[1968] 38 Comp. Cas. 543 (SC)
Supreme Court of
v.
Grain Chambers Ltd.
J.C. SHAH AND S. M. SIKRI, JJ.
NOVEMBER 15, 1967
N.D. Karkhanis, (J.P. Aggarwal,) for the Appellants.
Shanti Bhushan and B.P. Maheswari for the Respondent.
Shah, J.—The Grain Chamber Ltd., Muzaffarnagar, a company registered under the Indian Companies Act, 1913, with a share capital of Rs. 1,00,000 divided into 1,000 shares of Rs. 100 each, was formed for the purpose of carrying on business of an exchange in grains, cotton, sugar, gur, pulses and other commodities. By article 5 of its articles of association no person or firm could remain a member of the company who was found not to be doing any transaction or business through the company for a continuous period of six months. By article 46 it was provided that a member of the company who owned 10 shares of the company in his own name or in the name of the firm of which he was a proprietor or partner may be elected a director of the company. By article 51, until otherwise fixed, the quorum in the meetings of directors was to be four.
In the years 1949 and 1950 the company was carrying on business principally in "futures" in gur. The method of carrying on business in "futures" was explained as follows, by the parties to the dispute in an agreed statement submitted before the Company Judge: The transactions for sale and purchase of gur have to be in the units called 'Bijaks' of 100 maunds. The buyer and the seller who are members of the company negotiate transactions of sale and purchase in gur through their respective brokers and then approach the company. The company enters into two independent contracts whereby the company is the puchaser from one and is the seller to the other at rates agreed upon between the seller and the buyer. The seller has therefore to sell to the company a specified quantity and the buyer agrees to purchase the same quantity from the company under an independent contract. For the due performance of their contracts, the buyer and the seller deposit with the company rupee one per maund as Sai and annas eight per maund as Chook—"margin". If there is a rise in the price, the company calls upon the seller to pay the difference, and if he fails to deposit the difference demanded, the company enters into a reverse transaction with a purchaser at the current rate of the day and squares up the transaction of sale. The purchaser is also entitled to withdraw from the company the profits he has made consequent on the rise in price. If the seller is adjudged an insolvent or for any other reason is incapable of performing his obligations, the buyer remains unaffected. Even if the company is unable to recover anything from the seller, it has still to pay to the buyer the profits earned by him. Similarly if there is a fall in the price, the buyer has to make good the difference. If on the day fixed for delivery of goods the parties intend to settle the transaction by paying and receiving the difference, the company fixes the rate at which the transaction is to be settled and the transaction is to settled at the rate fixed by the company. Both the buyer and the seller send bills known as "dailies" setting out the amounts paid and received according to the rates fixed.
On March 14, 1949, the board of directors of the company passed a resolution sanctioning transaction of business in "futures" in gur for Phagun Sudi 15 Samvat 2006 (March 4, 1950) settlement. On August 9, 1949, Seth Mohanlal and company purchased one share of the company and qualified for membership. They commenced dealing with the company in "futures" in gur. By December, 1949, Seth Mohan Lal and company—who will hereinafter be called "the appellants"—had entered into transactions with the company which aggregated to 1,136 Bijaks of sale of gur for Paush Sudi 15, 2006, delivery. The appellants also claimed that they had entered into sals transactions in 2,137 Bijaks in the benami names of five other members. In January, 1950, there were large fluctuations in the prices of gur, and in order to stabilise the prices, the directors of the company passed a resolution in a meeting held on January 7, 1950, declaring that the company will not accept any settlement of transaction in excess of Rs. 17-8-0 per maund. The sellers were required to deposit margin money between the prices prevailing on that date and the maximum rate fixed by the company. The appellants deposited in respect of their transactions Rs. 5,26,996-14-0 as margin money. They claimed also to have deposited amounts totalling Rs. 7 lakhs odd in respect of their benami transactions.
In exercise of the powers conferred by section 3 of the Essential Supplies (Temporary Powers) Act, 1946 (24 of 1946), the Government of India issued a notification on February 15, 1950, amending the Sugar (Futures & Options) Prohibition Order, 1949, and made it applicable to “futures” and options in gur. By that Order entry into transactions in “futures“ after the appointed day was prohibited. On the same day the board of directors of the company held a meeting and resolved that the rates of gur which prevailed at the close of the market on February 14, 1950, viz., Rs. 17-6-0 per maund, be fixed for settlement of the contracts of Phagun delivery. It was recited in the resolution that five persons including Lala Mohan Lal, partner of the appellants, were present at the meeting on special invitation. In clause 2 of the resolution it was recited that as the Government had banned all forward contracts in gur it was resolved to take the prevailing market rate on the closing day of February 14, 1950, which was Rs. 17-6-0 per maund for Pha-gun delivery, and to have all outstanding transactions of Phagun delivery settled at that rate.
Entries were posted in the books of account of the company on the footing that all outstanding transactions in futures in gur were settled on February 15, 1950. In the account of Mohanlal & Company an amount of Rs. 5,26,996-14-0 stood to the credit of the appellants. Against that amount Rs. 5,15,769-5-0 were debited as "loss adjusted", and on February 15, 1950, an amount of Rs. 11,227-9-0 stood to their credit. Similar entries were posted in the accounts of other persons who had outstanding transactions in gur.
On February 22, 1950, the appellants and their partner, Mohan Lal, filed a petition in the High Court of Judicature at Allahabad for an order winding up of the company. Diverse grounds were set up in the petition. The principal grounds were that the company was unable to pay its debts, that it was just and equitable to wind up the company, because the directors and the officers of the company were guilty of fraudulent acts resulting in misappropriation of large funds, and that the substratum of the company had disappeared, the business of the company having been completely destroyed.
On February 23, 1951, another petition was filed by the appellants and their partner, Mohan Lal, for an order winding up the company. It purported to raise certain grounds which, it was submitted, had not been raised in the first petition and which had arisen since the first petition was instituted. In the second petition it was averred that by virtue of the notification issued by the Government, the forward contracts in gur had become void and the appellants were entitled to be repaid all the amounts deposited by them, that the outstanding contracts stood rescinded, and the company having paid out large sums to its directors and other shareholders was not in a position to meet its liability to the appellants.
Brij Mohan Lal J. held that the company was not unable to pay its debts and that it was not just and equitable to wind up the company on the grounds set out in the petition. Orders passed by Brij Mohan Lal J. dismissing the petitions were confirmed by the High Court of Allahabad in its appellate jurisdiction. With certificates granted by the High Court, these two appeals have been preferred by the appellants and their partner, Mohan Lal.
The High Court held that by the notification dated February 15, 1950, the outstanding transactions of “futures“ in gur did not become void; that in fixing the rate of settlement by resolution dated February 15, 1950, and settling the transactions with the other contracting parties at that rate the directors acted prudently and in the interests of the company and of the shareholders, and in making payments to the parties on the basis of a settlement at that rate the directors did not commit any fraudulent act or misapply the funds of the company; that the case of the appellants that apart from the transactions entered into by them in their firm name, they had entered into other transactions benami in the names of other firms, and that the company had mala fide settled those transactions with those other firms was not proved ; and that the board of directors was and remained properly constituted at all material times and no provision of the Companies Act was violated by the directors trading with the company.
Counsel for the appellants contended (a) that by virtue of the notification issued by the Central Government on February 15, 1950, all outstanding “futures“ in gur became void; (b) that the resolution dated March 14, 1949, was void because there was no quorum at the meeting of the company; (c) that the resolution dated February 15, 1950, by the board of directors was not passed in the interest of the company but to serve private interests of the directors; (d) that the company having repudiated the outstanding contracts, it was bound to refund the deposits received from the members; and (e) that in any event, the substratum of the company ceased to exist, and the company could not after the Government notification carry on business in gur.
In support of his contention that by the order issued by the Central Government on February 15, 1950, the outstanding transactions in futures in gur became void, counsel for the appellants relied upon a press note issued by the Government of India relating to the amendments made in the Sugar (Futures and Options) Prohibition Order, 1949. In the press note apparantly it was stated that all transactions in "futures" in sugar, gur, gurshakkar and rab made before the commencement of the order or remaining to be fulfilled shall be void and not enforceable by law. The interpretation of the Order depends not upon how the draftsman of the press note understood the notification, but upon the words used therein. The relevant clauses of the Order, after the amendment, read as follows:
"2 (d) 'Futures in sugar and gur' mean any agreement relating to the purchuse or sale of sugar or gur on a forward basis and providing for delivery at some future date and payment of margin on such date or dates, as may be expressly or impliedly agreed upon by the parties.
2 (e) 'margin' means the difference between the price specified in an agreement relating to the purchase of or sale of sugar and gur and the prevailing market price for the same quality and quantity of sugar or gur on a particular day.
2 (f) 'Option in sugar or gur' means an agreement for the purchase or sale of a right to buy or a right to sell or a right to buy and sell, any sugar or gur in future and includes a teji-mandi and teji-mandi in any sugar.
3. On or after the appointed day no person shall—
(a) save with the
permission of the Central Government in this behalf or of an officer authorised
by the Central Government in this behalf, enter into any futures in sugar or
gur, or pay or receive or agree to pay or receive any margin in connection with
any such futures;
(b) enter into any option in sugar or gur ;
4. Any option in sugar or gur entered into before the tappointed day and remaining to be performed whether wholly or in part shall be void within the meaning of the Indian Contract Act, 1872, and shall not be enforceable by law".
By clause 3(a) all persons are prohibited, save with the permission of the Central Government in that behalf from entering into futures in sugar or gur: the clause also prohibits receipt or payment of, or agreement to pay or receive any margin in connection with any such futures. The clause in terms operates prospectively. Clause 3(b) prohibits options in gur and sugar, and clause 4 expressly invalidates options in sugar and gur entered into before the appointed day and remaining to be performed whether wholly or in part. The contrast between the provisions relating to ”futures” and "options" is striking. While imposing a prohibition on options, the Central Government has also expressly provided that all outstanding options shall be void. No such provision is made in respect of outstanding “futures“. Counsel for the appellants however contended that when the Central Government imposed a prohibition against payment or receipt, or agreement to pay or receive, any margin in connection with the outstanding “futures”, the “futures“ were also prohibited. But the prohibition imposed against payment or receipt, or agreement to pay or receive, margin is made in connection with such futures, and the expression "such futures" means “futures“ of the like or similar kind previously mentioned, i.e., transactions in “futures“ to be entered into on or after February 15, 1950. If it was intended by the Central Government to declare void outstanding transactions in “futures“, the Central Government would specifically have imposed a prohibition against payment or receipt of, or agreement to pay or receive, margin in connection with all "futures". A transaction in "future" in gur may be settled by payment of margin or by actual delivery, and the Order does not prohibit the settlement of the transaction by specific delivery of goods. If the plea for the appellants be accepted, the Central Government may be attributed a somewhat singular intention of permitting outstanding futures in gur to be carried out by giving and taking actual delivery of goods contracted for, but not by payment and receipt of margin. If it was intended to invalidate transactions in futures which were outstanding on February 15, 1950, an express provision to that effect could have been made. No such provision has been made, and there are clear indications in the terms of the notification which show a contrary intention. Prohibition against payment or receipt of margin money under transactions entered into after February 15, 1950, is not redundant: it was enacted presumably with a view to maintain control over the transactions made with the sanction of the Central Government.
But, said counsel for the appellants, the resolution dated March 14, 1949, which permitted the company to enter into transactions in "futures" in gur was invalid, because the directors who took part in the meeting were disqualified under sections 86-I(1)(h) and 91B of the Indian Companies Act, 1913, and the company could not retain money paid in pursuance of unauthorised transactions. It was resolved unanimously in the meeting of the board of directors convened on March 14, 1949, that forward transactions in gur for Phagun Sudi 15, Samvat 2006, i.e., March 4, 1950, "may be started according to the rules" laid down therein. It was said that the resolution which authorised transactions of “futures“ in gur in the manner in which the company was carrying on its business entailed disqualification of the directors and as the directors were disqualified there was no quorum and no proper resolution and therefore all transactions entered into and any payments made pursuant to that resolution were invalid and the company was bound to refund the amounts paid by the appellants from time to time. The company had 11 directors : out of these 9 directors were carrying on business with the company. It appears that at the meeting dated March 14, 1949, all the directors present were those who carried on business in "futures" in gur with the company, and did after March 14, 1949, carry on that business. Under the Indian Companies Act, 1913, as originally enacted, there was no prohibition against a director entering into transactions with the company, and on that footing the scheme of the company's business was devised. Under the articles of association no person could remain a member of the company who was found not to be doing any transaction or business through the company continuously for six months, and a person could be elected a director if he held 10 shares in his own name or in the name of the firm of which he was a proprietor or a partner. A director of the company had therefore to hold ten shares and had to carry on business with the company. If he ceased to do business for a period of six months he ceased to be a member of the company, and on that account ceased also to be a director of the company. The articles of association prescribed diverse contingencies in which a director was to vacate his office, but carrying on business with the company was not made a ground of disqualification.
The company had started business in the year 1931. In 1936, several important amendments were made in the Indian Companies Act, 1913. By section 86F which was incorporated by Act 22 of 1936, it was provided:
"Except with the consent of the directors, a
director of the company, or the firm of which he is a partner or any partner of
such firm, or the private company of which he is a member or director, shall
not enter into any contracts for the sale, purchase or supply of goods and
materials with the company,..".
Section 86-I enumerated the conditions or situations in which the
office of director was vacated. In so far as the section is material, it provides
:
"(1) The office of a director shall be vacated
if—...
(h) he acts in contravention of section 86F..".
Section 91B which was inserted by Act 11 of 1914 as modified by Act 22 of 1936 by the first sub-section provided:
"No director shall, as a director, vote on any
contract or arrangement in which he is either directly or indirectly concerned
or interested nor shall his presence count for the purpose of forming a quorum
at the time of any such vote; and if he does so vote, his vote shall not be
counted:"
After the amendment of the Indian Companies Act by Act 22 of 1936, the rules of the company were not modified and the company apparently carried on business in the same manner in which it was originally carrying on its business. It appears that the directors were oblivious of the requirements of section 86F and of the provisions of section 86-I and section 91B, and the modus operandi of the business continued to remain the same as it was previously. On the terms of section 86F (1) all directors of the company were prohibited, unless the directors consented thereto, from entering into contracts for the sale, purchase or supply of goods and materials with the company. On behalf of the company it was urged that by the resolution dated March 14, 1949, the directors resolved generally to sanction all transactions of the directors for the sale and purchase in commodities in which the company carried on business, and on that account, notwithstanding the prohibition contained in section 86F, the directors did not vacate their office. Counsel for the appellants urged that the consent of the directors contemplated by section 86F is consent in respect of each specific contract to be entered into and no general consent can be given by the directors authorising a director or directors of the company to sell, purchase or supply goods and materials to the company. Such a general resolution without considering the merits of each individual contract would, it was urged, amount to repealing the provisions of section 86F. Strong reliance was placed upon the judgment of the Bombay High Court in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw.
It is not necessary for the purpose of this case
to decide whether in any given set of circumstances a general consent may be
given by the board of directors, to a director or directors to enter into
contracts for sale or purchase or supply of goods and materials with the
company so as to avoid the prohibition contained in section 86F of the Indian
Companies Act, for, in our view, the resolution dated March 14, 1949, cannot be
challenged in view of regulation 94 of Table A which for reasons to be presently
mentioned must be deemed to be incorporated in the articles of association of
the company.
Regulation 94 of Table A in the First Schedule is not one of the obligatory regulations which is to be deemed by section 17(2) of the Indian Companies Act, 1913, to be incorporated in the articles of association. Section 18 provides:
"In the case of a company limited by shares and
registered after the commencement of this Act, if articles are not registered,
or, if articles are registered, in so far as the articles do not exclude or
modify the regulations in Table A, in the First Schedule those regulations
shall, so far as applicable, be the regulations of the company in the same
manner and to the same extent as if they were contained in duly registered
articles".
The respondent company is limited by shares and was registered after the commencement of the Indian Companies Act, 1913: the company has adopted special articles of association, but there is no article which excludes or modifies regulation 94 of Table A, and by the operation of section 18 of the Act that regulation must be deemed to apply in the same manner and to the same extent as if it was contained in the registered articles of the company. We are unable to hold that; because the company has not incorporated regulation 94 of Table A in its articles of association, an intention to exclude the applicability of the regulation to the company may be inferred. Regulation 94 of Table A is not expressly excluded by the articles of the company: that is common ground. It is not excluded by implication: for it is not inconsistent with any other express provision in the memorandum or the articles of association. It, therefore, follows that regulation 94 must be deemed to be incorporated in the articles of association of the company. That regulation provided:
"All acts done by
any meeting of the directors or of a committee of directors, or by any person
acting as a director, shall, notwithstanding that it be afterwards discovered
that there was some defect in the appointment of any such directors or persons
acting as aforesaid or that they or any of them were disqualified, be as valid
as if every such person had been duly appointed and was qualified to be a
director".
There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the company without the express sanction of the directors. By the subsequent discovery that they had incurred disqualification, because they had entered into contract with the company for sale or purchase or supply of goods, the resolution passed by them is not rendered invalid. It is, in the view we have taken, unnecessary to decide whether section 86 of the Indian Companies Act, 1913, also grants protection to the acts done by directors who are subsequently discovered to be disqualified.
Section 91B imposes a prohibition against a director voting on any contract or arrangement in which he is either directly or indirectly concerned or interested. But the directors of the company are not shown to have voted on any existing contract or arrangement. At the meeting dated March 14, 1949, they resolved that the company shall commence business in "futures" in gur according to the rules set forth in the resolution. Thereby the directors were not voting on a contract or arrangement in which they were directly or indirectly concerned or interested.
It must then be considered whether the resolution of February 15, 1950, was passed by the board of directors with a view dishonestly to make profit for themselves and for others who were purchasers, and to cause loss to the appellants. In the light of the situation prevailing on February 15, 1950, in our judgment, the board of directors acted, in passing the resolution, as prudent businessmen for the protection of the interests of the company and the members. Since the promulgation of the Sugar and Gur (Futures and Options) Prohibition Order, 1949, if any member of the company failed to pay the margin, the company could not enter into a reverse transaction. That was prohibited. Whereas the outstanding transactions were valid, a very important sanction which the company could impose against the member who failed to pay the margin became ineffective. It was therefore necessary in the interest of the company to devise an effective scheme for settlement of those transactions. Again in view of the imposition of severe restrictions by the Government on transport of gur by rail or by mechanised transport, it was well-nigh impossible for the members to give or take delivery of gur. It was therefore resolved that all outstanding contracts shall be settled at the rate prevailing on the evening of February 14, 1950. It may be recalled that on January 7, 1950, the board of directors had resolved, because the prices of gur were spiralling that all outstanding transactions in gur will be settled at the rate of Rs. 17-8-0 per maund whatever may be the price ruling at the date of settlement. The appellants had sold 1,123 Bijaks of gur at an average rate of Rs. 12-13-9 per maund, and those transactions in “futures“ were not invalidated by the notification issued by the Government. But since no reverse transaction to protect the company against loss, if a member failed to pay margin, was possible, the only practical way out was to provide for settling the outstanding transactions. This the board of directors did by taking the rate which was prevailing in the evening of February 14, 1950, as the rate of settlement of all the outstanding transactions. The resolution, however, did not put an end to the outstanding contracts as on February 15, 1950: the resolution merely fixed the rate at which the transactions were to be settled on the due date, the possibility of any fresh transactions in futures so long as the Order remained in force being completely ruled out. It may be noticed that the appellants' representative was present at the meeting, and he was apparently heard. Whether or not he agreed to the passing of the resolution is immaterial. But we are unable to hold that the resolution was passed with a view to benefit the directors: it appears that the resolution was passed with a view to protect the interests of the company and its members.
But it was urged that simultaneously large amounts were intended to be paid to the members who had purchased contracts outstanding, and for that purpose it was resolved to borrow money from the Allahabad Bank and the Central Bank of India Ltd. This, it was urged, disclosed anxiety on the part of the directors to appropriate to themselves the liquid funds and to deprive the appellants of the benefit of any fall in the prices after February 15, 1950. It is true that in the books of account of the company the transactions were shown to have been settled as on February 14, 1950. But we agree with the High Court that the entries in the books of account of the company were not in accordance with the resolution, and no intimation was given to any of the members of the company that the transactions were so closed. There is no clear evidence about the dates on which payments were made to the purchasers in respect of their outstanding transactions. But that in our judgment is not material. It appears from the agreed statement filed before the company judge that if the seller made a deposit to cover the rise in prices, the purchaser was entitled to withdraw from the company the profit which he had made under his cross transaction, even before the date of settlement. It was clearly contemplated that when a seller deposited the difference between the price at which he had agreed to sell gur for future delivery, the ruling rate being higher than the rate at which he had agreed to sell, it was open to the purchaser to approach the company and to call upon it to pay him the profit. Whether or not this right was strictly enforced is irrelevant. It appears from exhibit D-10 that as many as 133 persons having sale transactions had made deposits of diverse amounts with the company aggregating to Rs. 36,38,932-2-9. The purchasers under the corresponding transactions were entitled to withdraw the profits earned by them out of the deposits so made. By allowing the purchasers to withdraw the amounts which they were entitled to under the business rules of the company after the contracts were frozen, the directors of the company acted according to the rules and not contrary thereto.
The attitude of the appellants in respect of the outstanding contracts since February 15, 1950, has also an important bearing. On February 23, 1950, the management of the company addressed a letter informing the appellants that in the interests and for the benefit of the trade, the board of directors has passed a resolution on February 15, 1950, to settle the outstanding transactions at the rate prevailing in the market on February 14, 1950. That resolution, it was stated, was for the benefit of the appellants, but if the appellants wanted to deliver the goods, they should intimate the date and place on which they were prepared to give delivery of goods according to the outstanding contracts on Phagun Sudi 15, Samwat 2006, in terms of the rules and bye-laws of the company. The appellants denied having received this letter. But we are unable to accept that denial. On March 1, 1950, the appellants wrote a letter stating that because of the notification issued by the Central Government the performance of the contracts had become impossible, and that the company was liable to refund all the amounts deposited with interest thereon, and that the illegal settlement dated February 15, 1950, amounted to repudiation of the contracts by the company and those contracts stood rescinded. The appellants apparently insisted that the transactions became impossible of performance in view of the prohibition contained in the notification published by the Central Government, and contended that the resolution amounted to repudiation of the contracts by the company. But by the resolution, in our judgment, there was no repudiation of the contracts by the company. The contracts, if they were to be settled by payment of differences, could be settled on the due date at the rates fixed : it was however open to the appellants to deliver goods under the contracts if they desired to do so.
The plea that there was frustration of the contracts, and on that account the company was liable to refund all the amounts which it had received, has no substance. As we have already held, the outstanding contracts were not at all affected by the Government Order. Imposition by the Central Government of a prohibition by its notification dated March 1, 1950, restraining persons from offering and the Railway administration from accepting for transportation by rail any gur, except with the permit of the Central Government from any station outside the State of Uttar Pradesh which was situated within a radius of thirty miles from the border of Uttar Pradesh does not lead to frustration of the contracts. Fresh contracts were prohibited: but settlement of the outstanding contracts by payment of differences was not prohibited, nor was delivery of gur in pursuance of the contract and acceptance thereof at the due date by the company prohibited. The difficulty arising by the Government orders in transporting the goods needed to meet the contract was not an impossibility contemplated by section 56 of the Contract Act leading to frustration of the contracts.
Finally, it was urged that by reason of the notification issued by the Central Government, the substratum of the company was destroyed and no business could be carried on by the company thereafter. It was said that all the liquid assets of the company were disposed of and there was no reasonable prospect of the company commencing or carrying on business thereafter.
The company was carrying on extensive business in "futures" in gur, but the company was formed not with the object of carrying on business in “futures“ in gur alone, but in several other commodities as well. The company had immovable property and liquid assets of the total value of Rs. 2,54,000. There is no evidence that the company was unable to pay its debts. Under section 162 of the Indian Companies Act, the court may make an order for winding up a company if the court is of the opinion that it is just and equitable that the company be wound up. In making an order for winding up on the ground that it is just and equitable that a company should be wound up, the court will consider the interests of the shareholders as well as of the creditors. Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In the present case the object for which the company was incorporated has not substantially failed, and it cannot be said that the company could not carry on its business except at a loss, nor that its assets were insufficient to meet its liabilities. On the view we have taken, there were no creditors to whom debts were payable by the company. The appellants had, it is true, filed suits against the company in respect of certain gur transactions on the footing that they had entered into transactions in the names of other persons. But those suits were dismissed. The business organisation of the company cannot be said to have been destroyed, merely because the brokers who were acting as mediators in carrying out the business between the members had been discharged and their accounts settled. The services of the brokers could again be secured. The company could always restart the business with the assets it possessed, and prosecute the objects for which it was incorporated. It is true that because of this long drawn out litigation, the company's business has come to a standstill. But we cannot on that ground direct that the company be wound up. Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the company should be wound up, and we agree with the High Court that no such case is made out.
The appeals fail and are dismissed with costs. One hearing fee.
Appeals dismissed.
[1984] 56 COMP. CAS. 141 (MP)
HIGH COURT OF MADHYA PARDESH -
v.
Commissioner of Income-tax
G.L. OZA, ACTG., C.J.
AND P.D. MULYE, J.
Miscellaneous Civil Case No. 132
of 1983
FEBRUARY 13, 1984
S.C. Goyal for the Applicant.
R.C. Mukati for the Respondent.
Oza, Actg. C.J.—This is a reference made by
the Income-tax Appellate Tribunal at the instance of the assessee for answering
the following question:
"Whether, in the facts and circumstances of the
case, the Tribunal was justified in confirming the order of the Commissioner of
Income-tax passed under s. 263 of the I.T. Act, 1961, directing the
disallowance of the directors' remuneration of Rs. 38,188?"
The year of assessment is 1976-77 ending on September
30, 1975. The ITO framed the assessment under s. 143(3) of the I.T. Act, 1961,
on February 16, 1979. While completing the assessment he had allowed the claim
for directors' remuneration to the tune of Rs.38,188 paid to them for the
period between February 1, 1975 to September 30, 1975. This amount included the
remuneration paid to the directors to the tune of Rs.14,800, house rent
Rs.3,300 and travelling expenses of the directors Rs.20,088. The Commissioner
of Income-tax exercising jurisdiction under s. 263 issued a notice to show
cause to the assessee and after hearing the assessee came to the conclusion
that this remuneration to the directors to the tune of Rs. 38,188 could not
have been allowed as according to the Commissioner the articles of association
of the company do not provide for payment of remuneration to the directors
although according to the Commissioner, by a resolution dated March 31, 1977,
the members of the company sanctioned the payment made to the directors
retrospectively but the Commissioner felt that by such a resolution this payment
could not be rectified as the resolution does not contemplate a modification or
amendment of articles of association. On this ground, the Commissioner, by his
order, dated February 13, 1981, set aside the order of assessment and directed
the ITO to carry the proceedings of assessment in accordance with law afresh.
Against this order, passed by the Commissioner, the
assessee preferred an appeal which was heard by the Tribunal and the Tribunal
in its order dated February 12, 1982, maintained the order passed by the
Commissioner. Although, in this order, the Tribunal also observed, that the
matter has been sent back to the ITO for reassessment but the Tribunal
maintained that the Commissioner was right when he exercised jurisdiction under
s. 263 of the Act and disallowed the remuneration paid to the directors. There
after, it appears that at the instance of the assessee, the Tribunal has made
this reference for seeking the opinion of this court on the question referred
to above.
Learned counsel appearing for the assessee contended
that so far as private companies are concerned, the definition of
"company" is provided in s. 3 and "private company" in s.
3(1)(iii) and it has been further provided in this definition that the
restrictions on private company are only what have been provided in this
definition and they are not all those restrictions which apply to a public
limited company. Section 28 of the Companies Act provides for adoption and
application of Table A in Sch. I in the case of companies limited by shares and
it was contended that it is not disputed that this is a company limited by
shares and because of s. 28 as there is no specific provision excluding the
operation of Table A in Sch. I, Table A in Sch. I will be applicable to this
company. It is further contended that Table A in Sch. I, item 65, provides for
remuneration to the directors and, therefore, although in the articles of
association there is no specific clause providing for remuneration to the
directors but by operation of s. 28 this clause as provided in item 65 of Table
A in Sch. I could be read into the articles of association. It was, therefore,
contended that there was an authority to make payment of remuneration to the
directors. It appears that as there was an audit objection, the company
considered the matter and passed a resolution rectifying the payment
retrospectively. It was, therefore, contended that it could not be said that
this was an unauthorised payment by the company to the directors which could be
disallowed. It was also contended by the learned counsel that, so far as, the
I.T. Act is concerned, scope of remuneration could only be limited to s. 40 and
nothing further. It is nobody's case that any part of remuneration paid to the
directors has been disallowed for the reasons which may justify disallowance
under s. 40. It was, therefore, contended that the answer to the question has
to be in favour of the assessee, i.e., in the negative.
Learned counsel appearing for the Department, on the
other hand, contended that although the Commissioner, while exercising
jurisdiction under s. 263, has examined the matter and has come to the
conclusion that this payment to the directors as remuneration and other
expenses was not justified in accordance with the provisions contained in the
Companies Act but it was contended that it was only a prima facie view to
justify the exercise of jurisdiction under s. 263 but there is no direction
made by the Commissioner to disallow this as the matter was sent back with a
direction to proceed with the assessment in accordance with law. It was also
contended that similarly the order passed by the Tribunal on appeal also has
not decided the question as the matter was open before the ITO afresh and it
was contended, therefore, that the question does not arise from the order of
the Tribunal and an answer to the question is not necessary. On merits an
attempt was made by the learned counsel for the Department to suggest that as
the ITO had not gone into the question and as the matter has been sent back to
him, it is open to the ITO on enquiry to find out if there is some error.
Learned counsel for the assessee, on the other hand,
contended that if the Tribunal had taken the view that the question that has been
raised is not finally decided, the order of the Tribunal would have clearly
stated that. Apart from it, when a prayer was made for making a reference to
this court, it was open to the Tribunal to have said so. It is apparent that
the Commissioner as well as the Tribunal disposed of the question of law as to
whether these payments made to the directors as remuneration and expenses were
justified in view of the provisions of the Companies Act and having taken that
view although there may not be a clear direction to disallow this expenditure
but after deciding the legal question when the matter is sent back, it is
nothing but a direction to disallow the remuneration paid to the directors.
Under these circumstances it was contended that the contention advanced by the
learned counsel for the Revenue could not be accepted. It was also contended
that sanction of payment made to the directors could also be justified in view
of s. 91 of the Contract Act.
It was contended on behalf of the Commissioner, that
when he exercised jurisdiction under s. 263 and passed the order in question,
he clearly held that the company could not make payment to the directors
without there being any specific clause in the articles of association. The
Commissioner also clearly held that the resolution which was passed by the
company in 1977 retrospectively justified the payment made to the directors. It
could not, therefore, be said that the. Commissioner did not decide the
question finally. This view taken by the Commissioner has been maintained by
the Tribunal, and, therefore, the contention advanced by the learned counsel
for the Revenue that the matter is yet open does not appear to be justified. It
is further clear that when the assessee sought a reference from the Tribunal to
this court, the Tribunal made a reference framing this question as arising out
of the order of the Tribunal. If the Tribunal was of the view that the question
was still open, it would have been free to say so by saying that as the
question is not yet decided, no question of law arises. It is, there fore,
clear that the argument advanced by the learned counsel for the Revenue was not
the view of the Tribunal nor was that the view taken by the Commissioner.
As regards the question, it is clear from s. 28 of
the Companies Act that if articles of association of a company do not
incorporate matters enumerated in Table A of Sch. I, they would be operative
unless they have been specifically excluded. Sub-section (2) of s. 28 clearly
provides that if the articles do not exclude or modify the regulations
contained in Table A, those regulations shall be applicable. It is not disputed
that the articles of association of this company do not specifically exclude
the application of Table A in Sch. I. Table A in Sch. I, item 65, which clearly
provides for payment of remuneration to the directors, reads :
"65. (1) The remuneration of the directors shall,
in so far as it consists of a monthly payment, be deemed to accrue from
day-to-day.
(2) In
addition to the remuneration payable to them in pursuance of the Act, the
directors may be paid all travelling, hotel and other expenses properly
incurred by them—
(a) in attending and returning from meetings of the board of the directors or any committee thereof or general meetings of the company; or
(b) in connection with the business of the company."
This Regulation follows
Regulation 76 of the English Act. It is subject to the provisions of ss. 198,
309, 310 and 311.
Unless there is express provision in the articles of a
company similar to this regulation, the directors will not be entitled to
travelling expenses, etc. Young v.
Naval, Military and Civil Service Co-operative Society of South Africa
Ltd. [1905] 1 KB 687. It may be noted that remuneration under s. 309 does not
include travelling expenses.
In this view of the matter, it could not be said that
without modifying or amending the articles of association, remuneration could
not be paid to the directors. Apart from it, the remuneration paid to the
directors has been further rectified by the resolution of the company and,
therefore, it could not be said that this payment was an unauthorised payment
and, therefore, could not be allowed while assessing the company.
Thus, the view taken by the Commissioner and the
Tribunal does not appear to be justified. In this view of the matter,
therefore, in our opinion, the Tribunal was not justified in confirming the
order of the Commissioner passed under s. 263 of the I.T. Act, 1961, directing
the disallowance of the directors' remuneration to the tune of Rs. 38,188. The
reference is answered accordingly. In the circumstances, parties are directed
to bear their own costs.
[1935] 5
Comp. Cas. 103 (MAD.)
High Court of
v.
RAMESAM AND STONE, JJ.
O.S.
NOS. 78 of 1924 AND 8 OF 1925
NOVEMBER 15, 1934.
S. Srinivasa Iyangar and T.M. Ramaswami Iyer, for the appellant.
S. Panchapagesa Sastri and K.R. Krishnaswami, for the respondents.
Stone, J.—This case raises two points one of which is of some interest. The facts are not in dispute. It is unfortunate that the respondent who is the respondent to the appeal that raises the only question of any difficulty is not represented so that we have not had the advantage of an argument in support of the position he would presumably have maintained.
The plaintiffs are a limited company. The defendants are (1) a firm and (2) The Indian Bank Limited.
The firm were at all material times acting as managing agents of the plaintiff company pursuant to an agreement. The terms of that agreement are scheduled to the articles of association and Article 132 provides inter alia that the firm 'shall be and are hereby appointed the agents of the company for the period and upon the terms, provisions and conditions set out in the Scheduled Agreement…………and the Board is hereby authorized to execute the said agreement on behalf of the company.'
Article 149 provides that any preliminary expenses "and any other costs charges or expense which the Directors consider may be fairly deemed and treated as preliminary may be placed to a separate account……..and shall be chargeable on the profits or capital of the company as the Directors may deem expedient."
Article 100 appoints the first Directors by name.
Article 3 requires the Directors forthwith after the registration of the company to affix the seal of the company to the scheduled agreement aforesaid with power to agree to modifications though only, in one event, subject to the approval of the statutory meeting.
The company was registered on 15th July, 1921, and on 29th March, 1923, received the certificate empowering it to commence business. The firm resigned all connection with the company on or about 7th November, 1921.
Between the date of registration of the company and the date of resignation of the firm the moneys of the company were deposited with the Indian Bank. The firm purporting to act as managing agents purported to operate on that account. There is no question but that under the powers conferred on the firm by the scheduled agreement the firm had power so to operate.
Between the said dates the firm drew moneys from the bank for two purposes: (1) to pay themselves the remuneration reserved by the scheduled agreement and (2) to pay on behalf of the company preliminary expenses incurred by the firm for the company. It is not disputed that none of the money drawn went into the coffers of the firm except such as went by way of remuneration under the terms of the scheduled agreement.
The questions arise because in point of fact the scheduled agreement was never executed by the Directors.
As a consequence the company now claims (1) all the moneys the bank has paid to the firm as a consequence of the firm operating on the company's account, (2) from the firm all the moneys so drawn by the firm from the bank.
Counsel for the company-appellants very faintly argued the appeal as against the Bank very properly observing that if the bank could not be regarded as put on notice of the need to have the scheduled agreement executed (which notice would impose upon the bank the duty to ascertain that the agreement was executed and the firm thereby authorised) the case was covered by Mahony v. East Holy ford Mining Company.
We are clearly of the opinion that though strangers to the company have constructive notice of the memorandum and articles they are entitled to assume that the provisions therein contained have been complied with by the officers of the company. Here by the articles the Directors are directed forthwith to execute by affixing the seal of the company to the Scheduled agreement. Strangers to the Company are entitled to assume that that direction has been carried out and that as a consequence the firm were entitled to act as managing agents with the powers conferred by the scheduled agreement.
The appeal as against the bank accordingly clearly fails.
The appeal as against the firm raises points of more difficulty.
It should be noted that if the firm can be regarded as impliedly employed as managing agents there is no question but that they have acted quite properly. There is therefore no suggesion that they are to be made liable for any dereliction of duty or because being in a fiduciary capacity they have betrayed their trust. All the moneys have been expended in wages that would be perfecty proper had the scheduled contract been sealed. In that event the firm would have been managing agents entitled to draw Rs. 1,000 a month (the amount they actually drew) and empowered to incur and pay the expenses they actually incurred and paid.
The cases cited by the appellant proceed along the following well-known lines:
(1) Prior to incorporation a company does not exist.
Accordingly no contract can be made by it or for it. It cannot be in the
position of principal and accordingly on incorporation it cannot ratify such an
agreement. This position has been established law since Kelner v. Baxter.
Accordingly no action lies for breach of such a contract: In re Northumberland
Avenue Hotel Company; Bagot Pheumatic Tyre Company v. Clipper Pneumatic Tyre
Company and Melhado v. Porto Alegre Railway Company.
(2) After incorporation but prior to the certificate
empowering it to commence business a company has no power to do business,
contracts made by it are therefore provisional and not binding upon it unless
and until the company is entitled to commence business. See In re Otto
Electrical Manufacturing Company.
(3) The articles of association do not constitute a contract
as between the company and third parties other than shareholders as such or
officials of the company, e.g., Directors, Consequently, the firm cannot
enforce those clauses in the articles which provide for the execution of the
scheduled agreement. Eley v. Positive Life Assurance Company and Browne v. La
Trinidad.
It is not proposed to examine the above propositions to see whether they precisely express the law or whether they should be in more guarded language because without deciding anything we assume in favour of the appellant that as stated they are correct. We also assume without deciding anything, that the firm here could not have successfully sued the company for the expenses they had paid; In re National Motor Mail Coach Company, Limited, Clintons's Claim or for their remuneration as managing agents. In re: English and Colonial Produce Company, Limited.
That however does not dispose of this appeal. The firm is not suing the company. The company is suing the firm and the action must be for money had and received. As Lord Mansfield observed in Moses v. Macferlan, (a case which has been overruled but which has been cited with approval so far as the excerpt we now use is concerned, “This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial and therefore much encouraged. It lies only for money which ex quo aequo et bono, the defendant ought to refund. It does not lie for money paid by the plaintiff, which is claimed of him as payable in point of honour and honesty, although it could not have been recovered from him by any course of law, as in payment of a debt barred by the Statute of Limitations, or contracted during his infancy or to the extent of principal and legal interest upon an usurious contract, or for money fairly lost at play; because in all these cases the defendant may retain it with a safe conscience, though, by positive law he was barred from recovering."
Although Lord Mansfield calls it an equitable action it is, in truth, an action which is derived from the old action for debt. It is one of the actions on the case and for it to lie there must be circumstances which raise an express, or implied contract to pay or what has been described as a fictitious contract to pay. That is in the last event the circumstances must be such that by the fiction of a contract the law will impose the obligation to pay an imaginary debt.
How entirely the action is dependant upon this contractual foundation (though the contract be only a legal fiction) can be seen by perusing Sinclair v. Brougham. There it was held that money paid by depositors to a buiding society pursuant to an agreement ultra vires the company could not be recovered back by an action for money had and received (though a tracing action lay) because an ultra vires contract is null and void. There is in such a case no contract express, implied or fictitious. Therefore the basis of the action for money had and received did not, in such a case exist.
Now although this aspect of the present case was only glanced at in the argument before us it was sought to meet the observation that no action for money had and received lay in the circumstances here present by the case of In re The Bodega Company, Limited.
That case must be considered. There the articles provided that on the happening of a certain event a Director shall vacate office. The event having occurred the office was ipso facto vacated and the board had no power to condone or waive. One such event was entering into a contract with the company. W a Director entered into a secret contract with the company. That contract commenced in December and ended in June. Thereafter he continued to draw his remuneration as Director. At the general meeting in July he retired in the ordinary way and was re-elected. That happened on two successive years. Then the secret contract was discovered. Then W ceased to act. Then W sought to sell his shares. The company claimed the remuneration back and a lien for remuneration paid under a mistake of fact for the two years. It was held that for the period between the making of the secret contract and the termination of the secret contract W was not entitled to remuneration as a Director, on the footing of quantum meruit or otherwise, and that for the fees paid during that period the company were entitled to recover them back and had a lien on his shares.
In that case at page 286 Farwell, J., observes as follows : "Lord Mansfield, speaking of the action for money had and received in Moses v. Macferlan says, ' it lies for money paid by mistake ; or upon a consideration which happens to fail.' The mistake on which you can recover must, as Bramwell, B puts it in Acton v. Short, be a mistake 'as to a fact which, if true' would make the person liable to pay the money; not where, if true, it would merely make it desirable that he should pay the money." That I apprehend means this. If you are claiming to have money repaid on the ground of mistake, you must show the mistake is one which led you to suppose you were legally liable to pay. The same proposition is really involved in the second head total failure of consideration.
As Farwell, J., founded this part of the judgment on Lord Mansfield we feel justified in placing greater reliance upon Lord Mansfield and his observations which discourage the view that money can be recovered back simply because the person paying paid without there being any legal liability to pay.
It is not however, necessary to disagree with Bodega Co.'s Case, on this point because here there was no mistake. In that case everybody thought the Director was Director except the Director, who must have known that, having entered into a secret contract with the company, he was not a Director. Here everybody connected with the company (i.e., the men whose knowledge could be imputed to the company) knew that the firm was not the managing agent under any express contract, knew that the firm was acting as managing agents, knew that the money was with the bank and was being operated upon by the firm and knew that expenses were being incurred and being paid by the firm with the money of the company. It may be said this knowledge is not proved (though we think it must be imputed). It is not a question whether it is proved or whether the knowledge existed. The question is, was the only fact that could be known something quite different so that the company, through its officers, was mistaken as to the true position. There is no such evidence. Obviously, the Directors could not be mistaken about the fact that the scheduled agreement was sealed. They must have known that it was not, for they were the officers charged with the duty of executing it.
Accordingly, in our opinion, this case does not fall within Bodega Company's Case even if that case on this point was rightly decided. This case falls within the group of instances mentioned by Lord Mansfield where money has been paid to a person A by B in circumstances such that A by action could not have recovered the moneys from B but such that there is nothing unconscionable or improper in A, having been in fact paid, retaining the money.
It follows that the appeal must be dismissed against both respondents. As the first respondent Messrs. Callianjee and sons, the firm aforesaid, are ex parte there will be so far as they are concerned, no order as to costs. The second respondents The Indian Bank Limited are entitled to their costs.
[1973]
43 Comp. Cas. 232 (Mad)
HIGH COURT of
v.
R. Krishnaswami Reddiar
Second Appeal No. 1398 of 1969
OCTOBER 27,
1972
N. Srivatsamani and K.V. Durairaj for appellants.
M.A. Sadanand for G. Ramaswami
and M. Kalyanasundaram for the respondents.
V. Ramaswami J.—2nd and 3rd defendants are the appellants.
The suit was filed by the plaintiff, 1st respondent, for the recovery of a sum
of Rs. 4,000 due under a promissory note dated August 12, 1960. The promissory
note was executed by the 1st defendant. The 3rd defendant Sri Rajagopal
Transports Private Ltd. was incorporated on April 7, 1959, with the 1st
defendant and his two wives as its only shareholders. The 1st defendant by a
resolution dated April 8, 1959, was appointed as the managing director of the
company. The suit promissory note was executed by the 1st defendant on August
12,1960, and he described himself as the proprietor of Sri Rajagopal Transports
P. Ltd. Subsequently, on July 29, 1961, all the shares of the company were
transferred in the name of the 2nd defendant and his son, Rajaram. It was the
case of the plaintiff that the money was borrowed by the 1st defendant for the
purchase of a bus for the company and
that when the shares were transferred to the 2nd defendant, the 2nd defendant also took over the
liabilities on the promissory note. The 2nd and 3rd defendants resisted the
claim and contended that the suit promissory note has not been executed in the
name of, or for and on behalf of, the 3rd defendant-company and that,
therefore, the suit was not maintainable against the 2nd and 3rd defendants.
