment of the above sums of money between December 15, 1998, and June 30, 1999, and for issuing an irrevocable guarantee from a nationalised bank in favour of the petitioners towards the payment of the above mentioned sums of money. The fourth clause deals with indemnifying the first petitioner against any claim in respect of personal guarantees given by him on behalf of the company. The fifth clause deals with giving bank guarantees for payment of certain sums of money to certain foreign companies for supplies made to the company which have been guaranteed by the first petitioner and authorising the first petitioner to enforce the guarantees in the event of the company failing to make payment of the sum within a year from the date of supply. Clause 6 deals with payment of arrears of rent, electricity charges, etc., in respect of premises in Calcutta, to the seventeenth petitioner with the stipulation that after payment of a fixed sum as stated in the consent terms, the balance will be settled as per the decision of one Shri Majumdar and one Mr. Asim K. Chattopadhayay. The seventh clause stipulates reimbursement of all expenses incurred by the first petitioner on account of the company. The eighth clause provides for payment of dividend on shares held by the petitioners. The ninth clause provides for enforcing the guarantees given in respect of payments as specified in clauses 1 and 2 in the event of failing to pay the amounts as stipulated. The tenth clause is a default clause according to which in the event of committing default in complying with the above terms, the shareholding of the respondents and all shares issued after March 31, 1997, shall stand cancelled and forfeited and that respondents Nos. 2 to 7 would cease to act as directors of the company. The eleventh clause stipulates that till all the amounts specified in the order are paid, the shareholding of the petitioners would continue and one of the persons nominated by the petitioners would attend the board meetings.
3. Both the applications were heard together at Calcutta on March 5, 1999. Shri Jayahta Mitra, senior advocate appearing for the respondents, submitted that the consent order should be recalled for the reasons that Shri Chattopadhayay, who represented the company in the hearing on June 24, 1998, had no authority to enter into the said consent terms, that there was no ad idem in respect of an important term in the consent order and that the consent terms entered into cannot be even otherwise implemented for want of definiteness in some of the terms of the consent. According to him, the petitioners and the respondents had certain discussions on June 23, 1998, with a view to resolve the disputes and the same was inconclusive. In view of the on-going discussions, the authorised representative was specifically instructed to seek adjournment of the hearing fixed on June 24, 1998, and that is the reason why none from the respondents’ side was personally present in the hearing. Therefore, by entering into the consent terms, which are not in the interests of the respondents, the authorised representative had exceeded his authority and as such the same is not binding on the respondents. That is why, as soon as they received the order on July 24, 1998, they filed an application on August 10, 1998, seeking for recalling the said consent order. He dealt with various clauses in the consent order. He submitted that refund of the application money as specified in clause 1 had been agreed in the meeting held on June 23, 1998, while in regard to clause 2 it was never in the contemplation of the respondents that they would purchase four lakh shares held in the name of the German company which were alleged to have been transferred to the first petitioner, at par value as provided in that clause. As a matter of fact, the respondents have been questioning the alleged transfer inasmuch as no valid transfer deeds have been lodged with the company. He also submitted that the authorised representative had also later informed the company that he was not aware that the amount mentioned in this clause included the value for the four lakh shares. Thus there was no ad idem as far as this amount is concerned. He further submitted that this clause provides for reduction of share capital of the company to the extent of about Rs. 56 lakhs. Such reduction would be impossible in view of the company incurring losses and as such would not be permitted by the banks and other financial institutions. He submitted that as of date the company owes Rs. 6 crores to the bank and the bank has stipulated that the share capital should be increased and there should be no reduction in the share capital. In other words, he submitted that this provision in the clause alone would make the consent terms invalid as such reduction, etc., would be against the interest of the company. In regard to clause 3, it is impossible to visualise the provision of bank guarantee as such commitment could never have been made without discussions with bankers. In regard to clause 4 which deals with indemnifying the first petitioner, the respondents have no objection to this clause. In regard to clause 5 relating to payment to foreign suppliers, they are not parties to the proceedings and, therefore, giving a commitment in this regard does not arise especially when they have not initiated any legal proceedings and that the petitioner has not furnished any documentary proof of his having stood guarantee for supplies made to the company. In regard to clause 6, he submitted that the amount of rent, etc., has not been quantified and as such giving a commitment on the unquantified and unascertained amount can never form part of the consent terms. As far as clause 9 is concerned, the question of enforcing the guarantee does not arise in view of the submissions in regard to clause 3. In regard to Clause 10, he submitted that this type of default clause could have never been agreed to by the respondents especially when it provides for forfeiture of the shares held by them and the other shareholders when all of them are not parties to the proceedings. Enforcement of this order would mean serious miscarriage of justice to these other shareholders and as such as decided in Snehalata Cold Storage P. Ltd. v. State Bank of India [1995] 1 CHN 152 this consent order can be recalled.
