Sekharan v. Joint Registrar — 1993 DIGILAW 80 (KER)

Judgment :- These petitions under Art.226 of the Constitution of India raised an interesting question. The question is whether a co-operative society registered under the Kerala Cooperative Societies Act (the Act for brevity) has the power to amend its byelaws to raise its authorised share capital retrospectively and thereby validate the allotment of shares made in excess of the share capital. 2. The petitioners are members of the Natiika Firka Co-operative Rural Bank Ltd., the respondent No.3 herein. The respondents 1 and 2 are respectively the Registrar of Co-operative Societies and the Administrator of the society, appointed under S.28(1) of the Act. 3. The facts giving rise to the question set out in paragraph 1 above are these: On 10-2-1992 when he entered office, the Administrator discovered that the paid up capital of the society was Rs.14,02,030/- which means that the shares worth Rs.4,12,030/- in excess of the authorised capital of Rs. 10,00000-00 had been issued by the managing committee. The managing committee which is the Board of Directors of the Bank, had admitted 1789 members between 15-9-1990 and 9-2-1992. The committee had issued loans of Rs.56,55,000/- to these "members". By resolution No.1365 dated 10-5-1991, the committee decided to amend the bye-law No.4 so as to raise the share capital. In pursuance of this resolution, the Administrator, on 26-5-1992 resolved to convene a meeting of the general body of the society on 15-11-1992. In view of the Supreme Court's direction in SLP (C) Nos. 6396, 6682,6935 and 9989/1992 and Writ Petition (C) No.379 of 1992, to conduct elections to the committees of all societies in Kerala, within six months from 13-5-1992, the meeting of the general body was not held. Since 1789 "members" had received loans which are still outstanding, the Administrator decided to continue their membership by increasing the authorised share capital. In view of the judgment of this Court in Janardhanan v. Joint Registrar (1990 (1) KLT 530) the allotment of shares and therefore the membership of 1789 debtors of the society would be void. The increase in the share capital became necessary for continuing these members and recover the loans from them. The Administrator also admitted 19,110 members between 10-2-1992 and 31-8-1992 much before the Supreme Court directed that no members shall be enrolled after 13-10-1992. The total number of members including the disputed "members" is 50,315. The Administrator called a special general body meeting on 3-1-1993. The Administrator also admitted 19,110 members between 10-2-1992 and 31-8-1992 much before the Supreme Court directed that no members shall be enrolled after 13-10-1992. The total number of members including the disputed "members" is 50,315. The Administrator called a special general body meeting on 3-1-1993. The general body, by resolution, amended byelaw No.4 and raised the authorised share capital to Rs.25,00,000/- which would accommodate shares allotted to the members in excess of the share capital. The amended bye-law No.4 not only raised the share capital to Rs.25,00,000/- but also made the increase in the share capital effective retrospectively from 15-9-1990. This amendment to the bye-laws is impugned in O.P. 268 of 1993. 4. O.P. 12423 of 1992 filed on 28-9-1992 is for a direction to the Joint Registrar of Co-operative Societies, and the Administrator of the society to delete from the register of members, 19123 members who were allotted shares in excess of the share capital of the society. But the general body of the society amended bye-law No.4 retrospectively subsequent to the filing of this petition and raised the share capital to Rs.25,00,000/- from Rs.10,00,000/-. Therefore the grievance of the petitioner based on the share capital did not survive. O.P.12423 of 1992 has thus become infructuous. Thereafter on 6-1-1993 the petitioners filed O.P. 268 of 1993. O.P.No.12423 of 1992 has, therefore, to be dismissed. The order which is made in this judgment governs O.P.268 of 1993 in which the question set out above arises. 5. Before considering the question arising in this petition, the nature of the bye-laws needs to be considered. Bye-laws of a co-operative society partake the character of Articles of Association of a company registered under the Companies Act. They constitute a contract between the society and its members. Like articles of association of a company, the bye-laws of a society bind the members to the same extent as if they had been signed and sealed by each member and contained covenants on the part of each member to observe all provisions. (Palmer's Company Law, 23rd Edition, page 162). This fundamental character of the byelaws determines the capacity of the members of a society to make, or alter the nature of their relationship with the society, subject of course to the other provisions of law and the rules. 6. (Palmer's Company Law, 23rd Edition, page 162). This fundamental character of the byelaws determines the capacity of the members of a society to make, or alter the nature of their relationship with the society, subject of course to the other provisions of law and the rules. 6. The general body of a society is the repository of the ultimate or final authority of a society. The exercise of the final authority is, however, subject to the provisions of the Act, Rules and the byelaws (S.27 of the Act). Thus the general body, may do every act in exercise of its authority. That is why the society has been clothed with the power "to do all things necessary for the purpose of which it was constituted". (Section 9 of the Act). The only limitation on the exercise of this final authority by the general body is that it shall not transgress the Act, rule and the byelaws. 