The second contention was that there was no resolution of the company as required
by section 292(c) of the Companies Act, 1956, for borrowing the money on
promissory note. The 3rd contention was that the liability under the promissory
note was not taken over by the 2nd defendant and that in any case the suit was barred by limitation. Both
the courts below have rejected the contentions of the defendants and decreed
the suit as prayed for. In this appeal, the learned counsel for the appellants
raised the same contentions.
The promissory note is written in
Tamil and in the description of the promissory note the promissor is stated as
"Sri Rajagopal Transport bus proprietor Ramanatha Reddiar" The
contention of the appellants is that since the promissory note is not executed
in the name of the company or for and on behalf of the company, the suit is not
maintainable against the company. Section 47 of the Companies Act, 1956,
requires that a promissory note shall be deemed to have been made, accepted,
drawn or endorsed on behalf of the company if drawn, accepted, made or endorsed
in the name of or on behalf of the company by any person under its authority,
express or implied. It is clear, therefore, that in order to make the company
liable, the instrument on the face of it must show that it was executed on
behalf of the company. Normally, if the promissory note had been in English one
would have expected a recital that the promissor is executing the document for
and on behalf of the company. But the promissory note is in vernacular and the
promissor is given as Sri Rajagopal Transport bus proprietor Ramanatha Reddiar.
If really the promissor was not executing the document on behalf of the company
it would not have been necessary for giving such a description. It is true that
no evidence de hors the instrument would be admissible to prove that the
promissory note was executed on behalf of the company. But, in my opinion,
since the promissory note is in Tamil and the description is Sri Rajagopal bus
Transport proprietor Ramanatha Reddiar, the intention is made clear in the
instrument itself and shows that the instrument was executed on behalf of the
company.
A similar question came up for
consideration before a Full Bench of this court in Sivagurupatha v. Padmavathi . It
was held in that case that when, in a promissory note written in Indian
language, the person after giving his own description adds that he is the agent
of another it means that he is acting as the other's agent in the matter of
execution of the document. This decision concludes the point against the
appellants.
The next contention of the appellants is that there is no resolution by
the board of directors of the company in terms of section 292(c) of the
Companies Act enabling the managing director to borrow money on promissory
notes. Apart from the fact that this plea had not been raised in the written
statement, there is no substance also in this contention. It is not disputed
that the memorandum and articles of association allow borrowing by the
directors. The transaction is a loan which is, therefore, authorised under the
memorandum and articles of association. Article 21 of the articles provides
that the directors may raise or borrow money on promissory notes. By resolution
4 of exhibit A-2, which is a certified copy of the registration of resolutions,
the 1st defendant was appointed as the managing director. Resolution 6 vested
in him full powers for the management of the company's affairs and also
authorised him to sign all papers of the company. The transaction is,
therefore, one which could be entered into on behalf of the company by the
first defendant. In such a circumstance, the creditor is entitled to presume
that all formalities required in connection therewith have been complied with.
A bona fide creditor in the absence of any suspicious circumstance is also
entitled to presume its existence. The creditor being an outsider or a third
party so far as the company is concerned is entitled to proceed on the
assumption of the existence of such a power. That in fact the money was
utilised for the purpose of the company is not in dispute and the 2nd defendant
himself has made a part payment towards this promissory note. In this
connection it is also useful to refer to the decision of the Allahabad High
Court in L.R. Cotton Mills Co. v. J.K. Jute Mills Co. It was
held in that case that even where there was no actual resolution authorising a
director to enter into a transaction on behalf of the company either by the
board of directors or by the board of managing agents, a claim of a creditor
could not be affected if the terms of its memorandum and articles of
association authorised such a transaction. It was also held that in such a case
the person negotiating with a company is entitled to presume that all the
formalities in connection therewith have been complied with. There is no
dispute in this case as to the bona fides of the plaintiff. This contention of
the appellants is therefore unsustainable.
It is next contended by the learned counsel for the appellants that the
2nd defendant had not taken over the liability under the promissory note when
the shares were transferred to him and the suit was also barred by limitation.
As already stated that the money was utilised for the purpose of the company
was not in dispute. In fact the 2nd defendant himself has paid a sum of Rs. 280
towards the promissory note on August 24, 1962, and has made an endorsement in
his own hand in the promissory note describing himself as the managing director
of Sri Rajagopal Transport Private Ltd. This endorsement would save the
limitation as the suit itself was filed on August 24, 1965. The finding of the
courts below also is that the 2nd defendant had taken over the liability under
the promissory note when he purchased the entire shares of the company.
For the foregoing reasons, the second appeal fails and it is dismissed.
No costs. No leave.
Appeal dismissed.
[1967]
37 COMP. CAS. 256 (
V.
Mondal Bros. &
Co.(Private) Ltd.
P
B MUKHARJI, J.
CIVIL
REVISION CASE NO. 1710 OF 1961
JANUARY
27, 1965
ORDER
This
application under article 227 of the Constitution raises an important point of
company law.
The dispute
arises on a loan of Rs.1,000 granted by the plaintiff- petitioner to the
defendant company on a bill of exchange being a hundi for Rs,1,000. On November
22, 1958, the defendant limited company drew a hundi for Rs.1,000 on the second
defendant, Ram Chandra Nag, who is also an opposite party here, payable to the
plaintiff 90 days after date without grace which was accepted by the second
defendant. It is the plaintiff's case that the hundi was presented to the
defendants for payment but the hundi was dishonoured. The plaintiff sent
letters of demand, but the money due was not paid. There was a reply by the
defendant company on August 3, 1959, denying the hundi and the loan. The
plaintiff filed the present suit on December 3, 1959, before the
The trial
court decreed the suit of the plaintiff in full with costs. The only contestant
was the first defendant, the limited company. The acceptor did not appear. It
is on record before the trial court, on the evidence of P.W. 1, Kishan Rathi,
the plaintiff himself, that Naresh Chandra Mondal, director and the manager of
the defendant- company, purchased the stamp for the defendant company in
respect of the hundi, that Naresh wrote the hundi in his presence and affixed
the company's rubber stamp on the hundi in his presence. On behalf of the
defendant company, its director, Sambhu Nath Mondal, gave evidence. His
evidence was that the hundi was not signed on behalf of the defendant company,
that the account books of the defendant company, cash books and the
balance-sheet showed that this money on the hundi, the sum of Rs.1,000, never
entered the till of the company and even the rubber stamp was not of the
defendant company. This Sambhu Nath Mondal is, however, a cousin of Naresh
Chandra Mondal, the maker and drawer of the hundi. Naresh was in November,
1958, when the hundi was drawn, a director and manager of the company.
According to Sambhu's evidence, Naresh resigned from the company some time in
February, 1959, i.e., a few months after the date of the execution of the
hundi.
The defendant
company applied for a new trial under section 38 of the Presidency Small Cause
Courts Act against this decree. The Full Bench of the
According to
the Full Bench, section 9 of the Companies Act, 1956, makes a certain clause in
the articles of association of this defendant company repugnant to the
Companies ACt and, therefore, void to the extent of its repugnancy. Section 9
of the Act provides as follows :
"Save as
otherwise expressly provided in the Act :-
(a) the provisions of this
Act shall have effect notwithstanding anything to the contrary contained in the
memorandum or articles of a company, or in any agreement executed by it, or in
any resolution passed by the company in general meeting or by its board of
directors, whether the same be registered, executed or passed, as the case may
be, before or after the commencement of this Act; and
(b) any provision contained
in the memorandum, articles, agreement or resolution aforesaid shall, to the
extent to which it is repugnant to the provisions of this Act, become or be
void, as the case may be."
Then the Full
Bench relies on section 292 of the Companies Act which mentions "certain
powers to be exercised by the board only at its meeting" and that such act
can only be done by means of a resolution passed at the meeting of the Board
and that included the power to borrow money otherwise than by a debenture.
From these two
sections, 9 and 292 of the Companies Act, the Full Bench of the Small Cause
Court drew the conclusion that the articles and memorandum of this company
authorising the directors to borrow money were bad and repugnant and that as
the books of resolutions or the minute book of the directors has not been
proved by the plaintiff, there was nothing to show that this money was borrowed
in accordance with section 292 of the Companies Act. On that finding the Full
Bench of the
The plaintiff
now has applied under article 227 of the Constitution.
The judgment
and 'order of the Full Bench of the
The Full Bench
failed to realise that the onus of proving that there was no resolution was
upon the defendant company and not upon the plaintiff. The minute books and the
book of resolution of the board of directors are books of the company and are
not open to strangers and outsiders. This was also within the special knowledge
of the defendant company. If the defendant company was trying to prove that its
manager and director had no authority to borrow money, then it was for the
company to prove from its own books of minutes and resolutions that no
authority was given to Naresh Chandra Mondal, its manager and director. Section
106 of the Evidence Act says that when any fact is specially within the
knowledge of any person, the burden of proving that fact is upon him. It is
strange that neither the defendant company nor its witness, director Sambhu
Nath Mondal, produced the minute book or the book of resolutions in this case.
The only inference that can be drawn from such non-production of the facts and
circumstances of this case is that, had they been produced, they would have
shown that there was good authority and resolution in favour of Naresh Chandra
Mondal. That presumption is irresistible in this case. Articles 103 and 114 of
the articles of association of this company cast a mandatory duty upon the
directors to record minutes of the proceedings of all meetings of the directors
in the minute book. The defendant company or its director witness, Sambhu Nath
Mondal, being in possession of such minute book and being in special knowledge
of the contents of that minute book, it was their duty to produce them and not
the duty of the plaintiff.
The next point
on which the Full Bench of the
"61...The
directors may from time to time borrow from the members or other persons and
may themselves lend any sum or sums of moneys for the purposes of the company.
62....The
directors may raise or secure the repayment of such moneys in such manner and
upon such terms and conditions...by making, drawing, accepting or endorsing on
behalf of the company and promissory notes, hundies or bills of
exchange...."
These
articles, in my view, are in no way in conflict with or repugnant to section
292(1) of the Companies Act. Section 292(1) of the Companies Act deals with
certain powers to be exercised by the board only at a meeting and lays down,
inter alia :
"The
board of directors of a company shall exercise the following powers on behalf
of the company, and it shall do so only by means of resolutions passed at
meetings of the Board :-....
(e) the power
to make loans."
Reading
section 292(1) of the Companies Act and articles 61 and 62 of the defendant
company, it will be quite clear that they are not inconsistent. The articles do
not say anything about the procedure by which the board of directors will act.
They grant the power to the directors to borrow money on a bill of exchange.
The articles deal only with the director's powers to borrow on a promissory
note or a hundi. They do not enjoin any particular procedure to exercise that
power to borrow. The first error of the Full Bench of the
The mistake of
the Full Bench lay in confusing the provision for power with the provision of
the procedure for the exercise of that power.
The next error
of the Full Bench is to overlook the proviso to section 292(1) of the Companies
Act, which says, inter alia :
"Provided
that the board may, by a resolution passed at a meeting, delegated to.... the
manager of the company ..... the powers specified in clause (e)..... to the
extent specified in sub-sections (2),(3) and (4) respectively."
That means
that the delegate may be the manager, which in this case the drawer of the
hundi, Naresh Chandra Mondal, admittedly was. Whether there was resolution by
the board of directors delegating such power again is a fact within the special
knowledge of the defendant company and its directors. They could have easily
produced the resolution book or the minute book to show that there was no such
delegation. But they had not done so and, therefore, an adverse inference must
be drawn against them to the effect that, had they produce them, they would
have shown such delegation to the manager, Naresh Chandra Mondal.
Non-production
of the most vital and crucial document, the minute book and the book of
resolution of the directors, is not the only point against the defendant
company. The defendant company did not even call Naresh Chandra Mondal and gave
no reason why the company could not or did not call him who actually executed
and drew the hundi for and on behalf of the company. True it is that Naresh was
no longer a director at the time of the trial, but then that is not enough. It
is not said that Naresh could not be called by the company. It is not even
alleged that there is any strained relationship or enmity between Naresh and
the company. Indeed, the director who came to give evidence on behalf of the
company at the trial, Sambhu Nath Mondal, is himself a cousin of Naresh Chandra
Mondal. That being so, the failure of the defendant company to call the most
important witness, namely, the drawer of the hundi in the case, can only
confirm the adverse inference drawn from the non-production of the most
important document, the minute book and the resolution book.
In that
context, the fact that this money on the hundi did not find its way to the till
of the company by reason of the fact that it is not shown in the company's
books of account for 1958-59 marked Exts. B and B/1 and the ledger of the
company marked Ext. C along with the company's balance-sheet marked Ext. D of
1958-59 cannot prejudice an independent third party stranger-creditor who is
advancing money to the company on a bill of exchange. If a director or a
manager with ostensible authority under the memorandum and the articles of
association of the company practices a fraud upon his own company by not
placing the money in the coffer of the company, that cannot defeat a bona fide
creditor's claim against the company.
This raises
the important question of law relating to the internal management of the
company. I shall presently deal with the law on the subject, but, before doing
so, some reference to further clauses in the articles and the memorandum of the
company will clear the ground. The first point to emphasis in this respect is
that the director's power to borrow money for the company on a hundi or a
promissory note or a bill of exchange is plainly recognised both in the
memorandum and in the articles. I have already cited article 61 of the company.
I shall refer here to clause 3(h) of the memorandum specifying the objects of
the company which include, inter alia, the object of -
"Borrowing
or raising money in such manner as the company shall deem fit and in particular
by the issue of bills of exchange, promissory notes or other
obligations....."
The position
of the drawer of the hundi in this case must also be emphasised. The drawer,
Naresh Chandra Mondal, was at the time he was drawing the hundi, not only a
director of the company but also its manager. Article 95 of the company shows
that Naresh Chandra Mondal was one of the first four directors of the company
and it also declares that "Naresh Chandra Mondal, B.Sc., shall be the
first manager of the company". Article 98 of the company expressly
recognises, inter alia, that :
"The
directors may from time to time entrust to and confer upon a managing director
or manager for the time being such of the powers exercisable under these
presents by the directors as they may think fit and may confer such powers for
such time and to be exercised for such objects and purposes and upon such terms
and conditions as they think expedient....."
Article 100
expressly recognises the directors' full power to make and sign such contracts
and to draw, endorse, accept and negotiate on behalf of the company all such
bills of exchange, promissory notes, hundies, cheques, drafts and other
instruments, etc. From a review and analysis of all these relevant articles it
is indisputable on the facts of the present case that the director and the
manager, Naresh Chandra Mondal, had prima facie authority to draw the hundi on
behalf of the company. The lender who lends money to the company in those
circumstances on a promissory note or a bill of exchange executed by the
manager and the director after having found on inquiry from the memorandum and
the articles the existence of such power to borrow, need not and cannot, and is
not obliged, in my view, to look further into the internal management of the
company and embark on an investigation whether a particular manager or director
who is given such powers under the memorandum and the articles has nevertheless
lost it or qualified or limited it by an internal resolution contained in the
internal minutes book or resolution of the company's directors and if so what
are the terms of such qualification or limitation ? This is exactly what is
meant by internal management.
A person
taking in due course a bill of exchange or hundi signed by a director who,
consistently with the company's articles, might have been, but who was not in
fact authorised to sign bills or hundies is, upon the principle of the Royal
British Bank v. Turquand [(1856) 6 El.and Bl.327], entitled to assume that the
director was "acting under its authority" when he signed the bill,
and to recover on the bill or hundi against the company accordingly. If any
authority is needed for the proposition, it is Dey v. Pullinger Engineering Co.
[(1921) 1 K.B.77], dissenting from Premier Industrial Bank Limited v. Carlton
Manufacturing Co. Limited & Crabtree [(1909) 1 K.B.106]. In this connection
a more recent decision in Birtish Thomson Houston Co. v. Federated European
Bank Limited [(1932) 2 K.B.176; (1933)3 Comp.Cas. 106] may also be seen. No
doubt, if the bill is signed by a local manager or other persons who cannot
properly be assumed to have, and is not held out as having authority to sign
bills for the company, then the position is different , as pointed out in
Kredit bank Cassel v. Schenkers [(1927) 1 K.B.826]. No doubt, again, if a
person has not , in fact, knowledge of the existence of the power of delegation
contained in the company' articles, he cannot rely upon its suggested exercise,
a point which was made clear in the decision in Houghton (J.C.) & Co. v.
Nothard, Lowe and Wills Ltd. [(1927) 1 K.B.246], affirmed by the House of Lords
in (1928) A.C. 1, although on different grounds. Again, if there is any
collusion or fraud between the director drawing the hundi or the bill and the
creditor or the lender, then, if that fraud or collusion is proved, that will
vitiate certainly the transaction, and the bill or the hundi will not be
binding upon the company. But be it said that there is no such case of fraud or
collusion between Naresh Chandra Mondal and the plaintiff in this case. As
Buckley points out in the 13th edition of the Companies Act at page 209 that,
if the borrowing power of the company itself as distinguished from that of the
directors is limited, the lender cannot rely upon the principle of Royal
British Bank v. Turquand [(1856) 6 El.&Bl.327] and say that he was entitled
to presume that the limit was not being exceeded. But even then if a company
which has power to borrow money for the purposes of its business borrows for an
illegitimate purpose, the loan is good in the absence of knowledge of the
lender that the borrowing was for a wrong purpose; In re Payne (David) &
Co. : Young v. David Payne and Co. [(1904) 2 Ch.608] and Sinclair v. Brougham
[(1914)A.C.398]. The learned commentator at page 373 of the said edition of the
Companies Act points out that outsiders are bound to know what Lord Hatherley
called the "external position of the company" in Mahony v East
Holyford Mining Co. [(1875)L.R. 7 H.L.869] at page 893, but are not bound to
know its "Indoor management". If persons are held out as and act as
directors, and the shareholders do not prevent them from so doing, outsiders
are entitled to assume that they are directors, and, as between the company and
such outsiders, the acts of such directors de facto will bind the company. A
stranger dealing with a company has a right to assume, as against the company,
that all requirements of internal management have been duly complied with. This
was clearly laid down in a number of decisions beginning from Royal British
Bank v. Turquand [(1856) 6 El.&Bl.327] and such cases as Totterdel v.
Fareham Blue Brick and Tile Co. [(1866)L.R.1C.P.674], In re Romford Canal Co.
[(1883) 24 Ch.D.85], Montreal and St.Lawrence Light and Power Co. v. Robert
[(1906) A.C.196 (P.C.)] at page 222 and in the more recent decision of the
House of Lords in Morris v. Kanseen [(1946)A.C.459; 16 Comp.Cas.186].
It is exactly
here that the Full Bench of the Small Cause Court went wrong in not realising
that a bona fide creditor-stranger who lent money on a hundi or a bill of
exchange has a right to assume as against the company that all requirements of
the internal management have been duly complied with, such as, necessary
resolutions are there on the directors book to make them regular and that the
directors have acted according to the procedure enjoined in their board
meeting. In this connection reference may also be made to the same edition of
Buckley on the Companies Acts at page 83 in support of the view expressed
above.
There is also
another relevant section of the Companies Act which the Full Bench of the Small
Cause Court failed to notice. That is section 47 of the Companies Act. That
section lays down that a bill of exchange, hundi or a promissory note shall be
deemed to have been made, accepted, drawn or endorsed on behalf of the company
if drawn, accepted, made or endorsed in the name of, or on behalf of, or on
account of, the company, by any person acting under its authority, express or
implied. Here, on the facts, the authority of Naresh Chandra Mondal was both
express and implied. The hundi itself shows on its very face that "it is
drawn for and on behalf of Mondal Brothers and Co. (Private) limited." The
endorsement on the back of the hundi also shows that the stamp paper of the
hundi was purchased for Mondal Brothers & Co. (Private) Limited. That being
so and section 47 making it expressly clear that it shall be deemed to have
been made by the company, all the onus on the facts and circumstances of this
case is upon the defendant company to show that this hundi did not bind the
company at all. I must say that nothing at all has been shown to prove that the
hundi does not bind the company on the face of it. Naresh Chandra Mondal's
alleged lack of authority has not been proved and established in the
circumstances mentioned above.
For these
reasons this rule must succeed. A last minute effort was made by Mr. Sinha for
the defendant company that there was really no presentment of the hundi. I am
afraid, this point of fact about presentment cannot now be entertained. It was
not taken by the company in its application under section 38 of the Presidency
Small Cause Courts Act before the Full Bench as one of the grounds to set aside
the judgment. Besides, the facts are eloquent on the record. There was a demand
latter mentioning the hundi and its non-payment. In fact, there was also a
reply by the defendant company.
I, therefore,
make the rule absolute with costs and set aside the order and judgment of the
Full Bench of the Small Cause Court and restore the decree of the trial court.
In other words, the suit will be decreed in full with costs as against the
first defendant company and ex parte against the second defendant as ordered by
the trial court.
Liberty is
given to withdraw the money already deposited by the defendent company opposite
party No. 1.
[1968] 38 Comp.Cas.228 (CA)
[1967] 3 W.L.R. 1408
IN THE COURT OF APPEAL
v.
Brayhead Ltd.
LORD DENNING M. R., LORD WILBERFORCE AND LORD PEARSON, JJ.
JUNE 20, 21, 22, 1967
Lord Denning M.R.: In opening this appeal Mr. Wheeler paid tribute to the judgment of Roskill J. He said it was a tour de force. I agree. It was delivered straight way after a five day hearing at the end of the term. His finding of fact having been accepted by both parties before us. The discussion has been on the correct legal principles to be applied. I need myself only summaries the salient facts.
Lord Suirdale, the plaintiff, was to may
years chairman and managing director of a public company dealing in electronics
called Perdio Electronics Ltd. (Perdio). He held a great number of its shares
and had guaranteed a loan to it from merchant bankers called Guinness Mahon
& Co. for £50,000. Mr. Richards, a professional
accountant, was the chairman of another public company called Brayhead Ltd.
(Brayhead). It also dealt in electronics. Towards the end of 1964 Perdio was
sustaining losses. It needed financial assistance. Bray head was ready to help.
Its intention was eventually to get control of Perdio. At the end of 1964 Lord
Suirdale sold 750,000 shares in Perdio to Brayhead at 3s. ed. A share, a deal
involving over £159,000 into Perdio. On January 14, 1965, Lord Suirdale became
a director of Brayhead. He did not attend a board meeting of Brayhead until May
19, 1965. At that meeting many matters were discussed and recorded in the
minutes. But after the board meeti9ng, in an office outside, there was a
discussion between the directors. Agreements were then reached between Mr.
Richards on behalf of Brayhead, he being the chairman, and Lord Suirdale. The
upshot of it was that Lord Suirdale agreed to put more money into Perdio. But
he was not prepared to do so unless he position was secured by Brayhead Ltd.
That was done by two letters. They form the subject-matter of these
proceedings. "
One letter with
is called the indemnity is on the paper of Brayhead Ltd. dated May 19, 1965,
addressed to Viscount Suirdale. It reads:
"Re Perdio
Electronics Ltd. Acceptance Credits.
Dear Lord
Suirdale
This letter may be taken as undertaking to indemnify you against any loss which may occur by you having to fulfil your personal guarantee to Guinness Mahon & Co. Ltd. for a figure not to exceed £50,000. It is agreed that the consideration for this indemnity will be a personal loan by you to Perdio Electronics Ltd. in a sum not exceeding £10,000.
Yours sincerely,
A. J. Richards,
Chairman."
Then there is a letter called the; guarantee also dated May 1965, likewise on the paper of Brayhead and likewise addressed to Viscount Suirdale:
"Re Perdio
Electronics Ltd. Loan.
Dear Lord
Suirdale,
It is hereby agreed that Brayhead Ltd. will guarantee repayment of any moneys loaned by you personally to Perdio Electronics Ltd. It is condition of this guarantee that at least six months' notice will be given by you to Brayhead Ltd. should the guarantee have to be implemented.
Yours sincerely,
A.J. Richards,
Chairman."
On the same
occasion two other letters were signed for connected transactions.
In reliance on
those letters Lord Suirdale advanced further sums to Perdio: in all a sum of
£45,000. Brayhead also lent Perdio large sums. Unfortunately their efforts were
unavailing to save Perdio. It went into liquidation. On September 27, 1965,
Lord Suirdale resigned from the board of Brayhead. He had been a director for
some nine months.
The merchant bankers, Guinness Mahon,
called on Lord Suirdale to honour his guarantee. He paid them £50,000 and then claimed that sum from Brayhead under the
letter of indemnity of May 19, 1965.He also wanted repayment of the £45,00
which he had lent Perdio. He claimed this cum under the letter of guarantee of
May 19,1965, and gave the requisite notice to Brayhead to repay. On November
27, 1965, he issued a writ against Brayhead.
The defence of
Brayhead is twofold: First, they say that the letter of indemnity and the
letter of guarantee are not binding on the company, because Richards had no
authority, actual or ostensible, to write those Lord Suirdale, being himself a
director of Brayhead, had no authority, actual or ostensible, to write those
letters: and that Lord Suirdale, Being himself a director of Brayhead, had
notice of that want to authority. So there was no contract by the company
Second, they say that if there was a contract by the company, it is
unenforceable by Lord Suirdale because he was a director and had an interest
which he did not disclose at any board meeting. Lord Suirdale challenges those
defences. But he says if they are available to a company he can come down on
Mr. Richards personally as upon a warranty of authority.
I need not
consider at length the law, on the authority of an agent, actual, apparent, or
ostensible. That has been done in the judgments of this court in Freeman &
Lockyer v. Buckhurst Park Properties (Mangal) Ltd. it is there
shown that actual authority may be express or implied. It is express when it is
given by express words, such as when a board of directors pass a resolution
which authorizes two of their number to sign cheques. It is implied when it is
inferred from the conduct of the parties and the circumstances of the case,
such as when the board of directors appoint one of their number to be managing
directors. They thereby impliedly authorize him to do all such things as fall
within the usual scope of that office. Actual authority, express or implied, is
binding as between the company and the agent, and also as between the company
and others, whether they are within the company or outside it.
Ostensible or
apparent authority is the authority of an agent as it appears to others. It
often coincides with actual authority. Thus, when the board appoint one of
their number to be managing director, they invest him not only with implied
authority, but also with ostensible authority to do all such things as fall
within the usual scope of that office. Other people who see him acting as
managing director are entitled to assume that he had the usually authority of a
managing director. But sometimes ostensible authority exceeds actual authority.
For instance, when the board appoint the managing direct, they may expressly
limit his authority by saying he is not to order goods worth more than £500
limitation, but his ostensible authority
includes all the usual authority of a managing director. The company is bound
by his ostensible authority in his dealings with those who do not know of the
limitation. He may himself do the "holding-out." Thus, if he orders
goods word £1,000 and sings himself "Managing Director for and on behalf
of the company," the company is bound to the other party who does not know
of the £500 limitation, see British Thomson-Houston Co., Ltd. v. Federated
European Bank Ltd., which was
quoted for this purpose by Pearson L. J. in Freeman & Lockyer1.
Even if the other party happens himself to be a director of the company, nevertheless
the company may be bound by the ostensible authority. Suppose the managing
director orders £1,000 worth of goods from a new director who has just joined
the company and does not know of the £500 limitation, not having studied the
minute book, the company may yet be bound. Lord Simonds in Morris V. Kanssen envisaged that sort of
case, which was considered by Roskill J. in the
present case.
Apply these
principles here. It is plain that Mr. Richards had no express authority to
enter into these two contracts on behalf of the company: nor had he any such
authority implied from the nature of his office. He had been duly appointed
chairman of the company but that office in itself did not carry with it
authority to enter into these contracts without the sanction of the board. But
I think he had authority implied from the conduct of the parties and the
circumstances of the case. The Judge did not rest his decision on implied
authority, but I think his findings necessarily carry that consequence. The
judge finds that Mr. Richards acted as de facto
managing director of Brayhead. He was the chief executive who made the final
decision on any matter concerning finance. He often committed Brayhead to
contracts without the knowledge of the board and reported the matter
afterwards. The judge said:
"I have
not doubt that Mr. Richards was, by virtue of his position as de facto managing
director of Brayhead or, as perhaps one might more compendiously put it, as
Brayhead's chief executive, the man who had, in Diplock L.J.'s words, 'actual
authority of manage", and he was acting as such when he signed those two
documents."
"the board
of Brayhead knew of the and acquiesced in Mr. Richards acting as de facto
managing director of Brayhead."
The judge held that Mr.
Richards had ostensible or apparent authority make the contract, but I think
his findings carry with it the necessary inference that he had also actual
authority, such authority being implied from the circumstance that the board by
their conduct over many months had acquiesced in his acting as their chief
executive and committing Brayhead Ltd. to contracts without the necessity of
sanction from the board.
This findings
makes it unnecessary for me to go into the question of ostensible authority; or
into the rule in Royal British Bank V. Turquand; or into the
question whether a director had constructive notice. It do not say that the
judge was in error in what he said on these subjects. All I say is that I do
not find it necessary to express any opinion on it.
Accepting that
Mr. Richards had actual authority to make these contracts, there still remains
the second point: Lord Suirdale was a director of Brayhead. He had an interest
in these contracts and did not disclose it. He failed to comply with section
199 of the Companies Act, 1948, and with article 99 of the articles of
association. He did not disclose the nature of his interest to any board
meeting as he should have done. His failure is a criminal offence. It renders
him liable to a fine not exceeding £100. But how does it affect the contract?
It was urged before us, quoting the words of Lord Lindley in Kaye v. Croyd on
Tramways,
that "he cannot enforce, as against the company, any contract which he had
entered into with that personal interest."
It seems to me
that when a director fails to disclose his interest, the effect is the same as
non-disclosure in contracts uberrimae fidei, or non-disclosure by a promoter
who sells to the company property in which he is interested: see Re Cape Breton
Co.;
Burland v. Early.
Non-disclosure does not render the contract void or a nullity. It renders the
contract voidable at the instance of the company any makes the director
accountable for any secret profit which he has made.
At first sight
article 99 does present difficulties. It says that:
"A
director may contract with and be interested in nay contact or proposed
contract with the company either as vendor, purchaser or otherwise, and shall
not be liable to account for any profit made by him by reason of any such
contract or proposed contract with and be interested in any contract or
proposed contract with the company either as vender, purchaser or otherwise,
and shall not be liable to account for any profit made by him by reason of any
such contract or proposed contract, provided that the nature of the interest of
the director in such contract or proposed contract be declared at a meeting of
the directors as required by and subject to the provisions of section 199 of
the act."
On the wording
it might be suggested that there is no contract unless the director discloses
his interest. In other words, that disclosure is a condition precedent to the
formation of a contact. But I do not think that is correct. All that article 99
does is to validate every contact when the director makes proper disclosure. If
he discloses his interest, the contract is not voidable, nor is he accountable
for profits. But if he does not disclose his interest, the effect of the
non-disclosure is as before: the contract is voidable and he is accountable for
secret profits.
In this case,
therefore, the effect of the non-disclosure by Lord Suirdale was not to make
the contract void or unenforceable. It only made the contract is not voidable,
Once that is held, everyone agrees that it is far too late to avoid it. It is
impossible to put the parties back in the same position, or anything like it. The
contracts are, therefore, valid and, I would add, enforceable. So Lord Suirdale
can sue upon them.
I need only add
one word about warranty of authority. If Lord Suirdale had failed in his action
because of a failure by him to disclose his interest, it would be his own fault
and he could not claim on a warranty of authority; or if he failed because he
knew that Mr. Richards had no authority, he could not claim on any implied
warranty. But if he failed because, unbeknown to him, Mr. Richards had no
authority, actual or ostensible, I think that Mr. Richards would have been
liable for breach of an implied warranty of authority. But that question des
not arise, seeing that Mr. Richards had actual authority.
I would,
therefore, dismiss the appeal.
Lord Wilberforce.
I take the benefit of the summary of the relevant facts which Lord Denning M.R.
has given and of the fuller findings accepted by both sides which are to be
found in the judgment of Roskill J.
I consider first
the question of Mr. Richards' authority. I agree, of course (as there is not
dispute about this), that Mr. Richards had no actual express authority to enter
into the two agreements of May 19, 1965, on which this action is brought. But
the question remains whether he had implied authority to do so. Now, when one
is considering whether he had implied authority, one asks first: From what is
the implication to be drawn? The suggestion was made that his authority might
be implied from the mere fact of his holding the office of director and
chairman of Brayhead at the relevant time. The judge dealt with
that and held that, merely by virtue of his position as chairman, he would not
have the necessary authority to enter into these agreements. I agree with that;
but the question as to implication does not stop there. I quote some words in
this connection from Diplock L,J.'s judgment in Freeman & Lockyer v. Buckurst
Park Properties (Mangal) Ltd. He says:
"An
'actual' authority is a legal relationship between principal and agent created
by a consensual agreement to which they alone are parties. Its scope is to be
ascertained by t applying ordinary principles of construction of contracts,
including any proper implications from the express words used, the usages of
the trade of the course of business between the parties."
I think,
therefore, that it is legitimate to go on and consider, over and above the
powers he had as chairman, what the actual circumstances of he relationship
between him and the board of directors may show. Looking at it in that way, it
seems to me clear from the findings of the judge that Mr. Richards in fact
impliedly had authority to do what he did by these two agreements. I take that
in two ways. First, quite generally, the judge deals1 with the nature of
Brayhead's business and the nature of the responsibility of Mr. Richards, in
particular, as against the other directors of the board. I shall not bread the
passage at length. He points out that the set-up of this company was unusual in
that the directors were in the main working directors looking after various
subsidiaries and that Mr. Richards took and was allowed to take authority to
deal with general, financial and policy questions, acting in the role of chief
executive, without having to consult on each occasion the other members of the
board. Brayhead, and Mr. Richards as directing Brayhead, were at this time and
for some time back has been engaged in an empire-building operation involving
the acquisition and take-over of various companies and it seems clear that
operations of that kind were entrusted to Mr. Richards to carry out. I need not
refer in detail to the numerous passages, to some of which Lord Denning M.R.
has already referred, which show that Mr. Richards, with the consent and
acquiescence of the board, was allowed to act as chief executive and to make
decisions relating to these financial questions.
Those are the
general considerations, but one can carry them further in relation to the
particular company, Perdio. There had been contact between Brayhead and Perdio
since January, 1964, and the question of their closer association had been
under consideration, at any rate at the end of 1964 and the beginning of 1965.
On January 1, 1965, there were heads of agreement entered into between Lord
Suirdale on behalf of Perdio and Mr. Richards on behalf of Brayhead with the object
of obtaining for Brayhead a substantial holding in Perdio. Mr. Richards entered
into them on behalf of Brayhead with the object of obtaining for Brayhead a
substantial holding in Perdio. Mr. Richards entered into them on behalf of
Brayhead There is no dispute that that part of the arrangement was authorized
by the board of directors of Brayhead. I would regard the subsequent
transactions as flowing from that initial step and as covered by the authority,
which Mr. Richards to my mind had on the judges finding, to enter into that
transaction. As the judge points out, a number of
subsequent arrangements were made Mr. Richards on his own responsibility.
Between January 1, 1965, and May 19, 1965, he agreed on behalf of Brayhead to
advance £150,000 to Perdio: he agreed to take over certain acceptance credits
provided by Klenwort Benson, and on February 5, 1965, he entered into and
signed on behalf of Brayhead an agreement varying the agreement of January 1,
1965.
That leads one
to the conclusion, which I think follows directly from the judge's analysis,
that on May 19, 1965, Mr. Richards, when he made the further agreement with the
object of holstering up the finances of Perdio, was doing so under the
authority which he had to enter into such arrangement on behalf of Brayhead. I
add this significant fact, that after the board meeting which was held on May
19, 1965, and Mr. Richards and Lord Suirdale adjourned to another room to enter
into the documents in question, there were two other transactions entered into
which were evidenced by documents C.25 and C.24, some of them in the presence
of other Brayhead directors, as to which it is not disputed that they were
valid and binding on Brayhead. It seems to me, therefore, to follow that Mr.
Richards is to be taken to have had authority from the board to carry through
to a conclusion those arrangements for the supports of Perdio which had been
started on January 1, 1965.
I, therefore,
reach the conclusion, both on Mr. Richard's general position with regard to the
financial conduct and management of Brayhead and in relation to the particular
transactions with Perdio, that he had implied authority from the board to enter
into the two documents in question.
That makes it
unnecessary to consider the question of ostensible authority, which, as Lord
Denning M.R. has pointed out, may in some cases coincide with, and in most
cases will overlap, the question of implied authority. I do not find it
necessary, since actual authority exists, to consider whether it was necessary
or possible for Lord Suirdale to rely on ostensible authority.
That then
validates the transaction at the Brayhead end of it, and I now proceed to the
second point, which requires consideration of the other end of the transaction,
that is at Lord Suirdale's end. The transaction is attacked at that end on the
ground that Lord Suirdale did not disclose, as in fact he did not, his interest
in these transactions to the board of directors of Brayhead, and it is said
that that circumstances disabled Lord Suirdale from suing on those contracts.
That does raise a question of some general importance in relation to the duty
to disclose, and I therefore add a few words on it, although I find myself in agreement
with what the judge has said and also
with what has fallen from Lord Denning, M.R.
Mr. Wheeler gave us an interesting historical account of the
origin of the present legislation with regard to the disclosure of directors'
interests.
For a great many years he showed us that this particular matter
was usually dealt with those articles of association derived from the Companies
Clauses Consolidation Act, 1845, under which a director was disqualified and
had to vacate office if he did not make proper disclosure. But in 1929 for the
first time the legislature intervened by introducing a section similar to
section 199 in the Companies Act, 1948, which imposed a duty on directors to
disclose their interest. I shall not read the section, but it is clear to my
mind that what it does is to impose a statutory duty on directors of companies
to disclose their interest in contracts or proposed contracts under sanction of
a monetary penalty and that it says nothing directly as to the effect upon a
contract or proposed contact of failure to do so. It does contain, however, in
sub-section (5) a statement that nothing in the section shall be taken to
prejudice the operation of any rule of law restricting directors of a company
form having any interest in contracts with the company.
If the matter rested there, it would be plain that the civil law
relations between a director and his company with regard to a contact or
proposed contract would be governed by normal principles of law and equity
relating to contracts made by persons in a fiduciary position, such principles
as govern the position of such persons as trustees or solicitors or anyone else
in a similar position. The normal consequences which follow from a contact made
by a person in such a fiduciary position are that the contract may be voidable
at the instance of, in this case, the company and that in certain cases a
director may be called upon to account for profits which he has made out of the
transaction. The application of this doctrine of equity to companies is very
clearly brought out in the case of Transvaal Lands Co. v. New Belgium
(Transvaal) Land and Development Co., a strong
case because the contract was between two companies, in one of which a director
had an interest Astbury J. at first instance and the Court of Appeal went into
the general principles of law which relate to these matters in some detail,
both of them quoting the well known passage, which I shall not repeat, from
Lord Cranworth's speech in Abredeen Railway Co. v. Blaikie Borthers. Astbury J. pointed out
that in certain circumstances the appropriate remedy might be to deprive the
director of the profits which he had made, but in relation to that particular
type of contract, both Astbury J. and the Court of Appeal came to the
conclusion that the contract was voidable.
With that in mind, one can
see what the meaning of article 99 of the company's articles of association is,
an article which otherwise might appear to be rather obscure in its drafting.
It is couched in a clear permissive form. It says first that a director may
take an interest in a contract, and then says he shall not be liable for the
profits provided he has made the statutory disclosure. It seems to me what that
means is this, that if the statutory disclosure is made, then a director's
contracts with a company are exempted from the normal consequences which would
follow under the general law where one person who is in a fiduciary position
enters into a contact with a person to whom he owes the fiduciary duty; and
there is also the second consequences, that the person in the fiduciary
position does not have to account for any profit. There is nothing in this
article which positively attaches any consequences to a failure to disclose.
All that it does is to relieve a contacting director from the consequences
which would attach under the general law, and those consequences as regards the
validity of a contract are in my opinion that the contract is voidable at the
option of the company.
Mr. Wheeler, in seeking to contend that a further consequence
follows, namely, non-enforceability by the director, was not able to point to
any decision either relating to companies or otherwise to persons holding a
fiduciary position which went so far. He relied on two cases. The first was
Flanagan v. Great Western Railway Co., where
specific performance was sought of an agreement to grant a lease over the
refreshment rooms on the down platform at Reading station. That, however, does
not seem to me to support the proposition for which he is contending, for I
would regard a refusal to grant specific performance really as the counterpart
on the director's side of avoidance of the contact or the side of the company.
It seems to me a very different thing to say that a contract if not fully
implemented need not be specifically performed and to say that when it is too
late to avoid a contact, the other side has no right to enforce it.
The other authority on which he relied was Kaya v. Craydon
Tramways,
to which my Lord has referred. Thee is nothing in the decision which supports
his argument. There is only a passage in the judgment of Lord Lindley M.R., where he
says that the director cannot enforce as against the company any contact. Now
anything, of course, which falls from Lord Lindley in this context commands
considerable respect but I do not think that in that passage he can have
intended to introduce a new category of remedy or defence to be available to a
company when a director has failed to disclose his contract. The case itself had
nothing to do directly with the enforcement by directors of a contact. It was a
case between two companies and he is dealing there with the argument that as
the director has failed to disclose and as there was an article saying that a
director should not be capable of being interested, that made the contract
ultra vires the company. That of course is not an argument which we are
concerned with here. The words in question are contained in a short passage in
which in very general terms he describes the legal consequences of a failure to
disclose and should not, I think, be read as a definition of the circumstances
in which a contact may or may not be binding on a company or as in any way a
statement of the remedy, certainly not of a new remedy, which a company may
possess. I cannot read it as supporting the proposition that non-enforceability
of a contract which it is too late to avoid is a consequence of a failure to
disclose.
I, therefore, come to the conclusion, which is substantially that
reached by the judge, that the failure to disclose merely rendered the contract
voidable and, it being conceded that avoidance is not now possible, both
contracts are enforceable by Lord Suirdale against the company.
That is sufficient to dispose of the appeal and I would only add,
as has Lord Denning M.R., that had the question of warranty of authority arisen
decision, I would agree both with him and the judge that really no answer could
be shown to Lord Suirdale's claim to recover damages against Mr. Richards for
breach of warranty of authority.
Lord Pearson. Mr. Richards on May 19, 1965, signed a contact of
guarantee and a contact of indemnity in favour of Lord Suirdale in connection
with the affairs of the Perdio company in which they were both concerned. Mr.
Richards purported to enter into these contacts on behalf of the Brayhead
company. Lord Suirdale, who was a director of Brayhead, ought to have disclosed
his interests in the contact at a meeting of the directors of Brayhead, but he
failed to do so. Now Lord Suirdale is in substance suing Brayhead for sums due
under these two contacts.
There are broadly two main questions arising: (1) Did Mr. Richards
have actual or ostensible authority to contract on behalf of Brayhead, or is
Lord Suirdale entitled to succeed in reliance on the principle of Royal British
Bank v. Turquand? (2) How, if
at all, are the contacts affected by Lord Suirdale's failure to disclose his
interest to the board of directors of Brayhead?
On the first question I agree that on the judge's findings of
fact, which are not disputed, there is proof that Mr. Richards had actual
authority to make the contracts on behalf of Brayhead. The points to which I
attach most importance in coming to this conclusion are these. First, Mr.
Richards, while acting as de facto managing director and chief executive and
entering into large transactions on behalf of the company, would sometimes
merely report the transactions and not seek prior authority or subsequent
confirmation by the board, and the board acquiesced in this course of dealing.
Secondly, these two contacts, though they seem large and hazarrdons, were
within the scope of Brayhead's business. Brayhead were a holding company and
their business involved taking over companies and operating them as
subsidiaries. In the present case Brayhead were taking over the Perdio Company
with a view to operating it as a subsidiary and they were pouring in money for
the purpose of keeping it alive, though they failed to do so. These contacts
were intended to assist in keeping the Perdio Company alive.
The difference and the relationship between actual authority and
ostensible authority were explained by Diplock L.J. in Freeman & Lockyer v.
Buckhurst Park Properties (Mangal) Co. Ltd. There is,
however, an awkward question arising in such cases as to how the representation
which creates the ostensible authority is made by the principal to the outside
contactor. There is this difficulty. I agree entirely with what Diplock L.J. said that
such representation has to be made by a person or persons having actual
authority to manage the business. Be it supposed for convenience that such
persons are the board of directors. Now there is not usually any direct
communication in such cases between the board of directors and the outside
contractor. The actual communication is made immediately and directly, whether
it be express or implied, by the agent to the outside contactor. It is,
therefore, necessary in order to make a case of ostensible authority to show in
some way that such communication which is made directly by the agent is made
ultimately by the responsible parties, the board of directors. That may be
shown by inference from the conduct of the board of directors in the particular
case by, for instance, placing the agent in a position where he can hold
himself out as their agent and acquiescing in his activities, so that it can be
said they have in effect caused the representation to be made. They are
responsible for it and, in the contemplation of law. They are to be taken to
have made the representation to the outside contactor.
