They say when the word is not defined in any statute meaning has to be derived from general meaning or dictionary meaning. Lord Hoffmann says that “the meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax …”
This highlights very important principle – while reading law, meaning of word has to be interpreted in context / background.
One very popular section under Companies Act 2013 [the Companies Act] is section 188 which provides a framework for approval of related party transactions under the Act. And almost all the key words used in this section, for example word goods, material, services, property, leasing etc are not defined . These words have multiple meanings in dictionaries and other laws. If we have to evaluate whether shares would be considered as goods or property for the purpose of section 188 or not, we will have to see meaning of goods and property and also the background/ context in which it is used.
Let’s first evaluate term ‘goods. Term goods is not defined in the Companies Act. There are multiple meanings for word ‘goods’ in dictionaries and other laws. While Sale of Goods Act, 1930 [Sale of Goods Act] include share as goods, Securities Contracts (Regulation) Act, 1956 (SCRA)excludes shares from the definition of goods. The question that arises is which definition is to be applied while interpreting word goods in context of section 188?
Like Lord Hoffman says meaning of words have to be interpreted in context/ background in which it is used.
Let’s see the context/ background of Sale of Goods Act. Sale of Goods Act basically provides framework for transaction of sale of goods like let the buyer be aware, rights and obligations of buyer and seller etc. Whereas SCRA specifically excludes shares from definition of goods because SCRA regulates trading in commodities as well as securities and therefore to avoid shares getting regulated both under securities and goods, it had to say that shares and securities would not fall under the definition of goods.
The context of section 188 is to provide framework for approving related party transactions. Section 188 also makes it clear that if transaction is in ordinary course and at arm’s length then provisions of this section will not apply. Obviously intent is very clear that transactions between company and related party which are either not at arm’s length or not in ordinary course will be regulated by section 188. In this context considering that trading in shares/ securities not being considered as goods and therefore not covered under section 188 can be absurd, particularly from context that many companies may not be in business of buying/ selling shares or securities.
Second question which arises is whether shares/ securities would be considered as property for the purpose of section 188. Section 44 of Companies Act specifically says shares or debentures in company shall be treated as movable property of a member and it is transferable in the manner provided in articles of the company. Therefore, it is beyond doubt that shares are considered as transferable property of member for the purpose of Companies Act, 2013. However, from the context of a company which classifies its holding in shares as stock in trade would it not be appropriate to compare materiality from context of turnover ?
Surely, a company which considers its holding in shares as investment it would be appropriate to evaluate its materiality in terms of net-worth and for the company which is in business of trading in share and considers shares as stock it would be appropriate to evaluate its materiality in terms of turnover.
Since these words [like goods, property] are very general and can have multiple meanings was that the intention of law maker to keep open ended words and interpret these in context of that company [like we discussed above]? Was this the reason why Companies Act 2013 has not defined it in the Act? I think yes, what you think?
Investors Compensation Scheme Ltd v West Bromwich Building Society, Investors Compensation Scheme Ltd v Hopkin & Sons (a firm), Alford v West Bromwich Building Society[1998] 1 BCLC 493 at 547-548, [1998] 1 WLR 896 at 912-913, Lord Hoffmann.
Clause (a) to (g) of section 188 of Companies Act, 2013
Section 2(7) of the Sale of Goods Act, 1930, defines the term ‘goods’ as every kind of movable property other than actionable claims and money, and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Further Section 2(bb) of Securities Contracts (Regulation) Act, 1956 (SCRA), define it as “goods mean every kind of movable property other than actionable claims, money and securities.
Term goods would be regulated as commodity under section 2(bc) of SCRA
4th Proviso to Section 188(1) of Companies Act, 2013
Clause (a) and (b) of Section 188(1) of Companies Act, 2013 r/w Rule 15(3)(a)(i) and (ii) of Companies (Meeting of Board and its powers) Rules, 2014