7. Is there any limitation on the amending power of the general body? The bye-laws themselves do not place any limit. Ss.7 & 12 are relevant. Registration of bye-laws which makes bye-laws valid is governed by S.7. The only limitation is that bye-laws shall not be contrary to the provisions of the Act and the Rules. S.12 also lays down that amendment to bye-laws shall not be valid unless registered under the Act. No limitation on the authority of the general body to amend is discernible. S.7 is based on the basic assumption that it is the society that may prepare byelaws. The Registrar may register them if they fulfill the conditions laid down therein. S.12, which deals with amendment to bye-laws reiterates that the amendment too shall comply with the conditions laid down in S.7 which governs to the registration of original bye-laws. Since both these sections place no limitation on the authority of the general body to amend bye-laws, it is reasonable to hold that the general body may propose any amendment, provided it is within the law. 8. The above proposition about the authority of the general body to make and amend the byelaws is not in dispute. What is disputed is the authority of the general body to make the amended bye-laws operative retrospectively. This question is considered in paras. 9-13 below. 9. 8. The above proposition about the authority of the general body to make and amend the byelaws is not in dispute. What is disputed is the authority of the general body to make the amended bye-laws operative retrospectively. This question is considered in paras. 9-13 below. 9. Before considering the power of the general body of a co-operative society to amend its bye-laws retrospectively, the law in regard to the amendment of Articles of Association of companies may be noted. The power of the general body of the members of a company to amend the articles of association with retrospective effect has been accepted by judicial decisions relating to corporations. Thus in Allen v. Gold Reefs of West Africa Lid. ((1900) 1 Ch. 656) and Sidebollom v. Kershaw Leese & Co. ((1920) 1 Ch. 154) the authority of the general body to amend the articles retrospectively was upheld. In Pepe v. City and Suburban Permanent Building Society ((1893) 2 Ch. 311), alleration of the Articles of Association of the company which took away the vested right of members was held valid. Therefore, the general law applicable to corporations recognises the authority of the general body to amend the articles retrospectively. The limitation on this power is that the power to amend the articles of association must be exercised bonafide for the benefit of the company. Whether a given amendment is for the benefit of the company or the society would depend upon the nature of the amendment and the purpose for which it was passed. For instance, retrospective alteration of the articles of association of a company which enables the company to recover its debts from the members was held to be for the benefit of the company. (Pennington's Company Law, Fourth Edition, Page 76). This is the background of the general law in regard to the retrospective amendments of articles of association of companies. A co-operative society is not different from a company. Against this background, consider the provisions of the Act. As already stated, the only limitation on the power of the general body to amend its bye-laws, whether prospectively or retrospectively, is that it shall conform to the requirements of S.7 of the Act. The basic principle which underlies Ss.7,9,12 and 27 of the Act is that the power to make and amend bye-laws belongs to the society. As already stated, the only limitation on the power of the general body to amend its bye-laws, whether prospectively or retrospectively, is that it shall conform to the requirements of S.7 of the Act. The basic principle which underlies Ss.7,9,12 and 27 of the Act is that the power to make and amend bye-laws belongs to the society. The Act places no fetters on this power of amendment except that the amendments shall conform to the provisions of the Act, Rules and the bye-laws. S.13 of the Act is important. It expressly deals with amendment of bye-laws of a society. The ordinary rule enacted by this section is that the amendment of the bye-laws shall come into force on the date on which it is registered. However, this section also provides that the society may stipulate that an amendment shall come into operation on a particular day. The words "unless it is expressed to come into operation on a particular day" employed in S.13 are a manifestation of the principle that it is open to the general body of the society to bring the amendment into operation on a day chosen by it. This implies that the general body may express the amendment to come into operation on a day prior to the resolution. The procedure regarding the amendment of byelaws laid down in R,9 also does not exclude retrospective amendments. Learned counsel for the petitioners relied upon sub-section (3) of S.80 of the Act which enables the Government to make rules regulating conditions of service of the employees of the societies. By an amendment introduced with effect from 15-2-19cS8 the words "prospectively or retrospectively" were added in sub-section (3) of S.80. According to learned counsel, where the Act intended to permit retrospective rule making power it has expressly done so. Since such a power is not conferred on the General Body, it cannot amend the byelaws retrospectively. The argument erroneously assumes that the General Body needs legislative authority to clothe it with the power to amend its byelaws. The general body possesses the power to make its contract with the society under the general law. Such power is subject to the Act and the Rules. As long as the Act and the Rules do not take away such power, the General Body continues to possess it. There is no merit in this submission. 10. The general body possesses the power to make its contract with the society under the general law. Such power is subject to the Act and the Rules. As long as the Act and the Rules do not take away such power, the General Body continues to possess it. There is no merit in this submission. 