For the present purpose it is important to note that actual
authority and ostensible authority are not mutually exclusive, and indeed, as
Diplock J.J.
pointed out, they generally co-exist and coincide. Therefore, the decision of
the judge in the present case that there was ostensible authority does not
preclude or stand in the way of a decision by this court on the facts found
that there was actual authority, and for the reasons which have been given,
which I need not seek to repeat, I would hold that there was proof of actual
authority in this case.
I will, however, add this. If the question arises between the
principal and the agent—either of them claiming against the other—actual
authority must be proved. There is no question of ostensible authority as
between those two parties, the principal and the agent. If the contactor is
claiming against the principal on a contact made by the agent professedly on
behalf of the principal, the contractor can succeed by proving actual or
ostensible authority, but usually it is easier for him to prove ostensible
authority and that is what he chooses to do. The peculiarity of the present
case is that the proof of ostensible authority, which otherwise would have been
easy, is complicated by the existence of a doubt whether, generally or on the
facts of this particular case, a director can rely on ostensible authority or
on the principle of Turquand's case when he is
suing on a contact professedly made on behalf of the company of which he is a
director. It can be suggested that a director has by virtue of his office the
means of knowing the true facts about the alleged authority and that therefore
he is not entitled to rely on the representation of authority. That may not be
right. I am not expressing any opinion as to how that doubt should be resolved.
There is ample proof of actual authority in the present case, and that is a sufficient
ground for deciding the first main question in favour of Lord Suirdale.
The second main question is : How, if at all, are the contacts
affected by Lord Suirdale's failure to disclose his interests? Section 199 of
the Companies Act, 1948, and article 99 of Brayhead's articles of association
contain the provisions relied on by Brayhead. It is not contended that section
199 in itself affects the contact. The section merely creates a statutory duty
of disclosure and imposes a fine for non-compliance. But it has to be read in
conjunction with article 99. The first sentence of that article is obscure. If
a director makes or is interested in a contact with the company, but fails duly
to declare his interest, what happens to the contact? Is it void, or is it
voidable at the option of the company, is it still binding on both parties, or
what? The article supplies no answer to these questions. I think the answer
must be supplied by the general law, and the answer is that the contract is
voidable at the option of the company, so that the company has a choice whether
to affirm or avoid the contact, but the contact must be either totally affirmed
or such events occur as to prevent rescission of the contract: Great Luxembourg
Railway Co. v. Magnay; In re Cape
Breton Co.
Kaye v. Croydon Tamways Co.; Transwaal
Lands Co. v. New Belgium (Transvaal) Land and Development Co.; and Cook v.
Deeks.
An argument was based on the language used by Lord Lindely M.R.,
in Kaye v. Croydon Tamways Co. 3 where he stated the consequences of a director
being interested in a contact with the company. He said6:
"secondly, there is what I may call the generally legal
consequence, that he cannot enforce, as against the company, any contact which
he has entered into with that personal interest.
It was contended that a contract which unenforceable by the
director is radically different from a contract which is voidable by the
company. But I am not able to agree. The contact, though unenforceable by the
director, is enforceable by the company. If the company chooses to enforce it,
they must affirm the whole contact, performing their part of it as well as
requiring performance by the director of his part of it. If the company chooses
not to enforce it, the contract is of no effect. The consequences are the same
as if the contract were voidable by the company, and indeed I do not think
there is more than a verbal difference between saying that the contract is
unenforceable by the director and saying that it is voidable by the company.
In this case, therefore, the two contacts were only voidable, and
on the facts it is conceded that rescission became impossible and so Brayhead
have lost their right to avoid the contacts.
Therefore, the second main question also must be decided in favour
of Lord Suirdale.
On the further question relating to breach of warranty of
authority, which would only arise if a different view be taken on the earlier
question, I agree with what has been said and have nothing to add.
Appeal dismissed with costs.
[1957] 27 COMP. CAS. 660 (ALL.)
HIGH COURT OF
Lakshmi Ratan Cotton Mills Co.
Ltd.
v.
J K Mills Co. Ltd.
DESAI AND BEG JJ.
First Appeal No. 526 of
1955
DECEMBER 21, 1956
BEG J. - This is a defendant’s
first appeal arising out of a suit for recovery of money brought by the
plaintiff-respondent, a company styled as J.K.Jute Mills Company Limited,
The
plaintiff’s case was that the plaintiff company had advanced a loan of Rs.
1,50,000 to the defendant company on the understanding that the loan advanced
would carry interest 1 per cent. higher than the current bank rate and would be
repaid together with interest within six months. Sir Gulab Chand Jain, one of
the directors of the defendant company, sent a letter on 24th December, 1951,
to Sir Padampat Singhania, the governing director of the plaintiff company, to
advance the said loan. Sir Gulab Chand Jain also sent an advance receipt to the
plaintiff along with the above-noted letter. Thereupon the plaintiff advanced a
sum of Rs. 1,50,000 as a loan to the defendant on 25th December, 1951, through
cheque No. 444821, dated 25th December, 1951, drawn on the Hindustan Commercial
Bank Limited in favour of the defendant. A covering letter of the same date was
also sent by the plaintiff to the defendant along with the above-noted cheque
stating that the said loan was repayable within six months with interest which
was to be 1 per cent. higher than the current bank rate. After the expiry of
the stipulated period of six months, the defendant failed to pay the loan in
spite of reminders sent to it. Accordingly, the plaintiff filed the present
suit praying that a decree for Rs. 1,55,671-14-0 together with pendente lite
and future interest be passed and that the costs of the suit be also awarded in
its favour.
The defendant
denied that there was any transaction of loan between the parties as alleged by
the plaintiff. According to the case set up by the defendant, Sir Padampat
Singhania had entrusted Sri Ram Ratan Gupta with work of a personal nature
involving a large amount of expenditure. As Sri Ram Ratan Gupta had to meet
these expenses from his own pocket on behalf of Sir Padampat Singhania, the
latter agreed to advance Rs. 1,50,000 on the said account by remitting the
amount of Rs. 1,50,000 to the defendant company by way of temporary
accommodation pending the payment of the money due to Sri Ram Ratan Gupta.
Further, in paragraph 16 of its written statement the defendant took the plea
that no loan could be taken as no resolution sanctioning the taking of loan was
passed by the board of directors. The defendant also alleged that the plaintiff
company owed an amount of Rs. 2,005-12-0 to the defendant company, and claimed
an adjustment in respect of this amount. The liability to pay interest was also
denied by the defendant company.
The trial
court held that an amount of Rs. 1,50,000 was advanced by the plaintiff company
to the defendant by way of loan as alleged by the plaintiff at the rate of
interest and for the period mentioned in the letter sent along with the cheque,
and that the said loan was binding on the defendant. As, however, the counsel
for the plaintiff had made a statement that his claim be reduced by Rs.
2,005-12-0, which was the amount of deduction claimed by the defendant, the
trial court, accordingly reduced the amount due to the plaintiff by Rs.
2,005-12-0. It accordingly, held that the plaintiff was entitled to get Rs.
1,53,665-2-0 from the defendant, and passed a decree in respect of the said
amount with pendente lite and future interest at the rate of 3 per cent. per
annum.
Dissatisfied
with the said decree of the trial court, the defendant has filed this appeal in
the High Court.
Having heard
the learned counsel for the appellant, we are of opinion that there is no
substance in this appeal. Whatever the merits of the plaintiff’s case as
initially set up might have been, the area of controversy has, in the present
case, been considerably narrowed down as a result of certain statements made on
behalf of the defendant at the preliminary stage of the case in the trial
court. In order to appreciate this aspect of the case, it is necessary to refer
briefly to the pleadings of the parties, and to the aforesaid statements of the
counsel of the defendant.
The
plaintiff’s case as set out by the plaint was based on the following three
allegations :
1. That the
transaction in question was a loan advanced by the plaintiff to the defendant ;
2. That the
loan was negotiated on behalf of the defendant ;
3. That the
loan was binding in law.
In reply, the
defendant controverted all the aforesaid three points and pleaded that :
1. The transaction was not a loan but an
adjustable accommodation ;
2. It was not negotiated on behalf of the
defendant ;
3 It was binding as no resolution sanctioning the said loan was
passed by the board of directors.
In view of the
above pleadings, the court framed issue No. 2 on the question whether the
alleged transaction was an adjustable accommodation as set out in paragraph 14
of the written statement and, if so, its effect. This issue was framed on 3rd
March, 1953. On the 11th February, 1954, however, the defendant’s counsel made
a statement that :
“If Sir
Padampat Singhania gives evidence on special oath on issue No. 2 against the
defendants then the amount in suit be deemed a loan subject to the objection of
authority of Shri Gulab Chand Jain. Loan, that is, the amount which Sri Gulab
Chand Jain has taken on loan on behalf of the defendants from the plaintiff.”
The words “on
behalf of the defendants” are important, and should be borne in mind. On the
same date, Sir Padampat Singhania appeared as D.W., and made the required
statement on special oath to the effect that J.K.Jute Mills gave Rs. 1,50,000
to the defendant by way of loan, and that this money was not to be adjusted
with anything.
As a result of
the above proceedings, two of the above mentioned three points of contest
between the parties must be taken to have been proved in favour of the
plaintiff. That is, it must be taken to be established that, firstly, the
transaction in question was not an adjustment accommodation but a loan, and
secondly, that the amount which was taken by Sri Gulab Chand Jain was taken, as
stated by the learned counsel for the defendant, “on loan on behalf of the
defendant from the plaintiff.” The only point that survived for contest between
the parties was point No. 3. The result was that the only plea that was left
open to the defendant to plead was that the loan could not be held to be
binding on the defendant as no resolution sanctioning the said loan was passed
by the board of directors. The defendant could, therefore, contest the suit
only on the ground that even though Sri Gulab Chand Jain acted on behalf of the
defendant the loan could not be binding on them because of the want of a
resolution of the board of directors making him competent to enter into such a
transaction. On this point, therefore, the court framed a fresh issue being
issue No. 4 which related to the question of competency of Sri Gulab Chand Jain
to borrow the money on behalf of the defandant company.
As stated
above, the only ground of his incompetency pleaded by the defendant was the
want of a resolution authorising him to borrow the money. The burden of proving
that no such resolution was actually passed by the board of directors lay on
the defendant. They have not produced their minute book, nor has Shri Gulab
Chand Jain come in the witness-box to state that no such resolution was
actually passed by the board of directors. The defendant having failed to
produce any evidence in support of the only plea that had survived, the plea
must be taken to have failed for want of evidence.
Even, if
however, the matter is approached from the legal stand point, we are of opinion
that the defendant’s plea in this regard cannot be sustained, as the plaintiff
would be protected by the legal doctrine of internal management. In order,
however, to appreciate the legal aspect of this matter, certain admitted or
proved facts must be borne in mind.
It is admitted
on behalf of the defendant that Shri Gulab Chand Jain was a director of the
defendant company. It is also admitted by the defendant company that article
148A of the memorandum of association lays down that Messrs. B.R. Sons Limited
would be the managing agents of the defendant company for a term of 20 years
with effect from 15th July, 1947. It is also admitted that Sri Gulab Chand Jain
was a director of B.R. Sons Limited, the managing agents. Further, it is also
proved from Exhibit 7, a copy of the resolution passed at the board of
directors’ meeting of B.R. Sons Limited on 3rd January, 1951, that Sri Gulab
Chand Jain and one Sri Sukhnandi Dayal Garg were jointly and severally
authorised to represent the managing agency in the discharge of its functions
as managing agents of the defendant company and to make, draw, accept, endorse,
and negotiate cheques, hundis and all other negotiable instruments or
mercantile documents for and on behalf of the company.
This
resolution delegated the entire power of the managing agency to Sri Gulab Chand
Jain and Sri Sukhnandi Dayal Garg jointly and severally. Sri Gulab Chand Jain
thus represented the managing agency, and could individually exercise all the
powers of the managing agency when the transaction in question took place. Thus
at the relevant time Sri Gulab Chand Jain combined within himself three-fold
capacities. Firstly, he was a director of the defendant company, secondly, he
was also a director of the managing director and thirdly, the entire power of
the managing agency was vested in him by a resolution passed by the directors
of the managing agency.
There is also
no doubt that the plaintiff creditor was throughout proceeding in a bona fide
manner, dealing as he was with the company through a person who was armed with
such formidable and all-embracing power on its behalf. The creditor in the
present case had, therefore, no reason whatsoever to suspect the propriety,
legality, or validity of the transaction. The transaction was of the usual nature
by a trading company through one of its directors or managing agents who is the
proper person in the normal course to represent the company in its dealings
with third persons and to act on its behalf.
There was
absolutely nothing in the circumstances that presented themselves before the
creditor to excite his suspicion, or to put him on his guard, or to lead him to
doubt the obviously legitimate nature of the transaction.
A reference to
the memorandum of association of the company shows that the defendant company
itself was a trading company. Paragraph 3 (n) of the memorandum of association
lays down that one of the objects of this trading company was to borrow money
in connection with its business. The transaction of borrowing was not,
therefore, in the present case ultra vires of the company. There is no bar in
the memorandum of association or the articles of association prohibiting either
the directors or the managing agents to enter into a transaction of loan on
behalf of the company. On the other hand, according to paragraph 3 (n) of the
memorandum of association the directors could borrow money on such terms as
they considered desirable. Further, there is no provision in the memorandum of
association or the articles of association prohibiting the delegation of the
power to borrow by the directors of the company to one of their own body or by
the managing agents to one of their own directors.
On the other
hand, the articles of association point to the contrary. In article 1 of the
articles of association it is stated that directors are the directors for the
time being of the company or such number of them as have authority to act for
the company.
The definition
of the managing agents as given in clause (1) of the articles of association is
that “managing agents” include the person or persons authorised by the managing
agents of the company to perform the duties of such managing agents. Articles
72 and 73 of the article of association authorise the directors to borrow money
within certain limits on such terms and conditions as they think fit. Article
140 empowers the directors to delegate their power to such member or members of
their body as they think fit. Article 142 lays down that the acts of the board
of directors or committee shall be considered to be valid notwithstanding any
defect in their appointment.
Article 145 of
the articles of association states that the business of the company shall be
managed by the directors and, subject to their control and supervision, by the
managing agents, if any. Article 146 specifies the area of the powers of
directors in so far as they are not exclusively vested in the agents. Clause 21
of this article also empowers the directors to appoint attorney or attorneys of
the company by a power of attorney under the seal of the company. Further,
according to article 149 of the memorandum of association the general
management of the company shall be vested in the managing agency subject to the
control and supervision of the directors.
As a part of
this general management the managing agents, among other powers have been
vested with the power “to sign, endorse or negotiable bills of exchange,
promissory notes, cheques and other negotiable instruments or mercantile
documents on behalf of the company and to operate on all banking account of the
company, to recover and receive interest on all banking accounts of the
company, and to recover and receive interest and dividends on Government
Promissory Loan Notes, War Bonds and securities of all kinds belonging to the
company.”
Article 150
runs as follows :
“The managing
agents shall have power to sub-delegate all or any of the powers, authorities
and discretions for the time being vested in them, and in particular from time
to time to provide, by the appointment of an attorney or attorneys for the
management and transaction of the affairs of the company in any specified
locality, in such manner as they think fit.”
In view of the
above provisions, there can be no doubt that Sri Gulab Chand Jain who was the
director of the defendant company, the director of the managing agency and also
a delegate of the managing agency could be authorised to enter into this
transaction. Under the above circumstances, even supposing that there was no
actual resolution authorising him to enter into this transaction on behalf of
the defendant company either by the board of directors or by the board of
managing agents, the claim of the plaintiff who was a creditor cannot be
affected. A creditor dealing with a trading company is required by law to be conversant
with the terms of its memorandum and articles of association and no more. If it
is found that the transaction of loan into which the creditor is entering is
not barred by the charter of the company or its articles of association, and
could be entered into on behalf of the company by the person negotiating it,
then he is entitled to presume that all the formalities required in connection
therewith have been complied with. If the transaction in question could be
authorised by the passing of a resolution, such an act is a mere formality. A
bona fide creditor, in the absence of any suspicious circumstances, is entitled
to presume its existence. A transaction entered into by the borrowing company
under such circumstances cannot be defeated merely on the ground that no such
resolution was in fact passed. The passing of such a resolution is a mere
matter of indoor or internal management and its absence, under such
circumstances, cannot be used to defeat the just claim of a bona fide creditor.
A creditor being an outsider or a third party and an innocent stranger is
entitled to proceed on the assumption of its existence ; and is not expected to
know what happens within the doors that are closed to him. Where the act is not
ultra vires the statute or the company such a creditor would be entitled to
assume the apparent or ostensible authority of the agent to be a real or
genuine one. He could assume that such a person had the power to represent the
company, and if he in fact advanced the money of such assumption, he would be
protected by the doctrine of internal management.
The leading
case on the subject is that of Royal British Bank v. Turquand. The judgment of
JERVIS C.J. in the said case contains the following significant observations
relevant to the present case :
“And the party
here, on reading the deed of settlement, would find, not a prohibition from
borrowing, but a permission to do so on certain conditions. Finding that the
authority might be made complete by a resolution, he would have a right to
infer the fact of a resolution authorising that which on the face of the
document appeared to be legitimately done.”
In Ram Baran
Singh v. Mufassil Bank Ltd., it was laid down that :
“The articles
of association of the company define the power of directors as between
themselves and the company, and unless there is anything in those articles
limiting the powers of the board of directors in carrying on the ordinary
business of the corporation, a third party who deals with the directors or with
the managers acting under those powers, however irregularly, is protected if he
acts in good faith in his dealing with them.”
In Dehra Dun
Mussoorie Electric Tramway Co. Ltd. v. Jagmandar Das, a Bench of this Court
held that :
“A company is
liable for all the acts done by its directors even though unauthorized by it,
provided such acts are within the apparent authority of the directors and not
ultra vires of the company. Person dealing bona fide with a managing director
are entitled to assume that he has all such powers as he purports to exercise
if they are powers which, according to the constitution of the company, a
managing director can have.”
In T.R. Pratt
(Bombay) Ltd. v. E.D. Sassoon and Co., it was held that there the act of
borrowing is ultra vires the directors, and not ultra vires the company, the
company is liable to pay. Further it was held that “If it is shown that a
particular act was ostensibly authorised by the statute and the memorandum or
articles of association, persons dealing with the company are not concerned to
see that the company has put itself into a position to exercise its power
properly.” The reason of this rule was stated to be “that it would be
disastrous if contracts made with companies could be impeached on account of
matters known to the company but not to the other contracting party.”
In Biggerstaff
v. Rowatt’s Wharf Ltd., it was held that :
“Persons
dealing bona fide with a managing director are entitled to assume that he has
such powers as he purports to exercise, if they are powers which according to
the constitution of the company a managing director can have.”
Further, it
was held in that case that if the director could have the power, or might have
the power to do what he purported to do, then a creditor proceeding in a bona
fide way could assume that he had the power to do what he actually did.
To the same
effect is the law laid down in Dey v. Pullinger Engineering Co.
In Buckley on
the Companies Act (12th Edition) the law relating to indoor management is
stated at page 375 as follows :
“Outsiders are
bound to know what LORD HARTHERLEY called the `external position of the
company’; but are not bound to know its `indoor managment’. If persons are held
out as and act as directors, and the shareholders do not prevent them from so
doing outsiders are entitled to assume that they are directors, and as between
the company and such outsiders, the acts of such directors, de facto, will bind
the company.”
On behalf of
the appellant in the present case strong reliance was placed on two cases
reported in Houghton and Co. v. Nothard, Lowe and Wills Ltd., and Kredit Bank
Cassel G.M.B.H. v Schenkers, Ltd. In our
opinion, the facts of both these cases were different. IN the former case, the
transaction was of an unusual kind. There were on the face of it, facts which
should have put the plaintiff on suspicion. The entire transaction was not done
by the director. The secretary had also come into the picture. There were
circumstances which should have put the plaintiff on enquiry. In spite of this,
however, the plaintiff did not make any enquiry at all. In the present case, no
such suspicious circumstances exist. The latter case is also distinguishable on
facts. In this case, the transaction was done not by the directors at all but
by a branch manager ; and this branch manager had acted in fraud of the
company, and had committed forgeries in the perpetration of the fraud. In the
present case, the transaction was not entered into by a branch manager, but by
Sri G.C. Jain who was the director. Moreover it is not alleged by the defendant
that Sri Gulab Chand Jain, the director, had acted in fraud of the company.
On behalf of
the appellants, our attention was drawn to Exhibit 2, to receipt of the money,
and it was argued that in this receipt Sri Gulab Chand Jain had described
himself only as the director of the managing agency, and not the director of
the defendant company. A perusal of the receipt, however, shows that it
contains the name of the defendant company printed in bold letters as its
heading. It also appears that the words “B.R. & Sons” at the bottom are
buried under the seal affixed on this receipt.
The first and
the obvious impression created on a cursory observation of the receipt is that
it was issued on behalf of the company and the word “director” might have
reference to the defendant company. In any case, the manner in which Sri Gulab
Chand Jain described himself in the receipt is quite immaterial, if, in fact,
he was really acting on behalf of the company. We have already pointed out that
he was acting on behalf of the company. This point, as already observed, stood
conceded on behalf of the defendant as a result of the statements made by their
counsel on 11th February, 1954.
It is also
supported by other circumstances. The plaintiff also appears to have taken the
negotiation to be on behalf of the company. This is borne out by the fact that
the cheque for the entire amount of loan was drawn in favour of the defendant
company. The receipt of the said amount was also executed on the printed
receipt book of the defendant company. The defendant company also admitted in
paragraph 3 of its written statement that the cheque for Rs. 1,50,000 was
received by the defendant company. On 11th February, 1954, the defendant’s
counsel further admitted that the cheque was credited in the books of the
defendant. These facts were also admitted in evidence. Under the circumstances,
there can be no manner of doubt that Sri Gulab Chand Jain was actually purporting
to act on behalf of the defendant. In view of this fact, the manner in which he
described himself in Exhibit 2 has hardly any bearing or value.
For the above
reasons, we are of opinion, that the transaction of loan of binding on the
defendant. This is quite enough to entitle the plaintiff to a decree in the
present case.
On behalf of
the plaintiff, reliance was further sought to be placed on the two other
doctrines, viz., the doctrine of benefit and the doctrine of ratification.
Regarding the doctrine of benefit, it was argued on behalf of the respondent
that in the present case it is admitted that the money went into the coffers of
the company. Reliance in this connection was placed on paragraphs 3 of the
written statement which states as follows :
“It is
admitted that cheque for Rs. 1,50,000 was received by the defendant from the
plaintiff.”
On 11th
February, 1954, Sri Amba Prasad Gupta, the defendant’s counsel further admitted
that the amount of Rs. 1,50,000 was credited in the books of the defendant
company. It was further admitted in evidence by the defendant’s witness, Sri
R.C. Gupta, who is an accountant of the defendant company, that this amount of
Rs. 1,50,000 was shown in the balance sheet. No doubt, this witness also stated
that this amount was gradually debited to the account of Beharilal Ramcharan.
Once, however, the payment is received by the defendant company, the receipt of
the money itself is a benefit to the company, and the creditor is not concerned
with what is done with the money by the company subsequently.
On this point
also we are in agreement with the argument advanced on behalf of the plaintiff,
and are of opinion that the admitted facts are enough to sustain the
plaintiff’s case based on this plea.
In Pratt T.R.
(Bombay) Ltd. v. E.D. Sassoon and Co. Ltd., it was held that even if the
borrowing by the agent of a company is unauthorised, the company would be
liable to pay, if it is shown that the money had gone into the coffers of the
company. The lender having not advanced the money as a gift but as a loan, and
the borrower having received the benefit of the money, the law implies a
promise to repay. On the establishment of these facts, a claim on the footing
of money had and received would be maintainable.
There are a
number of English cases also in support of the contention of the respondent. In
In re David Payne & Co. Ltd. : Young v. David Payne & Co. Ltd., it was
laid down that where a company has a general power to borrow money for the
purposes of its business, a lender is not bound to enquire into the purposes
for which the money is intended to be applied. At page 613 BUCKLEY J.’s view is
given as follows :
“The borrowing
being effected, and the money passing to the company, the subsequent
application of the money is a matter in which the directors may have acted
wrongly ; but that does not affect the principal act, which is the borrowing of
the money.”
This view of
BUCKLEY J. was upheld in appeal.
In Reid v.
Rigby & Co., it was held that where it is shown that the money had come
into the hands of the defendant and used for its benefit, the defendant would
be liable even though the act of borrowing was unauthorised.
In Halsbury’s
Laws of England (Third Edition), Vol. 6, page 299, para. 603, it is stated that
:
“Apart from
ratification, the company will be answerable for any property which has come
into its possession through the unauthorised acts of the directors.”
In the present
case, therefore, even supposing for a moment that the action of the directors
was unauthorised, the defendant company would be liable because it is admitted
by the defendant company that it did come into possession of the money advanced
by the plaintiff and the said money had gone into its coffers.
The respondent
also relied on the doctrine of ratification. In this connection, reliance was
placed on behalf of the respondent on the statement of the defendant’s own
witness namely, Sri R.C. Gupta, D.W. 2, who stated as follows :
“Every year
the balance sheet is prepared. Auditors check it and sign it. Directors also
sign. Their consolidated liability is shown. In trial balance the details of
liabilities are given. Rs. 1,50,000 was shown in the balance sheet. Directors
signed it. Rs. 1,50,000 was shown in the name of J.K. Jute Mills. Balance Sheet
is put before the directors in the meeting. Shareholders pass the accounts. On
30th September 1952, shareholders approved the balance sheet. Directors had
approved.”
It is argued
on behalf of the respondent that this admission by D.W. 2, who is an accountant
of the defendant company, makes out a plea of ratification. On behalf of the
appellant it is argued that these fact are not sufficient to make out the plea
of ratification, as ratification, in order to be good in law, must have been
made with full knowledge of the facts which invalidate the transaction.
Reliance in this connection placed on Premila Devi v. Peoples Bank of Northern
India Ltd. Sri Gulab Chand Jain had authority, then the question does not
arise. If he had no authority, then this fact must have been known to other
directors as well as to the shareholder. It is not possible to believe that
though the directors and the shareholders fully knew that such a large amount
of money had gone into the account of the company yet they were obvious of the
fact of the want of authority of the person responsible for the inflow of such
a large sum into its coffers. For the above reasons we find ourselves in
agreement with the argument advanced on behalf on the respondent on this point
as well.
On behalf of
the appellant a grievance was made that the pleas of benefit and ratification
were not taken by the respondent in their written statement, and hence they
should not be allowed to be raised. There is a two-fold reply to this
objection. Firstly, these pleas are raised in reply to a new plea which is
adduced on behalf of the appellant itself, namely, that the transaction was
ultra vires of the company. Secondly, both these pleas are based on admitted
facts. If facts admitted or established give rise to certain questions of law,
the court is not debarred from giving effect to such pleas by any technicality
of procedure. On behalf of the respondent reliance in this connections is
placed on Srinivas Ram Kumar, Firm v. Mahabir Prasad and Kedar Lall v. Hari Lall. In the latter
case, BOSE J. observed as follows :
“I would be
slow to throw out a claim on a mere techincality of pleading when the substance
of the thing is there and no prejudice is caused to the other side, however
clamsily or inartistically the plaint may be worded.”
In the present
case, the defendant cannot complain of any surprise nor has any grievance on
this score been made before us. In this situation we would uphold the
contention raised on behalf of the plaintiff-respondent in this regard. We may,
however, observe that the plaintiff is entitled to a decree in the present case
independently of the last two pleas on the grounds given in the earlier part of
our judgment.
The only
remaining question that arises in this case relates to interest. On behalf of
the plaintiff it is alleged that along with the cheque a covering letter was
also sent to the defendant. The carbon copy of the said latter is on the file
of this case and it is marked as Exhibit 4. It is mentioned in this letter that
the disputed loan was repayable within six months, and carried interest at 1
per cent. higher than the current bank rate. The plaintiff examined Parshottam
Das and Mangal Sen Gupta as P. Ws. 1 and 2 respectively in support of his case.
The defendant
produced Sri. S.N. Kapur, D.W. 3, in rebuttal. The case set up by the defendant
appears to be quite improbable. We are of opinion that the trial court rightly
disbelieved Sri S.N. Kapur, D.W. 3, on this point and, in agreement with the
view taken by the trial court, we have no hesitation in holding that the
original of Exhibit 4 had been handed over to Sri S.N. Kapur along with the
cheque. In this connection, it may also be mentioned that the plaintiff had
demanded repayment of the disputed amount together with interest in both the
reminders Exhibits 5 and 6 sent by him to the defendant. On behalf of the
defendant no evidence was produced to indicate that they controverted the claim
of the plaintiff in this regard at any time previous to the suit. Under the
circumstances, there appears to be no reason to discard the plaintiff’s claim
on this ground.
For the above
reasons, we are of opinion that there is no substance in this appeal. We
accordingly dismiss it with costs.
Appeal
dismissed.
[1968]
38 COMP. CAS. 884 (MAD)
Official Liquidator, Manasuba and
Co. (P.) Ltd.
v.
Commissioner of
Police
RAMAPRASADA
RAO, J.
C.P. NO. 21 OF 1961.
COMPANY APPLICATIONS NOS. 359 OF
1961 AND 132 OF 1966
November 10, 1967
V. Thyagarajan for the Applicant.
V.S.
Subrahmanyan, C. Vasudcvan, K.S. Sankara Iyer, V.K. Thiruvenkatachari, A.R.
Ramanathan, A. Nagarajan, M. Ranganatha Sastri, Ramaswami, G. Subrihmanian and
T. Chengalvarayan for Respondent.
JUDGMENT
This is an application taken out by the official liquidator for determination of the rights of many of the respondents to this application who are claiming preferential rights over the sale proceeds of the various vehicles belonging to the company in liquidation and sold by the official liquidator with the consent of such respondents and by orders of court. He has also sought a relief for determination of the rights of priority inter se between such respondents, as according to him, amongst the respondents one or the other of them claims that he is entitled to be paid the entire amount due and payable to him in priority to others who might have a preferential right to ask for the sale proceeds now in the hands of the official liquidator. Tn so far as the latter prayer of the official liquidator for determination of the rights inter se between the respondents is concerned, it is completely outside the scope of this court as a company court. Even if it were to be held ultimately that the respondents' claim to be declared as preferential creditors is well-founded, the forum in which the issues that might arise as between the respondents themselves as to who amongst them have to be preferred in the matter of such payment of the sale proceeds now in the hands of the official liquidator, notwithstanding the fact that it is justiciable, cannot be agitated in a summary proceeding like the one that is being enquired into by this court under the Companies Act, 1956. As such rights of preference inter se amongst the respondents have to be determined in another forum and not by this court as a company court, I am not persuaded to consider this aspect of the prayer in the judge's summons. In the instant case however in the ultimate analysis of the facts, the general proposition set out above should give way to avoid multiplicity of actions. I shall advert to this later.
It is common ground that the vehicles in question were handed over
to the official liquidator or otherwise secured by him under section 456 of the
Companies Act and it is also not disputed that in order to avoid further damage
to the vehicles and also to secure the best possible price as early as possible
for such vehicles which were by then not put on the road for a considerable
length of time, they were sold under orders of court and the official
liquidator has, after incurring the necessary expenditure, effected such a sale
publicly and has obtained the moneys therefrom and such sale proceeds are now
in his custody. Ordinarily, the official liquidator would be entitled to retain
this money for the benefit of the general body of creditors. But as many of the
respondents to this application projected rights before him as preferential
creditors or as charge-holders over the erstwhile vehicles, he is seeking the necessary
directions from this court for determination of the quality and quantity of
rights so put forward by many of the respondents to this application. It is
necessary to set out the succinct facts so as to appreciate the compass of the
issues between the parties. It may be noted that the Commissioner of Police
filed a report through the Government leader,
In the report of the official liquidator, his case is put forward thus. The company was wound up by an order of this court on August 11, 1961. The petition itself was filed by two of the directors of the company. It. is also averred in the petition that the managing director was charged for forgery, cheating and other offences which were by then being investigated by the police and in pursuance of which a criminal case has also been laid against the managing director and others. The official liquidator would say that 21 lorries and 2 motor cars belonging to the company were seized by the police from various persons ; but moneys have been borrowed on the security of these vehicles from many of the respondents hereto and as he was not in a position to ascertain the nature of the rights of such respondents who financed the company, he sought for directions for sale of the vehicles as some of them were by then not even roadworthy. In the interim this matter was disposed of by this court earlier and permission was accorded, after notice to the respondents for the sale of such vehicles and conversion of the corpus into cash. The official liquidator is therefore seeking for further directions from this court as to how and in what manner the funds in his custody have to be disposed of, after determining the rights of many of the respondents to this application. The report of the official liquidator further shows that there are several respondents claiming rights over one and the same vehicle and that therefore there is a conflict of interest between the parties inter se and a scramble for possession of the vehicles as on the date when he filed the application and which is now traced to the sale proceeds in his hands. He has therefore come up with this application for determination of such questions arising in this application as to priority of interests of such of those respondents amongst whom there is conflict of interest and the legality and propriety of such claims of the respondents. He would state that this court has the jurisdiction to entertain and dispose of all questions as may be necessary or incidental to give effect to the winding-up order including determination of the conflicting claims. I have already observed that even though this court has seisin of the affairs of the company in the course of the winding up, the question whether who amongst the respondents should rank as the first of such creditors who is entitled in preference to be paid a portion of the sale proceeds in the hands of the official liquidator is a civil claim which has to be necessarily adjudicated by civil courts. The company court which is vested with jurisdiction to deal with affairs relating to the winding up of a company cannot be said to have been invested with such jurisdiction either expressly or by necessary implication. To assume such jurisdiction would necessarily mean that civil and justiciable rights of parties, who are outside the scope of the winding up of the company can secure relief from this court in a summary manner without paying the necessary court fee and without following the usual common law procedure as to the ascertainment and adjudication of civil rights. I am, therefore, refraining from addressing myself to this question which the official liquidator seeks the company court to determine. But, in the circumstances of this case, the above principle is inapplicable and has to give way to render justice and to avoid multiplicity of actions. The several interested parties, including the Commissioner of Police, as already stated, have filed their respective counters to the report of the official liquidator.
The 2nd respondent states that 8 vehicles amongst the list of vehicles furnished by the official liquidator were the subject matter of a hypothecation dated May 30, 1960, under exhibit A-27. As the hypothecation created an equitable charge, the resultant charge was registered in the books of the Registrar of Companies under sections 125 and 132 of the Companies Act, as is seen from exhibit R-54. This respondent states that, even the insurance policies granted in respect of the vehicles have been effected by the bank. Inter alia the 2nd respondent submits that MDC 1136, which is also the subject-matter of the above hypothecation agreement, was actually in the possession of the Pandyan Bank Ltd. and that there are no other claims in respect of the same and he is therefore entitled to be paid the sale proceeds less the necessary expenses incurred by the official liquidator while administering the same thus far. Pursuant to the said hypothecation deed, the 2nd respondent's case is that he is entitled to be treated as a secured and as a preferential creditor and be dealt with as such.
It would be also convenient at this stage to record the contentions of the learned counsel appearing for the 2nd respondent. Mr. V. S. Subrah-manyam, who has been of great assistance to me in this case, contends that the 2nd respondent, namely, the Pandyan Bank Ltd., is a bona fide lender having placed implicit faith and confidence in the representations made by the managing director. The bank had no reason to doubt the genuineness of the resolutions of the board as forwarded to it by the managing director. As the minutes book of the board is a document to which he cannot have recourse, as it is a private document of the company, and as the resolutions contained therein are purely matters relating to indoor management and as the managing director was acting for the company and persuaded the 2nd respondent to act upon the copies of such resolutions produced by him and duly certified by him, no overt or covert act of mala fides can be attributed to it. His case is section 292 of the Companies Act has no application. The lending is evidenced by the hypothecation deed exhibit A-27 dated May 30, 1960. 8 vehicles are involved in this hypothecation. It is not in dispute that MSX 5976, which was originally included was later substituted in the hypothecation deed. The two other lorries mentioned in exhibit A-27 were later registered as MSX 8928 and MSX 8929. This hypothecation has been duly notified with the Registrar of Companies as a registrable charge under section 125 of the Companies Act. Mr. V. S. Subrahmanyam, learned counsel for the ^nd respondent, on the strength of such a registration of the charge and since the transactions are bona fide transactions in that they are not tainted in any manner known to law, contended that the bank is entitled to be treated by the official liquidator as a preferential creditor and cannot be directed to be ranked along with ordinary creditors. He cited before me many decisions, all to the effect that the bank is a hypothecatee and therefore is a mortgagee of the lorries or vehicles concerned and its right to enforce the equitable charge over the vehicles cannot be defeated by supervening liquidation. He referred in particular to exhibit A-3 and sought to add that by reason of the subsequent conduct of the directors, no possible attack can be made against the transactions of the company through the managing director and in fact the company is equitably estopped from questioning the priority rights of the 2nd respondent. Mr. V.S. Subrah-manyam also maintains that the company is estopped from saying that the managing director is not a person who is not authorised to borrow and tv make all the dealings which he had with the 2nd respondent and to enter into certain transactions which are now impugned by the official liquidator. He referred to certain dates which are relevant. The managing director was arrested on May 19, 1961, and the other two directors, who are petitioners in C.P. No. 21 of 1961, were arrested on May 25, 1961. The resolution to wind up the company was made on May 29, 1961, and the petition for winding up was filed actually on May 30, 1961. But this resolution was not signed by Mr. C.V. Raman. This is seen from exhibit A-3 at page 4. The official liquidator was appointed as interim liquidator on June 6, 1961. Notwithstanding the winding-up petition which was by then pending, the directors, that is, the petitioners in C.P. No. 21 of 1961 and the managing director Mr. C.V. Raman, met on June 4, 1961 and passed the resolution— vide exhibit A-3 at page 4—resolving to revive the company and to seek all matters to run the same. This is the essence of the resolution passed on that date. Thus, the learned counsel says that it cannot be pretended now at this stage by the official liquidator that the other directors were not aware of all the dealings which Mr. C.V. Raman had by then and it is impossible to conceive that all that Mr. C.V. Raman did was on his own volition and without the knowledge of the other directors. It is not disputed that the managing director, Mr. C.V. Raman, was the person in charge of all the affairs of the company. This is seen from paragraph 9 of the petition in support of the winding-up. Paragraphs 6 and 7 also throw light upon it. Even in exhibit A-2 there are certain resolutions, though no doubt anterior to the date of the winding up, to the effect that it was the managing director, Mr. C.V. Raman, who was the pivot and who was in charge of all its affairs and thus the contention of the learned counsel for the 2nd respondent is that it is not open to the official liquidator, to say that there is no authority or at any rate authority by necessary implication given by the company to the managing director to deal in the manner he did. Learned counsel says that his client no doubt was acquainted with the objects of the company and the articles of the company and it is not obliged in law to know anything more about the company. In view of the copies of the resolutions produced by the managing director to the effect that he had the authority to borrow and hypothecate the lorries in question, it cannot be said that the bank in any way acted in an unreasonable or imprudent manner so as to divest it of its legal, legitimate and equitable right to recover the moneys as a charge-holder, from the official liquidator. Exhibit A-21 is the resolution which the 2nd respondent has produced as the one which the managing director has forwarded to it while applying for the loan on the hypothecation.
The complaint of the official liquidator that such a resolution is non-existent is a matter which cannot be investigated and which could not have been investigated by the 2nd respondent on its own volition, and the bank out of necessity relied upon the representations of the managing director in so far as this resolution is concerned. Learned counsel has classified the decisions cited by him under the following heads : (a) the managing director should be deemed to have had ostensible authority to deal with the property of the company and the bank having acted upon such authority which is either actual or ostensible must be deemed to be a bona fide creditor ; (b) an irregularity in the exercise of such powers by a person ostensibly acting on behalf of the company would be immaterial in so far as the bona fide creditor is concerned and whilst developing this argument, learned counsel submits that even if there is no resolution in fact passed by the company and if representation to that effect has been made by the managing director, that would suffice to protect its interests; (c) in any event the company should be deemed to have rectified all the acts of the managing director in that the company did have benefit of the lorries on the one hand and also the benefit of such borrowings made by the managing director on the other. They cannot therefore have the benefit alone and reject the liability ; and (d) the absence of the resolution, even if it were to be true, is a matter which relates to the indoor management of the company and such absence of a resolution cannot be put against it and its interests jeopardised thereby.
It is however brought to my notice in the course of the hearing of this application that all the above 8 vehicles excepting one bearing MDF 1136, are subjected to independent dealings with other parties. I have already expressed that the company court cannot be called upon to adjudicate upon the claims inter se between the respondents, who project rights over the same vehicle or vehicles pursuant to independent arrangement with the company through the managing director. It is for the contesting respondents in such circumstances, to establish their claims one against the other in appropriate proceedings. But as regards MDF 1136, it is admitted that no one else has put forward any concurrent claim over the vehicle. The sole rights of the 2nd respondent against MDF 1136 are not challenged by any other respondent. In these circumstances, the submission of the 2nd respondent is that in so far as the vehicle is concerned, it is entitled to be paid out the sale proceeds of the same, less the expenses incurred by the official liquidator so far.
We can now take up the case of respondents Nos. 3, 11 and 23. The common case of these respondents is that the company through its managing director secured loans under hire-purchase agreements over vehicles which the company owned and possessed. This system of financing is what is known as the refinancing agreement, the concept and details connected with which I shall presently advert. On the strength of such refinancing hire-purchase agreements the respondent claims as preferential creditors The 3rd respondent, inter alia, would state that as regards MSX 8469, a hire-purchase agreement was executed by the company on July 29, 1960, under exhibit A-112 and the registering authorities under the Motor Vehicles Act were informed about such a hire-purchase agreement and an endorsement to that effect is said to have been made by the traffic office consequent upon such an intimation. The intimation from the company to the registering authority is exhibit A-114 and the confirmation of the endorsement in the certificate of registration by the traffic authorities is seer, from exhibit A-115. For the vehicle MSX 7305, which is also one dealt with by the company with the 3rd respondent, the hypothecation agreement is under exhibit A-116 dated January 23, 1961. One other factor which appears from the voluminous records filed in this case is that in so far as these two vehicles are concerned, they were dealt with by the company earlier and finances secured from others and it is said that in so far as MSX 8469 was concerned, there were no prior encumbrances. But as regards MSX 7305 there were such encumbrances. The 11th respondent claims to have such preferential rights on the basis of refinancing hire-purchase agreement over 5 vehicles. Exhibits A-137 and A-143 are the hypothecation agreements under which this respondent claims. This is also a case in which the company dealt with the vehicles in question prior to its securing the finances from this respondent. It is reported however that such prior hire-purchase agreements have been cancelled in favour of some and subsisting in favour of others. In some of these cases also, the traffic authorities were informed of the hire-purchase agreements and this respondent received a communication to that effect from them. The 23rd respondent claims to have similar rights over vehicles MSW 2307 and MSX 9862. Both these vehicles appear to have been dealt with by the company who through its managing director secured finances from others. This respondent as well was tricked into entering into finance agreements exhibit A-207 in respect of two vehicles in question. But these two hire-purchase agreements were entered into by Chakra Traders. In the course of my judgment it would be necessary to consider as to whether Chakra Traders was a trading unit distinct and separate from the company in liquidation. In fact, the argument of Mr. C. Vasudevan, learned counsel for this respondent, is that Chakra Traders is a proprietary concern of the managing director and that therefore the company in liquidation cannot by any stretch of imagination claim to have any rights over the properties of Chakra Traders and on this ground alone this respondent is entitled to the sale proceeds of the vehicles in question less the expenses. It should however be noted that prior to the hypothecation agreement in favour of the 11th respondent by Chakra Traders, there are other creditors who claim equally such rights of priority over the vehicles in question by virtue of independent hire-purchase agreements entered into between Chakra Traders and themselves. To complete the narration, in respect of MSW 2307 Sundaram Finance Private Limited, and Fleet Financiers, do claim to have such rights, which arose in their favour earlier in point of time to that projected by this respondent.