4. Dealing with the legal aspects of the consent terms, he submitted that the consent terms should have been signed by the parties as provided in Order 23, Rule 3 of the Code failing which the consent terms are not valid. For this proposition, he relied on Gurpreet Singh v. Chatur Bhuj Goe, AIR 1988 SC 400. In the present case, he stated, that the parties have not signed the consent terms. Further, he submitted that the board of the company had authorised two directors to defend the proceedings and they had engaged Shri Chattopadhayay. These directors had not been authorised to enter into any consent terms and as such Shri Chattopadhayay could not have been given such authority by these directors. Referring to the letter of engagement given to Shri Chattopadhayay, learned counsel submitted that no authority has been given to him to enter into any compromise. For the proposition that when an authorised representative does not have the authority to compromise, then, the same cannot be enforced by the court, learned counsel relied on Sheonandan Prasad Singh v. Hakim Abdul, AIR 1935 PC 119, and Smt. Jamilabai Abdul Kadir v. Shanharlal Gulabchand, AIR 1975 SC 2202. He also referred to the observation of the apex court in the latter case that a compromise entered into by an authorised representative should be to the benefit of his client. In this case, according to him, the reduction in the share capital is not to the benefit of his clients as also the default clause.
5. He further submitted that any compromise entered into in violation of the law is invalid. Since, the terms of compromise stipulate reduction in the share capital and transfer of shares without valid transfer instruments in violation of the relevant provisions of the Companies Act, such terms cannot be given effect to. In this regard, he relied on Mannalal Khetan v. Kedarnath Khetan [1977] 47 Comp Cas 185 (SC) and Damodar Valley Corporation v. Mritunjoy Basu [1995] 1 CLT 275. He further submitted that some of the terms of compromise relate to indefinite and contingent terms which are not enforceable as decided in Jaywantraj Punamiya v. Choksi arid Co. Pvt. Ltd. [1997] 2 JT 518 (SC). He further submitted that clause 5 which gives the authority to the first petitioner to invoke bank guarantees given in favour of third parties is unenforceable by him and as such unlawful. No unlawful compromise can be enforced and can be recalled as decided in Banwari Lal v. Smt. Chando Devi, AIR 1993 SC 1139.
6. Summing up his arguments, Shri Mitra submitted that the consent terms recorded in the order dated June 29, 1998, are without authority, unenforceable, not to the benefit of the company, involve the interest of a large number of shareholders who were not parties to the proceedings, and were never in the contemplation of the respondents. He submitted that the test to be applied is whether the parties could have agreed to this sort of compromise. The answer to this would be that the parties could have never envisaged this type of compromise which would be completely against the interest of the respondents. Therefore, he submitted that the order dated June 29, 1998, should be recalled and the application filed by the petitioners, viz., C. A. No. 265 of 1998 be dismissed.