10. Therefore, I have no hesitation in holding that, neither the Act nor the Rules limit the authority of general body in the matter of amendment of byelaws to prospective operation only. Having regard to the general law and the provisions of the Act and the Rules I hold that the general body of a co-operative society possesses the power to amend its byelaws retrospectively. But it must be borne in mind that the exercise of such power is subject to limitations. Firstly the amendment, whether prospective or retrospective, must conform to the provisions of the Act and the Rules. Secondly the amendment, whether prospective or retrospective, must be bonafide and in the interest of the society. 11. Then the question is whether the amendment with which this petition is concerned is bonafide and in the interest of the society. The Administrator was confronted with the situation in which 1789 members had been admitted to membership. Shares were allotted at a time when the share capital of the company did not permit it. Loans of fifty six lakh rupees were granted to these "members". If these members were deprived of their membership on the ground that the allotment of shares was in excess of the share capital of the society, there was a risk of losing this amount. Ii is for this reason that the Administrator chose to call a general body meeting to consider the retrospective amendment so that the admission of these members is validated. Therefore the validation of the membership of 1789 members and those admitted by the Administrator himself, vas for the benefit of the society. Allen v. Gold Reefs of West Africa Ltd. ((1900) 1 Ch. 656) referred to at page 76 of Pemmngton's Company Law, illustrates that the alteration which imposes a lien on the company's shares for debts owed to it by its shareholders was for the benefit of the company. Allen v. Gold Reefs of West Africa Ltd. ((1900) 1 Ch. 656) referred to at page 76 of Pemmngton's Company Law, illustrates that the alteration which imposes a lien on the company's shares for debts owed to it by its shareholders was for the benefit of the company. As in Allen v. Cold Reefs of West Africa Ltd, ((1900) 1 Ch.656), in this case too, the retrospective opera lion of the amendment which validates the membership of the persons in question, enables the society to recover its debts. Therefore it is bona fide and for the benefit of the society. 12. Learned counsel for the petitioner relied upon the principle laid clown in Janardhanan v. Joint Registrar (1990(1) KLT 530). In that case the general body of the society had not amended the byclaws to raise the authorised share capita!. But it had issued shares in excess of its share capital. The Joint Registrar of Co-opc rali vc Societies granted "permissive sanction" to the society to amend its byelaws to enhance the share capital so as to accommodate the shares allotted in excess of the share capital. It was the Managing Committee who sought and the Registrar who granted "permissive sanction". Therefore the principle that emerges is that the managing committee shall not amend the bye-laws and the Registrarshall not grant permissive sanction to amend the byelaws. The judgment does not lay down ]that the General Body of a society cannot retrospectively amend its byelaws so as to validate membership which in the absence of share capital would-be invalid. In para.13 of the judgment I find recognition of the power of the general body to amend the bye-laws. The judgment lays down that without the sanction of the general body an amendment cannot be made. The question whether general body can amend its byelaws retrospectively never arose in that case. No doubt as a result of the judgment the increase in the share capita! "permissiveiy" sanctioned by the Registrar did not take effect thereby rendering the allotment of shares to a large number of members void. But such a result followed because the general body had not passed a resolution. In my opinion this case does not support the petitioners. 13. "permissiveiy" sanctioned by the Registrar did not take effect thereby rendering the allotment of shares to a large number of members void. But such a result followed because the general body had not passed a resolution. In my opinion this case does not support the petitioners. 13. Learned counsel for the petitioners then relied upon the judgment of the Division Bench in Mathrubliumi Printing and Publishing Company Ltd. v. Vardhaman Publishers (73 Company Cases 80) with reference to what the Division Bench said at page 97. The judgment considered interpretation of S.31 of the Companies Act. Subsection (2) of S.31 of the Companies Act lays down that any alteration made in the articles of association pursuant to sub-section (1) of that section shall "be as valid as if originally contained in the articles". Sub-section (2) of S.31 was relied upon to urge that since the amended article is as valid "as if originally contained in the articles of association, such amendment should be understood to operate retrospectively. This argument was negatived. In the present case the question is different. The amendment has been expressly made retrospective by the general body. The judgment has no application to this case. 14. Learned counsel for the respondents urged the following points. They are: (i) In view of the judgment of the Supreme Court in Co-operative Central Bank Lid. v. Addl. Industrial Tribunal, Andhra Pradesh, Hyderabad & others (AIR 1970 SC 245) byelaws cannot be challenged by the petitioners. (ii) If the petitioners seek a relief quashing the amendment to the bye-laws made by the general body, in effect, they seek a relief against the society. In view of the judgments in P. Bhaskaran v. Addl. Secretary (1987 (2) KLT 903) (FB) and Devadas v. Administrator (1992 (2) KLT 955), such relief cannot be granted. (iii) If the petitioners challenge the registration of the amended byelaws, such an order is appealable. In view of my conclusions about the power of the general body to amend the byelaws retrospectively I do not think it necessary to consider these arguments made by learned Additional Advocate General. 15. In my opinion the respondent No.3, the Society was within its authority in amending the byelaw No.4 retrospectively and thereby validating the enrolment of members by the committee and the Administrator. 16. The original petitions are dismissed.