Mr. C. Vasudevan, learned counsel appearing for respondents Nos. 3, 11 and 23, concedes that the equitable charge or lien created under the refinancing hire-purchase agreements was not registered with the Registrar of Companies under section 125 read with section 132 of the Companies Act of 1956. He referred to a passage in paragraph 889 of Halsbury's Laws of England, Simonds edition, volume 6. He took me through the various clauses in exibit A-112 which is a pattern of the refinancing hire-purchase agreements in the series in question and submitted that on the strength of the sale letter executed by the company in favour of the respondents contemporaneously with the hire-purchase agreements, it would take out the transaction from the mischief of a refinancing agreement and would in effect be a financing agreement and therefore the non-intimation of such charge to the Registrar of Companies would not deprive the respondents of their rights as preferential creditors. He relied on Manchester, Sheffield, and Lincolnshire Railway Company v. North Central Wagon Company , and contended that the reality of the transaction has to be looked into. One other contention raised by the learned counsel was that Chakra Traders, which was originally a sole proprietary concern, dealt with the 23rd respondent and that therefore the company in liquidation cannot be said to be the owner or a person in possession of the vehicle in question. I have already stated that I will deal with the inter se relationship between Chakra Traders and the company in liquidation. Suffice it, however, to say at this stage that no question was put to the witnesses who were directors of the company and who were specially called upon and examined in this case, to the effect that the assets, liabilities and dealings of Chakra Traders should be dealt with de hors the assets, liabilities and dealings of the company in liquidation. Learned counsel virtually states that Sundaram Finance Ltd. v. State oj Kerala applies to the facts of this case, but would add that non-registration of the charge under the Companies Act does not preclude him from enforcing his vested right as a secured or a preferential creditor.
Mr. Sankara Iyer, appearing for respondents Nos. 4 and 5, states that his clients are concerned with 13 vehicle:; the particulars of which are set out in exhibit A-43. The vehicles are subject to a hypothecation in favour of the Punjab National Bank. This is seen from exhibits A-52 and A-53. That there is such a hypothecation in favour of the Punjab National Bank is not in dispute. This is signed by the managing director, Mr. C. V. Raman, and has been registered with the Registrar of Companies under section 125 read with section 132 of the Companies Act. The managing director is reported to have represented to the bank that he had the necessary authority to borrow and is said to have furnished to the bank the copy of the resolution enabling him to borrow. The resolution was produced by the managing director and exhibited as exhibit A-48. In this resolution C. V. Raman is expressly authorised to furnish the vehicles in question as security and sign and execute on behalf of the company all documents as required by the bank. He referred to ma the various documents, exhibits A-41, A-48, A-43, A-44, A-300, A-49, A-57, A-52, A-53, A-54 and A-58 in support of his claim. Being hypothecatees, he claims an equitable charge and practically adopts the arguments of the learned counsel for the 2nd respondent. He would also add that the bank acquainted itself with the memorandum of association and the articles and were bona fide satisfied that the managing director had real or in any event ostensible authority to so borrow. His contention is that the company virtually delegated its powers to the managing director. As the resolutions passed by the board of directors are creatures of indoor management, he had neither the occasion nor the necessity to probe into the regularity or legality of such resolutions in the light of article 100 of the articles of the company. He added that the bank had no right to pry into the company's archives. He referred in particular to paragraphs 2, 5, 26 and 29 of the memorandum, to substantiate his contention. He contends that the copy of the resolution as forwarded by the company through its managing director having come from proper custody, the presumption as to its genuinenenss and its sanction arises as a matter of course and that no investigation by the official liquidator can be undertaken independent of and de hors the content and context of such resolutions. He relied upon the dictum in In the matter of Ambrose Summers, an Insolvent in support of his argument. At all material times the bank believed that C. V. Raman was at the helm of affairs, had the power to borrow for purposes of business expansion and that the moneys were taken from the bank for purposes of securing assets to the company. He also adds that under the hypothecation agreement, the bank had the right to seize the vehicles and having seized the vehicles in question their right was converted to that of a pledgee and therefore they should be treated as preferential creditors. He also relied upon the fact that the official liquidator is ratifying the purchase of the vehicles and as ratification can only be of the whole and not of any part, his claim to trace his right to the sale proceeds of the vehicles in question cannot be negatived.
The 6th repondent reported no instructions and never interested himself in this enquiry.
Mr. V. K. Thiruvenkatachari who has taken the brunt of the argument in this case contended that the type of hire-purchase agreement with which respondents Nos. 7 and 8 are concerned is the financing hire-purchase agreement. Under this agreement, the vehicle is purchased and the major portion of the sale price is found by the financier. He invited my attention to the two ordinary types of hire-purchase agreements and made pointed references to the various documents filed in this case to substantiate his contention that the dealings in which these respondents were involved were financing hire-purchase agreements in which the ownership of the vehicle always vested in the financier at the time of the transaction. He also took me through the various clauses in the hire-purchase agreements in question to substantiate his contention that the ownership vested with the financier until the instalments under the hire-purchase agreements are fully paid. He also explained that the formal registration of the vehicle in the name of the company does not militate against his above contention. Inter alia, he referred me to the provisions of the Motor Vehicles Act and particularly rule 82 and forms E and G prescribed thereunder to solve the apparent riddle which prima facie appears from the documents regarding the ownership of the vehicle ; his contention is that once a dealer has been told by the customer that part of the price is being paid by him and the rest to come from the financier, the intention at all material times that subsisted between the parties was that property in the vehicles is not to pass to the customer but to the financier and the former was only to hire the vehicle from the financier. He referred to exbitit R-75, the printed book filed in Sundaram Finance Ltd. v. State of Kerala and particularly to pages 209, 218 and 219 to show that the vehicles involved in the transaction in question are new vehicles for which a substantial portion of the purchase price was provided for by the financier. He brought out the distinction between hire-purchase agreements entered into under rules 82(a) and 82(b) of the Madras Motor Vehicles Rules and stated that the hire-purchase agreements in question with the respondents come within the scope of rule 82(a). His contention is that even though in some cases the financier may not send the cheque direct to the dealer, yet if the dealer knows that it is a hire-purchase agreement within the meaning of rule 82(a) of the Madras Motor Vehicles Rules and the money of the financier went for the purchase of the vehicle through the hands of the customer with notice of such hire-purchase agreement, then the dealer is obliged to deal with it by acknowledging the hire-purchase agreement under rule 82(a) read with Form E referred to above. His alternative case was, though it was not quite essential for his purpose, that assuming that the transaction was only a secured loan, the charge need not be registered as the official liquidator is ratifying the transaction He argues that ratification cannot be in part, but it should be for the whole and therefore the official liquidator cannot keep the assets of the company without the same being purged of the moneys obtained by the company from the financiers who were bona fide lenders without notice of any defect in the ostensible authority of the managing director who dealt with these respondents. Under section 199 of the Contract Act the liquidator cannot own the vehicle without paying the liabilities due and payable towards the same. He contends that the substance of the transaction should be ascertained and much reliance should not be placed on the form and referred me to the decision in Laurence Arthur Adamson v. Melbourne and Metropolitan Board of Works and Commercial Banking Company of Sydney Ltd. v. Mann . Reference was also made to a passage in Halsbury's Laws of England, third edition, volume 3 page 316. Learned counsel says that the clause enabling the financier to seize the vehicle converts the original hen into a pledge and on such conversion the rights of these respondents are crystallised into that of a pledge with possession which could be traced to the funds in the hands of the official liquidator. My attention was drawn to section 172 of the Contract Act.
Anticipating the argument of the official liquidator that the managing director acted illegally in securing finances from these respondents, Mr. V.K. Thiruvenkatachari would state that the company cannot approbate and reprobate, once the company concedes that the vehicles which were the subject-matter of hire-purchase agreements as above are vehicles of the company the sale proceeds thereto do belong to the body of creditors. It cannot re-elect having so elected and contend that there cannot be any preference over such body of creditors if such a preference amongst the creditors can be established in the eye of law. Particular reference was made to the well known decisions in Sinclair v. Brougham and In re Diplock : Diplock v. Wintle . The passage in Halsbury's Laws of England, third edition, volume 6 paragraph 888 was also pressed for the purpose and ultimately the submission was made that the funds in the hands of the official liquidator can be separated and earmarked for the benefit of the body of preferential creditors, as against such funds if any available, for the benefit of the general body of creditors. The official liquidator being a public body cannot unjustly enrich himself ignoring the rights of parties.
Allied with the above contention was the answer given by the learned counsel regarding the formidable objection of the official liquidator that if the respondents' claim were to be treated as a secured loan, then it ought to fail for want of registration under section 125 read with section 132 of the Companies Act. The main contention of Mr. Thiruvenkatachariar is that under rule 6 of the Companies (Central Government's) General Rules and Forms, 1956, it is only every instrument or deed creating or evidencing a charge that has to be registered with the Registrar of Companies. According to him, the instrument of hire-purchase in question not being an instrument executed by the person having title to the vehicle in question but being an agreement between the financier who is the real owner of the property and the company who is the hirer, does not come within the grip and mischief of sections 125 and 132 of the Companies Act and therefore the absence of registration cannot fail these respondents. He would rely upon the dicta of the Supreme Court in K.L. Johar & Co. v. Deputy Commercial Tax Officer and in the alternative on his contention that the rights of the respondents fruitioned into a pledge on seizure and such event being the necessary result of the statutory impact and the contractual obligations under the document, was one which was not foreseen on the date of the execution and therefore such an instrument need not have been and could not have been registered under section 125 read with section 132 of the Companies Act. Incidentally and in support of his alternative contention that by reason of the supervening impact of the provisions of the Contract Act and the effect of the legal obligations under the very instrument of hire-purchase an equitable charge is created over the vehicles in question which cannot be lightly brushed aside by the official liquidator, reliance was placed on the dicta in In re Ambrose Summers, an Insolvent and Puninthavelu Mudaliar v. Bhashyam Ayyangar .
As regards one other contention which arose in the course of arguments that the hire-purchase agreements cannot be acted upon because some of them contain the signatures of the other directors of the company which are admittedly forgeries, it is seen that two directors have been examined as P.Ws. 1 and 3 and it can be taken for granted that the signatures of the other directors wherever they appear in any document filed in the course of these proceedings, excepting that of the managing director, are forgeries. Mr. Thiruvenkatachari suggests that this is not a case of a hypothecation but is a case of financing hire-purchase agreement wherein the company secured vehicles. Therefore it is not a case of borrowing. Section 292 of the Indian Companies Act will not apply. As regards the document itself, it has been signed by the managing director who was in charge of the affairs of the company. The fact that in some of the hire-purchase agreements two other directors or one amongst them signed as a guarantor would not take away the legal effect of the document. His contention is that if indeed the guarantor's signature is ultimately discovered to be a forgery, it is for the creditor to set it aside. This is not the case here. Even otherwise the document is distinctive in the sense that it is separable and so separated the document creates an actionable and an enforceable claim in favour of the financier ; whatever may be said in such circumstances of executed contracts cannot apply to executory contracts. The fraud, if any, was discovered after the instrument was acted upon and therefore these respondents' rights as preferential creditors cannot in any way be disturbed in view of the guarantor's signature only being a forgery.
In conclusion, the learned counsel stated that this court can adjudicate upon the rights of preferential creditors inter se, which is the subject-matter of Application No. 132 of 1966. He invited my attention to section 446(2)(b). The effect of this argument is that the non-obstante parenthesis in clause (2) of this section enables this court to investigate the claims inter se as between preferential creditors and therefore he requests that the claims of the respondents inter se who are similarly placed can be enquired and adjudicated upon. I have expressed to the contrary even in the beginning. Section 446(2)(b) is only concerned with any claim made by or against the company. In the instant case, claims were made against the company by many of the respondents hereto. The court has jurisdiction to adjudicate upon the character of such claims. By this it would not necessarily involve the consideration of the quality or the quantity of the claims amongst such claimants against the company. This would essentially be civil claim which is outside the scope of section 446(2)(b). As the learned counsel mainly pressed Application No. 132 of 1966 for this purpose and called for a decision from this court on this, I am obliged to opine that the company court exercising jurisdiction under section 446 cannot entertain and dispose of claims by creditors placed in the same level who require this court to consider who amongst them has to be preferred as against the rest. Learned counsel wished to draw an analogy from the Banking Companies Act, 1949. Section 45 of the said Act, no doubt, expressly enjoins the court to decide all questions arising between the company in liquidation and the creditor. In fact, it is the company court which is competent under the Banking Companies Act to enquire whether a purchaser in a public sale held by the official liquidator has validly secured title thereto as against third parties projecting adverse claims against such court auction purchaser. This is one amongst the series of claims that could be adjudicated upon by the company court. In my view, however, even the invitation and reference to the provisions of the Banking Companies Act, 1949, cannot solve the problem posed in this application whether the company court can investigate into the merits or demerits inter se of conflicting claimants who are admittedly ranked in the same plane of action. No doubt, Buckland J., in Bibhuti Bhusan Shoma v. Baidya Nath Dev , observed that where there is a dispute as to the priority between two hypothecatees, the principle of qui prior est tempore, potior est jure should apply. This rule of equity '.vas considered by the learned judge in that case in a regular suit which involved a contest between two persons both of whom were similarly placed. This is not, however, the case here. Viewed in the context of events which has led to the official liquidator to take out this application for determination of the rights of each of the respondents to this application, I am unable to accept the contention of the learned counsel that in such proceedings the company court can delegate to itself the powers of a civil court and enter upon the enquiry as to who amongst themselves should rank in priority over the others. Application No. 132 of 1966 is therefore dismissed, but there will be no order as to costs. To repeat again, the principle stated by me is not strictly applicable to the facts of the instant case as in the ultimate analysis only two respondents out of the many before me are adjudged by me as preferential creditors ranking in the same plane and it is in the interests of justice that their rights should be finally decided in these proceedings to avoid procrastination and prolonging in general and multiplicity of actions in particular.
The 9th respondent's case is a peculiar one. No doubt, the two lorries in question, MSW 3056 and MSW 3589, were in the possession of this respondent at the time of seizure. These lorries were sold by this respondent as new lorries in March, 1961, to Chakra Traders, who, according to this respondent, were acting for Manasuba and Company Private Limited. But the financing agreement was entered into with Hindusthan Motor Corporation in respect of MSW 3056 under exhibit A-1 19 and in respect of MSW 3589 under exhibit A-120. Necessary endorsements were secured but the charges were not registered. This respondent guaranteed the performance of the hire-purchase agreement to Hindusthan Motor Corporation. The financiers terminated the hire-purchase agreement on May 21, 1961. This respondent also states that one Pushpa Kavur of Mint Street is claiming interest in the said lorries stating that the lorries are under hire-purchase agreements with her. It is not clear, however, how the vehicles were taken possession of by Messrs. Rane (Madras) Limited. It is claimed, that such possession was taken by them on behalf of Hindusthan Motor Corporation and the vehicles continued to be in their custody till they were handed over to the Commissioner of Police. R.W. 1, T. A. Sankaranarayanan, the accountant of Messrs. Rane (Madras) Limited, was examined and he would say that after the vehicles were seized by the financing company they paid the amount to Hindusthan Motor Corporation and secured possession. It is claimed by this witness that the amounts were so paid because they were the guarantors under the agreement. In cross-examination he admitted that his respondent was not a party to the hire-purchase agreement either as guarantor or in any other character. He would also add that there are no other documents with reference to these vehicles in particular to show their interest. His case is that the vehicles were seized by this respondent as the financiers wanted them to seize and it was done on behalf of the financiers. Learned counsel for the 9th respondent argued that this respondent was acting as the general power of attorney of Messrs. Hindusthan Motor Corporation under exhibit R-91 and he also produced the letter of authority, exhibit R-90, to show that the vehicles were repossessed on default of the company. The power of attorney, however, is dated December 22, 1961. It is admitted to be later than the date of seizure. Under this, this respondent is authorised to take possession of the two vehicles in question which were the subject-matter of the above hire-purchase agreement and generally to take all steps to realise the amounts due under the aforesaid hire-purchase agreement. It is contended on the strength of this power of attorney and on the fact of actual payment of the dues to Hindusthan Motor Corporation, that this res respondent has stepped into the shoes of the financier and the hire-purchase agreement in question being financial agreement, it is entitled to be treated as preferential creditor. One other person by name Pushpa Kavur, who is not a party to these proceedings, is said to be interested in these vehicles.
The 10th respondent, besides filing the counter, did not make any independent submission. His case is that MSY 2662 was under a hire-purchase agreement with him. This hire-purchase agreement is exhibited as exhibit A-131 and is obviously a refinancing agreement creating a secured loan which has not been registered with the Registrar of Companies.
Mr. Ranganatha Sastri, appearing for respondents Nos. 12 to 15, also claims that his clients should be ranked as preferential creditors. In so far as the 12th respondent is concerned, six vehicles are involved. All the six vehicles are the subject matter of refinancing hire-purchase agreement. They are evidenced by exhibits A-146 to A-151. The charge or the lien created under the hire-purchase agreements are not registered under the Companies Act. So far as the 13th respondent is concerned, eight vehicles are involved and they are said to be subject to hire-purchase finance agreements under exhibits A-171, A-172, A-174, A-175, A-168, A-164, A-170 and A-167. All the vehicles are said to have been purchased and the hire-purchase agreements were entered into to secure finance for such purchase. The very same vehicles have been subject to such similar dealings with one or the other of the other respondents. Even so, the 14th respondent is concerned with three vehicles. The hire-purchase agreements are exhibits A-180, A-183 and A-181. They are said to be finance hire-purchase agreements relating to purchase of new vehicles. But these vehicles are dealt with by the company with one or the other of the other respondents. As regards the 15th respondent, the vehicles are three in number, two said to be covered by hire-purchase finance agreements and the other being an used vehicle, by a hire-purchase refinance agreement. The relative documents are exhibits A-178, A-176 and A-166.
Mr. Ranganatha Sastri contends that though the charges have not been registered, his clients are entitled to be treated as preferential creditors because they have in all those cases secured a sale letter from the registered owner of the vehicle and even otherwise their right to seize in default clothes them with the rights similar to that of a charge-holder and that they are entitled to be ranked as preferential creditors. Even if such a charge has to be registered, it could be done by this court exercising its discretion under section 141(3) of the Companies Act and time may be extended for such registration of the charge under section 132 of the Companies Act. He refers to Akkirath Mundanat Manakkal Thuppan Nambudiri v. A. P. Kutti Sankara Menon, Official Liquidator of the Malayalee Bank Lid. It is however conspicuous that no application for such extension of time for filing the charge has been filed so far. On the strength of the above, however, it is contended that respondents Nos. 12 to 15 are to be treated as preferential creditors.
Regarding the 21st respondent, no one appeared and he has not interested himself in this enquiry.
Mr. Ramaswami, learned counsel appearing for the 22nd respondent, stated that his client is concerned with two vehicles which are the subject-matter of a refinancing arrangement. His case is that the endorsement in the "C" certificate showing the hire-purchase agreement in favour of his client is sufficient for him to claim as a preferential creditor. He invited my attention to the usual sale letter executed by the company (which in this case is Chakra Traders) in favour of his client and states that that is sufficient to establish that the property in the vehicles in question passed to the 22nd respondent and that, notwithstanding the non-registration of the charge under section 125 read with section 132 of the Companies Act, it is valid and enforceable. It is in this behalf he states that he should be ranked as a preferential creditor.
Mr. G. Subrahmanyam, appearing for the 24th respondent, says that
his client is concerned with four vehicles, MSX 9862, MSW 719, MSW 720 and MSW
2305. This is a case of refinancing. The hire-purchase agreement is dated April
24, 1961, and exhibited as exhibit A-212. The borrower was Chakra Traders,
represented to be a sole proprietary concern of the managing director of the
company. As in other cases, a sale letter, exhibit A-213, in respect of the
four vehicles is taken in favour of this respondent from Chakra Traders. Timely
intimation is given to the Regional Transport Authority under the Motor
Vehicles Act, about the hire-purchase agreement. Long after the company was wound
up, this respondent gave a notice to Messrs. Chakra
Traders, on October 20, 1961, determining the hire-purchase contract and called for the amount due. The official liquidator replied on October 31, 1961, that the company has been wound up and that this application*or directions has been filed. This respondent thereupon filed Company Application No. 454 of 1961 for impleading himself as a party and this application was ordered on December 12, 1961. This respondent in his counter affidavit would state that his information was that the company was the proprietor of Messrs. Chakra Traders and it was such information which prompted him to file the above application. He pleads that he is a tona fide lender for value and that the sale note taken by the respondent at or about the time of the hire-purchase agreement in question would entitle him to be treated as a preferential creditor. It is admitted that the hire-purchase agreement in question is a refinancing hire-purchase agreement. The lien or charge created thereunder has not been registered under the Companies Act. His main contention is that as on the date when the hire-purchase agreement was entered into, the vehicles still stood in the name of Chakra Traders, and that there was no obligation to register the charge under section 132 of the Companies Act. As, according to him, the company was not the registered owner of the vehicle but Chakra Traders, the official liquidator has no right to deal with the property and negative his right. It should however be noted that, prior to the hire-purchase agreement, the very vehicles were subject to hire-purchase agreements in favour of other respondents, who also claim contemporaneously preferential rights over the same vehicles as charge-holders of the same. This respondent also projects a claim as a preferential creditor for the amounts due by Chakra Traders.
One Pushpa Kavur who has not been added as a party to this judge's summons has filed a counter affidavit representing herself to be the 25th respondent, but no attempt has been made before me to substantiate her case.
The 24th respondent has claimed interest in four vehicles. His counter-affidavit discloses that amounts were advanced under refinancing hire-purchase agreements. The charge created thereunder has not been registered with the Registrar of Companies. This respondent, however, did not attempt to substantiate his case further in the course of arguments.
Sri V. Thyagarajan, learned counsel for the petitioner, when he opened the case, filed all the documents relevant for the enquiry with particular reference to each of the respondents herein. The useful data prepared by the official liquidator and a summary sheet thereto was of considerable assistance to the court. Those documents had to be necessarily marked so as to have a full and complete picture of the events connected with each of the dealings of the company with the respective creditors and also for the purpose of appreciating the chronology of events. In spite of the voluminous record that has been filed and meticulously referred to before me in these proceedings, in the ultimate analysis the important documents only need be adverted to to appreciate the real controversy between the parties. To illustrate, in the case of the creditors who lent moneys on hire-purchase agreements, whether at the financing stage or at the refinancing stage, the documents that require consideration are the hire purchase agreements, the resolutions of the company which were acted upon by the lenders and which prompted them to lend moneys to the company which was invariably acting through its managing director. In the case of creditors who secured a hypothecation over the goods of the company, the hypothecation agreement, the resolution to borrow, the certificate of registration with the Registrar of Companies are the few important documents. The other documents are ancillary to and invariably contemporaneous with the main hire-purchase agreements or hypothecation agreements as the case may be. A reference to such documents does not further the case either of the petitioner or of the respondents. I have, therefore, discreetly avoided in this order to the reference of such of those documents which may not be quite necessary for arriving at the conclusion required.
In answer to the various contentions of the respondents, Mr. V. Thyaga-rajan, learned counsel for the petitioner, broadly divided his submissions under many heads. Firstly, his answer to the creditors claiming under hire-purchase agreements was that they are not entitled to any preference. As regards creditors claiming under financing hire-purchase agreements, his case was that if only the chassis or/and the engine had been purchased by the company with the funds so secured, they cannot project a claim over the entire vehicle as such, including the body built upon it by the company with its funds, on the foot of their respective hire-purchase agreements. He distinguished the case reported in K. L. Johar and Co. v. Deputy Commercial Tax Officer on this ground and also on the ground that in some of such cases in these proceedings the respondents concerned did not advance the full amount of the purchase price and therefore the principle in K. L. Johar and Co. v. Deputy Commercial Tax Officer is not applicable to the facts arising in these proceedings. I may at once state that this argument is based on a misapprehension. Even in K. L. Johar and Co. v. Deputy Commercial Tax Officer the Supreme Court's dicta cannot be said to be applicable only to cases where the financier in the first type of hire-purchase agreements advanced the totally of the purchase price and paid the same to the dealer. If it could be normally established that the funds made available under the financing hire-purchase agreement was responsible for the acquisition of the goods by the company, then it would not matter whether a part of the price of such goods came from the funds of the company. Continuing his argument, the learned counsel would state that, inasmuch as the company has also provided a part of its funds to build the body to make the vehicle complete and road-worthy as a lorry, such portion of the funds so expended by the company has to be excluded and the necessary equities between the financier and the company have to be allocated. This argument does not appeal to me. When a person obtained an advance over the base of the goods and if such a base is improved upon by the borrower conscious of such a charge in favour of the creditor who was responsible for the purchase of that base, the borrower cannot later set up a case that the amounts spent by him for putting up a body over the unfinished base and for other improvements have to be separated from the totality of the value of the vehicle and the rights ascertained. Not only the borrower is estopped from contending in the manner as above, but there is absolutely no equity in favour of the borrower to put up such a contention as when he sought to improve the base he was conscious that it would get itself affixed and planted over the base and that the finished product would still be available to the creditor who has a lien or a charge over the base. I am unable, therefore, to accept this contention.
Before
proceeding further to consider the contention of Mr. V. Thyaga-rajan, learned
counsel for the petitioner, a fair appraisal is necessary as to what is a
hire-purchase agreement, which is a hypothecation and who is a secured
creditor, and the rights of parties thereto.
With the growth of society and its needs, the old conventional and orthodox system of credit has changed and novel and new innovations have been made in the matter of such borrowing and lending. A citizen is now enabled to secure articles of utility by paying the price therefore in instalments. This was rare in olden days. With the advancement of commerce and industry, a new outlet and a marketing system commonly known as "hire-purchase system" has been introduced. Under this system the mutual rights and obligations of a lender and a borrower or, to adopt the words used in hire-purchase agreements, the "owner" and the "hirer" are curiously veiled in mercantile allegorical language. Such inherence of allegory and peculiar words in the documentation of the system, has com-pulsorily led courts of law to pierce through such a commercial veil and find out the real scope and intendment of the bargain. Courts are bound to be astute in interpreting them. As Lord Esher M. R. said in Madell v. Thomas & Co.
"... the court is to look through or behind the documents and to get at the reality".
Such a penetration behind what appears on the face of the record is no doubt an exception to the rule, "what is expressed makes what is silent cease". But such exceptions are bound to be ingrafted in circumstances where a well instructed judge finds that what is patent is not the reality but what is latent. It is this peculiar mode of interpretation that has to be necessarily adopted while scrutinising a hire purchase agreement. Such type of agreements are two-fold. One is entered into between the financier and the customer (who are respectively described as owner and hirer in the hire purchase agreement) in a case where the customer secures a new vehicle from a dealer but is unable to pay the price therefore to the dealer. To secure accommodation he straightaway approaches the financier, who purchases the vehicle from the dealer, through the instrumentality of the customer and in return enters into a hire-purchase agreement with the customer, providing therein a right to the customer to become the owner after payment of all dues to the financier or on paying a nominal price as agreed to. Besides other usual terms, the vehicle has to be registered in the name of the financier as owner, and a right of seizure of the vehicle in case of default of the customer is also provided. But to satisfy the provisions of the Motor Vehicles Act, the certificate of registration, is kept in the name of the customer.
In the second form of hire-purchase agreement, usually adopted, the customer is the indisputable owner of the vehicle and it is so registered in his name under the Motor Vehicles Act. He requests the financier to grant a loan on the security of the vehicle. This is granted and a hire-purchase agreement is entered into. The terms, inter alia, of this type of agreement provides that on payment of the entire hire as contemplated in the agreement and in some cases on paying a nominal price, the customer (called hirer again) becomes the sole owner. There is also the right of retaking the vehicle on default of the hirer in any manner as stipulated. Ordinarily, the clause vesting in the hirer an option to purchase the vehicle or good" as the case may be would be absent. But its absence does not detract the real legal significance of the agreement.
Thus it is seen that whilst in the first type of hire-purchase agreement, the property in the goods always remains with the financing company and the customer or hirer becomes the owner thereof eo instanti he pays off the dues or exercises his option, in the second type of hire-purchase agreement, the intention as gathered from the content and terms of the agreement is, not to transfer any interest in the vehicle by the customer or hirer to the financing company, notwithstanding there appears in the ancillary documents connected with such a hire-purchase agreement, a sale letter by the hirer in favour of the financing company. In both types of agreements, the financing company is described as the owner and the customer as hirer. But in some cases, in the first type of agreement, the vehicle is registered in the name of the hirer as owner under the Motor Vehicles Act. This apparent paradox has to be reconciled. It can be done if we appreciate that the description of the customer as the owner under the Motor Vehicles Act is to satisfy its statutory norms. This is one of those cases in which the technical meaning of the word has to be followed, as it is sometimes the rule—see Laurence Arthur Adamson v. Melbourne and Metropolitan Board of Works . In the view of the Supreme Court, such a factum of registration under the Motor Vehicles Act in the name of one or the other of the parties to a hire-purchase agreement, may not be determinative of the ownership of the vehicle ; even so the learned judges would say that undue importance to the sale letter in the second type of the hire-purchase agreement cannot be attached—vide A'. L. Johar and Co. v. Deputy Commercial Tax Officer and Sundaram Finance Ltd. v. State oj Kerala . The distinction between the first type of hire-purchase agreement (hereinafter referred to as the finance hire-purchase agreement) and the second type of hire-purchase agreement (hereinafter referred to as the refinance hire-purchase agreement) has been well brought out by the Supreme Court in Sundaram Finance Ltd. v. State of Kerala thus:
"The agreement, ignoring variations of detail, broadly takes one or the other of two forms: (1) When the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance of the price undertakes the recovery. In this form, goods, are purchased by the financier from the dealer, and the financier obtains a hire-purchase agreement from the customer under which the latter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this court in K. L. Johar & Company v. Deputy Commercial Tax Officer dealt with a transaction of this character. (2) In the other form of transactions, goods are purchased by the customer, who in consideration of executing a hire-purchase agreement and allied documents remains in possession of the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier obtains a hire-purchase agreement which gives him a licence to seize the goods in the event of failure by the customer to abide by the conditions of the hire-purchase agreement".
There is therefore considerable force in the contention of Mr. V. K. Thiru-venkatachari that in all cases where financing hire-purchasing agreements are involved, such respondents ought to be treated as preferential creditors straightaway since they are the owners of the vehicle and there cannot be any conflict in so far as their right to be ranked as preferential creditors is concerned. There is sufficient force in this contention and I shall refer to it at a later stage.
The next aspect to be considered is what is hypothecation and what are the rights of the hypothecatee. A mortgage of movables without possession is called a hypothecation. This is not denned in the Contract Act, but referred to in the Indian Stamp Act for purposes of reckoning of stamp duty. As stated by Ghose at page 115 of The Law of Mortgage in India, fifth edition :
"We must not, however, infer from the silence of the legislature that such transactions are invalid in this country, or that they may not be enforced even against bona fide purchasers without notice".
At the Bar, a number of decisions on the point were cited. In In the matter of Ambrose Summers, an Insolvent, Sale J. was of the view that a bank which has acted on a letter of hypothecation is entitled to preferential payment of so much of the fund as can be shown to represent asseis of the insolvent's business, which were in existence at the date of the letter of hypothecation, and that, as regards the balance of the debt the bank must rank only as a general creditor of the estate. In Puninthavelu Mudaliar v. Bhashyam Ayyangar, Bashyam Ayyangar J. was of the view that the instrument in question in that case created a charge or hypothecation in the plaintiff's favour, but a charge-holder is as much the substantial owner of and has as substantial an interest in the goods and chattels as a mortgagee thereof. In Official Assignee of Madras v. Mercantile Bank of India Ltd., which dealt with a case of a railway receipt, the opinion of the Law Lords of Privy Council was to the effect that where the owner of goods hands to a bank indorsed railway receipts relating thereto as security for an advance (even without a formal letter of hypothecation), there is constituted, in the absence of evidence to the contrary, an equitable charge upon the goods which is binding between the owner and the bank. In Pramatha Nath Talukdar v. Maharaja Probirendra M. Tagore, Mallick J. observed as follows :
"By hypothecation no interest or property is transferred to the hypothecatee. Hypothecatee has nothing more than an equitable charge to have his claim realised by the sale of goods hypothecated. By a charge no interest in the property is transferred. The only right acquired by the charge-holder is the right to be paid out of the property charged".
In Md. Sultan v. Firm of Rampratap Kannyalal, the court observed:
"... In the absence of specific rules applicable to any matter, the principle recognised in the various Civil Courts Acts is that the courts should decide according to justice, equity and good conscience which is considered to be equivalent to the English law wherever such law is applicable to Indian conditions. It is only under this principle that the hypothecation or mortgage of movable property, although not specifically provided for in the Contract Act, are valid and a decree can be passed in enforcement of such transactions".
Thus, a hypothecation of moveables is permitted by law and even though the possession of the hypotheca is with the hypothecator, the hypothecatee has an equitable and enforceable charge over the movables mortgaged. Can such a charge be traced by the hypothecatee against the sale proceeds of the hypotheca if it is sold by volition of the parties to such an hypothecation ? In the instant case, by orders of court the hypothecated vehicles were sold by the official liquidator after the winding-up of the company was ordered. This was apparently by consent and by orders of this court. It cannot be disputed that it was the loan advanced by the hypothecatee under the hypothecation agreement that created assets for the company; if such assets by some due process are taken into custody by the official liquidator, then, in my view, the hypothecatee's rights to trace his claim under the hypothecation agreement cannot be discountenanced. The sale proceeds in the hands of the official liquidator are equitably charged with the right of the hypothecatee to recover his lawful and legitimate dues there from. Otherwise, to adopt the language of the House of Lords in Sinclair v. Brougham it would result in a ruthless logic whereby the company would be entitled to approbate the gains while permitting them to reprobate the borrowing by which they were acquired. The above principle has been re-stated in In re Diplock : Diplock v. Wintle. Their Lordships held that:
"...It was impossible to contend that a disposition which according to the general law was held to be entirely invalid could yet confer on those who, ex hypothesis, had improperly participated under the disposition, some moral or equitable right to retain what they had received against those whom the law declared to be properly entitled".
In my view, the right to trace the sale proceeds in the hands of the owner or a third party is available to a hypothecatee by virtue of the equitable charge to which he is entitled under the instrument of hypothecation. Thus, a hypothecatee, therefore, can be rightly characterised as a secured creditor.
The Presidency Towns Insolvency Act, 1909, gives only an inclusive definition to the words "secured creditor". But the Provincial Insolvency Act, 1920, defines a "secured creditor" so as to mean a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor. Stroud in his Judicial Dictionary says that though a lien is a security, yet the former word is much too narrow to comprise all that may be apprehended under the law.
It would thus appear that not only a hypothecatee but also the financier under the re-financing hire-purchase agreement being a person who has lent moneys by way of a loan on a security is also a secured creditor. I am fortified by the view expressed by the Supreme Court in Sundaram Finance Limited v. State of Kerala.
Mr. V. K. Thiruvenkatachari, though not necessarily for his case, has argued this point. His case is that if in a refinancing hire-purchasing agreement the vehicle is seized, the financier became a pledgee and the official liquidator is bound to redeem the pledge ; but as in the instant case the hypothec has been sold by consent, the official liquidator is bound to respect the rights of the pledgee-financier, by paying off the dues owing to him. No doubt, the right to seize the vehicle is peculiar to a hire-purchase contract. This licence to seize the vehicle in case of default is an extraordinary right not available at common law but provided for in the document of hire-purchase and which is a peculiar concept by itself. By an overt act of his and on his own volition a financing company or a creditor under a hire-purchase agreement can seize a vehicle without intervention of law. This right provided for in the hire-purchase agreement has a special signification. It establishes that the financing company or the creditor is not an ordinary creditor, but a creditor having such ordinary rights known to law coupled and annexed with a privilege to seize the vehicle in case of default. Hals-bury's Laivs of England, third edition, volume 3, paragraph 593 states as follows; where seizure is contemplated:
"When the grantee seizes the chattels, the grantor's legal interest in them ceases, and he cannot sue the grantee in trespass for removing them, even after tender of principal, interest and costs".
I am of the view that if the official liquidator desires to own the vehicles so seized, he cannot ignore the pledge, lien, hypothecation or rights under the hire-purchase agreement, if it is otherwise cognizable and enforceable under the Companies Act, 1956.
It is an accredited canon of law that parties to an ordinary contract cannot unjustly enrich themselves. A fortiori, the official liquidator, a public officer, cannot Though on the principle of money had and received, the problem can be approached, yet in the ultimate analysis, a nearest possible approach practicable to substantial justice has to be found. This is based on the principle of ratification. In the chain of events that happened, it is impossible to conceive that the official liquidator has not ratified the acts of the company in its entirety. Section 199 of the Contract Act provides:
"A person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which such act formed a part".
The official liquidator cannot therefore escape the impact of the vested rights of such secured creditors under the hypothecation instruments c: financiers under the refinancing hire-purchase agreements. This aspect has to be adverted to again by me while dealing with the effect of section 125 read with section 132 of the Companies Act.
From the above discussion, the following points emerge : (a) In the case of a financing hire-purchase agreement, the financier being the owner is entitled to be treated as a preferential creditor by the official liquidator and no question of conflict of his interests with the other creditors even though secured will arise, (b) In the case of refinancing hire-purchase agreement, the financier is no doubt a secured creditor. But his rights are subject to sections 125 and 132 of the Companies Act, 1956, and if he is able to surpass and hurdle the same, he would be entitled to be treated as a preferential creditor by the official liquidator, (c) A hypothecatee is a secured creditor and has to be treated as such subject however to the provisions of sections 125 and 132 of the Companies Act, 1956. (d) All creditors having an enforceable charge, legal or equitable, over the movables of the company, have a right to trace such lien even over the sale proceeds of the hypotheca, if indeed the movable property has been so converted.
The next phase of the argument of Sri V. Thyagarajan is that even assuming the creditor is a preferential creditor, section 292 of the Companies Act, 1956, is a mandatory provision and the non-observance of the strict inhibitions contained therein by a creditor of the company, would deprive him of his rights and privileges and his claim as against the company as a preferential creditor or otherwise cannot be countenanced. Section 292 deals with powers to be exercised by the board only at meetings. Section 292(1)(d) provides that the board of directors shall have the power to take loans on behalf of the company and it shall do so only by means of resolutions passed at meetings of the board. No doubt the power of borrowing mentioned in this section would include the power to enter into any arrangement for deferred payments in case goods, vehicles or other machinery purchased for the benefit of the company. It may also be noted incidentally that the power may also be delegated to one or more of the directors provided however there is no express prohibition under the memorandum of articles of the company in question. In this case it is not seriously disputed that such power to borrow was indeed delegated to the managing director. The articles do not prohibit such a delegation. The oral evidence let in is a pointer in this direction.
|
** |
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[His Lordship
referred to the oral evidence and continued.']
I find that there was a delegation of authority by the board to the managing director within the meaning of section 292 of the Act.
As the company cannot be said to have disclosed all the books, it cannot be presumed that there was no resolution under which powers were delegated. Even otherwise, there is ample evidence in this case as spoken to by two of the directors that Mr. Raman was actually the person who was piloting the affairs of the company. As pointed out by Astbury J., in In re Fireproof Doors, Limited : Umney v. Company " an unrecorded resolution may be proved aliunde". Such proof is available in the instant case.
Whether the official liquidator is bound by the act of the company through its managing director, can also be approached from a different perspective which is based on the theory of ostensible authority and equitable estoppel. Whether a person can be deemed to have ostensible authority in a particular case, is a mixed question of law and fact. The evidence of the directors in this case and the minutes book discloses that C. V. Raman had the requisite authority. By functioning as such, the company secured the benefit of the advances from the respondents. The classical passage of Lopes L.J. in Biggerstaff v. Rowatt's Wharf Limited may be usefully quoted:
"...a company is bound by the acts of persons who take upon themselves, with the knowledge of the directors, to act for the company, provided such persons act within the limits of their apparent authority; and that strangers dealing bona fide with such persons, have a right to assume that they have been duly appointed".
It is unnecessary to multiply authorities. The cardinal principle appears to be that if a company allows its affairs to be managed by one and such functional exercise of authority is warranted under the charter of the company and its articles, then the resultant bargains due to the exercise of such power, actual or ostensible, cannot be disregarded by the company who has had the benefit therefrom : vide Lakshmi Ratan Cotton Mills Co. Ltd. v. J. K. Jute Mills Co. Ltd. No one can approbate and reprobate. The bedrock on which this principle is decided is that of equitable estoppel. The chain of events that led to the innocent lenders particularly such as respondents Nos. 2 to 4, to enter into the bargain are that there was a representation by C. V. Raman that he had the requisite authority, that in fact C. V. Raman has been held out to be the person at the helm of affairs. It is on such ostensible authority of C. V. Raman that the banks and lenders acted.
The next contention of Mr. V. Thyagarajan is that there was no resolution as required under section 292 of the Companies Act, 1956, authorising the borrowing and therefore the creditors cannot claim any right of preference. His case is that the resolutions in exhibits A-18 and A-21 and others are opposed to the spirit and letter of section 292. I am unable to appreciate this contention. Apparently, he is outweighed with the concept that such resolutions were faked and, therefore, his contention is that they should be deemed to be non-existent and consequentially offending section 292. Learned counsel himself has dealt with this aspect, namely, that the resolations are faked and forged, under a different head of his argument. It cannot be said that in this case the provisions of section 292 of the Companies Act have not been observed. A true and certified copy of a resolution said to have been passed by the board was produced by the managing director who is at the helm of affairs, to the creditors in question and they bona fide acted upon the same. Learned counsel relied upon a catena of decisions to substantiate his contention that if a statutory condition is not complied with, then the act of the company or its agent or delegatee must be deemed to be void ab initio and no rights could flow therefrom. He referred to William Augustus Mahony, Public Officer of the National Bank, Dublin v. Liquidator of the East Holyford Mining Company Limited and indeed would accept the ratio in that case. But reliance is mainly placed upon the oft quoted decision in D'Arcy v. Tamar, Kit Hill and Callington Railway Company. That was a case in which a special Act of a railway company provided that the quorum of the meeting of the directors could be three. There the company borrowed, but affixed the seal to the document evidencing such borrowing not after securing the authority of the three directors simultaneously, but two having given it on one occasion and the third on a subsequent occasion. It was held in such circumstances that such authority was insufficient, inasmuch as, the directors who gave it had not acted at a board meeting of directors and the bond was therefore not duly executed so as to bind the company. To similar effect was the decision in In re Haycraft Gold Reduction and Mining Company. In Pacific Coast Coal Mines Limited v. Arbuthnot the learned Law Lords made it clear that if a statutory condition was not complied with by the board, then any act done pursuant thereto was consequentially ultra vires of the company and incapable of being made valid even by acquiesence on the part of the shareholders. Reference was made to a passage in Halsbury's Laws of England, third edition, Volume 6, Simonds edition, at page 431, which runs as follows:
"...where the act is only within the power of a company on the fulfilment of a statutory condition, persons dealing with a company are bound to ascertain whether the condition has been fulfilled".
But, as already stated by me, the argument proceeds on the assumption that there was no resolution at all and even if there was one it should be considered for all purposes as faked or a non-existent resolution and should be deemed to be non est. The managing director represented that they were passed by the board and certified them to be so.
Some of the respondents including respondents Nos. 2, 4 and 5 acted upon those resolutions said to have been passed by the board. These were passed, according to the managing director, at a board meeting and certified by him to be so. Article 100, inter alia, prescribes that the directors shall cause the minutes to be duly entered in books provided for the purpose of all resolutions of the board. Article 101 reads as follows:
"Any such minutes of any meeting of the company or of the directors if purporting to be signed by the chairman of such meeting or by the chairman of the next succeeding meeting shall be conclusive evidence of the matters stated in such minutes".
There is considerable force in the contentions of the counsel for respondents Nos. 2, 4 and 5 that the resolutions cannot be ignored. While accepting the force of the contentions of counsel in this behalf already summarised by me, there is enough material in the case to assume that respondents Nos. 2, 4 and 5 amongst others are entitled to assume that the managing director lawfully exercised all the powers in the regular course of business and they were in accordance with the constitution of the company. As pointed out by Sir John Romilly in Wilson v. West Hartlepool Harbour and Railway Company :
"Where a company, through their directors, hold out an officer of the company as their agent for a particular purpose and ratify his acts, they cannot afterwards dispute acts done by him within the scope of such agency".
It is no doubt imperative that lenders to an incorporated company should acquaint themselves with the memorandum and articles of the company. They cannot be allowed to plead ignorance of the various limitations under the constitution of the company. But to go still further and vest on the shoulders of such parties a responsibility to delve deep into the "archives of the company" is incompatible with the ordinary terms of accepted mercantile practice. As observed by the learned judges in Pudumjee & Co. v. N. H. Moos:
"It would hardly conduce to facility of business if outsiders were compelled to search the register and find for themselves whether a person who was permitted to act as a director of the company for some length of time was also its director de jure".
When a person is held out as managing director with authority to act for the board, as was done in this case, of a company and as such an office necessarily involves the exercise of a particular authority and incurrence of liabilities, a normal presumption in favour of the third party arises that such exercise of authority is lawful; any amount of reservation within the four walls of the indoors of the company touching upon such authority cannot be of any avail to the company vis-a-vis such strangers.
The above general rule as it were, is adumbrated in what is terminolo-gically called "Doctrine of Indoor Management" by Lord Hatherley. Gower in his Treatise on Modern Company Law states the rule as follows :
"But provided that everything appears to be regular so far as this can be checked from the public documents, an outsider dealing with the company is entitled to assume that all internal regulations of the company have been complied with, unless he has knowledge to the contrary or there are suspicious circumstances putting him on inquiry. Omnia praesumuniur rite ac solemniter esse acta."