7. S. N. Mookherjee, advocate appearing for the petitioners, submitted that the consent terms were entered into after full discussion with Shri Chattopadhayay and the draft produced before the Company Law Board had also been signed by him. Therefore, to allege that there was no ad idem is not correct. The vakalatnama given in favour of Shri Chattopadhayay makes it abundantly clear that he has been authorised to do everything in connectioa with the petition which would include entering into compromise also. He referred to the format of memorandum of appearance in Form No. 5 in the Company Law Board Regulations wherein the word “act” has been used. The word “act” had been judicially interpreted by the Supreme Court in Smt. Jamilabai Abdul Kadar v. Shankarlal Gulabchand, AIR 1975 SC 2202, in para. 15 “in the absence of speaking instruction to the contrary, the power to act takes in its wings the right and duty to save a client by settling the suit if and only if he does so bona fide in the interest and for the advantage of his client”. Therefore, he submitted that the stand of the respondent that the consent terms are not enforceable in view of want of authority cannot be sustained. Relying on Garden Reach Shipbuilders and Engineers Staff Association v. Garden Reach Shipbuilders and Engineers Ltd., AIR 1990 Cal 442, in which it was held that Order 23, Rule 3 is not applicable in a writ proceeding and that there is implied authority of an advocate to enter into agreement or compromise without specific approval of a client, he submitted that in a Section 397/398 petition, the provisions of the Code are not applicable. On the same analogy, in view of the provisions of Section 10E of the Companies Act which excludes the Code in Company Law Board proceedings, Order 23, Rule 3 is not applicable in proceedings before the Company Law Board. Even in the board resolution, the word “act” has been used which would include the authority to compromise. As long as there is a nexus between the allegations and the relief in the compromise, then, such compromise order is binding on all the parties and is enforceable. For this proposition he relied on Bennett Coleman and Co. Ltd. v. Union of India [1977] 47 Comp Cas 92 (Bom). According to him, the main allegations in the petition are that further issue of shares was made with a view to reduce the petitioners from majority to minority in the company and also on the board, that the company has been denying the right of the first petitioner to four lakh shares transferred by the foreign company, which was his own, to him, even though the approval of the Reserve Bank had been received for the transfer on a company application, on the flimsy ground that the instruments were not stamped. Even then, the company had already endorsed on the share certificates about the transfer of the shares and as such in terms of Section 164, the shares are prima facie evidence of the title to the shares. He pointed out that the Reserve Bank of India approval for transfer of the shares was received in July, 1995, and the endorsement of the transfer was recorded on the share certificates in July, 1995. The authorised representative was fully aware of all these facts and that is why he agreed for the inclusion of these shares in clause 2 of the consent order. The consent order only records settlement of disputes as raised in the petition and as such is binding and enforceable.
8. He dealt with various clauses in the consent order. In regard to clause 1, he submitted that the share application money was remitted in the form of DMs which worked out to Rs. 20 lakhs when the amount was remitted. Due to changes in the exchange rate, the amount has been mentioned as Rs. 22 lakhs. As far as clause 2 is concerned, he submitted that the figure of Rs. 56 lakhs appears more than four times in that order and as such the allegation of the respondents that the authorised representative was not aware that this figure included four lakh shares is not correct. Further as per this clause the share capital of the company is to be reduced, which is permissible in a Section 397/398 petition as held by the apex court in Cosmosteel P. Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312. As far as clause 3 is concerned wherein there is a provision for providing bank guarantee, he submitted that the petitioners are prepared to waive this condition in view of the difficulties expressed by the respondents. He also submitted that the petitioners are prepared for deletion of clause 5 relating to the guarantees to be given for the supplies made by foreign companies. In regard to clause 6 that it is indefinite, Shri Mookherjee, pointed out that liberty has already been given to apply and in case any difficulties arise in quantifying the amount, the parties can always apply to the Company Law Board. As far as clauses 7 and 8 are concerned, in the meeting held on June 23, 1998, these terms had already been agreed by the parties. As far as clause 10 is concerned which involves the forfeiture of shares held by the respondents and other shareholders, he submitted that in a Section 397/398 petition, orders can be passed even against outsiders. Therefore, there is no miscarriage of justice and as such the observation in Snehalata Cold Storage P. Ltd. v. State Bank of India (1995] 1 CHN 152 is not applicable. Further, he submitted that most of the shares allotted were to the respondents themselves and as such they being parties to the proceedings, they are bound by the consent terms. Dealing with the cases cited by Shri Mitra, he submitted that Damodar Valley Corporation v. Mritunjoy Basu [1995] 1 CLT 275 deals with violation of law while in the present case, there is no such violation. As far as Banwari Lal v. Smt. Chando Devi, AIR 1993 SC 1139, is concerned, the same deals with fraud while in the present case, no fraud has been alleged. In the same (sic).
9. Summing up his arguments, Shri Mookherjee, submitted that the consent order is valid in law entered into by the authorised representative of the respondents with full understanding of the implications of the consent terms and that the implementation of the consent terms would ultimately put an end to the disputes between the parties and as such should be enforced.
10. Before dealing with the pleadings and arguments of counsel, it is necessary to record, that, after the arguments on these applications were concluded, we urged the parties, that in the interest of everyone they must once again try to settle the disputes amicably. Respecting our suggestion, certain discussions took place in our presence in the court room itself and certain suggestions were put forth by both the parties. Since the parties desired more time to consider these proposals, the matter was fixed at Delhi, on April 7, 1999, when certain fresh terms were proposed by the respondents which were not acceptable to the petitioners and as such we recorded on that day, that we would issue an order on the applications which were heard at Calcutta, and accordingly this order is being issued.