The resolution authorising to borrow is invariably in the minutes book. The minutes book is not a public document, but relates to a record of events concerning internal management. The creditors cannot have access to the minutes book as such kept by a company under section 193 of the Companies Act. Section 195 draws a presumption as to its regularity. Section 194 makes such minutes of meetings evidence of the proceedings recorded therein. In this case the managing director purported to produce certified copies of such minutes. No doubt they later turned out to be faked. But they were acted upon and the company was benefited. There were no suspicious circumstances at that time which might have put the creditor on enquiry. The rule cited by the learned author applies to all the resolutions which the managing director produced. William Augustus Mahony, Public Officer of the National Bank, Dublin v. Liquidator of the East Holy ford Mining Company Limited was a case where there was no resolution at all, but there was a misrepresentation by persons who were characterised by the Law Lords as those who usurped the position of directors (because they do not seem to have been regularly appointed). Even then it was held :
"...When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, then those so dealing with them, externally, are not to be affected by any irregularities which may take place in the internal management of the company".
In Duck v. Tower Galvanizing Company Limited ' the principle has been restated thus:
"The rights of a bona fide holder for value of a debenture, which is in proper form and charges all the property of the company as security for the debenture debt, prevail over those of an execution creditor, even where the debenture is issued without authority, no director of the company having been appointed and no resolution to issue debenture passed; provided that the holder had no notice of any irregularity in the issue of the debenture".
Thus, strangers dealing with incorporated companies are not ordinarily expected to know what has transpired inside the doors of the company and cannot embark upon an investigation as to the legality, propriety and regularity of the acts of directors, who are authorised to act and who represent that they have the power to do so. In the instant case, exhibit A-3 which reflects upon the enthusiasm of the directors to revive the company, after all that happened, again fortifies the contention of the learn- ed counsel for respondents Nos. 2, 4 and 5 that all was well and nothing suspicious about the managing director.
Mr. V. Thyagarajan however proceeds that even if the acts of the managing director come within the fold of "indoor management", yet the arrangements entered into by him with third parties are void and unenforceable because such documents are tainted with fraud. Strong reliance was placed on the ratio in Ruben v. Great Fingall Consolidated. That was a case where the secretary of the company, who had absolutely no authority to issue shares, fraudulently affixed the seal of the company and forged the signatures of two of the directors. In those circumstances Lord Macnaghten observed:
"The thing put forward as the foundation of their claim is a piece of paper which purports to be a certificate of shares in the company. This paper is false and fraudulent from beginning to end. The representation of the company's seal which appears upon it, though made by the impression of the real seal of the company, is counterfeit, and no better than a forgery. The signatures of the two directors which purport to authenticate the sealing are forgeries pure and simple. Every statement in the document is a lie. The only thing real about it is the signature of the secretary of the company, who was the sole author and perpetrator of the fraud. No one would suggest that this fraudulent certificate could of itself give rise to any right or bind or affect the company in any way. It is not the company's deed, and there is nothing to prevent the company from saying so".
This case is distinguishable. Here the managing director was the real person acting and dealing for the company. P. Ws. 1 and 3 admit that he was at the helm of affairs and was permitted to borrow. The resolutions, copies of which were produced by him, primarily satisfied all the requirements of law and the articles of the company. So the document executed by him either alone or purporting to be with other directors cannot be lightly brushed aside as a waste paper. Even so the decision in Kreditbank Cassel v. Schankers is not apposite because there the entire document was a forgery and brought about by one who had no authority to represent the company. In the instant case, it is not disputed that the managing director signed all the impugned documents. In some of the arrangements, the names of P.W. 2 or D. W. 2 or P.W. 3 or two amongst them appear, but they are not their signatures. In a document, which has been availed of fully by the company and where the company admittedly secured the finances from the respondents on the strength of such documents as is seen from the account books of the company, it would be hiphly inequitable and metaphysical to allow the company to retain the advantage and eschew the liability. Prolixity in law is reprehended.
Acquum et bonum est lex legum (that which is equal and good is the law of laws). The impugned documents cannot be thrown out as void because they are executed by the managing director who had the ostensible authority to do so. The company and the official liquidator have ratified such acts of the managing director and have treated the vehicles as the properties of the company. Unequal treatment cannot be meted out to a creditor by contemporaneously conferring a benefit to the borrower. This is not good; law should be in accord with justice, equity and good conscience. The observations of the Division Bench in Lakshmi Ratan Cotton Mills Co. Ltd. v. J. K. Jute Mills Co. Ltd. can be usefully quoted :
"Even if the borrowing by the agent of a company is unauthorised, the company would be liable to pay, if it is shown that the money had gone into the coffers of the company. The lender having not advanced the money as a gift but as a loan, and the borrower having received the benefit of the money, the law implies a promise to repay. On the establishment of these facts a claim on the footing of money had and received would be maintainable. Once, however, the payment is received by the defendant company, the receipt of the money itself is a benefit to the company and the creditor is not concerned with what is done with the money by the company subsequently".
Thus viewed I am unable to subscribe to the argument of Sri V. Thyaga-rajan that the documents containing forged signatures of the other directors should be avoided even though they are valid and enforceable by reason of the managing director having principally and firmly executed the same. It is also to be noted that in a majority of cases the signatures of the other directors appear on the document as guarantors. Even if they do find a place in the document as co-executants, such execution by the other directors can be ignored and the document accepted for being enforced on the strength of the signature of the managing director.
It was hesitantly argued by the counsel for the third respondent that Chakra Traders is an independent legal entity distinct and separate from the company in liquidation and that therefore any dealings between the respondents and the said Chakra Traders are outside the liquidation proceedings. It is to be noted that C. V. Raman was the proprietor of Chakra Traders. But at all material points of time, this was treated as a concern owned by the company and the exhibits do confirm that it was the company which was dealing with all the assets of Chakra Traders. The documents also support the view that Manasuba and Company took over Chakra Traders as a going concern and was owning all its dealings. In fact, no question was put to the witnesses who were directors of the company, on this aspect by any of the counsel for the respondents. On the other hand, the official liquidator owns the dealings of Chakra Traders as those of the company in liquidation and there is no element of controversy over this at his end. All the vehicles of Chakra Traders having been sold by him under orders of this court as the properties of the company. There is abundant documentary evidence to find that Chakra Traders was a name and style under which the company was conducting business. I am unable to see any force in the contention that the vehicles dealt with by Chakra Traders ought to be treated as dealings otherwise than by the company of its property. The assets of Chakra Traders are the assets of Manasuba and Company in liquidation and has to be dealt with as such. Therefore, I am not making distinction in the manner suggested, in this order of mine.
One other argument of Sri V. Thyagarajan is that any charge created on the assets, not on the immovable property of an incorporated company, unless registered under section 132 of the Companies Act of 1956, is void as against the official liquidator. Section 125(1) leaving aside the proviso reads:
"125(1). Subject to the provisions of this Part, every charge created on or after the 1st day of April, 1914, by a company and being a charge to which this section applies shall, so far as any security on the company's property or undertaking is conferred thereby, be void against the liquidator and any creditor of the company, unless the prescribed particulars of the charge, together with the instrument, if any, by which the charge is created or evidenced, or a copy thereof verified in the prescribed manner, are filed with the Registrar for registration in the manner required by this Act within twenty one days after the date of its creation".
Section 125(4) provides :
"This section applies to the following charges :.....................
(e) a charge, not being a pledge, on any movable property of the company;.............".
Under a hypothecation agreement, the company creates a charge over its movable property. Even so in a re-finance hire-purchase agreement, where the loan is secured on the vehicle which is the subject-matter of the finance agreement, a lien is created on the vehicle, resulting in a charge within the meaning of section 125(4)(e) of the Companies Act of 1956. Therefore, it is imperative that the document evidencing such a charge has to be registered in either of the above cases. Mr. V. Thyagarajan relied upon In re Kent & Sussex Saw Mills Limited . I respectfully adopt the ratio of the decision, which holds that "the letters (in that case) were assignments of book debts to the bank by way of security for the overdraft and not having been registered under the Companies Act, 1929, section 79(2)(e), were void against the liquidator in the winding-up". Some of the learned counsel relied upon the sale letters executed by the company in favour of the financier in the refinancing hire-purchase agreement and contend that by reason of this letter, the company cannot claim any title to the vehicles. One should be guilty of being astute if this argument is accepted. Shorn of all technical garb and language couching the refinancing hire-purchase agreement, it is purely a transaction resulting in a loan being granted by the creditor on the security of the vehicle. As pointed out by an eminent author "the requirement of the section cannot be evaded by making what is in fact a mortgage or a charge in form an absolute assignment or otherwise adopting a form which does not accord with the real transaction between the parties". The Supreme Court in Sundaram Finance Ltd. v. State of Kerala treats the agreement as a loan transaction but characterises it as a secured loan. Therefore, the loan granted on such a security results in a charge on the security offered. This not having been registered under section 132 of the Companies Act, 1956, is void and unenforceable.
I shall now consider vehicle war the quantitative and qualitative rights of the respondents as prayed for by the official liquidator in the judge's summons.
MSX 7305: Respondents Nos. 2, 3 and 15 are claiming preferential rights over this vehicle. The second respondent rests his claim on the hypothecation agreement, exhibit A-27, dated May 30, 1960. This charge has been registered with the Registrar of Companies. The 15th respondent claims under a hire-purchase agreement dated January 30, 1961, exhibit A-177. This is ho doubt a fresh hire-purchase agreement which cancelled the earlier finance hire-purchase agreement dated January 27,1960, under exhibit A-l 76. Possibly exhibit A-l 76 could have come within the rule of K. L. John and Co. v. Deputy Commercial Tax Officer as under the said agreement, funds were provided by the financier for purchar3 of the vehicle. The claim however is based on exhibit A-177 which, prima facie, is a refinancing agreement coming within the mischief of the ratio of Sundaram Finance Ltd. v. State of Kerala .As this has not been registered, the claim cannot be sustained. As regards the claim of the third respondent which is based on exhibit A-166 which is a refinancing hire-purchase agreement, the claim has to fail for want of registration under the Companies Act of 1956. Therefore, the only claimant wno is entitled to enforce its rights is the 2nd respondent, who will be treated as a preferential creditor by the official liqudator, who shall pay the creditor the net sale proceeds of the vehicle, expenses, charges and costs pro rata worked out for the purpose.
MSX 8469 : The claimants who project preferential claims against this vehicle are respondents Nos. 2, 3, 4 and 13. The 2nd respondent relies on exhibit A-27, hypothecation agreement dated May 30, 1960. This is signed by C. V. Raman and the signatures of the other directors are faked. But the agreement of guarantee, exhibit A-28, is signed by Raman. No doubt, the signatures of the other directors in the promissory note and the letters accompanying the same, exhibits A-25, A-26 and A-27, are faked. But C. V. Raman had signed the same, as managing director. In the view already expressed by me, the hypothecation agreement, exhibit A-27, cannot be rejected in toto. As the company had the benefits of the moneys, it is enforceable. The charge having been registered under the Companies Act under rule 54, it is binding on the company.
The 3rd respondent bases his claim on the hire purchase agreement, exhibit A-122, dated July 29, 1960. In the light of my judgment, this secured loan not having been registered with the Registrar of Companies is void. The 3rd respondent can only figure as an ordinary creditor, as the official liquidator does not dispute the borrowing.
The 8th respondent rests his claim on exhibit A-54, the hypothecation deed, which charge was registered under the Companies Act of 1956 under exhibit A-58. The 4th respondent is entitled to rank as a preferential creditor.
The 13th respondent no doubt originally advanced the purchase price and entered into the hire purchase agreement, exhibit A-161, dated April 25, 1960. But this has been cancelled. The company dealt with this vehicle with others. After cancelling the original financing hire-purchase agreement, a fresh refinancing hire-purchase agreement dated January 30, 1961, was entered into under exhibit A-162. It cannot be said that exhibit A-I62 stands in the same footing as exhibit A-161. The later arrangement can only be viewed as a refinancing agreement, as by then the company owned the vehicle. The charge under exhibit A-162 has not been registered under the Companies Act. Therefore, the 13th respondent can rank only as an ordinary creditor, as his debt is admitted.
Thus, as regards this vehicle, respondents Nos. 2 and 4 are to be considered as preferential creditors who have a claim over the net sale proceeds of this vehicle in the hands of the official liquidator and the liquidator ought to proceed, in distributing the net sale proceeds between respondents Nos. 2 and 4, on the principle of distributing them pari passu in proportion to the amounts due to the banks on this vehicle on the date of liquidation of the company. The liquidator in arriving at the net sale proceeds is entitled to deduct pro rata all expenses, costs and charges attributable to the vehicle.
MSX 8470 : Respondents Nos. 2, 4, 11 and 12 are claiming rights over this vehicle. Respondent No. 12 bases his claim under exhibit A-149, a refinancing hire-purchase agreement. Though respondent No. 12 advanced moneys for the purchase of the vehicle and entered into a financing hire-purchase agreement, exhibit A-155, yet it was cancelled and exhibit A-149 was entered into. The charge under this agreement not having been registered, the claim of respondent No. 12 as preferential creditor ought to fail. Respondent No. 11 bases his claim on the refinancing hire-purchase agreement, exhibit A-143. This has no force because the charge has not been registered under the Companies Act. The claim of the 11th respondent to rank as a preferential creditor falls to the ground. As regards respondents Nos. 2 and 4, they both claim as hypothecatees of the vehicle; the former under exhibit A-27 registered under exhibit R-54 and the latter under exhibit A-54 registered under exhibit A-58. Both are entitled to rank as preferential creditors and the official liquidator will deal with them as such.
MSX 8471 : Respondents Nos. 2, 4, 11 and 13 are the claimants over this vehicle. Respondent No. 13 bases his claim under exhibit A-164, a refinancing hire-purchase agreement. Though respondent No. 13 advanced moneys for the purchase of the vehicle and entered into a financing hire-purchase agreement, exhibit A-163, yet it was cancelled and exhibit A-164 was entered into. The charge under this agreement not having been registered, the claim of respondent No. 13 as preferential creditor ought to fail. Respondent No. 11 bases his claim on the refinancing hire-purchase agreement, exhibit A-143. This has no force because the charge has not been registered under the Companies Act. The claim of the 11th respondent to rank as a preferential creditor falls to the ground. As regards respondents Nos. 2 and 4, they both claim as hypothecatees of the vehicle the former under exhibit A-27 registered under exhibit R-54 and the latter under exhibit A-54 registered under exhibit A-58. Both are entitled to rank as preferential creditors and the official liquidator will deal with them as such.
MSX 8928: Respondents Nos. 2, 4, 15 and 22 are the claimants over this vehicle. Respondent No. 15 bases his claim under exhibit A-116, a refinancing hire-purchase agreement. Though respondent No. 15 advanced moneys for the purchase of the vehicle and entered into a financing hire purchase agreement, exhibit A-165, yet it was cancelled and exhibit A-166 was entered into. The charge under this agreement not having been registered, the claim of respondent No. 15 as preferential creditor ought to fail. Respondent No. 22 bases his claim on the refinancing hire-purchase agreement, exhibit A-188. This has no force because the charge has not been registered under the Companies Act. The claim of the 22nd respondent to rank as a preferential creditor falls to the ground. As regards respondents Nos. 2 and 4, they both claim as hypothecatees of the vehicle, the former under exhibit A-27 registered under exhibit R-54 and the latter under exhibit A-54 registered under exhibit A-58. Both are entitled to rank as preferential creditors and the official liquidator will deal with them as such.
MSX 8929 : Respondents Nos. 2, 4, 12 and 22 are the claimants over this vehicle. Respondent 12 bases his claim under exhibit A-148 a refinancing hire-purchase agreement. Though respondent No. 12 advanced moneys for the purchase of the vehicle and entered into a financing hire purchase agreement, exhibit A-154, yet it was cancelled and exhibit A-148 was entered into. The charge under this agreement not having been registered the claim of respondent No. 12 as preferential creditor ought to fail. Respondent No. 22 bases his claim on the refinancing hire-purchase agreement, exhibit A-188. This has no force because the charge has not been registered under the Companies Act. The claim of the 22nd respondent to rank as a preferential creditor falls to the ground. As regards respondents Nos. 2 and 4, they both claim as hypothecatees of the vehicle, the former under exhibit A-27 registered under exhibit R-54 and the latter under exhibit A-54 registered under exhibit A-58. Both are entitled to rank as preferential creditors and the official liquidator will deal with them as such.
MSX 9159 : Respondents Nos. 4, 11 and 13 are the claimants over this vehicle. Respondent No. 13 bases his claim under exhibit A-l70, a refinancing hire-purchase agreement. Though respondent No. 13 advanced moneys for the purchase of the vehicle and entered into a financing hire-purchase agreement, exhibit A-169, yet it was cancelled. The subsisting hire-purchase agreement under exhibit A-170 which creates a charge has not been registered under the Companies Act. Hence, his claim to rank as a preferential creditor fails. Respondent No. 11 rests his claim on an unregistered refinancing hire-purchase agreement, exhibit A-143. He cannot therefore claim preference. The net result is that the claim of the 4th respondent as a registered hypothecatee under exhibit A-54 has to be upheld and he will be treated as such by the official liquidator, who shall pay the sale proceeds of the vehicle to the 4th respondent, less expenses, costs and charges, which have to be reckoned pro rata by him.
MSX 9411 : Respondents Nos. 2, 4, 13 and 23 are the claimants over this vehicle. Respondent No. 13 bases his claim under exhibit A-168, a refinancing hire-purchase agreement. Though respondent No. 13 advanced moneys for the purchase of the vehicle and entered into a financing hire-purchase agreement, exhibit A-167, yet it was cancelled and exhibit A-168 was entered into. The charge under this agreement not having been registered, the claim of respondent No. 13 as preferential creditor nas to fail. Respondent No. 23 bases his claim on the refinancing Lire purchase agreement, exhibit A-201. This has no force because the charge has not been registered under the Companies Act. The claim of the 23rd respondent to rank as a preferential creditor falls to the ground. As regards respondents Nos. 2 and 4, they both claim as hypothecatees of the vehicle ; the former under exhibit A-27 registered under exhibit R-54 and the latter under exhibit A-54 registered under exhibit A-58. Both are entitled to rank as preferential creditors and the official liquidator will deal with them as such.
MSX 9564: Respondents Nos. 4, 11 and 12 are the claimants over this vehicle. Respondent No. 12 bases his claim under exhibit A-146, a refinancing hire-purchase agreement. Though respondent No. 12 advanced moneys for the purchase of the vehicle and entered into a financing hire-purchase agreement, exhibit A-152, yet it was cancelled. The subsisting hire purchase agreement under exhibit A-146 which creates a charge has not been registered under the Companies Act. Hence his claim to rank as a preferential creditor fails. Respondent No. 11 rests his claim on an unregistered refinancing hire-purchase agreement, exhibit A-137. He cannot therefore claim preference. The net result is that the claim of the 4th respondent as a registered hypothecatee under exhibit A-54 has to be upheld and he will be treated as such by the official liquidator, who shall pay the sale proceeds of the vehicle to the 4th respondent, less expenses, costs and charges, which have to be reckoned pro rata by him.
MSX 9566 : Respondents Nos. 4, 11 and 12 are the claimants over this vehicle. Respondent No. 12 bases his claim under exhibit A-146, a refinancing hire-purchase agreement. Though respondent No. 12 advanced moneys for the purchase of the vehicle and entered into a financing hire-purchase agreement, exhibit A-153, yet it was cancelled. The subsisting hire-purchase agreement, exhibit A-146, which creates a charge has not been registered under the Companies Act. Hence, his claim to rank as a preferential creditor fails. Respondent No. 11 rests his claim on an unregistered refinancing hire-purchase agreement, exhibit A-137. He cannot therefore claim preference. The net result is that the claim of the 4th respondent as a registered hypothecatee under exhibit A-54 has to be upheld and it will be treated as such by the official liquidator, who shall pay the sale proceeds of the vehicle to the 4th respondent, less expenses, costs and charges, which have to be reckoned pro rata by him.
MSX 9835, MSW 719, MSW 720, MSW 2305, MSW 2307, MSW 4134 and MSW 4136 : The claimants in MSX 9835 are respondents Nos. 4, 8 and 14. The 4th respondent rested his claim on the basis of the hypothecation agreement, exhibit A-54, dated September 12, 1960, and the certificate of registration with the Registrar of Companies, exhibit A-58. Ordinarily, his claim has to be accepted. But on the date when the hypothecation agreement was signed by the managing director, the company did not own the vehicle at all. The vehicle was purchased from Sundaram Motors Limited. The price therefor was paid by the 8th respondent. This is seen from exhibit R-3 dated September 15, 1960. What prompted the 4th respondent to accept this vehicle as forming part of the hypotheca is not known. The financing hire-purchase agreement with the 8th respondent is entered into only on September 15, 1960. The normal presumption is that it was only on that day negotiations by the company to own the vehicle were completed. It could not have any semblance to the same before September 15, 1960. This is not a case in which conflicting claims of two persons have to be adjudicated. This is a case in which one person cannot put forward a preferential claim at all over this vehicle. As the 8th respondent advanced the price of the vehicle and obtained a financing hire-purchase agreement, he is deemed to be the owner of the vehicle. Therefore, the 4th respondent's claim as a preferential creditor on the foot of the hypothecation agreement dated September 12, 1960, is rejected. For a greater reason the claim of the 14th respondent to the vehicle which is rested on the hire-purchase agreement dated August 18, 1960, is equally untenable. There was no vehicle which could be dealt with by the company on August 18, 1960. The subject-matter of the hire purchase agreement dated August 18, 1960, is said to be the vehicle bearing chassis No. PAB 27387 and Engine No. 600463. This was the subject-matter of the hire-purchase agreement dated September 15, 1960, in favour of the 8th respondent. Therefore, it is mythical as to how a vehicle not even purchased could be the subject-matter of hire-purchase agreement under exhibit A-180 dated August 18, 1960, with the 14th respondent. Even the "C" certificate, as it is commonly called, does not disclose such a transaction. As the 8th respondent advanced the moneys for the purchase of this vehicle, his claim as owner of the vehicle has to be accepted and the amount due to the 8th respondent be paid by the official liquidator from and out of the sale proceeds of the vehicle, less expenses, charges and costs pro rata worked out for the purpose. In this view, the non-registration of the hire purchase agreement in question with the Registrar of Companies under section 132 of the Act does not matter.
MSX 9862 : The claimants are respondents Nos. 4, 3, 23 and 24. Respondents Nos. 23 and 24 claim under refinancing hire-purchase agreements, exhibits B-207 and A-212, which are not registered under the Companies Act. Their claim to rank as preferential creditors cannot be accepted. The 8th respondent advanced monies for the purchase of the vehicle. The vehicle was purchased on September 15, 1960. The financing hire-purchase agreements on which reliance is placed by the 8th respondent are exhibits R-2 and A-78. The hypothecation in favour of the 4th respondent is dated September 12, 1960, before the vehicle was purchased by the company. The inclusion of this vehicle in the hypothecation agreement, exhibit A-54, which was registered, cannot vest any right in the hypothecatee because the vehicle was not there. Even so, the 14th respondent is said to have advanced moneys under hire-purchase agreement dated August 18,1960, on a non-existent vehicle. The 14th respondent's claim as a preferential creditor cannot be envisaged. Therefore, as the 8th respondent advanced the moneys for the purchase of the vehicle his claim as owner of the vehicle has to be accepted and the amount due to the 8th respondent be paid by the official liquidator from and out of the sale proceeds of this vehicle, less expenses, charges and costs pro rata worked out for the purpose of this vehicle.
MSW 719 and MSW 720 : The claimants are respondents Nos. 4, 8, 13 and 24. The 24th respondent's claim to rank as preferential creditor is untenable because he rests his claim on the refinancing hire-purchase agreement, exhibit A-212, which was not registered under section 132 of the Companies Act. The vehicles were negotiated for purchase only on November 9, 1960. The 8th respondent advanced moneys for the purchase of the vehicles and entered into the financing hire-purchase agreement under exhibit A-85 dated January 9, 1960. The 4th respondent claims to have accepted these vehicles as security under the hypothecation agreement, exhibit A-54, dated September 12, 1960. This is impossible. Merely because the vehicles are mentioned in exhibit A-54 cannot make any difference. So the 4th respondent cannot rank as a preferential creditor in so far as these vehicles are concerned. The 13th respondent pretends to have advanced moneys to the company on these vehicles under a hire-purchase agreement exhibits A-171 and A-l72, dated August 16, 1960, when the vehicles were not owned by the company at all. As the 8th respondent advanced the moneys for the purchase of these vehicles, his claim as owner of the vehicles has to be accepted and the amount due to the 8th respondent be paid by the official liquidator from and out of the sale proceeds of these vehicles, less expenses, charges and costs pro rata worked out for the purpose of these vehicles.
MSW 2305 : The claimants are respondents No. 8, 15 and 24. The 8th respondent advanced moneys to the company for the purchase of this vehicle. The financing hire-purchase agreement entered into is exhibit A-96 dated January 20, 1961. Under this the 8th respondent is to be deemed to be the owner of this vehicle—See K. L. Johar and Co. v. Deputy Commercial Tax Officer . Therefore, the claims of respondents Nos. 15 and 24 to be ranked as preferential creditors based on hire-purchase agreement dated January 30, 1961, under exhibit A-178 and the hire-purchase agreement dated April 24, 1961, under exhibit A-212 respectively cannot be countenanced Because the company had no authority to deal with the vehicle at all. The termination of the finance hire-purchase agreement, exhibit A-96, was on June 2, 1961, under exhibit R-46. Therefore, the right of the 8th respondent to rank as the only preferential creditor as regards this vehicle is unassailable. As the 8th respondent advanced the moneys for the purchase of the vehicle his claim as owner of the vehicle has to be accepted and the amount due to the 8th respondent be paid by the official liquidator from and out of the sale proceeds of this vehicle, less expenses, charges and costs pro rata worked out for the purpose of this vehicle.
MSW 2307 : The claimants are respondents Nos. 8, 14 and 23. The 8th respondent advanced moneys to the company for the purchase of this vehicle. The financing hire-purchase agreement entered into is exhibit A-96 dated January 20, 1961. Under this the 8th respondent is to be deemed to be the owner of this vehicle—See K. L. Johar and Co. v. Deputy Commercial Tax Officer . Therefore, the claims of respondents Nos. 14 and 23 based on hire-purchase agreements dated January 30, 1961, and May 2, 1961, under exhibits A-183 and A-207, when during that period the 8th respondent was the legal owner of the vehicle, cannot be entertained. The hire-purchase agreement, exhibit A-96, was terminated only on June 2, 1961. Therefore, the right of the 8th respondent to claim the net sale proceeds of the vehicle as a preferential creditor cannot be questioned. As the 8th respondent advanced the moneys for the purchase of the vehicle, his claim as owner of the vehicle has to be accepted and the amount due to the 8th respondent be paid by the official liquidator from and out of the sale proceeds of this vehicle, less expenses, charges and costs pro rata worked out for the purpose of this vehicle.
MSW 3056 and MSW 3589 : Though there appear to be two claimants asking to be treated as preferential creditors with reference to their dealings with the company in the subject relating to the above vehicles, in reality it is the 9th respondent who is seeking such a relief. Another person, Pushpa Kavur, has not referred to me any document in support of her case, nor was she represented by counsel. I am not considering her claim in the absence of any material. She is not even a party to the proceedings but a counter-affidavit however filed by her is on record.
The 9th respondent claims to be the guarantor under the financing hire-purchase agreements, exhibits A-l 19 and A-120, dated February 24, 1961, executed by the company in favour of the Hindusthan Motor Corporation. This was terminated under exhibit A-123 on May 22, 1961. It is in this letter of termination the 9th respondent has been authorised to follow up the matter. Under the hire-purchase agreement, exhibit A-119, Hindusthan Motor Corporation Limited advanced the moneys to the company to enable them to purchase the vehicles from the 9th respondent. The name of the guarantor as shown in the agreement is one R. S. Rangarajan. But when the deal was put through, this respondent recommended the advance and gave a report, exhibit R-89. Exhibt R-89 refers to exhibit R-87, which is an agreement entered into between this respondent and Hindusthan Motor Corporation Limited. Under exhibit R-87, it was obligatory on the part of this respondent to forward to the Corporation all applications from persons or companies for hire-purchase facilities in respect of motor vehicles sold by the dealer. In consideration of the Corporation sanctioning the applications recommended by the dealer, this respondent undertook to guarantee the due performance and observance by the applicant, called the hirer, of all the conditions in the hire-purchase agreement. Therefore, though this respondent was not eo nomine a guarantor in exhibits A-l 19 and A-120, yet by reason of the overall guarantee undertaken by them under exhibit R-87, the respondent became virtually a guarantor for the due observance of the hire-purchase conditions by the company in liquidation. As already stated, this respondent recommended the advance. Therefore the Corporation, on the default committed by the company, re-possessed the vehicles and intimated the registering authority that all further steps would be taken by the respondent. It transpires that the vehicles were handed over to the respondent after seizure by the Corporation. This is seen from exhibit R-90 dated August 17, 1961. Under this letter, the respondent is called upon to pay a sum of Rs. 43,800 said to be by then due under the hire-purchase agreements. Obviously, this demand is made by the Corporation under the foot of the guarantee under exhibit R-87. Otherwise, their conduct in demanding the amount from this respondent cannot be understood. Even R. W. 1 examined on behalf of the respondent would say that they were obliged under the agreement to pay the amount demanded. The agreement referred to by him is exhibit R-87. This witness produced exhibit R-83, the account book of the respondent which was kept in the regular course of business to prove the payments made by this respondent to Hindusthan Motor Corporation Ltd. consequent upon the failure of the company to respect its obligations. After demanding the amounts due as above, the Corporation gave a power of attorney to this respondent which is extremely general in scope. This power enables this respondent to project the claims in question in his own name and ask the official liquidator to treat him as a preferential creditor. Even apart from the power of attorney, I am satisfied that this respondent guaranteed all payments, if default is committed by the company and in fact they have paid the corporation its dues.
The next question is what was the right of the corporation and what could be the right of the respondent who paid off the corporation on behalf of the company which is admittedly the principal debtor. So far as the corporation is concerned, they satisfy the tests in K.L. Johar and Co. v. Deputy Commercial Tax Officer and they were the owners of the vehicle till the hire-purchase agreement was terminated. There is therefore no question of registering any charge with the Registrar of Companies. This respondent as guarantor and having paid the amounts due and payable by the company as debtor is entitled to be subrogated to all the rights to which the creditor is entitled to. Sections 140, 141, 145 and 146 of the Contract Act support this respondent's contention that they ought to be ranked as a preferential creditor. As observed by Eve J. in In re Lamplugh Iron Ore Co. Ltd : "when the surety seeks to enforce his remedy he shall be in the same position as if he were the original creditor still unpaid". I, therefore, find that this respondent should be treated as a guarantor who stepped into the shoes of the Corporation and, therefore, he is entitled to recover the net sale proceeds of the vehicle in specie, on the ground that he has stepped into the shoes of the Corporation and entitled to be treated preferentially by the official liquidator. I, therefore, declare that this respondent is to be ranked as preferential creditor. As the 9th respondent has stepped into the shoes of the financier who advanced the moneys for the purchase of the vehicles, his claim in such capacity has to be accepted in full. I therefore direct that the amount reckoned as payable to the 9th respondent be paid by the official liquidator from and out of the sale proceeds of the two vehicles less expenses, charges and costs pro rata worked out for the purpose. I may add that the non-registration of the hire-purchase agreement with the Hindusthan Motor Corporation with the Registrar of Companies under section 132 of the Companies Act would not make any difference.
MSW 4134 and MSW 4136: The two rival claimants are respondents Nos. 8 and 13. This is yet again a case where the 13th respondent is said to have taken a hire-purchase relating to the vehicles when they were not the properties of the company at all. The vehicles were purchased and immediately subject to a financing hire-purchase agreement, exhibit A-104 dated March 22, 1961. Negotiations for purchase took place in March 1961. Under exhibit A-104 the 8th respondent became and continued to be the owner of the vehicles until it was terminated under exhibit R-52 dated June 2, 1961. In those circumstances the claim of the 13th respondent, that he entered into a hire-purchase agreement under exhibits A-174 and A-175 dated January 30, 1961, over these vehicles is absolutely undiscernable. I declare that the 8th respondent is the only creditor who should be treated as a preferential creditor in so far as these vehicles are concerned. As the 8th respondent advanced the moneys for the purchase of these vehicles, hi claim as owner of the vehicles has to be accepted and the amount due to the 8th respondent be paid by the official liquidator from and out of the sale proceeds of the vehicles, less expenses, charges and costs pro rata worked out for the purpose. In this view the non-registration of the hire-purchase agreement in question with the Registrar of Companies under section 132 of the Act does not matter.
MDF 1136 : There being no other claimant to the vehicle excepting the 2nd respondent, the bank is declared to be entitled to be treated as a preferential creditor and dealt with accordingly by the official liquidator, who shall have the liberty to deduct the expenses, charges and costs pro rata to arrive at the net sale proceeds available for being paid out.
MSY 2662 and MSY 9460 : In the first cited vehicle, respondents Nos. 10 and 12 are interested. In the second cited vehicle the 12th respondent is interested. They are motor cars owned by the company. They were subject to refinancing agreements under exhibits A-156, A-150, A-131 and A-151. The charges created under the above agreements were not registered under the Companies Act. Therefore, they are void as against the official liquidator. Respondents Nos. 10 and 12 cannot thus be treated as preferential creditors. They should prove their claim in the ordinary way.
The application
is ordered accordingly. The official liquidator alone will get his costs and
expenses.
[Note.—This case is reported in these Reports in view of its general importance.—Ed.]
[1980] 50 COMP. CAS. 817 (KER.)
HIGH COURT OF KERALA
v.
Kerala Financial Corporation
P. SUBRAMONIAN POTI AND KUMARI P. JANAKI AMMA, JJ.
M.F.A. NOS. 137 OF 1977 AND 469 OF 1978
APRIL 18, 1980
K.N. Parameswaran Pillai for the Appellant.
K.S. Rajamony, A. Shahul Hameed, Siby Mathew and T.V.
Ramakrishnan for the Respondent.
Janaki Amma, J.—The appellant in these appeals
is a major creditor of the Sree Rama Vilasam Press and Publications (Private)
Ltd., Quilon, now under liquidation in Company Petition No. 1 of 1973. He filed
Company Application No. 515 of 1975 for staying the sale of a Plamag Rotary
Press and Block Studio which was ordered in O.P. No. 54 of 1970 and obtained an
order of stay. The order of stay was vacated in Company Application No. 88 of
1976 filed by the Kerala Financial Corporation. M.F.A. No/137 of 1977 is an
appeal filed against the order. The appellant had also filed Company
Application No. 6 of 1977 for rectification of the register of charges
mentioned by the Registrar of Companies by cancelling the registration of the
charge created by the mortgage dated February 11, 1970, executed by the
Malayala Rajyam Private Ltd., and the Sree Rama Vilasam Press &
Publications (Private) Ltd., hereinafter referred to as the mortgagor and the
co-mortgagor respectively. That petition was dismissed M.F.A. No. 469 of 1978
is against the said order of dismissal.
The Sree Rama Vilasam Press and Publications
(Private) Ltd., was incorporated under the Indian Companies Act, 1913, with its
registered office in
Going by the case put forward by the Corporation the
board of directors of the mortgagor company had a meeting' convened on 25th
January, 1970, when a resolution was passed authorising Sri. N. Chandrasekharan
Nair to execute a mortgage in favour of the Corporation for availing a loan of
Rs.9,60,000 and pledging the necessary assets of the company as security for
repayment. The managing director was also authorised to affix the common seal
of the company to the said mortgage and/or other documents securing the
repayment of the loan in the presence of Sri N. Madhavan Nair, another director
of the company. On the same day the board of directors of Sree Rama Vilasam
Press and Publication (Private) Ltd., the co-mortgagor, is also stated to have
passed a resolution guaranteeing the repayment of the above loan and offering
the landed properties scheduled to the resolution as additional security. Sri N
Chandrasekharan Nair who was also the managing director of the co-mortgagor
company was authorised to execute the guarantee deed and also to affix the
common seal in the presence of Sri N. Balakrishnan Nair, a director of the
co-mortgagor company. Exhibit P-3 and Ex. P-4 are stated to be copies of the
resolutions of the co-mortgagor company and the mortgagor company respectively,
certified by Sri N. Chandrasekharan Nair, the common managing director. In due
course, Ex. P-2 mortgage was executed by Sri Chandrasekharan Nair as managing
director, representing the mortgagor and the mortgagee companies. Sri
Chandrasekharan Nair, Sri N. Madhavan Nair Sri K. Ambujakshi Amma also joined
in the document in their personal capacities as guarantors. The common seals of
both the mortgagor and the mortgage companies were also affixed in the mortgage
deed as directed in Ex. P-3 and Ex. P-4. An amount of Rs. 4,00,000 being the
first instalment of the loan was paid on February 10, 1970, to meet part of the
price of the Plamag Rotary Press. The amount remaining was to be paid to meet
the balance cost of the said machinery including the transportation and
erection charges only after the Plamag Rotary Press was brought to the
mortgaged site and installed, after the Corporation was satisfied on valuation
through its technical advisor that the press was worth not less than Rs.
10,00,000 in the erected condition and after the mortgagor company constructed
an extension to the existing press building included in the mortgage to house
the new press which on valuation by the Corporation was to be not less than Rs.
50,000. The documents relating to the new press were to be surrendered to the
Corporation and a supplementary mortgage deed was to be executed by the
mortgagor company in favour of the Corporation securing the new press for the
repayment of the loan with interest and costs.
Subsequent to the execution of Ex. P-2 and payment of
Rs. 4,00,000 there was correspondence between the Corporation and M/s. Manubhai
Sons & Co., the vendor of the Plamag Rotary Press. On the Corporation
undertaking to pay Rs. 5,00,000 towards the balance price, the vendor agreed to
send the bank delivery order to the Corporation to be handed over to the
mortgagor, M/s. Malayala Rajyam after the forrmalities required by the
Corporation were fulfilled (see Ex. P-8). On 26th May, 1970, the manager of the
mortgagor company wrote to the Corporation that the machinery had been
"cleared and stored in the premises pledged" and that the inspection
thereof would take place in a day or two. On 10th June, 1970, the board of
directors of the mortgagor company again met. and passed a resolution
authorising the managing director to execute a supplementary mortgage securing
the Plamag Rotary Press. A similar resolution was passed by the board of
directors of the co-mortgagor company on the same day. Ex. P-13 and Ex. P-14
are copies of the resolutions certified by the managing director. Ex. P-12 is
the supplementary mortgage deed executed by the mortgagor, the co-mortgagor and
the guarantors, charging the machinery by way of simple mortgage. The common
seals of both the companies have been affixed in Ex. P-12 as in the case of Ex.
P-2 Ex. P-12 contains an undertaking that the installation of the machinery
which was being proceeded with would be over within a month and that the
machinery would not be shifted from the said premises without the prior consent
of the Corporation.
Under the terms of Ex. P-1, it may be recalled, the
charges created in favour of the Corporation was to be registered as provided
in the Companies Act. Section 125 of the Companies Act provides that the particulars
of the charge should be filed with the Registrar of Companies for registration
within a period of thirty days after the date of its creation. It appears that
the particulars of Ex. P-2 were filed by the co-mortgagor company only by June
19,1970. A petition was filed under s. 141 of the Companies Act by the
co-mortgagor to condone delay in furnishing the particulars. This petition was
allowed on November 30, 1970. The charge was registered by the Registrar on
October 10, 1972, as is seen from Ex. P-5 extract from the register of charges.
The supplementary mortgage under Ex. P-12 remained unregistered.
In the meanwhile, there was default on the part of
the mortgagor company to pay up the debt as provided in Ex. P-2 and Ex. P-12.
The Corporation initiated proceedings O.P. No. 54 of 1971, before the District
Court, Quilon, as provided in ss. 29, 30 and 31 of the State Financial
Corporations Act, 1951, for realisation of the amounts due by sale of the
properties secured and from the guarantors personally, impleading the mortgagor
company, the co-mortgagor company and the gurantors. None of the parties
opposed the claim. The petition was allowed on 30th January, 1973, limiting
future interest at 6 per cent, per annum.
It so happened that due to labour disputes and financial strain there was hindrance to the smooth working of the co-mortgagor company and on March 20, 1972, one of the creditors of the company filed C.P. No. 3 of 1972 for winding up of the company. This petition was followed by C.P. No. 1 of 1973, which was filed on January 1,1973, by another creditor. Both the petitions were being posted together; but C.P. No. 3 of 1972 was dismissed for non-prosecution. Apprehending a similar fate for C.P. No. 1 of 1973, the present appellant claiming that an amount of Rs. 1,42,000 with interest from 1972, was due to him from the co-mortgagor got himself substituted as the petitioner in O.P. No, 1 of 1973. He found that steps were afoot for the sale of the Plamag Rotary Press by the Corporation on the basis of the order in O.P. No. 54 of 1970. The appellant apprehended that there was a collusive move by the Corporation, the managing director and M/s. Manubhai Sons & Company to have the machinery sold to the detriment of the creditors of the co-mortgagor. The appellant also challenged the binding nature of the mortgage so far as the co-mortgagor was concerned on the ground that there was violation of s. 125 and s. 292 of the Companies Act. He filed C.A. No. 197 of 1975, in C.P. No. 1 of 1973, for an injunction restraining the mortgagor and the co-mortgagor companies from alienating their assets and C.A. No. 515 of 1975 for staying the sale of the Plamag Rotary Press. An order of stay was issued by the company court. The Corporation, thereupon, moved,. for getting itself impleaded in C.P. No. 1 of 1973, and filed C.A. No. 88 of 1975 for vacating the order staying the sale of the press. C.A. No. 189 of 1977 was filed for permission to proceed with the sale. The petitions, though opposed by the mortgagor, and the co-mortgagor, were allowed by the company court. In M.F.A. 137 of 1977, the appellant seeks to set aside the orders in C.A. No. 88 of 1976, and C.A. No. 189 of 1977.
Pending appeal the appellant filed C.M.P. No. 3049 of
1978, for stay of the operation of the order in C.A. No. 88 of 1976, and also
the sale of the Plamag Rotary Press. Although this court ordered stay of confirmation of the sale, the said order was
subsequently reviewed in C.M.P. No. 3510 of 1978. Rupees 9,55,000 obtained by
way of sale of the Plamag Rotary Press has been directed to be deposited in the
State Bank of India pending disposal of the appeal. The auction purchaser
company has got itself impleaded as the fourth respondent in the appeal.
Confirmation of the sale of other properties of the mortgagor and co-mortgagor
companies stands stayed till the disposal of the appeal as per the order in
C.M.P. No. 16138 of 1978.
The main
contention of the appellant is that the mortgage Ex. P-2, and the supplementary
mortgage, Ex. P-12, are not binding on either the mortgagor company or the
co-mortgagor company since they were not executed with the concurrence of the
board of directors. The co-mortgagor company was not benefited by the mortgage.
The loans were granted in violation of s. 292 of the Companies Act. The board
of directors of the Sree Rama Vilasam Press and Publications (Private) Ltd.,
the co-mortgagor had no occasion to meet and pass the resolutions evidenced by
Ex. P-4 and Ex. P-14 and, therefore, the execution of the mortgage deeds Ex. P-2
and Ex. P-2 was an unauthorised act on the part of the managing director and as
such the two transactions are not binding on the co-mortgagor company or its
creditors.
It has to be
noted at this stage that the original minutes books containing the proceedings
of the meetings stated to have been held on January 25, 1970, and June 10,
1970, by the board of directors of the mortgagor company and also the minutes
book of the co-mortgagor company containing similar resolutions have not been
produced. There are only the copies of Ex. P-3, Ex. P-4 and Ex. P-13 and Ex.
P-14 signed by the common managing director, Chandrasekharan Nair.
Chandrasekharan Nair having died before the proceedings came up for evidence,
could not be examined. The only witness examined on the side of the Corporation
when the proceedings were in the company court was PW. 1, Gangadharan, the law
officer of the Corporation. When the copies of the resolutions were sought to
be proved by this witness, objection was raised regarding the non-production of
the original minutes books. The company court overruled the objections in view
of cl. (2) of the proviso to s. 66 of the Evidence Act, 1872. After the appeal
came up for hearing the appellant filed C.M.P. No. 4266 of 1979, for production
of additional evidence by examining the official liquidator and persons who
were directors of the co-mortgagor company during the relevant period to
ascertain the existence or otherwise of the concerned minutes books of that
company. The petition was not opposed and we allowed it. Accordingly RW. 1, M.
Rama-chandran Nair, one of the directors of the co-mortgagor company and RW.
2, the official liquidator, were examined apparently to prove that there were
no minutes books for the concerned period.
The case of the appellant is that no meetings of the
board of directors of the co-mortgagor company was held after November 20,
1968, on which date the board met for passing director's report and
balance-sheets and profit and loss accounts for the year ended 31-12-1143 (M.E.).
Though RW. 1 was a shareholder and also a director of the co-mortgagor company
he could not say when the last meeting of the board of directors was held. No
doubt, when a leading question was put he said that it was on 31-12-1143 S.F.E.
Exhibit R-1, the minutes book of the board of directors of the co-mortgagor
company for the period November 27, 1952 to November 20, 1968, would show that
R.W. 1 was co-opted as a director. According to the witness, he was a director
from 1968 to 1971 and the managing director for a short period, during the
interval, there were no minutes books other than those produced and there was
no meeting of the board of directors authorising the managing director to
borrow funds from the Corporation during the period he was a director. However,
he admitted in cross-examination that he was removed from managing directorship
at a meeting of the board of directors held in October, 1971. He himself did
not attend that meeting. He also admitted that there were meetings of the board
of directors of the co-mortgagor company during the period when he was the
managing director. The minutes of those meetings were not recorded in the
minutes books produced in the case. The witness would say that the minutes of
those meetings were recorded in sheets of paper signed by the directors present
and delivered to Chandrasekharan Nair who was keeping minutes book. The latter
portion of his evidence belies his earlier case that there were no meetings of
the board of directors since November 20, 1968, It is noted that Ex. R-1,
minutes book, contains a number of instances where the typed sheets of papers
containing minutes of the board of directors are pasted in the book. Therefore,
the possibility of the meetings of the board of directors of the co-mortgagor company
being held on January 25, 1970 and June 10, 1970, for passing the resolutions
covered by Ex. P-3 and Ex. P-14 and the minutes of the meetings being recorded
in sheets of paper is not overruled. The evidence of RW. 2, official
liquidator, also does not overrule the above possibility inasmuch as his
evidence only shows that he did not receive the minutes book for the concerned
period. It has come out from the evidence of PW. 1, that Ex. P-3, Ex. P-4, Ex.
P-13, and Ex. P-14 are copies of resolutions of the board of directors of the
mortgagor and co-mortgagor companies signed by the common managing director and
delivered over to the Corporation to make out that the managing director was
authorised to execute the mortgages. The managing director and the guarantors
who were also directors of the
mortgagor companies have signed in Ex. P-2 and Ex. P-12. The common seals of
the two companies are seen affixed in the mortgage deeds in the presence of the
directors, Madhavan Nair and Balakrishnan Nair, respectively of the
co-mortgagor and mortgagor companies as mentioned in the copies of the
resolutions above referred to. These are strong circumstances which make out
that there were meetings of the board of directors of the two companies held on
January 25, 1970 and June 10, 1970, as mentioned in the copies of the
resolutions.
Under s. 193
of the Companies Act, it is incumbent that the minutes of the board of
directors are entered in a book kept for the purpose. Subsection (IB) of that section
directs that in no case the minutes of proceedings of a meeting should be
attached to the minutes book by pasting or otherwise. The penalty for
non-compliance of the direction is provided in s. 193(2) under which provision
every officer of the company who is in default becomes liable to fine which may
extend to fifty rupees. Evidently non-compliance may not affect the validity of
the resolutions passed during the meeting.
The further
question is how far the absence of the minutes book would affect the rights of
parties in a case where borrowing is involved. Section 292 of the Companies Act
enjoins that the board of directors of a company should exercise the power to
borrow money otherwise than on debenture only by means of resolutions passed at
the meetings of the board of directors. The minutes of the meeting where the
decision is taken will be prima facie evidence regarding the passing of the
resolution contemplated in s. 292. In cases where formal resolutions are not
insisted upon, decisions need not in all cases be recorded in writing; they can
be inferred from conduct [see H.L. Bolton (Engineering) Co. Ltd. v. T.J. Graham
& Sons Ltd. [1956] 3 All ER 624 (CA)]. "In the absence of a minute
other evidence can be given ; and if the book of a company shows a record of a
transaction, as, for instance, the forfeiture of share, which would not be
valid without a resolution of the directors, the court will, in the absence of
other evidence, presume that such a resolution has been passed"
(Halsbury's Laws of England, 4th Edn., Vol. 7, para. 533).
In the
present case Ex. P-3, Ex. P-4, Ex. P-13 and Ex. P-14 are prima facie, copies of
resolutions stated to have been passed by the mortgagor and the co-mortgagor
companies. They contain the signature of Chandra-sekharan Nair, who was the
managing director of both the companies— nobody has a case that Chandrasekharan
Nair was not the managing director or that he has not signed in the above
documents. Section 54 of the Companies Act directs that a document or proceeding
requiring authentication by a company may be signed by a director, the manager,
the secretary or other authorised officer of the company and need not be under the
common seal. The substance of what is contained in Ex. P-3, Ex. P-4, Ex. P-13
and Ex. P-14 has been implemented by execution of Ex. P-2 and Ex. P-12 wherein
not only the managing director but the guarantors who are also directors have
joined. The common seal of the company has been affixed in the presence of
managing director and another director (or shareholder). None of the directors
chose to challenge the act of borrowing. There is no case that the amount
borrowed was beyond the powers of the board of directors. Under such
circumstances there is a strong presumption in favour of the regularity of the
action taken and it can be safely assumed, even in the absence of the minutes
books that meetings of the board of directors of both the mortgagor and the
co-mortgagor companies had in fact taken place on the dates mentioned in Ex.
P-3, Ex. P-4, Ex. P-13 and Ex. P-14 and resolutions in conformity with those
documents had been passed at those meetings.
It will be advantageous at this stage to have a
glance at the scheme of management of companies under the Companies Act. Under
s. 291, the board of directors of a company is entitled to exercise all such
powers and to do all such acts and things as the company is authorised to
exercise and do, except those which under any law or memorandum or articles of
the company or otherwise are to be exercised or done by the company in a
general meeting. Power to issue debentures and to borrow money otherwise than
on debentures is vested in the board of directors [sec. 292(1)(b) and (c)], to
be exercised subject to the limitation fixed by the company in general meeting
[sec. 292(5)]. Under the proviso to s. 292(1) the board may by means of a
resolution delegate the powers to borrow under cl. (c) to the managing
director. But the total amount up to which moneys may be borrowed should be
specified in the resolution delegating the power [sec. 292(2)]. The managing
director is to exercise his powers subject to the superintendence, control and
direction of the board of directors [see proviso to sec. 2(26)]. Therefore, in
a case where there is a resolution by the board of directors delegating the
power to borrow to the managing director it is open to an outsider or a
stranger to the company to act upon the resolution and lend money to the
company subject to the limitations mentioned in the resolution. An
authenticated copy of the resolution signed by the managing director is in the
ordinary course sufficient evidence to show that there has been a delegation to
the managing director. The question in the present case is whether the
Corporation was right in acting upon the ostensible authority apparent from the
copies of the resolutions produced before it and whether it was incumbent on
the Corporation to probe further and see if such a resolution had in fact been
passed at a meeting of the board of directors and whether the concerned meeting
was properly convened. The leading case where the principles involved are
discussed and which is often referred to in subsequent decisions is the English
case, Roya1British Bank v. Turquand [1856] 6 E & B 327. Turqu-and was the
official manager of a company incorporated under the Act of 1844. A bond under
the seal of the company, signed by two directors and the secretary was given by
the company to the plaintiff-bank to secure its drawings on current account. In
an action based on the bond the company alleged that under the terms of the
registered deed of settlement the directors had power to borrow only such sums
as had been authorised by general resolution of the company, and that in the
particular case no sufficiently specific resolution had been passed. The Court
of Exchequer Chamber overruled the objection and held that the bond was binding
on the company. The relevant portion of the judgment of Jervis C.J. reads :
"The deed allows the directors to borrow on bond
such sum or sums of money as shall from time to time, by a resolution passed at
a general meeting of the company, be authorised to be borrowed: and the
replication shows a resolution passed at a general meeting, authorising the
directors to borrow on bond such sums for such periods and at such rates of
interest as they might deem expedient, in accordance with the deed of
settlement and Act of Parliament. but the resolution does not define the amount
to be borrowed. That seems to me enough..............We may now take for
granted that the dealings with these companies are not like dealings with other
partnerships, and the parties dealing with them are bound to read the statute
and the deed of settlement. But they are not bound to do more. And the party
here on reading the deed of settlement, would find, not a prohibition from
borrowing but a permission to do so on certain conditions. Finding that the
authority might be made complete by a resolution, he would have a right to
infer the fact of a resolution authorising that which on the face of the
document appear to be legitimately done".
The rule enunciated in the decision is often referred
to as "Turquand's rule" and "indoor management rule". The
gist of the rule is that persons dealing with limited liability companies are
not bound to enquire into their indoor management and will not be affected by
irregularities of which they had no notice. The Turquand's rule has now
obtained statutory recognition in the country of its origin in s. 9(1) of the
European Communities Act, 1972, which reads.
"9. Companies.—(1) In favour of a person dealing
with a company in good faith, any transaction decided on by the directors shall
be deemed to be one which it is within the capacity of the company to enter
into, and the power of the directors to bind the company shall be deemed to be
free of any limitation under the memorandum or articles of association ; and a
party to a transaction so decided on shall not be bound to enquire as to the
capacity of the company to enter into it or as to any such limitation on the
powers of the directors, and shall be presumed to-have acted in good faith
unless the contrary is proved".
The Turquand's rule has been approved and followed by
Varadaraja lyengar J., in Varkey Souriar v. Keraleeya Banking Co. Ltd. [1957]
27 Comp. Cas. 591, 594 ; AIR 1957 Ker 97, in the following passage:
"Coming to the alternative ground, it is no
doubt true that where a company is regulated by a memorandum and articles
registered in some public office, persons dealing with the company are bound to
read the registered documents and to see that the proposed dealing is not
inconsistent therewith but they are not bound to do more. They need not enquire
into the regularity of the internal proceedings what—:Lord Hatherley called '
indoor management'. See Roya1British Bank v. Turquand [1856] 6 E & B 327,
Ram Buran Singh v. Mufassi1Bank Ltd., AIR 1925 All 206(2), Dehra Dun Mussoorie
Electric Tramway Co. Ltd. v. Jagmandar Das [1931] 1 Comp. Cas. 227; AIR 1932
All 141, T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon and Co. Ltd. [1936] 6 Comp.
Cas. 90 ; AIR 1936 Bom 62. So if there is a managing director and authority in
the articles for the directors to delegate their powers to him, a person
dealing with him may assume that it is within the ordinary duties of a managing
director. All he has to see is that the managing director might have power to
do what he purports to do. See Biggerstaff v. Rowatt's Wharf Ltd. [1896] 2 Ch
93 (CA). But the rule cannot apply where the question, as here, is not one as
to the scope of the power exercised by an apparent agent of the company, but is
in regard to the very existence of the agency".
In Federa1Bank Ltd. v. Geevarghese, [1974] KLT 249 a
Division Bench of this court, of which one of us (Subramonian Poti J.) was a
party, had occasion to consider in detail with Turquand's rule in relation to
its applicability to cases of fraud and forgery. In that case an agent of a
bank received amounts offered by a customer by way of fixed deposit,
appropriated the amount and gave a receipt apparently duly executed, but where
the signatures of the accountant and the cashier were forged. The question
arose whether the depositor who was not a party to the fraud was entitled to a
decree against the bank. After a detailed discussion of the English cases, it
was held that he was. The reasons are given in the following passage:
"That the agent, Sri George who received the
deposit from the plaintiff was at that time functioning as agent of the
Angamali branch, that he had a power of attorney to receive such deposit and
issue receipt, that he was acting in the course of his employment in receiving
such deposit in the instant case, the delivery of the deposit receipt was also
in the course of his employment and that he had sufficient authority for what
he did are matters either admitted or proved. When a customer approaches the
Bank, puts the money by way of deposit in the hands of the Agent of the Bank
and gets the receipt in due course from the Agent, he would be justified in
assuming that the amount has been paid to the defendant-bank as whose Agent the
person who received the money apparently functioned at the time payment was
made. It is not practical to expect the customer on receiving the deposit
receipt to proceed to the Accounts section and ascertain whether the amount has
been entered in the books of account of the bank. It is not practical to expect
the customer to go to the Accountant and the cashier and ascertain from them
whether the signatures in the deposit receipt purporting to be theirs are really
affixed by them".
It is also advantageous to refer to the case Mahony
v. East Holy ford Mining Co. [1875] LR 7 HL 869. Therein the company's bank
made payments based on a formal copy of a resolution of the board authorising
payments of cheques signed by any two of three named "directors" and
countersigned by the named "secretary". The copy was itself signed by
the secretary. It came out subsequently that neither the directors nor the
secretary had ever been formally appointed. According to the articles, the
directors were to be nominated by the subscribers to the memorandum and the
cheques were to be signed in such manner as the board might determine. It was
held that since the bank had received formal notice in the ordinary way of the
board's decision, it was not bound to enquire further. Lord Hatherley said:
"When there are persons conducting the affairs
of the company in a manner which appears to be perfectly consonant with the
articles of association, then those so dealing with them, externally, are not
to be affected by any irregularities which may take place in the internal
management of the company".
In Lakshmi Ratan Cotton Mills Co. Ltd. v. j.K. Jute Mills Co. Ltd. [1957] 27
Comp. Cas. 660; AIR 1957 All 311, the plaintiff company sued the defendant
company on a loan for Rs. 1,50,000. Among other things the defendant company
raised the plea that the transaction was not binding as no resolution
sanctioning the loan was passed by the board of directors. The court, after
referring to Turquand's case [1856] 6 E & B 327 and other Indian cases,
held (p. 668):
"If it is found that the transaction of loan
into which the creditor is entering is not barred by the charter of the company
or its articles of association, and could be entered into on behalf of the company
by the person negotiating it, then he is entitled to presume that all the
formalities required in connection therewith have been complied with. If the
transaction in question could be authorised by the passing of a resolution,
such an act is a mere formality. A bona fide creditor, in the absence of any
suspicious circumstances, is entitled to presume its existence. A transaction
entered into by the borrowing company under such circumstances cannot be
defeated merely on the ground that no such resolution was in fact passed. The
passing of such a resolution is a mere matter of indoor or internal management
and its absence, under such circumstances, cannot be used to defeat the just
claim of a bona fide creditor. A creditor being an outsider or a third party
and an innocent stranger is entitled to proceed on the assumption of its
existence ; and is not expected to know what happens within the doors that are
closed to him. Where the act is not ultra vires the statute or the company such
a creditor would be entitled to assume the apparent or ostensible authority of
the agent to be a real or genuine one. He could assume that such a person had
the power to represent the company, and if he in fact advanced the money on
such assumption, he would be protected by the doctrine of internal
management".
Shri Kishan Rathi v. Mondal Brothers and Co. (P.)
Ltd. [1967] 37 Comp. Cas. 256; AIR 1967 Cal 75 and Rangaswami Reddiar v.
Krishnaswamii Reddiar [1973] 43 Comp. Cas. 232 ; AIR 1973 Mad 251, lay down the
same principle. In the present case the managing director is authorised to
authenticate documents of the two companies. Ex. P-2 and Ex. P-12 were executed
by the managing director in conformity with the terms of the resolutions, Ex.
P-3, Ex. P-4, Ex. P-13 and Ex. P-14. Persons interested in the company have
joined in the deeds as guarantors. The common seal of the concerned company has
been affixed in the documents in the presence of one of its directors. The
resolutions, copies of which were produced, satisfied the requirements of law.
There is no allegation of fraud or collusion. There is also no case that the
boards of directors of the companies acted beyond their powers in passing the
resolution or in incurring the debts. Under such circumstances, if the
Corporation was to demand the minutes books of the companies it would amount to
probing into the internal management of the companies, which it was not bound
to do. If the Corporation was not bound to look into the minutes books, neither
is the court expected to draw an adverse inference based on the non-production
of the minutes book.
The non-availability of the minutes book in this case
is, therefore, not a ground for holding that there was no resolution of the
board of directors or that the loan was incurred unauthorisedly by the managing
director. The case of the Corporation is that the mortgagor company is a sister
concern started by the shareholders of the co-mortgagor company for carrying on
its business activities, and under the memorandum of articles of association of
the co-mortgagor that company is authorised to guarantee loans to the mortgagor
company. Under the circumstances, it is not open to the co-mortgagor company to
say that its board of directors acted beyond its powers in mortgaging its
assets by way of guarantee for the loan incurred by the mortgagor.
The next ground of attack by the appellant is based
on s. 125(1) of the Companies Act. Under the said provision a charge created by
a company to the extent to which it confers security on the company's property
or undertaking would be void against the liquidator and any creditor of the
company, unless the prescribed particulars of the charge together with the
instrument, if any, by which the charge is created or evidenced or a copy
thereof verified in the prescribed manner, are filed with the Registrar for
registration in the manner required by the Act within thirty days of its
creation. A certificate of registration is provided in s. 132 of the Act. The
Registrar is competent to extend the period for filing the particulars by seven
days if he is satisfied that there was sufficient reason for the omission to
file within the period. Under s. 141 as it stood on the relevant date the court
could extend the time on application, on being satisfied that the omission to
file the particulars was accidental or due to inadvertence or to some other
sufficient cause or is not of a nature to prejudice the position of the
creditors or shareholders of the company or that it was due to other just and
equitable grounds. Such order of extension was not to prejudice any right
acquired in the property concerned before the charge was actually registered.
As already stated, Ex. P-2 mortgage was executed on 10th February, 1970. The
particulars of the charge were filed only on May 19, 1970. A petition was filed
on August 13, 1970, in the District Court, Quilon, for condoning the delay and
for extending the time for filing the particulars till May 19, 1970. The
petition was allowed on November 30, 1970, but the charge was registered only
on October 10, 1972. In the meanwhile, C.P. No. 3 of 1972 was filed on March
20, 1972, by a creditor of the co-mortgagor company for winding up of that
company, which was followed by C.P. No. 1 of 1973 filed on January 1, 1973, by
another petitioner. The appellant subsequently got himself substituted in the
place of the petitioner in C.P. No. 1 of 1973. The appellant would contend that
since the registration was effected at a time when winding up proceedings were
pending, the registration is invalid and the Ex. P-2 mortgage would not get
precedence over the other debts of the co-mortgagor company. The appellant has
also a case that O.P. No. 58 of 1970, stated to be the petition for extending
the period for filing the particulars of the charge under Ex. P-2 was in fact a
petition for condoning the delay in filing the release of a charge in favour of
the Syndicate Bank in respect of a mortgage of Rs. 50,000 and that there was no
application for enlarging the time for registration of the charge in favour of
the Corporation. It was also contended that the registration of the charge in
favour of the Corporation offended s. 536(2) of the Companies Act. C.P. No. 6
of 1977 was filed by him for rectification of the register of charges by
cancelling the registration, of the charge in favour of the Corporation. The
company court did not accept the contention. It dismissed C.P. No. 6 of 1977.
The contentions are reiterated in M.F.A. No. 469 of 1978.
We may at the outset dispose of the contention that
there was no application for extension of time filed in respect of the
mortgage, Ex. P-2, in favour of the appellant. What has given room to such a
case being put forward is some mistake committed in the filing of affidavits in
two petitions filed by the co-mortgagor company, O.P. No. 57 of 1970 and C.P.
No. 58 of 1970, both under s. 141 of the Companies Act. One of these petitions
was for condoning the delay in filing the documents relating to the release of
a charge in favour of the Syndicate Bank while the other was in respect of the
charge created under Ex. P-2 in favour of the Corporation. Both the petitions
were filed on August 13, 1970. Though all the details are mentioned correctly
in the petitions in the respective cases, it appears that there was an
inter-change of affidavits, the affidavit meant for Corporation's charge being
tacked on with the petition for condonation of delay in the Syndicate Bank's
charge and vice versa. This did not, however, affect the ultimate result of the
petitions since both O.P. No. 57 of 1970 and O.P. No. 58 of 1970 were allowed
by the court. The Registrar of Companies has produced all the relevant
documents connected with both the petitions as also the register of charges.
These documents clearly make out that the particulars of the charge under Ex.
P-2 were filed before the Registrar on May 19, 1970, that the petition for
condonation was filed in court on August 13, 1970, that it was allowed on
November 30, 1970, and that the charge was registered in register of charges on
October 10, 1972.
Whether the court should extend the time for filing
the particulars is a matter left to the discretion of the court to be exercised
in a judicial manner. Decided cases go to the extent of laying down that even
the insolvency of the company is not a matter to which the court need pay
attention while deciding whether time should be extended (see Re Kris Cruisers
[1949] 19 Comp. Cas. 134; [1948] 2 All ER 105 (CHD) and Thuppan Nambuderi v.
Sankara Menon [1954] 24 Comp. Cas. 489 ; AIR 1955 Mad 35). No doubt, it is open
to the court to consider the effect, of giving extension, on the creditors of
the company before deciding whether extension should be allowed, In re Dinshaw
& Co. Ltd. [1936] 6 Comp. Cas. 434 ; AIR 1937 Oudh 62).
There is also no weight in the contention that delay
in registering the charge by entering it in the register of charges would
affect its validity or would render it void. The argument overlooks the fact
that the period fixed in s. 125 is for the filing of the particulars of the
charge and not for the registration of it. The delay in registration
contemplated in s. 141 of the Act is the delay due to the omission to file the
particulars in time. This is evident from the fact that s. 125 does not
prescribe a period within which the Registrar is to register the charge or make
entries in the register of charges. Therefore, the delay in registering the
charges even after the court condoned the delay in filing the particulars and
extended the time till May 19, 1970, the date of filing the particulars, may
not affect the validity and the binding nature of the mortgages on the
companies.
According to the scheme of the provisions relating to
the registration of charges, the discretion vested only in the court to decide
whether the period for filing the particulars should be extended. Once time is
extended, and it is made out that the particulars have been filed within the
extended time, the Registrar is bound to register the charge. He is also to
issue a certificate of registration as provided in s. 132 of the Act. Once a
certificate of registration is granted, s. 132 states that it is conclusive
evidence that the requirements of registration have been complied with. [See
also In re Eric Holmes (Property) Ltd. [1965] 35 Com Cas 811; [1965] 2 All ER 333
(Ch D)].
A contention is then raised that since the
registration of the charge was after the filing of C.P. No. 3 of 1972 for
winding up of the company, it will not affect the rights of the creditors of
the co-mortgagor company. We have already held that it is the date of filing
the particulars of the charge that is relevant and not the date of
registration. Even assuming otherwise, since C.P. No. 3 of 1972 was dismissed
for default subsequently, the pendency of that petition would not have
prejudicially affected the right of the creditor under Ex. P-2.
It was argued on the basis of rr. 101 and 102 of the
Companies (Court) Rules, 1959, that since C.P. No. 1 of 1973 was filed before
the dismissal of C.P. No. 3 of 1972, the former proceedings should be considered
to be a continuation of the latter. The language of rr. 101 and 102 does not
warrant such a contention. For the application of those rules the petition in
respect of which substitution is sought should be pending at the time when the
order of substitution is made. If the appellant really wanted to take advantage
of the earlier filing of C.P. No. 3 of 1972, he should have moved for
substitution of his name in that petition before its dismissal rather than in
C. P. No. 1 of 1973.
Since both the execution of Ex. P-2 and the
registration of the charge by the Registrar were prior to the filing of C.P.
No. 1 of 1973, s. 536(2) has no application. Even assuming that C.P. No. 1 of
1973 could be presumed to have been filed before the registration of the charge
by-the Registrar the petitioner may not have any locus standi to file the
present petition or claim any preference against the rights of the Corporation
inasmuch as he is only an unsecured creditor of the co-mortgagor company. The
provision contained in s. 125, that the charge sought to be registered, would
be void against any creditor of the company unless the particulars are filed
within the period prescribed, may not have any application to the case of an
unsecured creditor. No doubt, the word "creditor" is wide enough to
include an unsecured creditor also. But s. 125 has to be taken in conjunction
with s. 141(3). The latter provision, as it stood on the relevant date, reads:
"Where the court extends the time for the registration
of a charge, the order shall not prejudice any rights acquired in respect of
the property concerned before the charge is actually registered".
The section necessarily implies that it has
application only to cases of debts, which have reference to property, namely,
secured debts. In other words, an unsecured creditor has no right to challenge
the validity of a charge or to claim that he has preferential right over the
charge holder on the ground that he incurred the liability prior to the registration
of the charge.
On behalf of the appellant reliance was placed on the
decision in the matter of Sathgram
Coa1Company Ltd. [1936] 40 CWN 1171. One of the creditors of the
company, which was in liquidation, obtained two decrees on mortgages, which had
not been registered under s. 109 of the Indian Companies Act, 1913. The court
held, that being unregistered charges they were void against all creditors
irrespective of the date on which their debts accrued. The decision may not be
of help to the appellant, because the question as to whether the provision has
application in respect of an unsecured creditor did not specifically arise in
the case. That question arose for consideration in Thuppan Nambudiri v. Sankara
Menon [1954] 24 Comp. Cas. 489 ; AIR 1955 Mad. 35. A Division Bench of the
Madras High Court held that s. 120(2) of the Indian Companies Act, 1913, which
corresponds to s. 141(3) of the present Act, excluded unsecured creditors. The
cases, In re Cardiff Workmen's Cottage Company Ltd. [1906] 2 Ch 627 (Ch D); In
re M.I.G. Trust Ltd. [1933] 1 Ch 542 ; 3 Comp. Cas. 345 (CA) and Calcutta
Nationa1Bank v. Abhoy Singh Sahela [1959] 29 Comp. Cas. 337 (Cal), are also to
the same effect.
It follows that the appellant is not entitled to
challenge the validity of the mortgage under Ex. P-2 on the ground that it was
not registered in conformity with the provisions contained in s. 125 of the
Companies Act. No grounds are also made out for cancellation of the
registration in respect of the charge as prayed for by him. This will dispose
of M.F.A. No. 469 of 1978.
One other aspect which has been dealt with by the
company court is the effect of non-registration of the supplementary mortgage
under Ex. P-12. Relying on Ex. P-6 to Ex. P-17 the court held that Ex. P-12
amounted to a pledge of the machinery and it did not require registration.
Section 125(1)(c) exempts from registration a pledge of movable property. The
supplementary mortgage Ex. P-12 is in respect of the Plamag Press purchased by
the mortgagor company utilising the loan sanctioned by the Corporation. The
appellant is not a creditor of the mortgagor company and he is interested in
challenging the validity of the transaction only as a creditor of the
co-mortgagor. If as has been held above, Ex. P-2 mortgage is binding on the
co-mortgagor, the upholding of the transaction under Ex. P-12 will only work to
the appellant's advantage because to the extent the amount under the loan is
recovered from out of the Plamag Press, the liability of the co-mortgagor, of
which the appellant is a creditor, will stand reduced.
It would appear that though Ex. P-12 mentions the
word "mortgage" what is secured under the document is the machinery
of the press. Under s. 2(26) of the General Clauses Act machinery would become
immovable property only if it is embedded to earth or attached to what is so
embedded. There is no evidence that the Plamag Press got fastened up or
embedded at any place. Evidence if at all is otherwise. Under the terms of Ex.
P-2, the documents of title relating to the press were to be surrendered to the
Corporation. The said documents have been in the possession of the Corporation.
The company court held that the machinery was in the premises mortgaged to the
Corporation and that the Corporation was in legal possession of the article and
security was by way of pledge. The above findings were not seriously challenged
before us.
What remains to be considered is whether the order
for sale in O.P. No. 54 of 1971 is binding on the co-mortgagor company. Exhibit
P-18, a certified copy of the order, shows that the co-mortgagor was a party to
the proceedings. The order was passed on 30th January, 1973, after the winding
up petition, C.P. No. 1 of 1973, was filed. Section 31 and s. 32 of the State
Financial Corporations Act lay down a special procedure for enforcement of the
claims of the Corporation. Exhibit P-18 order for sale was passed following the
said procedure. The question is whether the pendency of the petition for
winding up on the date of disposal of O.P. No. 54 of 1970 would in any way
affect the validity of the order. Reference may in this connection be made to
s. 46-B of the State Financial Corporations Act, which came into effect from
October, 1, 1956. By virtue of s. 46-B, the provisions of that Act, and Rules
or Orders made thereunder would have effect notwithstanding anything
inconsistent therewith contained in any other law. Except as aforesaid the
provisions of the Act are in addition and
not in derogation of any other law for the time being in force. Section 32(10)
of the Act states that where proceedings in liquidation in respect of an
industrial concern have commenced before an application is made under s. 31(1)
the Financial Corporation is not entitled to any preference over other
creditors. It follows that in cases where proceedings under s. 31(1) commenced
prior to the starting of the winding up proceedings the orders passed under the
former proceedings would remain unaffected. Therefore, in the present case the
order of sale in O.P. No. 54 of 1970, is not affected by the proceedings in
C.P. No. 1 of 1973. Thus, the appellant has not succeeded in establishing a
case for stay of the sale in O.P. No. 54 of 1970. The company court rightly
allowed the application in C.A. No. 88 of 1976.
The result is
both M.F.A. No. 137 of 1977 and M.F.A. No. 469 of 1976 are dismissed. No costs.
An oral
application is made under art. 134A of the Constitution for certificate for
appeal to the Supreme Court. The case does not involve a substantial question
of law of general importance which question needs decision by the Supreme
Court. The application is dismissed.
[1944] 14 COMP CAS 231 (MAD.)
HIGH COURT OF
v.
Official Liquidator, Oriental Investment Trust Ltd.
LEACH, C.J,
AND LAKSHMANA RAO, J.
O.S. APPEAL NO. 40 OF
1942
FEBRUARY 10, 1944
K. Rajah Aiyar and K. Subramanyan. for the Appellant.
S. Srinivasaraghavan, for the Respondent
Leach, C.J.—On the 21st July. 1939 the Court passed an order for the compulsory winding up of the Oriental Investment Trust, Limited, a company registered under the Indian Companies Act. An undivided Chettiar family carrying on business under the vilasam of V.K.R.S.T claimed to rank as a creditor in the sum Rs. 1,36.274,1.2. The Official Liquidator disputed the validity of the claim, except to the extent of Rs. 6,310-7-0 As the investigation of the question involved a lengthy inquiry, it was decided that it should be tried in accordance with the procedure prescribed for the trial of a suit on the Original Side of the Court. After the pleadings had been closed the suit came on for hearing before Bell, J., who held that the contentions of the Official Liquidator were well founded and consequently only allowed the firm to rank as a. creditor for the admitted sum of Rs 6 310-7-0. This appeal is from the judgment of the learned Judge. It will be convenient hereafter to refer to the V.K.R.S.T Firm as "the firm" and the Oriental Investment Trust, Limited as "the Company".
The members of the joint, family were Kasi Viswanathan, his son Manikkam, his brother Narayanan, and Narayanan's son Somasundara. Narayanan died on the 16th January, 1939, Kasi Viswanathan died after the trial and the appeal has been preferred by his son as the manager of the family.
The
company was incorporated on the 9th September 1936, with an authorized capital
of Rs. 25,00 000 divided into 25.000 shares of Rs. 100 each. The shares
actually issued numbered 6068, and at the date of the winding up order only Rs.
25 per share had been paid by the subscribers. The principal promoters of the
company were Kasi Viswanathan and P.L. A.V.A. Ramanathan Chetty who was then a
local director of the Reserve bank of
The Articles of Association provided that the business of the company should be managed by the directors of whom there were sex, including the two managing directors. Authority was given to the directors to delegate their powers to a committee consisting of one or more of their number. A formal agreement was entered into between the company and the managing directors under which subject to the control of the directors they were to have "either joinly or severally" the general conduct and management of the business and affairs of the company and without prejudice to their general power, jointly and severally the power inter alia of buying and selling shares and securities on behalf of the company and of borrowing Rs 25,000 without the sanction of the board of directors or Rs. 1,00.000 with the sanction of the board.
The memorandum of association sets out in unambiguous terms the objects for which the company was formed. The objects are restricted to those expected of a company incorporated for the purpose of carrying on business as an investment trust. Naturally power was taken to buy and sell shares, but this has erroneously been interpreted as authority to deal in differences on the stock exchange. From the very beginning Ramanathan, with the full consent of his fellow directors, commenced gambling in differences on behalf of the company. The share subscribed provided a capital of only a little over Rs 1,50 000. This was supplemented by borrowings from the firm to the extent of Rs. 1,23,136-12-0. The difference between this sum and the sum of Rs. 1,36,274-1-2 claimed by the firm represents interest. Notwithstanding that the funds of the company were so limited, the transactions entered into by Ramanathan on behalf of the company amounted in value to over a crore and a half of Rupees and wiser, the company went into liquidation it only possessed securities worth some Rs. 20,000. There is here clear indication of the unlawful nature of the business which was done. In fact, neither in this case nor in proceedings against the directors for misfeasance, which have given rise to Original Side Appeals Nos, 44, 47 and 52 of 1942 (these appeals are dealt with in a separate judgment) has it been denied that the business done was otherwise than that of a gambling nature. The only excuse put forward is that the directors considered chat they were entitled to do such business.
At a meeting of the board of directors held on the 10th Aprils 1937, the following resolutions were passed:—
"(1) Resolved that Managing Director Mr. PL, V.A. Ramanathan Chettiar be and is hereby authorised to invest the moneys of the company in shares and securities and sell them when deemed necessary provided that shares and securities beyond the value of Rs. 1,00,000 (rupees one lakh) shall not be bought or sold except with the permission of any other Director present in Madras.
(2) Resolved that the Managing Director Mr. PL. V.A. Ramanathan Chettiar is authorised to borrow money from Messrs. V.K.R.S.T. Firm as and when it is necessary and the amount borrowed by him till date is approved."
The statutory report, made up to the 3rd April, 1937, was passed at this meeting and disclosed that heavy gambling had already been indulged in, It stated that Rs. 11,904-14 8 had been received as profits made in dealing in differences and that a sum of Rs. 41,671-11-6 had been lost in such transactions. The statutory report was passed at a general meeting of the company held on the 3rd May, 1937.
The next balance-sheet was made up to the 31st May, 1937. It showed that there was owing to sundry creditors a sum of Rs. 54,967-0-4 and that this amount stood in a suspense, account. This balance-sheet was approved of by the directors at a meeting held on the 19th July, 1937. On the 21st February, 1938, the Board considered and passed a balance-sheet disclosing the position of the company, as on the 31st October, 1937. By that time the advances by the firm had been reduced to Rs. 5,575-11-0 and the profit and loss account showed a profit pf Rs 17,974-5-4 out of which a dividend of six per cent. was declared. Kasi Viswanathan was present at this meeting of the directors when this balance-sheet was approved, but he was not present at the earlier meetings to which reference has been made. There is, however, no reason to doubt that he knew of what had transpired at the earlier meetings.
The next statement of account, and the last before the company went into liquidation was for the period of seventeen months ending the 31st March, 1939. This disclosed that Rs. 1,33,798-15-6 was due to the firm by the company and that Ramanathan had taken Rs. 1,42,632-6-3 of the company's funds. Until the month of March, 1939, neither the directors nor the auditors had any idea that Ramanathan was helping himself to the company's month. This was only discovered when he debited himself with the amounts in his personal account. He had been gambling in shares on his own account, and these sums had been devoted to the payment of his own differences. He had, been course, grossly abused the trust placed in him and he had rendered himrendered himself liable to prosecution. When his misconduct was brought to light he alleged that he had sufficient securities in Bombay to enable him to repay the whole of the Rs. 1,42,632-6 3 and he undertook to deliver the securities over to the company. His co-directors still believed in him and on the 16th June, 1939, they passed a resolution approving of the balance-sheet, which meant that they consented to Ramanathan being treated as having borrowed from the company the Rs. 1,42,632-6-3. Ramanathan went to Bombay with a representative of Kasi Viswanathan to whom he was to hand over the securities. They arrived if Bombay on the 22nd June, 1939, and then Ramanathan absconded, Although criminal proceedings were instituted against him he has so far evaded arrest.
The short ground or which Boll, J., dismissed the firm's claim was that it was suing for moneys lent mind that it had not been proved that the company had received the moneys. He regarded the firm's books as well as the company's books as being altogether unreliable, because they had been written up under the direction of Ramanathan. In his judgment he refers to both sets of accounts as being "admittedly faked". The learned Judge must here have been under a misapprehension, at any rate so far as the firm's books were concerned. The relied on its own books and has relied on them here. The entries made in them were made on the instructions of Ramanathan, but this does not mean that the moneys were not taken by Ramanathan as loans to the company under the authority given to him by the company to borrow from the firm.
It has not been disputed in this Court that with interest his borrowings amounted at the date of the liquidation to Rs. 1.36.274-1-2, the amount of the appellant's claim. It is, of course, disputed that the company is liable to make good the amount. The learned Judge was also not correct in saying that, except for the admitted amount of Rs 6,310-7-0, none of the moneys borrowed by Ramanathan had found its way to the company. The Official Liquidator, in the affidavit which he filed in reply to the application of the firm to be allowed to rank as a creditor for Rs. 1,36,274-1-2, admitted that the company had actually received Rs. 31,310-7-0, but he considered that from this sum Rs. 25,000 should be deducted. The firm denies that Rs. 25,000 is deductible and Mr. Rajah Aiyar, on behalf of the firm, has advanced very good reasons in support of this contention. He has also shown that the company actually had use of a further Rs. 15,000. He maintains that it is not necessary for the firm to recover the full amount claimed to show that the company had the use of the money borrowed by Ramanathan. This broad question will be discussed presently.
The reasons given by the Official Liquidator for his contention that the sum of Rs. 25,000 should be deducted from the Rs. 31,310-7-0 are these. On the 4th August, 1937, Ramanathan, on behalf of the company, drew a cheque in his own favour as the agent of the firm for the sum of Rs. 5,000 and on the 4th August, 1937, he drew a cheque for Rs. 20,000 in the same way. The words "Account of V.K.R.S.T. Firm" appeared under his signature in each case. He did not pay these cheques into the firm. He struck out the words "On account of V.K.R.s.T. firm" and then cashed the cheques for his own purposes. Subsequently he made entries in the books of the company debiting the amounts to himself. No. Part of the moneys ever went back to the firm. In drawing the cheques Ramanathan was acting on behalf of the company, and he embezzled the proceeds before they had reached the firm. The fact that he struck out the words "on account of V.K.R.S.T. Firm" before cashing the chaques is in itself strong indication of the fact that he was not holding the cheques as the agent of the firm. As the proceeds of the cheques were never paid into the firm it cannot be said that they represent a reduction in the company's liability to the firm.
We turn now to the question of the Rs. 15,000. On the 9th November, 1937, Ramanathan, acting under the authority give to him by the company to borrow from the firm, withdrew from it Rs. 39,500 in cash. Two days later he repaid to the firm Rs. 4,500 leaving a balance in his hands of Rs. 35,000. Admittedly Rs. 20,000 of this sum was used for the company. The Rs. 15,000 remaining was lent to one A.T.V. Subramaniarn Chettiar, who had an account with the company. The lender was the company, not Ramanathan. The directors had authorised Ramanathan to lend money to A.T.V. Subramaniam. The loan was made on the 9th November, 1937, and A.T.V. Subramanyam's account with the company was immediately debited with the amount. As Ramanathan, in lending the money was acting within the scope of his authority there is no escaping from the conclusion that the money was lent by the company. We hold that, the firm is, in any event, entitled to rank as a creditor in the sum of Rs 46 310-7 0, the total of the three sums of Rs 8,310-7-0, Rs. 25,000 and Rs 15,000.
This
brings us to the discussion of the question whether the firm is entitled to
recover the whole of the Rs. 1,36,274-1-2. As we have already indicated, the
directors were not aware of Ramanathan's misappropriation until the month of
March, 1939. The learned Judge was under the impression that Kasi Viswanathan
knew more than he pretended to know. Kasi Viswanathan did not make a good
impression in the witness-box and a perusal of his evidence shown that he
fenced with the questions put to him. At the same time we cannot believe that
he had any inkling of Ramanathan's misconduct until the month of March, 1939.
It stands to reason that he would not have allowed his agent to borrow from the
firm these large sums of money if he had known that he was utilizing them for
the payment of his own gambling transactions. He was, of course, aware that
Ramanathan was borrowing money from the firm under the authority given t him by
the company and that he was borrowing money from the firm on his own behalf in
respect of which there was a separate account. It is the usual practice in
Chettiar firms for the agents to send periodically to his principals copies of
the accounts and this practice was followed by Ramanathan. Ramanathan had
acquired a reputation as a sound businessman as his election to the Madras
Board of the Reserve Bank of India indicates. In the early stages the company
had earned a profit. It had appointed a firm of qualified auditors as the
auditors of the company. They had drawn up three balance sheets before 1939,
and until the month of March, 1939, they had been satisfied that everything was
in order. Whether the directors and auditors were justified in regarding
gambling in differences as legitimate business of the company is, of course,
another matter. Obviously the gambling in differences was most improper and
this will be discussed further in the appeals relating to the charges of
misfeasance which have been preferred against certain of the directors. But in
our opinion it cannot be said that Kasi Viswanathan had any knowledge before
the first half of 1939 that Ramanathan had borrowed money from another firm
under the authority conferred upon him by the company the lender would not have
been put on inquiry as to the application of the money and that the company
would in such circumstances be liable notwithstanding that Ramanathan had
misappropriated the moneys borrowed. Ramanathan's knowledge of the fraud which
he was committing was not the knowledge of the firm or company. In J.C.
Haughton and Company v. Northard, Lowe and Wills, Ltd.,
Lord Dunedin said:
"The knowledge of a mere official like the secretary would only be the knowledge of the company if the thing of which knowledge is predicated was a thing within the ordinary domain of the secretary's duties. But what if the knowledge of the director is the knowledge of a director who is himself Particeps criminis, that is, if the knowledge of an infringement of the right of the company is only brought home to the man who himself was the artificer of such infringement? Common sense suggests the answer, but authority is not wanting".
Lord Dunedin then proceeded to quote from the judgment of Vaughan Williams, L.J., in In re Hampshire Land Co., where Vaughan Williams, L.J. said:
"If Wills had been guilty of a fraud, the personal knowledge of Wills of the fraud that he had committed upon the company would not have been knowledge of the society of the facts constituting that fraud; because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud. It seems to me that if you assume here that Wills was guilty of irregularity—a breach of duty in respect of these transactions—the same inference is to be drawn as if he had been guilty of fraud. I do not know, I am sure, whether he was guilty of actual fraud; but whether his conduct amounted to fraud or to breach of duty, I decline to hold that his knowledge of his own fraud or of his own breach of duty is, under the circumstances, the knowledge of the company."
Therefore the company must be held to be liable unless the fact that Kasi Viswanathan was a managing director of the company makes a difference. In our judgment it does not. He knew nothing of Ramanathan's defalcations until all the money had been borrowed and on the authorities which we have just referred to he cannot be imputed with knowledge, notwithstanding that he was a co-managing director of the company and the head of the firm which employed Ramanathan as its agent.
In order to succeed the firm has to satisfy the Court that the moneys now claimed were handed to Ramanathan as loans to the company under the authority conferred by it on him and, we consider that the evidence establishes this. Ramanathan had been given power to borrow from the firm. In the firm's books the withdrawns are entered as loans to the company. In the company's books credit is given to the firm for the amounts. As the money was withdrawn from the firm on behalf of the company under authority given by the company the company must accept liability unless the firm had knowledge that Ramanathan was abusing his authority, which is not the case. For these reasons we direct the Official Liquidator to include the firm in the list of creditors for the sum of Rs. 1,36,274-1-2.
As the firm has succeeded it is entitled to the costs here and below. These will be paid out of the assets of the company. The Official Liquidator will also get his costs out of these assets. We certify for two counsel.
[1931] 1 COMP CAS 227 (ALL.)
HIGH COURT OF
Dehra Dun-Mussoorie Electric Tramway Co. Ltd.
v.
Jagmandar Das
BANERJI, J., AND KING, J.
FIRST APPEAL NO. 80 OF
1929
MAY 11,1931
K. N. Katju and K. Verma, for the Appellants.
Iqbal Ahmad and Mansur Alam, for the Respondent.
This is a defendant's appeal arising out
of a suit for sale upon the basis of a mortgage. The defendant is the Dehra
Dun-Mussoorie Electric Tramway Company, Limited, (in liquidation). This company
was incorporated about the end of August, 1921, having a registered office at
The first question is whether Mr. Beltie Shah had authority to borrow Rs. 25,000 from the plaintiffs on behalf of the company. This question formed the subject of the first issue in the trial court.