11. We have considered the pleadings and arguments of counsel. The consent terms have been assailed by the respondents on various grounds as already elaborated earlier. The foremost objection of the respondents is that Shri Chattopadhayay, did not have the authority to enter into the consent terms and that the provisions of Order 23, Rule 3 that the consent terms should be signed by all the parties have not been complied with and as such are not binding on the respondents. First we shall deal with the provisions of Order 23, Rule 3. A consent order can normally arise, as we have seen, in a Section 397/398 proceedings before the Company Law Board, in various ways. One is that the parties enter into a compromise either in writing or orally and pray for dismissal of the petition as withdrawn. In such cases no order in terms of the settlement is recorded. In some cases they desire that the terms of compromise in writing be made a part of the order and the petition disposed of in terms of the compromise. (Michelle Jawad-Al-Fahoum v. Indo Saudi (Travels) Pvt. Ltd. [1998] 93 Comp Cas 151 ; [1998] 30 CLA 42 (CLB)). In some cases the written and signed terms are directed to be read as a part of the order. In these cases, the requirements of Order 23, Rule 3 are normally satisfied. Sometimes, the parties make an oral statement regarding the terms of compromise which is recorded by the Company Law Board in its order disposing of the petition in terms of such compromise. V. Sundararajan v. R. R. Spinning Mills Ltd. [1998] 30 CLA 35 (CLB) ; [1999] 98 Comp Cas 105 (CLB). There are cases in which the advocates/authorised representatives with express or implied authority from their clients, decide the terms of compromise and get an order passed in those terms by making oral or written submission (as it happened in this case). In some cases, the parties invite the Company Law Board to decide the terms of compromise and pass an order accordingly (as in Bennett Coleman and Co. Ltd. v. Union of India [1977] 47 Comp Cas 92 (Bom). The question is whether, in all types of cases, the compromise should be in writing and signed by the parties as held in Gurpreet Singh v. Chatur Bhuj Goe, AIR 1988 SC 400. It is to be noted that the above case was related to a compromise entered into in a suit, the proceedings of which are governed by the provisions of the Code. Proceedings before the Company Law Board are not governed by the provisions of the Code as the same are not applicable to proceedings before the Company Law Board. The Calcutta High Court in Garden Reach Shipbuilders and Engineers Staff Association v. Garden Reach Shipbuilders and Engineers Ltd., AIR 1990 Cal 442, also has held the provisions of Order 23, Rule 3 are applicable only in suits. Thus we are of the view that it is not necessary that in all types of compromises in proceedings before the Company Law Board, it is necessary that they should be reduced in writing and signed by the parties in terms of Order 23, Rule 3.
12. Having held that, when the advocate/authorised representative enters into a compromise in proceedings before the Company Law Board, there is no need for compliance with the provisions of Order 23, Rule 3, let us examine whether the consent terms entered into by Shri Chattopadhayay are valid and binding on the respondents. As per the letter of authority given to Shri Chattopadhayay, he was to represent the company as well as all the respondents. The letter dated December 19, 1997, from the managing director of the company reads as follows : “I do hereby engage, appoint and constitute you as our representative to appear for or plead or otherwise conduct the aforesaid matter before the Company Law Board, for and on behalf of the company and also on our behalf, i.e., all the respondents. I/we hereby agree to ratify and confirm all acts done by you in the said matter as my/our own acts as if done by me/us to all intents and purposes”. It is clear from the letter of authority, that there is no express authority to enter into a compromise. Even Shri Mookerjee relied only on the term “act” as elaborated in Smt. Jamilabai Abdul Kadar v. Shankarlal Gulabchand, AIR 1975 SC 2202, to force his point that Shri Chattopadhayay had implied authority to enter into a compromise. It is relevant to note that the decisions in Sheonandan Prasad Singh v. Hakim Abdul, AIR 1935 PC 119 and Smt Jamilabai Abdul Kadar v. Shankarlal Gulabchand, AIR 1975 SC 2202, related to the authority of a legal practitioner, viz., an advocate/vakil/lawyer/pleader as is evident from the following passage in para. 4 of the judgment in Smt. Jamilabai Abdul Kadar v. Shankarlal Gulabchand, AIR 1975 SC 2202, “we mention this to narrow the scope of the controversy which really turns on the existence or otherwise of the implied authority of a pleader to compromise a suit in the interests and on behalf of his client although without actual reference to him where his vakalat is silent on the point. There is no statutory provision decisive of this issue and we have to garner the principles from various factors like the status and significance of the legal profession in society, the wider powers conferred on lawyers as distinguished from ordinary agents on account of the triune facets of the role of an