The Board of Directors undoubtedly had
power under the articles of association to borrow money for the purposes of the
company and to secure the loan by a mortgage. The appellants rely upon article 104
of the articles of association which lays down that "The Board may
delegate any of their powers, other than powers to borrow and make calls, to
committees consisting of such member or members of their body as they think
fit." Under this article the Board are expressly prohibited from
delegating their power to borrow money. Under article 120 the managing agent
was given very extensive powers to conduct and manage the business and affairs
of the company and he was given power "to enter into all contracts and to
do all other things usual, necessary or desirable in the management of the
affairs of the company." The respondents contend that the power of
entering into contracts would include the power of contracting loans. In our
opinion, however, this contention cannot be accepted. The articles must be read
as a whole and as article 104 restricts the Board from delegating its powers of
borrowing, we think that article 120 could not be interpreted so as to give the
managing agent unrestricted powers of borrowing money on behalf of the company.
It is open to question, however, whether under the ordinary rules of law
relating to agency the managing agent should not be held to have been
authorized to obtain the overdraft in the circumstances of this case. The loan was
urgently required for the purposes of the company. Machinery and stores had
been ordered and had arrived from
Even if Mr. Beltie Shah, acted ultra vires in obtaining this loan, it appears that his action was clearly ratified by the Board of Directors. We cannot lay stress upon the resolution which purports to have been passed at a meeting of the Board on the 2nd of June, 1923, as it appears to us (for reasons which we shall presently give) that this resolution was not passed by a properly convened meeting of the Board. The directors' report to the shareholders for the period ending the 31st of March, 1923, submitting the audited accounts for that period, shows the item of Rs. 24,454-3-8 as due to Bhagwan Das and Company (the plaintiffs) as an unsecured loan. This report purports to be signed by four of the directors of the company at a meeting dated 17th September, 1923, and it has not been argued that this meeting was not properly convened. We take it, therefore, that the Board of Directors clearly ratified the loan to the plaintiffs in their report dated the 17th of September, 1923.
Similarly the directors' report for the period ending the 31st of March, 1924, was signed by the directors on the 7th of January, 1925. This report submitted the audited accounts of the company and the accounts clearly show a sum of Rs. 26,802-7-3 as due to Bhagwan Das and Company secured by charge over the company's lands. Even if Mr. Beltie Shah exceeded his powers in obtaining the loan to meet an emergency, his action was never repudiated, but, on the contrary, was clearly ratified by the Board of Directors; so we hold that the company cannot escape liability on the ground that their managing agent had no authority to raise the loan.
The second question is whether the mortgage deed was executed in such a manner as to bind the company under the provisions of company law.
The mortgage deed was signed by Mr. Beltie Shah in his capacity as magaging agent of the company and it bears the common seal of the company. The appellants refer to article 98 (t) of the articles of association and argue that the execution of the mortgage deed is invalid because under article 98 (t) a document to which the common seal is affixed must also be signed by at least one director and countersigned by the agent or other officer appointed by the Board for that purpose. Mr. Beltie Shah is an ex officio director as well as managing agent, but it is clear that, even if he be considered to have signed the document in his capacity as director, article 98 (t) requires counter-signature by the agent or some other officer duly appointed and the document in question bears no counter-signature.
The respondent contends that there was no necessity for affixing the common seal to the mortgage deed and the presence of the seal may be ignored. In our opinion, the affixation of the seal was not required by company law. Under section 88 of the Companies Act the mortgage could be validly executed by any person acting under the authority of the company. No rule of law applicable to companies in general, or to this company in particular, has been shown to us requiring a deed of mortgage to be executed on behalf of a company by affixation of the common seal. If a document under seal is not necessary, then a mere defect in the manner of affixing the seal will not render the document invalid. This was the view taken by the Calcutta High Court in Prabodh Chandra Mitra v. Road Oils (India) Ltd. Their Lordships held that a mere defect in respect of the seal does not make the document for all purposes bad, even if it was intended to be under seal.
The next question is whether Mr. Beltie Shah was authorised to execute the mortgage on behalf of the company.
The minute book of the company (page 121 of the printed record) sets forth a resolution which purports to have been passed by the directors of the company on the 2nd June, 1923, in these terms : —
"Resolved that the Board of Directors of the Dehra Dun Mussoorie Electric Tramway Company, Limited, approve of the proposal of the managing agents to the effect that in order to secure the overdraft of Rs. 25,000 obtained by the company from Messrs. Bhagwan Das & Company, bankers at Dehra Dun, the company's land known at the Khazanchi Bagh, near the Dehra Dun Railway Station, be legally assigned to the said Messrs. Bhagwan Das & Company on such terms and conditions as may be settled between the managing agents and Messrs. Bhagwan Das & Company. The Board of Directors authorize Mr. Beltie Shah to enter into the agreement and give the necessary deed to Messrs. Bhagwan Das & Co.: "and to sign and seal and deliver the deed on behalf of the Board."
This resolution purports to be signed by three directors namely, Bakhshish Singh, B. N. Sen and Beltie Shah.
It has been strenuously contended for the appellant that this is a mere bogus resolution as no meeting of directors was, in fact, held on the 2nd June, 1923, and even if some directors did meet together, it was not a properly convened meeting in accordance with the procedure laid down in the articles of association. It has been argued for the respondent that it is not open to the defendant on the pleadings to argue that no meeting took place. Paragraph 16 of the additional pleas at page 6 states "That the Directors" meeting referred to in paragraph No. 7 of the plaint was not properly convened inasmuch as due notice had not been given to all the directors and a ratification, if any, by any such improperly convened meeting cannot legally bind the company." We think there is much force in this objection. The defendant did not deny that a meeting took place but they alleged that the meeting had not been properly convened as due notice had not been given to all the directors. On these pleadings we think it was only open to the defendant to contend and establish the fact that the meeting had not been properly convened and, therefore, any resolution passed by such a meeting was not legally binding upon the company. If the fact of a meeting had been expressly challenged, then the plaintiff might have called evidence to prove that in fact a meeting did take place. The defendant did not call any director to prove that no meeting took place as alleged. The question, however, does not appear to be of much importance since, if the meeting of directors had not been properly convened, after due notice, its proceedings would not have been valid and binding upon the company. No trace has been found of any notice convening a meeting on the 2nd of June, 1923, nor is there any trace of the agenda of any such meeting. From the letter, Exhibit E, page 127, dated the 7th June, 1923, from Mr. Beltie Shah to Mr. Sen, one of the directors, it appears that although Mr. Beltie Shah, Mr. Narsingh Rao and Mr. Sen might have met together on the 2nd June, 1923, they did not in fact pass the resolution which appears in the company's minute book on that date. The letter of the 7th of June states the fact of the overdraft having been obtained from Messrs. Bhagwan Das & Company who were pressing for repayment and wanting security Mr. Beltie Shah enclosed a draft resolution (to the same effect as the resolution appearing in the company's minute book on the 2nd of June, 1923) asking Mr. Sen to sign it and to get it signed by Mr. Rao and Sardar Bakhshish Singh. In view of this letter, we think, it is clear that there could not have been a-properly convened meeting of directors on the 2nd June, 1923, which passed the resolution set forth above.
The next question is whether the plaintiff knew that there could have been no properly convened meeting of directors on the 2nd June which passed the resolution mentioned.
The appellant contends that the plaintiff Jagmandar Das knew perfectly well that no meeting had been held on the 2nd June and that the resolution was a mere bogus resolution. He relies mainly on the letters, Exhibit Q and Exhibit CC. Exhibit Q (page 135) is a letter from Mr. Beltie Shah to the plaintiff, dated the 12th June, 1923. Mr. Beltie Shah complains that the plaintiff is unreasonably impatient to obtain security for his loan and states that the company are doing everything in their power to meet the plaintiff's wishes and adds : "You are perfectly well aware of the fact that in the case of limited company the procedure laid down by the articles and law has to be gone through and the delay is only natural as all our directors are non-residents of Dehra Dun."
The appellant argues that the plaintiff on receiving this letter must have known that no resolution sanctioning the execution of a mortgage to secure the overdraft could have been passed by a meeting of directors on 2nd June. Exhibit CC (p. 139) is a letter dated the 16th June, 1923, from the plaintiff to Mr. Beltie Shah. The plaintiff complains of the delay in adjusting the overdraft and giving security for it and says :
"Till now you ought to have got the matter settled by the directors by means of correspondence." This is interpreted by the appellant as showing that the plaintiff knew that no resolution sanctioning the mortgage had been passed on the 2nd June but he hoped that the business would be settled by means of correspondence. For the respondent ft is contended that although no resolution may have been passed at a properly convened meeting of directors on the 2nd of June, the plaintiff was not aware of that fact. Exhibit HH (page 117) which is a letter written by the plaintiff to Mr. Beltie Shah on the 16th of May, 1923, shows that there was a talk about giving security for the overdraft from about the 25th of May. It was possible, therefore, for the managing agent to have given one week's notice of a meeting to the directors before the 2nd June. Exhibit Q does not show for certain that no resolution was passed on the 2nd June, nor does Exhibit CC show for certain that the plaintiff knew that no resolution could have been passed on the 2nd June. Buggan Lal, manager of the plaintiff's bank, deposed that Mr. Beltie Shah had shown him the minute book of the company, containing the resolution of the 2nd June, a day or two before the execution of the deed, i.e., on the 18th June. The question was expressly put to him that when he knew from the letter of the 12th June (Ex. Q) that Beltie Shah had spoken of the necessity of sanction by the directors why did he not suspect Mr. Beltie Shah of being a tricky and unreliable man when he showed the witness a resolution purporting to have been passed on the 2nd June. The witness answered:
"I took him to be extra honest because he had frankly shown me the minute book of the company and because he had said that money was being expected from Nabha every day."
In all the circumstances of this case, we think it was very possible that Buggan Lal and the plaintiff were deceived by Mr. Beltie Shah. One must remember that in June, 1913, there was no suspicion that the company would go into liquidation and the plaintiff had no reason to suspect Mr. Beltie Shah of being a tricky and unreliable man. Subsequent events have no doubt cast a lurid light upon his character and methods and in the light of such subsequent events it may be argued that the plaintiff and Buggan Lal ought not to have put so much trust in Mr. Beltie Shah. It is easy to be wise after the event, but in the circumstances, we think that Mr. Beltie Shah who appears to have been a very capable and plausible man persuaded the plaintiff that the execution of the mortgage had really been sanctioned by a properly convened meeting of the directors. Buggan Lal and the plaintiff may have thought it strange that Mr. Beltie Shah did not refer to the resolution in his letter of the 12th June but he seems to have explained to them that he was in daily expectation of receiving large sums of money from Nabha out of which he could repay the overdraft, thus rendering the execution of a mortgage deed unnecessary, and, therefore, he made no previous mention of the resolution sanctioning the mortgage. However this may be, when Mr. Beltie Shah showed Buggan Lal the minute book of the company containing the resolution signed by three of the directors, as we believe he did, we think it would have been difficult for Buggan Lal to disbelieve the representation that the resolution had been duly passed. Moreover, the conduct of the plaintiff in accepting the mortgage supports the view that he believed that the execution of the mortgage had been sanctioned by the Board of Directors. The plaintiff would not have been likely to accept a mortgage which, to his knowledge, had not been sanctioned by the directors and was not binding upon the company. If the plaintiff had known or even strongly suspected that the mortgage had not been sanctioned, he would not have accepted it but would have sued the company for recovery of the loan.
It has further been argued for the appellant that the directors were not authorized under the articles of association to empower Mr. Beltie Shah to execute the mortgage. The argument is that, as the directors cannot delegate their power to borrow, they could not leave the details of the mortgage transaction to be settled by the managing agent. The reply to this is that the loan had already been incurred and there was no question of delegating the power of borrowing any further sums. The only question for the directors was whether they should give the plaintiff a security for the loan which he had already advanced. Under article 104, we think the board could legally empower one of the directors to execute the mortgage deed on their behalf and to settle the details of the mortgage transaction.
The result is that in our opinion the Board of Directors could legally authorize Mr. Beltie Shah to execute the mortgage on behalf of the company by a resolution passed at a properly convened meeting. As a matter of fact, we hold that there was no properly convened meeting which passed the resolution, dated the 2nd June, but the plaintiff had no reason to suppose that the resolution had not been properly passed and was not binding upon the company. On these facts we consider that the plaintiff is protected, in spite of the defect in passing the resolution, and the company is bound by the mortgage so far as company law is concerned. The law on this point is laid down in Halsbury's "Laws of England,"
Volume V, page 302, as follows :—
"The persons contracting with a company and dealing in good faith may assume that acts within the power of the company have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular."
The case of the Royal British Bank v. Turquand is one of the most important cases on this point. In that case the Directors of the company were authorized in certain circumstances to give bonds but the company sought to escape liability on the ground that there had been no resolution authorizing the making of the bond in suit. It was held that the plaintiff was entitled to judgment having a right to presume that there had been a resolution at a general meeting authorizing the borrowing of the money on the bond.
For an Indian decision on this point we may refer to the case of Ram Baran Singh v. Mufassil Bank Limited in which it was held that a company is liable for all acts done by its directors even though unauthorized by it, provided such acts are within the apparent authority of the directors and not ultra vires of the company. Persons dealing bona fide with a managing director are entitled to assume that he has all such powers as he purports to exercise, if they are powers which, according to the constitution of the company, a managing director can have.
We agree with the court below, therefore, in finding that the company is bound by the mortgage so far as company law is concerned.
The next question is whether the mortgage is void for want of previous sanction by the Local Government. Under clause 37 of the Dehra Dun-Mussoorie Tramway Order, 1921, it is laid down that "the promoter shall have power to transfer the undertaking with the assent of Government previously obtained, but not otherwise, to any person or persons or to a company." It is argued that as the Local Government did not give their previous assent to the mortgage, it is void.
The respondent replies that the defendant has never proved that the mortgage was made without the previous sanction of the Local Government, a fact which was within the defendant's special knowledge. In our opinion, there is no force in this reply. Issue No. 3 at page 20 implies that the mortgage had not been sanctioned by the Local Government. The plaintiff never alleged that such sanction had been obtained. In our opinion, the court below wrongly cast the onus upon the defendant of proving that, in fact, no sanction had been obtained for the mortgage. The plaintiff himself admits in cross-examination that so far as he is aware, no permission or sanction was taken from the Government for the execution of the mortgage deed; he did not known that any such sanction was necessary, nor did Beltie Shah ever tell him that any such sanction had been obtained. In view of the plaintiff's admissions and in view of the fact that he never alleged that sanction had been obtained and allowed the issue to be framed in such a manner as to imply the absence of sanction, we consider that it must be held that that the mortgage was executed without previous sanction by the Local Government. The question, however, remains whether the mortgage is void on that account and this raises several points for determination. The first question is whether the company was a "promoter" within the meaning of the Indian Tramways Act, 1886, and the Tramway Order of 1921 made under subsection (3) of section 6 of that Act by the Local Government. "Promoter" is defined in the Act as meaning a Local authority or person in whose favour an order has been made and includes a Local authority or person on whom the rights and liabilities conferred and imposed on the promoter by this Act and by the order and any rules made under this Act as to the construction, maintenance and use of the Tramway have devolved. Beltie Shah was undoubtedly a "promoter" and is expressly referred to as the promoter in the Tramway order. The question is whether the rights and liabilities conferred and imposed upon him have legally devolved upon the company.
It is argued for the respondent that they have not legally devolved upon the company because the Local Government did not give their previous consent to the transfer of the undertaking by Beltie Shah to the company. On the 22nd of December, 1921, an agreement was entered into between Beltie Shah and the company (Exhibit H, p. 53) whereby the company agreed to take over the benefit and liability of Beltie Shah under the Tramway order. It was argued that there was no proof of any previous sanction of this transfer and therefore, it was void and the company never became a "promoter" and was not subject to the conditions laid down in the Tramway order. By consent of parties we allowed the appellant to file further evidence on the question of the Local Government's sanction of the transfer of the undertaking by Beltie Shah to the company. It appears that on the 27th of May, 1921, Mr. Beltie Shah first submitted his formal application for permission to transfer the undertaking to a company. This application was dated before the concession had been granted to him. On the 28th of June, 1921, Mr. Beltie Shah writing to Mr. Willmott, the Chief Engineer and Secretary to Government in the Public Works Department, admits that strictly speaking, he has not yet received the concession and therefore, he will content himself with a letter from Mr. Willmott to the effect that he will have no objection to permit the transfer of the proposed concession for constructing the tramway. He further says it must be understood that this tentative permission is merely to facilitate the incorporation of the company under the Indian Companies Act. Mr. Willmott replies by a letter dated the 9th of July, 1921 :
"As regards the request made in paragraph 6 of your letter I have to say that if the provisional order becomes valid Government will have no objection to the transfer."
After the Tramway order had become absolute Mr. Beltie Shah wrote again to Mr. Willmott on the 10th of January, 1922, referring to the previous letter (saying that Government will have no objection to the transfer) and asking that official permission for the transfer shall now be given. By a letter dated the 22nd of February, 1922, the formal sanction of the Local Government to the transfer of the order, authorizing the construction of the tramway, was conveyed to Mr. Beltie Shah.
For the respondent it is argued as formal sanction for the transfer was only accorded on the 22nd of February, 1922, the transfer effected by the agreement of the 22nd December, 1921, was void since there was no previous sanction. The appellant maintains that the letter of the 9th July, 1921, intimating that Government will have no objection to the transfer is sufficient authority for the transfer. In our opinion, the appellant's contention is correct. The Tramway order merely lay down in clause 37 that the undertaking can only be transferred with the assent of Government previously obtained but does not specify any form in which such assent should be expressed. In our opinion, a demiofficial letter such as that of the 9th July, 1921, by a Secretary to Government in the P.W.D. intimating that Government will have no objection to the transfer is sufficient to convey the previous assent of Government. We take it, therefore, that the company did become a "promoter" in place of Beltie Shah.
The next question is whether the land mortgaged formed part of the "undertaking." The land was bought by the company on the 15th of May, 1922, for the purpose of a tramway depot. "Undertaking" is defined as including all movable and immovable property of the promoter suitable to and used by him for the purposes of the tramway. The fact that the land near the railway station was "suitable" for the purposes of the tramway can hardly be disputed. It was obviously necessary that the tramway company should have some administrative offices and a car shed, and a site near the railway station was obviously suitable. It is argued, however, that at the time of the mortgage the property was not used by the company for the purposes of the tramway. The evidence shows that at that time some sleepers, intended for the construction of the tramway, were stacked upon the land. In our opinion, this indicates use of the land for the purposes of the tramway sufficient to bring it within the definition of "undertaking." The mere fact that the land was not acquired under the Land Acquisition Act or with the concurrence of the Superintendent of the Doon, as laid down in clause 13 of the Tramway order, will not take the land out of the category of "undertaking". Undoubtedly the land was acquired for the purpose of the tramway and the method of its acquisition is immaterial for the purpose of deciding whether it is part of the company's undertaking. We find that it is part of the " undertaking " because it belonged to the company and was suitable for and used by the company for the purposes of the tramway.
The mortgage, then, was made in contravention of clause 37 of the Tramway order, as having been made without the previous assent of Government. On these facts the respondent argues that the transfer would only be voidable at the option of the Local Government and not absolutely void. The appellant maintains that the mortgage is absolutely void and, in our opinion, his contention is well-founded. The rules laid down in the Tramway order have the force of law, and in our opinion, the transfer of part of the undertaking without the previous sanction of Government must be held to be absolutely void. In the case of Gauri Shanker Balmokund v. Chinumia it was held by their Lordships of the Privy Council that a mortgage by a judgment debtor in contravention of paragraph 11 of the Third Schedule of the Code of Civil Procedure is void and not merely voidable. We may also refer to the rulings in Dipan Rai v. Ram Khilawan and Har Prasad Tiwari v. Sheo Gobind Tiwari in which the mortgage of an occupancy holding in contravention of the Agra Tenancy Act was held to be void. In our opinion, the same principles would apply to a mortgage in contravention of a clause of the Tramway order. If the mortgage is void it cannot be ratified nor can it be pleaded that the defendant is estopped from denying his competence to create the mortgage.
We hold, therefore, that the mortgage is void.
The
appellants being the liquidators of the Dehra Dun Mussoorie Electric Tramway
Company and all the evidence having been taken in this case, we think that
instead of the plaintiffs proving their claim in the course of the liquidation
proceedings they should be given a decree for money as against the liquidators.
They will thus rank as unsecured creditors and will get their money is due
course of liquidation.
We allow the appeal and vary the decree of the trial court by granting to the plaintiffs a simple money decree for Rs. 29,773-4-3 to be realized by them in due course of liquidation. Interest at the contractual rate will cease as from the 29th of January, 1926. If there are any surplus assets, interest at 6 per cent, per annum will be payable out of the surplus up to the date of repayment. The appellants will get half the costs of this appeal and those in the court below from the respondents. The respondents will bear their own costs.
Andhra
Pradesh High Court
companies act
[2003]
42 scl 798 (ap)
High Court of Andhra Pradesh
v.
G. Venkata Rao
P.S.
Narayana, J.
AS No. 1586 of 1988
October
8, 2002
Section 47 of the Companies Act, 1956 - Bills
of exchange and promissory note - Chief executive of company, D-1, borrowed money
from respondent to pay electricity dues of company and executed promissory note
to repay same - When assets of company were acquired by transferees, D-2 and
D-3, they denied their liability in relation to promissory note as said
transaction did not find place in company’s accounts - Trial court decreed suit
personally against D-1 and also against assets of D-2 and D-3 - Whether where
chief executive of company at relevant time executed promissory note and
borrowed amount for company’s sake, it could not be said that amount was
borrowed by him, D-1, in his personal capacity - Held, yes - Whether in view of
clear language of section 47, especially in light of evidences of prosecution
witnesses and also clear admission by defence witness relating to authority of
executive to enter into said transaction, trial court’s findings fastening
liability in relation to promissory note as against D-2 and D-3 could not be
said to be unsustainable - Held, yes - Whether making of entries or maintenance
of account books predominantly relates to internal management of affairs of
company and creditor having no control over its maintenance, cannot be
non-suited on that ground - Held, yes - Whether, therefore, appeal being devoid
of merits was to be dismissed - Held, yes
Facts
The
plaintiff/respondent filed the suit for recovery of a certain sum towards
balance of the principal and interest due on a promissory note executed by
first defendant. The first defendant , D-1, acting as Chief Executive of the
company, had borrowed the sum for the purpose of paying electricity dues to the
AP Electricity Board. He executed the demand promissory note to repay the same
with interest. Since the assets were transferred, defendants 2 and 3 were added
as parties. On a suit filed by the plaintiff, the trial court decreed the same
personally against D-1 and also against the assets of D-2 and D-3. On appeal,
the defendants 2 and 3 alleged that they had not admitted the borrowing of the
amount by the first defendant and also execution of the promissory note; that
the account books of the company did not show any such liability and, hence,
they were not liable to pay the suit amount. The first defendant did not,
however, contest.
Held
If the
promissory note was read as a whole, it was specifically stated that D-1 had
executed as the Chief Executive and had undertaken to pay the amount borrowed
with interest. The promissory note was attested by two witnesses and the first
defendant not only had signed the same but also the seal of the company was affixed.
Apart from that, even in the payment endorsement, the first defendant signed as
the Chief Executive affixing the stamp of company. Thus, the promissory note
was executed by the first defendant as the Chief Executive of the second
defendant company at the relevant point of time.
On appreciation
of oral and documentary evidence available on record in the instant case, the
first defendant as Chief Executive of the company at the relevant point of time
had not denied the execution of the promissory note. The third defendant was
only a successor-in-interest of the second defendant company who was in the
present management of the affairs of the company. The material on record also
showed that several other liabilities of the company also had been discharged by
the present management but, however, the appellants-defendants 2 and 3 in the
instant suit had taken a stand that inasmuch as the transaction did not find a
place in the accounts of the company, the company could not be made liable. The
Chief Executive of the company at the relevant point of time executed the
document and borrowed the amount for the purpose of payment of the electricity
bills of the company only. Hence, the said borrower paid for the sake of the
company and at any stretch of imagination, it could not be said that the amount
was borrowed by the first defendant in his personal capacity.
Making of
entries or maintenance of account books by the company predominantly relates to
the Indoor Management or the Internal Management of the affairs of the company
with which a creditor is not concerned with and the creditor cannot have any
control over the maintenance of the accounts and, hence, on that ground a
creditor of the company cannot be non-suited. In the light of the clear
language of section 47, especially in the light of the evidence of prosecution
witnesses and also clear admissions made by defence witness relating to the
authority of the executive to enter into the transaction, the findings recorded
by the trial court fastening the liability in relation to promissory note as
against defendants 2 and 3 could not be said to be unsustainable. Hence, there
was no reason to disturb any of the findings which had been recorded by the
trial court in that regard. Thus, all the findings recorded by the trial court
were confirmed.
Cases referred to
G. Vasu v. Syed
Yaseen Sifuddin Quadri AIR 1987 AP 139 (FB), Visvanata Raghunath Audi v.
Mariana Colaco AIR 1976 Goa, Daman and Diu 60, Jhandu Mal & Sons v.
Official Liquidators of the Dehradun Mussoori Electric Tramway Co. AIR 1930
All. 778, Probodh Chandra Chakravarty v. Jatindra Mohan Chakravarty AIR 1940
Cal. 177, Brindaban Chandra Mitra v. Atul Krishna Basu [1936] 164 Indian Cases
728 (Cal.), Edula Ayyappa Reddy v. Amma Bai [1970] 1 ALT 246, Mangal Bahu v.
Jaitly & Co. [1946] 16 Comp. Cas. 214 (All.), Gopal Krishnaji v. Mohamed
Haji Latif AIR 1968 SC 1413, Oriol Industries Ltd. v. Bombay Mercantile Bank
Ltd. AIR 1961 SC 993, P. Rangaswami Reddiar v. R. Krishnaswami Reddiar AIR 1973
Mad. 251, Lohia Properties (P.) Ltd. v. Atmaram Kumar 1993 (2) APLJ 58 (SC),
Bharat Barrel & Drum Mfg. Co. v. Amin Chand Pyarelal AIR 1999 SC 1008, Mir
Niyamath Ali Khan v. Commercial & Industrial Bank Ltd. AIR 1969 AP 294,
Ganesh Trading Co. v. Moji Ram AIR 1978 SC 484, Manjushri Raha v. B.L. Gupta
AIR 1977 SC 1158 and Surve Kedarappa v. D.G. Bhimappa AIR 1959 Mys. 36.
Srinivas
Chitturu for the Appellant. M. Ram Mohan for the Respondent.
Order
1. The unsuccessful
defendants 2 and 3 in OS No. 61 of 1987 on the file of the Subordinate Judge,
Pithapuram are the appellants and the plaintiff in the said suit is the
respondent.
2. The parties will be
referred to as arrayed in the trial Court for the purpose of convenience. The
plaintiff filed the suit in OS No. 184 of 1984 on the file of the Subordinate
Judge, Kakinada which was renumbered as OS No. 61 of 1987 on the file of
Subordinate Judge, Pithapuram for recovery of a sum of Rs. 48,882.40 ps towards
balance of the principal and interest due on a promissory note dated 30-3-1982
executed by the 1st defendant in favour of the plaintiff for Rs. 40,000
repayable with interest at 24 per cent p.a. together with subsequent interest
and for costs of the suit.
3. In the trial Court on
the strength of respective pleadings of the parties, framed issues. On behalf
of the plaintiff PWs. 1 and 2 were examined and Exs. A-1 to A-8 were marked.
Likewise on behalf of the defendants D.W.1 was examined and Exs. B1 to B3 were
marked.
4. The trial Court on
appreciation of the oral and documentary evidence ultimately decreed the suit
as prayed for personally against the 1st defendant and also against the assets
of the 2nd and 3rd defendants. Aggrieved by the said judgment and decree,
defendants 2 and 3 preferred the present appeal.
5. The respective pleadings of the parties are
as hereunder.
6. It is pleaded in the
plaint that the 1st defendant during the time when he was acting as Chief
Executive of M/s. Kirlampudi Sugar Mills Limited, Pithapuram borrowed a sum of
Rs. 40,000 from the plaintiff for the purpose of paying huge amounts due to the
A.P. Electricity Board and executed the demand promissory note dated 30-3-1982
undertaking to repay the same with interest at 2 per cent per month to the
plaintiff or to his order on demand. It was also pleaded that the 1st defendant
executed the promissory note in the capacity of Chief Executive of M/s.
Kirlampudi Sugar Mills Limited and bound himself personally also. Since the
assets are transferred to defendants 2 and 3, they are added as parties. It was
also further pleaded that subsequent thereto the 1st defendant on behalf of
M/s. Kirlampudi Sugar Mills Limited paid a sum of Rs. 10,000 on 29-9-1982 as
part payment and endorsed the same on the reverse of the said promissory note.
Inasmuch as no further payments were made, the plaintiff got issued a notice on
26-7-1983 to the defendants and though the notice was received there was no
reply from the defendants. It was also further pleaded that as the management
of M/s. Kirlampudi Sugar Mills, Pithapuram did not pay the value of sugarcane
to the growers, the mills, premises and machinery and stocks of sugar etc.,
were seized by the District Collector and subsequently certain amounts were
deposited by the management of the Kirlampudi Sugar Mills with the District
Collector, East Godavari District and the 3rd defendant management had taken
possession of the premises, undertaking to receive and pay all assets and
liabilities. Certain other details had been pleaded and however, it was stated
that since the said Sugar Mills became very heavily indebted, it was trying to
give up the debt.
7. The defendants 2 and 3
had filed a written statement with the following allegations that these
defendants had not admitted the borrowing of the amount by the 1st defendant
and also execution of the promissory note dated 30-3-1982 agreeing to repay the
same with interest at 24 per cent p.a. It was further pleaded that there is no
credit in the accounts of the factory that the plaintiff lent Rs. 40,000 to the
factory. It was also stated that these defendants had not admitted that the 1st
defendant borrowed Rs. 40,000 from the plaintiff for the purpose of paying dues
of the factory. It was also pleaded that these defendants represent the public
limited company and the management of the defendants 2 and 3 was Patwaris and
their group previously. In April, 1983 Morarkas of Bombay and their group have
taken the controlling interest by way of transfer of shares from Patwaris and
their group. After the Morarkas and their group had taken the controlling
interest, the Board of Directors was reconstituted on 7-4-1983 and new
management came into existence. It was also pleaded that the new management
deposited 33 lakhs of rupees into the State Bank of Kakinada to the District
Collector for payment of dues to the cane-growers. The management also paid 15
lakhs of rupees towards the electricity and fee of other statutory liabilities.
The management had spent 20 lakhs for acquiring new machinery and the
management paid 16 lakhs of rupees towards salaries, bonus etc. Thus the
management had spent 84 lakhs of rupees to bring the factory into a running
condition. It was also further pleaded that the cane was also crushed in
1983-84 season. The allegations that the factory is heavily indebted and
secreting the properties and the plaintiff is asking attachment of properties
before judgment had been specifically denied. It was also pleaded that the
account books of the defendant factory do not show any liability of the
defendants 2 and 3 to the plaintiff and hence they are not liable to pay the
suit amount. It was also stated that the registered notice said to have been
issued was received by one of the employees of the defendant-factory who had
not brought it to the notice of the management and hence reply could not be
given. It was further pleaded that the plaintiff has no cause of action to file
the suit as against the defendants 2 and 3. The 1st defendant had not contested
the litigation.
8. On the strength of the
respective pleadings of the parties, the following issues were framed by the
trial Court—
(a) Whether there is no
cause of action against D-2 and D-3 and whether D-2 and D-3 are not liable to
pay the suit amount ?
(b) Whether D-1 executed
the suit promissory note dated 30-3-1982 in favour of the plaintiff and whether
the plaintiff is entitled to recover the suit amount from D-1 ?
(c) To what relief ?
9. As already stated
supra after recording evidence ultimately the suit was decreed and hence
defendants 2 and 3 had preferred the present appeal.
10. Sri Chitturu Srinivas,
learned Counsel representing the appellants/defendants 2 and 3 while making
elaborate submissions had contended that the plaintiff had filed the suit for
recovery of money against the defendants based on promissory note dated 30-3-1982
alleged to have been executed by the 1st defendant as Chief Executive of the
2nd defendant, having borrowed the said amount for payment of electricity
charges of the 2nd defendant Company. The learned Counsel further submitted
that the 3rd defendant is the new management which had taken over the 2nd
defendant during April, 1983. It was also further contended that the 1st
defendant left the 2nd defendant long prior to 3rd defendant taking over the
management of the 2nd defendant from the Collector, East Godavari District. The
learned Counsel also submitted that the 1st defendant had remained ex parte and
had chosen not to contest the suit at all. It was further submitted that the
2nd and 3rd defendants/appellants herein had denied the very execution of the
promissory note and also had taken a stand that the company books do not show
this loan transaction at all and hence it cannot be said that the company is
liable to pay the amount. The learned counsel also had drawn my attention to
the evidence of P.Ws.1 and 2 and had contended that the evidence of P.W.1 is in
total variance of the pleadings. The learned Counsel also pointed out that the
details narrated by P.W.1 had not been pleaded in the plaint at all. It was
also further contended that here is a case where the plaintiff had not chosen
to enter into the witness box and P.W.1 is the cousin of the plaintiff and had
been examined on this ground only. The trial Court should have non-suited the
plaintiff. The learned Counsel also had taken me through the promissory note
and had contended that neither the body nor the recitals of the promissory note
go to show that the 1st defendant executed the promissory note representing the
Company and at the best it can be said that the promissory note was executed by
the 1st defendant in his individual capacity and hence in such case on the
strength of such document, the company cannot be fastened with the liability.
The learned Counsel further elaborating his submissions had drawn my attention
to sections 4, 7, 26, 27, 28 and 118 of the Negotiable Instruments Act, 1881
and also to sections 47 and 147(1)(c) of Companies Act, 1956. The learned
Counsel further submitted that a reading of the promissory note Ex.A-1 would
show that D-2 and D-3 are not the makers of the promissory note and hence the
essential requirement of a promissory note as contemplated under section 4 of
Negotiable Instruments Act is violated. The unconditional promise to pay is not
there as far as 2nd defendant and Ex.B-3 are concerned and hence the company is
liable to pay the amount. The learned Counsel also submitted that the identity
of the maker also must be certain and Ex-A-1 simply shows the 1st defendant as
the maker of the promissory note and an unconditional promise is made only by
the 1st defendant. The learned Counsel also stressed on the body of Ex.A-1
showing that the 1st defendant son of Ramgilal Patwari executed the promissory
note in his personal capacity and at any rate it does not show that the 1st
defendant executed the promissory note as Chief Executive of 2nd defendant
Company. The learned Counsel also further commented about the evidence of P.W.1
who had deposed that he does not know whether the 1st defendant has power to
borrow on behalf of the 2nd defendant Company. The learned Counsel also
contended that the statements of P.Ws.1 and 2 relating to the payments of
consideration under Ex.A-1, are contradictory and hence at any rate the trial
Court should have arrived at a conclusion that Ex. A-1 is an unenforceable
document as far as the appellants/defendants 2 and 3 are concerned.
11. The learned Counsel
also made elaborate submissions relating to the nature of presumption available
under section 118 of the Negotiable Instruments Act and had contended that the
plaintiff in the present case had miserably failed to discharge the burden and
the trial Court has not considered this aspect in proper perspective. The
learned Counsel also placed reliance on G. Vasu v. Syed Yaseen Sifuddin Quadri
AIR 1987 AP 139 (FB), and Visvonata Raghunath Audi v. Mariana Colaco AIR 1976
Goa, Daman and Diu 60. The learned Counsel also further had submitted that at
any rate inasmuch as the 1st defendant had executed the promissory note in his
individual capacity, his liability cannot be extended or the promissory note
cannot be enforced as against appellants/defendants 2 and 3. Strong reliance
was placed on Jhandu Mal & Sons v. Official Liquidators of the Dehradun
Mussoori Electric Tramway Co. AIR 1930 All. 778, Probodh Chandra Chakravarty v.
Jatindra Mohan Chakravorty AIR 1940 Cal. 177, Brindaban Chandra Mitra v. Atul
Krishna Basu [1936] 164 Indian Cases 728 (Cal.), Edula Ayyappa Reddy v. Amma
Bai [1970] 1 ALT 246 and Mangal Bahu v. Jaitly & Co. [1946] 16 Comp. Cas.
214 (All.).
12. Sri Ram Mohan, learned
Counsel representing the respondent/plaintiff had contended that in view of the
material available on record, it is a clear case where the 1st defendant as the
Chief Executive of the Company had borrowed the amount under Ex.A-1 promissory
note for the sake of the company and 2nd and 3rd defendants intend to escape
the liability by taking such a defence. The learned Counsel also further
contended that when it was specifically pleaded in plaint that the 1st
defendant as the Chief Executive had executed Ex.A-1 promissory note and had
borrowed the amount representing the subject company only, there should have
been a specific denial in the written statement and in the absence of such a
denial, it should be taken that the case of the plaintiff in this regard had
not been disputed by the contesting defendants. The learned Counsel also
further submitted that the recitals of the particular promissory note are very
clear and the learned Counsel also had pointed out that the amount was borrowed
for the purpose of paying electricity charges of the M/s. Kirlampudi Sugar
Mills Limited, Pithapuram and as the Chief Executive of the Company he had
undertaken to pay the amount. The learned Counsel also had drawn my attention
to the signature portion and also the seal which had been affixed in Ex. A-1.
Payment endorsement also had been pointed out by the learned Counsel for the
respondent/plaintiff while further making elaborate submissions. The learned
Counsel commented that it is no doubt true that the plaintiff was not examined,
but however P.W.1 who had no knowledge about the transaction was examined and
he had deposed about all the details. The evidence of P.W.1 is well supported
by the evidence of P.W. 2 the attester of Ex.A-1 and hence in the light of this
evidence, it can be said that the cause of action of the promissory note is
duly proved by the respondent/plaintiff. Hence, non-examination of the
plaintiff is of no consequence. The learned Counsel further contended that it
is no doubt true that certain details which had been narrated by P.W.1 had not
been pleaded in the plaint. But, however, while considering the pleadings, the
Courts are expected to take a liberal view so as to advance the substantial
justice instead of taking a narrow and technical view while looking into the pleadings.
The learned Counsel also had drawn my attention to section 47 of the Indian
Companies Act, 1956 and had contended that in the light of the language of the
said provision, it cannot be said that the 1st defendant had no authority to
borrow the amount representing the company. The learned Counsel submitted that
it is not the case of the other side also and had pointed out to the admissions
made by D.W.1 in this regard in the cross-examination that is relating to
authority of the 1st defendant to borrow the amounts on behalf of the company
and representing the company. The learned Counsel further submitted that the
1st defendant had not chosen to contest the matter of defendants 2 and 3 who
are liable to pay the amount. The company will be in the custody of all the
records and a 3rd party creditor cannot be expected to know about the several
internal affairs relating to the Indoor Management of the company as such and
hence the respondent/plaintiff/3rd party creditor cannot be expected to produce
such a relevant material which would be in the custody of the opposite party
and hence in such a case, non-production of such records by the company should
be taken serious note of and this was rightly done by the trial Court. Strong
reliance was placed on Gopal Krishnaji v. Mohamed Haji Latif AIR 1968 SC 1413.
The learned Counsel further submitted that though sections 4, 26, 27 and 28 of
the Negotiable Instruments Act, 1881 may throw some light on the Negotiable
Instruments, in the case of execution of promissory notes on behalf of the
Company, the provisions of the Companies Act, 1956 have to be looked into for
the purpose of deciding the binding nature of such a document. The learned
Counsel had drawn my attention to the language of section 47 of Indian Companies
Act, 1956 while taking me in detail through the evidence of D.W.1. The learned
Counsel commented that the admissions made by D.W.1 are sufficient to establish
the claim put forth by the respondent/plaintiff. The learned Counsel placed
strong reliance on Oriol Industries Ltd. v. Bombay Mercantile Bank Ltd. AIR
1961 SC 993, and P. Rangaswami Reddiar v. R. Krishnaswami Reddiar AIR 1973 Mad.
251. The learned Counsel also had placed reliance on Lohia Properties (P.) Ltd.
v. Atmaram Kumar 1993 (2) APLJ 58 (SC), and also Bharat Barrel & Drum Mfg.
Co. v. Amin Chand Pyarelal AIR 1999 SC 1008.
13. Heard both the learned
Counsel at length and also perused both the oral and documentary evidence
available on record from the respective contentions which had been advanced by
both the Counsels elaborately. The following points for consideration will
arise in this appeal.
(a) Whether the
appellants/defendants 2 and 3 are also liable to pay the amounts due under
Ex.A-1 promissory note ?
(b) Whether the
respondent/plaintiff has cause of action to file the suit as against the
appellants/defendants 2 and 3 ?
(c) Whether the trial
Court had appreciated the aspect of burden of proof in the context of section
118 of the Negotiable Instruments Act, 1881 properly ?
(d) To what relief ?
Points a to c.
14. Since points a to c are
closely inter-connected and for the purpose of avoiding overlapping discussion
and for the purpose of convenience, all these points are being discussed
together.
15. The suit is based on the
strength of promissory note dated 30-3-1982 executed by the 1st defendant in
favour of the plaintiff for Rs. 40,000. It was marked as Ex.A-1 and the
endorsement on the promissory note was marked as Ex.A-2, Ex.A-3 is the office
copy of notice. Exs. A-4 to A-8 are the postal acknowledgements. The evidence
of P.Ws. 1 and 2 had been let in on behalf of the plaintiff. The 1st defendant
had not chosen to contest the matter. No doubt, defendants 2 and 3 filed
written statements taking a stand denying the very execution of Ex.A-1 but
however the proper person to take a stand in this regard is the 1st defendant.
As already observed by me, the 1st defendant had not chosen to contest the
matter. P.W. 1 is one Jogarao, the cousin brother of the plaintiff. P.W. 1
deposed that he worked as Yard Inspector in K.S. Mills, Pithapuram and had
resigned his job in 1984. P.W.1 also deposed that the 1st defendant was the
Chief Executive of D.2 factory and one Narasimha Rao, worked as Cane
Superintendent in D.2 factory. He also had resigned his job and Mohan
Chatterjee was working as cashier in the 2nd defendant’s factory and still he
is working as cashier in the 2nd defendant’s factory. P.W. 1 further deposed
that the 1st defendant asked him for a loan of Rs. 40,000 for paying electrical
charges for 2nd defendant’s factory and he brought the money from his cousin’s
brother, the plaintiff and gave Rs. 40,000 to 1st defendant and on the next
day, the 1st defendant executed a promissory note as the Chief Executive of 2nd
defendant’s factory and agreed to pay interest at 2 per cent p.m. This witness
also further deposed that Ex.A-1 was executed at the premises of the factory
and D.1 also affixed stamp of the mill and signed the pronote so as to show
that the debt is for the mill. P.W. 1 further deposed that the attestors of the
Ex.A-1 were present when the consideration of Rs. 40,000 was passed and the
plaintiff was not present when Ex.A-1 was executed. P.W.1 also further deposed
that the 1st defendant on behalf of the 2nd defendant paid Rs. 10,000 towards
the part payment of debt covered by Ex.A-1 and the said endorsement was marked
as Ex.A-2 and it also contains the stamp of the mill and subsequently, thereto
no other payment had been made. P.W.1 further deposed about the issuance of
notice and the acknowledgement in the cross-examination at length for the
purpose of establishing that D2 and D3 are not liable and the suggestion that
Ex.A-1 is the collusive document to defraud D-2 and D-3 had been specifically
denied by P.W.1
16. P.W. 2 Narasimha Rao,
one of the attestors of Ex. A-1 was examined and P.W. 2 deposed that he worked
as Cane Superintendent in Sugar Mill from 1952 to September, 1982. P.W.2 also
deposed that the 1st defendant was the Chief Executive of the 2nd defendant and
he had attested Ex.A-1 and in his presence P.W.1 paid Rs. 40,000 to the 1st
defendant and he attested the pronote and he was present at the time of payment
of Rs. 40,000 and also at the time of execution of Ex.A-1 and the 1st defendant
executed in his capacity as the Chief Executive of the 2nd defendant. P.W.2
also deposed about the affixing of the stamp of the Sugar Mills on the
promissory note. P.W.2 also deposed that the promissory note was executed in
favour of G. Venkata Rao but he was not present either at the time of payment
of consideration or at the time of execution of Ex.A-1. No doubt, this witness
was also cross-examined by putting certain suggestions but however the
suggestions had been denied by P.W. 2. As against the oral and documentary
evidence adduced on behalf of the respondent/plaintiff and on behalf of the
appellants/contesting defendants Ex.B-1 entry at page 357 in cash book relating
to Kirlampudi Sugar Mills Ltd., for the year 1981-82; Ex. B-2 ledger at page
223 for the year 1981-82 as expenditure towards Electricity charges and Ex.B-3
is the ledger at page 358 for the year 1981-82 towards cash advance from Andhra
Bank, Pithapuram had been marked. D.W.1 the only witness had deposed that he
has been working in the D.2 factory since 1970 as accounts clerk and no doubt
he deposed about the entries made in the regular course of his business and had
spoken about the electrical Charges. D.W.1 also had deposed that from the
plaintiff there is no credit entry in the books of the Company and hence the company
is not liable to pay anything to the plaintiff. D.W.1 also deposed that the
factory accounts do not show any payment of Rs. 10,000 on 29-9-1982 to the
plaintiff. This witness was cross-examined at length and in cross-examination,
D.W.1 admitted that there will be vouchers when the loans are taken on
promissory notes by the company. D.W.1 also deposed that cashier prepares the
vouchers and send them to him and if the vouchers are misplaced or not received
by him for any reason, that will not be accounted for and he has nothing to do
with the balance in the account or the cash in hand and he does not deal with
cash and therefore he cannot say whether the cash balance represented is there
or not. D.W. 1 also deposed that he does not know personally where from the
cash was paid for electricity bills. D.W. 1 also deposed that Sri Mahesh Kumar
Patwari was the Chief Executive and he is D1 in this case and he is authorised
to borrow and pay moneys and he is also a general power of attorney holder.