advocate vis-a-vis the client, the court and the public and its traditions and canons of professional ethics and etiquette. Above all, the paramount consideration that the Bench and the Bar form a noble and dynamic partnership geared to the great social goal of administration of justice puts the lawyer appearing in the court in a class by himself and to compare him with an ordinary agent may be to lose sight of the lawyer as engineer of the Rule of law in society”. Even the word “act” has been interpreted in the judgment only with reference to a legal practitioner. Therefore, it is not free from doubt as to whether the implied authority attributable to an advocate could be extended to an authorised representative who is not an advocate or a legal practitioner on the basis of these judgments, which have dealt with only legal practitioners. Anyway, we do not propose to decide this issue in view of the statement of the respondents that Shri Chattopadhayay was only instructed to seek adjournment of the hearing fixed on June 24, 1998, and if it is so, then, on the day when he entered into the terms of settlement, he had no authority to do so on that day. It is not denied by the petitioners that some discussions relating to the settlement of the dispute took place on June 23, 1998, and even during the hearing Shri Mookherjee pointed out broad consensus only on certain terms in the meeting held on June 23, 1998. Thus, we are of the view, even assuming that he had implied authority to compromise, that Shri Chattopadhayay did not have that authority on June 24, 1998, in view of the instruction given by his clients that on that day he should only seek an adjournment. In this connection, it is worthwhile referring to Smt. Jamilabai Abdul Kadar v. Shankarlal Gulabchand, AIR 1975 SC 2202, wherein the court held that an advocate, on the basis of his implied authority, could enter into a compromise only if he did it bona fide in the interest and for the advantage of his clients. In the present case, as is clear from the consent order, the reduction in share capital would definitely adversely affect the interest of the company and, therefore, this stipulation in the consent order should not have been agreed to by Shri Chattopadhayay without the express consent of his clients. As a matter of fact in Syed Mahomed Ali v. R. Sundaramurthy [1958] 28 Comp Cas 554 ; AIR 1958 Mad 587, it was held that, if the consent terms affect the interest of a company, its shareholders can seek for recalling the consent order. Even though the counsel for the respondents alleged that many other terms also suffer from various infirmities, we find that the major infirmity relates to the provision in clause 10 of the consent order. This is a very peculiar default clause which we have never come across in any of the proceedings before us. Normally, in cases of purchase of shares, in proceedings under Section 397/398, the default clause only provides that, in the failure of purchase of the shares by one side as provided in the order, the other side would have the right to purchase the shares of the defaulter. But in this case the order provides for forfeiture in case of default. Without the express authority of the clients, the authorised representative could have never agreed for such forfeiture clause. Further, clause 10 provides for forfeiture of shares of not only the respondents but also all the shares issued after a particular date, which would mean shares held by others who are not parties to the proceedings would also be forfeited. The case of Cosmosteel P. Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312 (SC) cited by Shri Mookherjee is not applicable in the present case as the same deals with reduction of share capital without issue of notices to the creditors. If the rights of persons who are not parties to the proceedings are to be affected by an order of the Company Law Board irrespective of the fact whether it is on the basis of consent or otherwise, natural justice demands that notices should be issued to such parties. Even otherwise, Section 402(e) of the Act also provides for issue of notices to such parties. We find from the statement of shareholdings given by the company, that nearly 25 per cent, of the shares are held by those who are not parties before us. In this connection, we may also note that in a compromise case before us, we recalled the compromise order on the ground that it affected the interests of a shareholder who was not a party to the consent terms (Tinplate Dealers Association P. Ltd.–unreported).
13. Thus, we find that the consent terms recorded in our order dated June 29, 1998, suffer from want of authority on the part of Shri Chattopadhayay to enter into- a compromise, that the implementation of the order would be against the interest of the company and that it would affect the interest of persons who are not parties before us. Under the circumstances, the order cannot be given effect to and as such deserves to be recalled. Accordingly, we recall the said order and direct that the petition be heard on merits.
14. Accordingly, C. A. No. 192 of 1998 is allowed and C. A. No. 265 of 1998 is dismissed. Since the pleadings are complete, the petition will be heard on September 22, 1999, at 10.30 a.m. at Calcutta.