D.W.1 also made several other admissions which may not be necessary to be dealt
with in detail. No doubt, in cross-examination relating to the entries several
questions were put and answers had been elicited in detail. D.W.1 also was
cross-examined relating to the maintenance of several loose sheets relating to
the company in relation to the maintenance of accounts. As can be seen from the
evidence available on record, P.Ws. 1 and 2 had specifically deposed that the
plaintiff was not present at the time of Ex.A-1 transaction and the payment was
made by P.W.1 the cousin brother of the plaintiff and hence P.W.1 was examined
and to further prove the execution of the promissory note though it was not
specifically denied by the 1st defendant, P.W.2 one of the attestors also had
been examined. Thus the execution of the promissory note had been duly proved
that the Executant of the promissory note the 1st defendant had not chosen to
deny Ex.A-1. It is also pertinent to note that in the plaint at para 4 it was
specifically pleaded that the 1st defendant had executed the pronote as the
Chief Executive of the company and this aspect was not specifically denied
though a vacate plea was taken in the written statement.
17. In Lohia Properties (P.)
Ltd.’s case (supra) it was held that when the plaint contains specific averment
as to service of notice of termination of tenancy on the tenant and it was not
denied in written statement and only legality of the notice contested in the
written statement. Non denial of service amounts to implied admission.
18. Not only that the 1st
defendant had not chosen to contest the matter but also in view of the clear
evidence of P.Ws. 1 and 2 it can be definitely said that the execution of
Ex.A-1 had been duly proved. No doubt, the learned Counsel for the appellants
had pointed out that in the plaint it was not specifically pleaded that P.W.1
had borrowed the amount from the plaintiff for the sake of the company and paid
the amount to the 1st defendant. The learned Counsel had contended that this is
the variance between the pleading and proof. In Mir Niyamath Ali Khan v.
Commercial & Industrial Bank Ltd. AIR 1969 AP 294, it was held thus :
“...although the evidence let in on issues on
which the parties actually went to trial should not be normally made the foundation
for decision of another and different issue, which was not present to the minds
of the parties and on which they had no opportunity of adducing evidence, that
rule, however, has no application to the present case where the parties have
gone to trial with full knowledge that the very question is in issue, though no
specific issue was framed, and adduced evidence relating thereto. Normally the
Court will not grant relief to the plaintiff on a case for which there was no
foundation laid in the pleadings and which the defendant was not called upon to
meet. It may be either oral or in writing. It may be expressed or it may even
be implied. It might be even inferred from the course of conduct of the parties
concerned. However, whatever may be the form of the contract, it must be
satisfactorily proved....” (pp. 297-298)
19. It is no doubt true that the details
deposed by P.W.1 had not been pleaded in the plaint but the evidence of both
P.Ws.1 and 2 is clear, categorical and consistent relating to the effect that
the plaintiff was not present at the time of Ex.A-1 transaction and P.W.1 paid
the amount and P.W.2 and other attestors were witnesses who had witnessed the
transaction. In the light of such clear evidence, I do not see that the mere
omission to plead these aspects can be taken to be fatal to the case of the
respondent/plaintiff so as to non-suit him. In Ganesh Trading Co. v. Moji Ram
AIR 1978 SC 484, the Apex Court while dealing with object of provisions
relating to pleadings had explained as follows :—
“2. Procedural law is intended to facilitate
and not to obstruct the course of substantive justice. Provisions relating to
pleadings in civil cases are meant to give to each side intimation of the case of
the other so that it may be met, to enable Courts to determine what is really
at issue between parties, and to prevent deviations from the course which
litigation on particular causes of action must take.” (p. 485)
20. In
Manjushri Raha v. B.L. Gupta AIR 1977 SC 1158, it was held that the pleadings
have to be interpreted not with formalistic rigour but with latitude or
awareness of low legal literacy of poor people.
21.
Hence in the light of the evidence of P.Ws.1 and 2 it cannot be said that the
non-examination of the plaintiff is fatal to the case of the plaintiff
especially in the light of the fact that plaintiff was not present and it is
P.W.1 who had advanced the amount and P.W.2 the other witness who had witnessed
the passing of consideration and also execution of Ex.A-1 and hence, the mere
omission to plead this aspect cannot be taken as a serious defect in the
pleading. Before adverting to the other contentions which had been argued at
length by the learned Counsel representing to the respective parties it may be
appropriate to look into Ex.A-1. Ex.A-1 the demand promissory note reads as
hereunder.
Demand Promissory Note
Pithapuram,
Dated 30-3-1982
Rs. 40,000 (Rupees forty thousand only)
Promissory
note executed by Mahesh Kumar Patwari son of Ramgilal Patwari of Pithapuram in
favour of Giyyana Venkata Rao son of Appalaraju of Thimmapuram on demand, I
promise to pay Rs. 40,000 (Rupees forty thousand only) borrowed from you today
for the purpose of paying electricity charges of the Kirlampudi Sugar Mills
Ltd., Pithapuram of which I am the Chief Executive and I undertake to pay the
same with interest at Rs. 2 per cent per mensum to you on order. The
consideration is received in cash today from you and undertake to be also
personally liable.
Mahesh Patwari
Witnesses :
1. Narasimha Rao
2. Mohan Chaterjee
It is no doubt
true that the commencement portion of the promissory note reads as though it is
executed by Mahesh Kumar Patwari son of Ramgilal Patwari but however if the
document is read as a whole it is specifically stated that he had executed as
the Chief Executive and had undertaken to pay the amount borrowed with interest
at 2 per cent per month. The promissory note is attested by two witnesses and
the 1st defendant not only had signed Ex. A1 but also the seal of the company
is affixed. Apart from Ex.A1 even in the payment of endorsement of Ex.A2, the
1st defendant signed as the Chief Executive affixing the stamp of M/s.
Kirlampudi Sugar Mills, Limited. Thus a careful reading of Ex.A1 clearly goes
to show that Ex.A1 was executed by the 1st defendant as the Chief Executive of
the 2nd defendant company at the relevant point of time.
Now the
question which had been seriously argued by the learned Counsel for the
appellants to the effect that Ex.A1 transaction is not binding on the 2nd and
3rd defendants, has to be considered in the light of the elaborate submissions
advanced by the learned Counsel for the appellants/defendants 2 and 3. It is no
doubt true that defendants 2 and 3 are not shown as parties in the main body of
the document. The 3rd defendant is only a successor-in-interest in the present
management of the affairs of the company. The main stand taken by the
contesting defendants is that inasmuch as this amount was not shown in the
accounts, defendants 2 and 3 cannot be fastened with the liability on the
strength of the promissory note alleged to have been executed by the 1st
defendant. Sections 26, 27 and 28 of the Negotiable Instruments Act read as
hereunder :
“Section 26. Capacity to make, etc. promissory
notes, etc.—Every person capable to contracting, according to the law to which
he is subject, may bind himself and be bound by the making, drawing acceptance,
indorsement, delivery and negotiation of a promissory note, bill of exchange or
cheque.
Minor - A minor may draw, indorse, deliver and
negotiate such instruments so as to bind all parties except himself. Nothing
herein contained shall be deemed to empower a corporation to make, indorse or
accept such instruments except in cases in which, under the law for the time
being in force, they are so empowered.”
Note
Whether company has power to issue cheques -
The power is to be found in the relevant provisions of the Companies Act
itself. Section 26 does not purport to make any provision of substantive or
procedural law. The latter part of section 26 merely brings out that a company
cannot claim authority to issue a cheque under its first part. Oriol Industries
Ltd. v. Bombay Mercantile Bank Ltd. AIR 1961 SC 993-1961 (3) SCR 652-1961 (1)
MLJ SC 163.
Section 27 : Agency - Every person capable of
binding himself or of being bound, as mentioned in section 26 may so bind
himself or be bound by a duly authorised agent acting in his name. A general
authority to transact business and receive and discharge debts does not confer
upon an agent the power of accepting or indorsing bills of exchange so as to
bind his principal.
An authority to draw bills of exchange does
not of itself import an authority to indorse.”
Section 28 : Liability of agent signing - An
agent who signs his name to promissory note, bill of exchange or cheque without
indicating thereon that he signs as agent, or that he does not intend thereby
to incur personal responsibility, is liable personally on the instrument,
except to those who induced him to sign upon the belief that the principal only
would be held liable.”
Sections 47 and 147(1)(c) of the Indian Companies Act, 1956 read as
hereunder :
“Section 47 : Bills of Exchange and promissory
notes - A bill of exchange, hundi or promissory note shall be deemed to have
been made, accepted, drawn or endorsed on behalf of a company if drawn,
accepted, made, or endorsed in the name of, or on behalf or on account of, the
company by any person acting under its authority, express or implied.
Section 147 : Publication of name by company -
(1) Every company—
(a) ** ** **
(b) ** ** **
(c) shall have its name (and the address of its registered office)
mentioned in legible characters in all its business letters, in all its bill
heads and letter papers, and in all its notices [***] and other official
publications; (and also have its name so mentioned in all bills of exchange),
hundies, promissory notes, endorsements, cheques and orders for money or goods
purporting to be signed by or on behalf of the company, and in all bills of
parcels, invoices, receipts and letters of credit of the company.”
22. In Oriol Industries Ltd.’s case (supra)
the Apex Court had observed as follows :
“Before a company can be bound by a negotiable
instrument one of the essential conditions is that the instrument on its face
must show that it has been drawn, made accepted or endorsed by the company.
This may be done either by showing the name of the company itself on the
instrument, or by the statement of the person making the instrument that he is
doing so on behalf of the company. In other words, unless the plain tenor of
the negotiable instrument on its face satisfies the relevant requirement the
instrument cannot be validly treated as an instrument drawn by the company. The
inevitable consequence of this requirement is that whenever a negotiable
instrument is issued without complying with the said requirement it would not
bind the company and cannot be enforced against it. The principle enunciated by
section 89 cannot be extended to a claim made by a company against its bank on
the ground that the cheque which the bank accepted and honoured was defective
in that it did not comply with the requirements of section 89 and could not
have been enforced against it.” (p. 993)
It may also be
relevant to note another passage in the same judgment in Oriol Industries
Ltd.’s case (supra). The Apex Court had observed as follows :
“That takes us to the principal question of
law in dealing with the said question it is first necessary to refer to section
26 of the Negotiable Instruments Act, 1881 (26 of 1881). This section provides
that ‘every person capable of contracting according to the law to which he is
subject, may bind himself and be bound by the making, drawing, acceptance,
endorsements, delivery and negotiation of a promissory note, bill of exchange
or cheque’.
This section further provides, inter alia,
that ‘nothing herein contained shall be deemed to empower a corporation to make,
indorse or accept such instruments except in cases in which, under the law for
the time being in force, they are so empowered’.
This section does not purport to make any
provision of substantive or procedural law. The latter part of the section
merely brings out that a company cannot claim authority to issue a cheque under
its first part. The law in regard to the company’s power to issue negotiable
instruments has to be found in the relevant provisions of the Companies Act
itself. We must, therefore, turn to section 89 of the said Act.” (p. 995)
23. In Visvonata Raghunath Audi’s case (supra) it was held there
is no presumption about execution of a negotiable instrument and in case of a denial
by the opposite side the party basing its claim on such instrument must fully
prove its execution.
24. In Jhandu Mal &
Son’s case (supra) it was held that Company not liable for promissory note
executed by and in name of agent so authorised. In Probodh Chandra
Chakravarty’s case (supra) it was held thus :
“Where a director of company executing
promissory note thereby promising to pay certain amount both in his personal
capacity as well as on behalf of company. His signature having at its top words
‘on behalf of company’ impressed by rubber stamp. It was held that this
endorsement at the top held did not alter his personal liability.”
Strong reliance was also placed on Brindaban Chandra Mitra’s case
(supra).
25. In Mangal Bahu’s case
(supra) while dealing with the liability of Company in case of a promissory
note executed by managing agent personally it was held as hereunder :
A firm
belonging to a joint Hindu family of which J was the manager, were the managing
agents of an electric supply company. J borrowed some money from P and executed
in his own name a promissory note in favour of P. J also pledged certain fully
paid up share held by the family in his name and transferred in blank the share
of P. The money borrowed by J was deposited in the High Court on behalf of the
company in order to secure the postponement of the appointment of a provisional
liquidator. There was no indication in the promissory note that J was acting on
behalf of the company. All the indications in the case were that the loan was
made to J personally and on his personal security, there being very good
reasons why P should not lend the money to the company. The question was
whether the company could be made liable for the payment of the loan :
(1) that the mere fact that the
company benefited was not by itself sufficient to bind the company;
(2) that before the company could
be held liable, it must be found not only that money came into their hands but
that it was in effect put into their hands by P through the managing agents, it
being understood by both parties when the promissory note was executed that the
company would be liable for repayment;
(3) that though J signed as
manager of the family and though the managing member of a joint Hindu family could
execute in his sole name a promissory note which would be binding on the family
as a whole, there was no justification for extending the principle to a
company, for which there is a special provision in section 89 of the Indian
Companies Act;
(4) that the company was not therefore liable
for the payment of the loan.
The general
principle to be followed in cases of negotiable instruments is that the name of
a person or firm to be charged upon a negotiable document should be clearly
stated on the face or on the back of the document, so that the responsibility
is made plain and can be instantly recognised as the document passes from hand
to hand. It is not sufficient that the name of the principal should be in some
way disclosed; it must be disclosed in such a way that on any fair
interpretation of the instrument, his name is the real name of the person
liable on the bill.
If B borrows
money from A in order for his own purposes to lend it to C, C cannot be held to
A, even if A knew with what object the money was being borrowed. Before he can
be held so liable, it must be found that the loan was actually a loan to C.
26. Strong reliance was also
placed on the principles of construction of a promissory note as decided in
Edula Ayyappa Reddy’s case (supra).
27. Apart from the above
decisions relating to the aspect of presumption under section 118 of Negotiable
Instruments Act, 1881 no doubt reliance was placed on G. Vasu’s case (supra)
and also Bharat Barrel & Drum Mfg. Co.’s case (supra).
28. In
P. Rangaswami Reddier’s case (supra) it was held thus :
“4. The next contention of the appellants is
that there is no resolution by the Board of Directors of the company in terms
of section 292(c) of the Companies Act enabling the Managing Director to borrow
money on promissory notes. Apart from the fact that this plea had not been
raised in the written statement there is no substance also in this contention.
It is not disputed that the Memorandum and Articles of Association allow
borrowing by the directors. The transaction is a loan which is therefore
authorised under the Memorandum and Articles of Association. Article 21 of the
Memorandum provides that the Directors may raise or borrow money on promissory
notes. By Resolution 4 of Ex. A2 which is a certified copy of the registration
of resolutions, the 1st defendant was appointed as the managing director.
Resolution 6 vested in him full powers for the management of the company’s
affairs and also authorised him to sign all papers of the company. The
transaction is, therefore, one which could be entered into on behalf of the
company by the first defendant. In such a circumstance, the creditor is
entitled to presume that all formalities required in connection therewith have
been complied with. A bona fide creditor in the absence of any suspicious
circumstance is also entitled to presume its existence. The creditor being an
outsider or a third party so far as the company is concerned is entitled to
proceed on the assumption of the existence of such a power. In fact the money
was utilised for the purpose of the company is not in dispute and the 2nd
defendant himself has made a part payment towards this promissory note. In this
connection it is also useful to refer to the decision of the Allahabad High
Court in L.R. Cotton Mills Co. v. J.K. Jute Mills Co. AIR 1957 All. 311. It was
held in that case that even where there was no actual resolution authorising a
director to enter into a transaction on behalf of the company either by the
Board of Directors or by the Board of Managing Agents a claim of a creditor
could not be affected if the terms of its Memorandum and Articles of
Association authorised such a transaction. It was also held that in such a case
the person negotiating with a company is entitled to presume that all the formalities
in connection therewith have been complied with. There is no dispute in this
case as to the bona fides of the plaintiff. This contention of the appellants
is therefore unsustainable.” (p. 252)
In Surve Kedarappa v. D.G. Bhimappa AIR 1959 Mys. 36, it was held
thus :
“The plaintiff, an endorsee of a promissory
note executed by the defendants in favour of a company sued on the basis of
that note impleading as defendant the Manager of the Branch of the Company who
had endorsed the note in his favour. Under the Articles of Association of the
Company the Managing Director of the Company had authority to endorse or
negotiate any bill of exchange, promissory note etc. executed in favour of the
Company and in such circumstances it was :
Held, that the plaintiff was entitled to
assume that the Manager of the branch had authority to assign the pronote in
question within the meaning of section 89, Companies Act. Under section 118,
Negotiable Instruments Act there is a presumption that the holder of a negotiable
instrument is a holder in due course. It was for the defendants to establish
that the Branch Manager had no authority to endorse the note and that the
plaintiff was not a holder in due course.” (p. 36)
29. The learned counsel for
the respondent/plaintiff had placed strong reliance on Gopal Krishnaji’s case
(supra) to the effect that the non-production of documents on the part of the
defendant’s company should be taken serious note of and an inference had to be
drawn as against the company and not as against the respondent/plaintiff. In
the aforesaid decision it was held that a party in possession of best evidence
which would throw light on the issue in controversy withholding it, Court ought
to draw an adverse inference against him notwithstanding that onus of proof
does not lie on him.
30. On appreciation of oral
and documentary evidence available on record in the present case, the 1st
defendant as Chief Executive of the Company at the relevant point of time had
not denied the execution of Ex.A1 promissory note. The 3rd defendant is only a
successor-in-interest of the 2nd defendant company who is in the present
management of the affairs of the company. The material on record also shows
that several other liabilities of the company also had been discharged by the
present management but, however, the appellants defendants 2 and 3 in the
present suit had taken a stand that inasmuch as Ex. A1 transaction does not
find a place in the accounts of the company, the company cannot be made liable.
As already observed by me, the Chief Executive of the company at the relevant
point of time executed Ex.A1 and borrowed the amount for the purpose of payment
of the electricity bills of the company only. Hence the said borrower pays for
the sake of the company and at any stretch of imagination, it cannot be said
that the amount was borrowed by the 1st defendant in his personal capacity.
31. It is pertinent to note
that the making of entries or maintenance of account books by the company
predominantly relate to the Indoor Management or the Internal Management of the
affairs of the company with which a creditor is not concerned with and the
creditor will not have any control over the maintenance of the accounts and
hence on that ground a creditor of the company cannot be non-suited. Even in
section 47 of the Indian Companies Act, 1956 the words implied are “shall be
deemed to have been made” and also “express or implied”. A careful reading of
section 47 clearly go to show that as far as the companies are concerned
relating to binding nature of Negotiable Instruments like bill of exchange and
promissory note. Section 47 has to be looked into though the general provisions
under the Negotiable Instruments Act, 1881 also may be relevant to some extent.
In the light of the clear language of section 47 especially in the light of the
evidence of PW1 and PW2 and also clear admissions made by DW1 relating to the
authority of the Executive to enter into Ex. A1 transaction, I am of the
considered opinion that the findings recorded by the trial Court fastening the
liability in relation to Ex. A1 as against defendants 2 and 3 cannot be said to
be unsustainable. Hence I do not see any reason to disturb any of the findings
which had been recorded by the trial Court in this regard. No doubt, on the
aspect of the burden of proof and also presumption that can be drawn under
section 118 of the Negotiable Instruments Act several contentions had been
advanced by both the learned Counsels. But, however, in the light of the clear
evidence of PW1 and PW2 and admissions made by DW1 and also the different
provisions under sections 26, 27 and 28 of the Negotiable Instruments Act, 1881
and also section 47 and also section 147(1)(c) of the Indian Companies Act,
1956, it is not necessary to further discuss these aspects in detail since it
will not alter the situation in any way in favour of the appellants/defendants
2 and 3. Hence all the findings recorded by the trial Court are hereby
confirmed.
Point d
32. In the light of the findings
recorded above in detail especially in the light of the oral and documentary
evidence available on record the appeal is devoid of merits and accordingly the
appeal is dismissed with costs.
33. This Court also records
its appreciation for the able assistance given by both the learned Counsels Sri
Chitturu Srinivas and Sri Ram Mohan in deciding the matter.
[1945] 15 Comp Cas 142
(NAGPUR)
High Court of
All
v.
Jamadar Baheshwarnath
NiYOGI, J.
February 12,
1945
K.V. Brahma and A.L.
Halve, for the appellant.
R. Kaushalendra Rao, for the respondent.
This is defendant's appeal from the reversing judgment of the second Additional
District Judge, Bilaspur, delivered on 7th April 1943. The respondent,
Baheshwarnath Bali, was in the service of the Bengal Nagpur Railway and the
appellent is an association of railway servants which has been organised for
the purpose of affording relief to its members or their nominees on their
retirement from service. It is a registered body. It is a body which is
incorporated under the Companies Act, 1913, with its registered office at
"I have
understood the memorandum and articles of association of the fund and bind
myself and claimants on my behalf to abide by the rules of the fund as they now
stand or as modified from time to time."
When he was enrolled as a member
he was aged 42 years. He made the requisite annual payments until he retired on
6th November 1940. He then applied for the amount due to him which the
defendant association found to be Rs. 1,216-11 0 on 22nd December 1940.
Deducting the amount of the loan due by him and other charges, about which
there is no dispute, the balance of Rs. 870-6-0 was paid to him, which, he acknowledged
by a receipt, dated 22nd December 1940. On 25th March 1941, the plaintiff
(respondent) demanded by a notice, served on the company, rendition of accounts
alleging that he was entitled to receive an amount calculated under rules 96,97
and 98 of the articles of association which were in force in 1932 when he was
enrolled as a member and that he was not bound by the resolutions of the extra
general meetings of the association passed on 23rd September 1939 and 28th
April 1940 whereby the original articles had been amended. His contention is
that he was governed by the articles of the association as they existed on the
date of his enrolment and that the association had no power to alter the
articles so as to affect his interest.
The defendant resisted the claim
on the ground that the Insurance Act (IV of 1938), abolished the dividing
scheme which was the basis of rules 96, 97 and 98 in force in 1932 and that it
necessitated amendment thereof and the registration of the association under
the Trade Unions Act of 1926. Accordingly, meetings of the members of the
association were convened on 23rd September 1939 and 28th April 1940 and the
resolutions making the necessary amendments were unanimously passed and further
that the plaintiff as a member of the association, who had agreed to abide by
the rules of the fund as modified from time to time was bound by those
resolutions and the consequent amendment of the articles of association. The
amendment, which the resolutions introduced, was that a scheme known as
guaranteed scheme was substituted for the original dividing scheme. The lower
Court affirmed the defendant's contention and dismissed the suit. The lower
appellate Court took the contrary view that the guaranteed scheme was wholly
inconsistent with the contract which was made on the basis of the dividing
scheme between the parties and that the adoption of the new where constituted a
breach of the contract. It therefore held that the defendant association
was bound to pay an amount calculated in accordance with the original articles
of association as they existed in 1932 and remanded the case to the trial Court
for further pleadings on the point. The lower appellate Court overlooked
materiality of the Insurance Act of 1938, and it thought that it was fortified
in its opinion by the case reported in Hari Chandana v. Hindustan Co-operative
Insurance Society.
The materiality of the Insurance Act, 1938, becomes apparent when one
adverts to rules 96, 97 and 98. Rules 96 and 97 of the articles of association
are framed by the All India Railwaymen's Benefit Fund, Limited. It is
unnecessary to reproduce them as it is common ground that they are based on the
principle of dividing scheme. That scheme left uncertain the number of claims
among whom the amount ascertained at any particular time was to be distributed.
It therefore contained an element of wager. That was hit by Section 52 of the
Insurance Act (IV of 1938), which prohibited business on dividing principle.
The material part of that section runs as follows: —
"No insurer shall after the commencement of this
Act begin, or after three years from that date continue to carry on, any
business upon the dividing principle, that is to say, on the principle that the
benefit secured by a policy is not fixed but depends either wholly or partly on
the results of a distribution of certain sums amongst policies becoming claims
within certain time limits, or on the principle that the premiums payable by a
policy-holder depend wholly or partly on the number of policies becoming claims
within certain time limits."
Then proviso 2 to sub-section (1) of that section is as follows: —
"Provided further that an insurer who continues
to carry on insurance business on the dividing principle after the commencement
of this Act shall withhold from distribution a sum of not less than forty per
cent. of the premiums received during each year after the commencement of this
Act in which such business is continued so as to make up the amount required
for investment under Section 27."
The respondent retired on 6th November 1940 and his claim accrued on that
day. The Insurance Act, 1938, had already come into force on 26th February
1938. Consequently, the respondent's contract with the association on the basis
of rules 96 and 67, as existed in 1932 when he was admitted as a member of the
All India Railwaymen's Benefit Fund, became unenforceable. Assuming for the
sake of argument at this stage that the association had no power to amend the
rules of the association, the respondent would be governed by the above cited
proviso 2 to Section 52(1) of the Insurance Act, with the result that before
distribution of the ascertained amount among the various claimants the
association would have to withhold a sum not less than 40 per cent. of the
premiums received during the year notwithstanding that the original rules of
the association provided for 10 per cent. only. I have had calculations made in
the light of proviso 2 to Section 52 (1) of the Insurance Act, 1938, and
according to the calculations the amount which would fall to the share of the
respondent would be Rs. 1,194-2-6 as against Rs. 1,216-11-0 which the defendant
association found due to the respondent. It is clear that the respondent has
received more than was due to him under the law. He can therefore have no
ground for any grievance.
This is in reality sufficient to justify reversal of the lower appellate
Court's decree. I would, however, consider the other point, namely whether or
not the association had power to amend the rules as they did in order to meet
the situation created by the promulgation of the. Insurance Act (IV of 1938).
It is pertinent to observe that the association was incorporated and registered
under the Companies Act of 1913. Section 20 of that Act authorises a company to
alter or add to its articles by a special resolution and declares that any
alteration or addition so made shall be as valid as if originally contained in
the articles and be subject in like manner to alteration by special resolution.
It has been held that a company cannot deprive itself of the statutory power to
alter its articles of association either by statement in the articles or by a
contract that they shall not be altered: Andrews v. Gas Meter Company,
Chithambaram Chettiar v. Krishna Aiyangar, Allen
v. Gold Reefs of West Africa, Limited and
Malleson v. National Insurance and Guarantee Corporation. Section
20 of the Indian Companies Act is apparently based on Section 10 of the English
Companies Act, 1929. The only limit that is placed on the generality of the
terms contained in that section is that the section cannot be used to oppress
or defraud a minority of shareholders, or so as to violate any statutory
provision or principle of law but that the power like other powers, must be
exercised fairly and according to law. In Allen v. Gold Reefs of West Africa,
Limited,
Lindley, M. R., observed: —
"The power thus conferred on companies to alter
the regulations contained in their articles is limited only by the provisions
contained in the statute and the conditions contained in the company's
memorandum of association. ... It must be exercised, not only in the manner
required by law, but also bona fide for the benefit of the company as a whole,
and it must not be exceeded. These conditions are always implied, and are
seldom, if ever, expressed. But if they are complied with I can discover no
ground for judicially putting any other restrictions on the power conferred by
the section than those contained in it."
The same view was expressed by Scrutton, L, J., in Shuitleworth v. Cox
Brothers & Co., Maidenhead. The
principal enunciated by Lindley, M.R., received assent of the House of Lords in
British Equitable Assurance Co. Ltd. v. Baily. There
can be no question as to the power of the All India Railwaymen's Benefit Fund
to amend their articles of association as they did by the resolutions passed on
23rd September 1939 and 28th April 1940. The respondent had notice of both these
meetings and he has said nothing against the regularity of the resolutions
passed. The lower appellate Court misdirected itself in relying on Hari
Chandana v. Hindustan Co-operative Insurance Society, as an
authority endorsing its view. It permitted itself to be guided more by the
decision than by the reasons for that decision. In that case the principle was
accepted that a shareholder in the company is presumed to know that an
alteration in the article, not inconsistent with the objects set out in the
memorandum of association, and if it is made bona fide in the interest of the
company, would be bound by such an alteration. The claim in Hart Chandana v.
Hindustan Co-operative Insurance Society was to
recover a definite sum of Rs. 20,000 as being the principal sum due under a
policy of insurance. That was a clear contract which was binding upon the company.
It was argued on behalf of the company (as will appear from p. 245) that the
company was not bound to pay that sum out of its General Fund but out of the
Combined Policy Holders Account which was insolvent. That contention was
overruled since though the company had a right to alter its articles, the
effect of the alteration of the articles was that it involved a fundamental
breach of the contract which the company had previously entered into with the
plaintiff and in respect of which the article was inapplicable.
The facts of this case are different. The contract, as originally entered
into by the association with the member (the respondent in the present case),
was not for payment of a definite sum but for a sum which had to be ascertained
on the basis of the number of the claims arising when the member's claim
matured. That contract became unenforceable except as provided by proviso 2 to
Section 52 (1) of the Insurance Act (IV of 1938). Since the association, which
was registered as a company under the Companies Act of 1913, had power to alter
their articles in good faith for the benefit of the association as a whole, the
alteration was binding upon the
shareholder (member). The calculation of the respondent's claim made on the
basis of that alteration was decidedly more beneficial to him (the
plaintiff-respondent) than the one made in accordance with proviso 2 to Section
52 (1) of the Insurance Act, which was binding on him. The result is that the
lower appellate Court's order remanding the case is set aside and the decree
dismissing the plaintiff-respondent's suit is restored with costs in all the
Courts. Counsel's fee Rs. 50.
[1992] 73 COMP. CAS. 80
(KER)
HIGH COURT of KERALA
Mathrubhumi Printing & Publishing Co. Ltd.
v.
Vardhaman Publishers Ltd.
K.P. RADHAKRISHNA MENON AND
T.V. RAMAKRISHNAN JJ.
M.F.A. Nos.
776-779 of 1990 (C.P. Nos. 29, 42 and 46 of 1989)
NOVEMBER 28, 1991
K.K. Venugopal, C.M. Devan and C.S. Vydyanathan
for the appellant.
Ramaswamy, M. Pathrose Mathai and Bhatt for the respondents.
Radhakrishna
Menon J.—These appeals are
not only important to the parties involved in them but they raise several
questions of general importance relating to the power of the appellant company,
a public limited company, to alter its articles and especially its power to
introduce a new article, the effect of which is to empower it to refuse to
recognise transfer of shares which it could not have refused under the articles
as they stood at the time of transfer as the transfer was prior to the alteration.
Facts
relevant and requisite to dispose of the disputes can briefly be stated thus:
The petitions from which the appeals arise are petitions under section 155 of
the Companies Act, 1956 (for short "the Act"), for rectification of
the share register; some of them filed at the instance of the transferors and
some at the instance of the transferees, of the equity shares of Mathrubhumi
Printing and Publishing Company Ltd. (for short, "the company"), a
company registered as a public company limited by shares. The transferees
lodged the share transfer applications with the company for registration of
transfers of 455 shares. The transferees are public limited companies, wholly
owned subsidiaries of M/s. Bennet Coleman and Company Ltd. which publish the Times
of India group of publications. The transferee companies, before the expiry of
the statutory period of two months contemplated under the Companies Act to
register the transfer, filed the above company petitions for rectification of
the share register mainly on the ground of unnecessary delay in entering in the
register the fact of the transferees having become members. They also moved the
learned single judge with a separate application for the issue of an interim
injunction restraining the appellant from holding the extraordinary general
meeting scheduled to be held on March 13, 1989, for amending the articles of
association of the company by inclusion of article 17. The petition for interim
injunction was opposed by the appellant. The learned single judge, by order
dated March 10, 1989, rejected the interim application holding that the
extraordinary general meeting could be held, but any decision that would be
taken at the said meeting or any decision the board of directors would take,
should be subject to the final orders in the company petition. The
extraordinary general meeting was held on March 13, 1989, as per schedule. The
transferee company's executive director, Sri P.R. Krishnamoorthy, Dr. Ram S.
Tarneja, managing director of the Dharmayug Investments Ltd. one of the
petitioners, and other executives of the various companies also participated in
the proceedings of the said extraordinary general meeting. They participated as
the power holders of the transferors. Article 17 of the articles of association
was inserted by special resolution passed at the said extraordinary general
meeting. Article 17 reads:
"The
board shall have the right in its absolute discretion and without assigning any
reasons to decline to register the transfer of any equity share in the company,
whether fully paid up or not, to a person or persons whether individuals,
companies or otherwise, who in the opinion of the board, would not be desirable
or whose association with the company may be detrimental to the interests of
the company or may affect the laudable objects of the company or who alone or
with others may have other competing business".
The board of
directors of the appellant company thereafter at its meeting held on March 20,
1989, declined to register the transfers on various grounds such as:
non-compliance with the statutory provisions of section 108, non-payment of
transfer fee and also on the ground that the transferees are companies who are
not desirable to be included in the membership of the company as they were competitors
to the appellant company.
The
respondents in these appeals who are the petitioners in the company petitions
filed amendment petitions seeking to include grounds that the decision to hold
the extraordinary general meeting and the decision to amend the articles of
association by inclusion of article 17 were illegal and mala fide, and that the
decision of the board in declining to recognise the transfer was illegal and
that the directors acted with ulterior motive and contrary to the interest of
the company. Regarding the objection on the cancellation of the stamps, the
transferees contended that the cancellation of stamps was proper and that the
other objections raised by the company are frivolous.
The company petitions
were heard jointly and, by a common judgment, the company court passed orders
directing Mathrubhumi to register the transfer of 432 out of 455 shares dealt
with in the four company petitions, subject to certain conditions in respect of
certain shares. Registration was disallowed only in respect of 23 shares.
It is the
said common judgment that is under challenge in these appeals. The questions
arising for consideration are:
(i) Was the company justified in refusing
to register the transfer of shares on the grounds:
(a) that
the instruments of transfer are not duly stamped; and
(b) that the transfer applications are not
accompanied by evidence showing payment of fee as per article 22 of Table A of
Schedule I to the Companies Act ?
(ii) Whether the alteration of the
articles of the company by inserting article 17 is valid ?
(iii) If
valid, is article 17 applicable to the transfers in question ?
(iv) In the facts and circumstances of the
case, was the board justified in refusing the registration of transfers ?
We shall now deal with question No. (i). The answer
depends upon the construction of section 108 and articles 21 and 22 of Table A
of Schedule 1 to the Act and section 2(11), section 12, section 63 of the
Indian Stamp Act, 1899 (for short "the Stamp Act"). We shall now
reproduce the provisions, leaving out the parts which are not relevant here.
"108(1). A company shall not register a transfer
of shares in, or debentures of, the company, unless a proper instrument of
transfer duly stamped and executed by or on behalf of the transferor and by or
on behalf of the transferee and specifying the name, address and occupation, if
any, of the transferee, has been delivered to the company along with the
certificate relating to the shares or debentures, or if no such certificate is
in existence, along with the letter of allotment of the shares or
debentures".
"21. The board may, subject to the right of appeal conferred by
section 111, decline to register —
(a) the transfer
of a share, not being a fully-paid share, to a person of whom they do not
approve; or
(b) any transfer of shares on which the company
has a lien.
22. The board may also decline to recognise any instrument of transfer
unless—
(a) a fee of two rupees is paid to the company
in respect thereof;
(b) the
instrument of transfer is accompanied by the certificate of the shares to which
it relates, and such other evidence as the board may reasonably require to show
the right of the transferor to make the transfer; and
(c) the instrument of transfer is in respect
of only one class of shares".
"2. Definitions.-ln this Act, unless there is
something repugnant in the subject or context,—. . . .
(11)Duly stamped- 'Duly stamped' as applied to an
instrument, means that the instrument bears an adhesive or impressed stamp of
not less than the proper amount, and that such stamp has been affixed or used
in accordance with law for the time being in force in India.
(12)Cancellation of adhesive stamps.- (1)(a) Whoever
affixes any adhesive stamp to any instrument chargeable with duty which has
been executed by any person shall, when affixing such stamp, cancel the same so
that it cannot be used again; and
(b) Whoever executes any instrument on any paper
bearing an adhesive stamp shall, at the time of execution, unless such stamp
has been already cancelled in manner
aforesaid, cancel the same so that it cannot be used again.
(2) Any
instrument bearing an adhesive stamp which has not been cancelled so that it cannot
be used again, shall, so far as such stamp is concerned, be deemed to be
unstamped.
(3) The person required by sub-section (1) to
cancel an adhesive stamp may cancel it by writing on or across the stamp his
name or initials or the name or initials of his firm with the true date of his
so writing, or in any other effectual manner".
"63.Penalty for failure to
cancel adhesive stamp.-Any person required by section 12 to cancel an adhesive stamp, and failing to cancel such
stamp in manner prescribed by that section, shall be punishable with fine which
may extend to one hundred rupees".
Learned
counsel for the appellant formulated his argument thus: Judicial pronouncements
including those of the apex court have categorically declared that the words
"shall not register" employed in section 108, are indicative of the
legislative intent that the provisions contained in the section are mandatory.
This mandatory character is further strengthened by the negative form of the
language (vide Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185;
AIR 1977 SC 536, Malabar and Pioneer Hosiery (P.) Ltd., In re [1985] 57 Comp.
Cas. 570 (Ker) and P.V. Chandran v. Malabar and Pioneer Hosiery (P.) Ltd.
[1988] ILR 2 Ker 552; [1990] 69 Comp. Cas. 164. To say that a duly stamped
instrument within the meaning of section 108 was lodged with the company, it
must be established that the adhesive stamps affixed thereto have been
effectually cancelled. Dilating on this point counsel submitted thus: So far as
an instrument executed in India is concerned, the adhesive stamps affixed
thereto require to be cancelled at the time of execution of the instrument
unless it be that such stamps had been already cancelled by the person who had
affixed the adhesive stamps to that instrument as provided for under clause (b)
of sub-section (1) of section 12. This is what is provided for by section 17 of
the Stamp Act. These requirements shall be complied with before the instrument
of transfer is lodged with the company because these provisions are mandatory.
Here, all the instruments lodged, in so far as the adhesive stamps affixed on
the instruments were cancelled only at the time of lodgment, are liable to be
treated as not duly stamped. In some cases, transfer fee has also not been paid.
As such, the company is bound to refuse registration.
Strict
compliance with the requirements of section 12 of the Stamp Act, however, is
not warranted as these requirements are not mandatory in nature and as such
failure to comply with the said requirements will not justify a declaration
that the instrument is not duly stamped, is the argument of counsel for the
respondent. That is the position under the Stamp Act is clear from the
provisions contained in Chapter IV of the Stamp Act, counsel further submits.
He continued his argument and submitted thus: If before actual lodgment of the
instruments, the stamps are effectually cancelled, the board is bound to accept
such instruments as duly stamped and cannot treat the same as not duly stamped
on the ground that the stamps were not cancelled at the time of execution. The
time of cancellation is not a mandatory requirement under section 12 of the
Stamp Act. What is mandatory is only the manner of cancellation of the stamps
and if the stamps are cancelled in an effectual manner so that it cannot be
used again, that will amount to substantial compliance with the requirements of
section 12 of the Stamp Act. The time at which the cancellation takes place is
totally irrelevant if at the time of lodgment or at the time when the board
takes up the instruments for consideration the stamps were duly cancelled. In
support of this argument he cited the following decisions:
STO v. K.I.
Abraham [1967] 20 STC 367; AIR 1967 SC 1823; Acraman v. Merniman (117 ER 1164);
Royal Bank of Scotland v. Tottenham [1894] 2 LR 715 (QB); Ramen Chetty v.
Mahomed Ghouse [1889] ILR 16 Cal 432; Motilal v. Jagmohundas (6 BLR 699) and
Surij Mull v. Hudson [1900] ILR 24 Mad 259.
Before we
consider the scope of the above contentions it is relevant to refer to some of
the admitted facts. Some instruments of transfer were stamped , at the time of
lodging and those stamps were cancelled by the chartered accountant, Sri
Gopalakrishnan, representing the respondents who lodged the instruments with
the secretary of the appellant company on behalf of the transferees. On some of
the instruments the fee contemplated under article 22 of Table A of Schedule I
to the Companies Act had not been paid. On a few of the instruments though
stamps were affixed they were not cancelled at all.
Sections 10
to 16 are included in Part B of Chapter II of the Stamp Act whereas sections
17,18 and 19 are included in Part C. The provisions included in Part B govern
matters, namely, duties how to be paid, use of adhesive stamps, cancellation of
adhesive stamps, instruments stamped with impressed stamps how to be written,
etc., whereas sections 17, 18 and 19 contained in Part C relate to the time of
stamping the instruments. To put it differently, Part B contains provisions
prescribing the mode or manner of use of adhesive stamps, the manner of
cancellation of the adhesive stamps affixed to any instrument whereas the
provisions contained in sections 17, 18 and 19 pertain to the time when an
instrument executed in India and one executed outside India shall be stamped.
Sections 17 to 19 thus deal with the time of stamping an instrument. The
expression "before or at the time of execution" in section 17 clearly
indicates that an instrument chargeable with duty and executed in India shall be
stamped before or at the time of execution. The term "stamped" in
section 17 means duly stamped, i.e., stamped not only with a stamp of the
amount required by law but also in the manner and with the kind of stamp
prescribed by law. Sections 18 and 19 prescribe the procedure that shall be
adopted for stamping a document executed outside India. Such instruments need
be stamped only after the execution but within the time prescribed by these
sections. We have now to focus our attention on the provisions contained in
section 12. The section concerns the manner of cancelling adhesive stamps
affixed to a document. Under the section, the adhesive stamp should be
cancelled at the time of execution (clause (b) of subsection (1)) except in
cases of instruments made mention of in sections 18 and 19 where the stamps
must be cancelled at the time of affixing the same to the said instruments (see
clause (a) of sub-section (1)). The language employed in sub-section (1) of
section 12 is in the nature of a direction and, therefore, the person executing
the instrument or affixing the stamp to an instrument already executed, as the
case may be, shall cancel the stamp. Failure to comply with this direction
results in the levy of penalty provided for under section 63. This, in short,
is the scheme of these sections contained in Part B and Part C of the Stamp
Act. This scheme makes it very clear that the stamps affixed to any instrument
executed in India require to be cancelled at the time of the execution of the
document following the procedure prescribed in clause (b) of sub-section (1) of
section 12. The cumulative effect of sections 17 and 12(1)(a) and (b) is that,
unless the person executes an instrument on a paper bearing an adhesive stamp
already cancelled in the manner prescribed under clause (a), he is bound to
cancel the adhesive stamp which he is obliged to affix to the instrument at the
time he executes the instrument in India. That this is how the adhesive stamps
affixed to instruments executed in India shall be cancelled is made further
clear by sections 18 and 19 read with section 12(1)(a). It is relevant in this
context to note that an instrument executed outside India, in order to be
declared to be duly stamped, must be affixed with the adhesive stamps, provided
the said instrument is one of the five categories of instruments contemplated
under section 11. A reference in this connection to section 47 is also
relevant. This section refers to a situation where a person other than the one
who has executed the document made mention of therein but at the same time not
residing outside India, can affix the stamp to the instrument and cancel the
same before payment due under the instrument is made.
When exactly
the stamp affixed to an instrument whether executed in India or outside India,
requires to be cancelled is the further question arising for consideration in
the context. The words employed in section 12(1) make it very clear that the
stamp must be cancelled either when it is affixed, or if it is not so
cancelled, it must be cancelled at the time of the execution of the instrument
which act, going by the definition of the word "execution", is at the
time of the signing of the instrument. To put it pithily, cancellation of the
stamps, as per section 12, is expected to be done either when stamps are
affixed or when the instrument is executed, that is, when the executant affixes
his signature to the instrument. Judicial pronouncements in this regard have
cleared the doubt as regards the simultaneous nature of the action of cancellation
of the stamp and signing the instrument thus:
"Viewed
in this light, the provision could only mean that the stamps must be cancelled
either immediately they are affixed or immediately after the maker puts his
signature. In other words, the entire process must take place in such a manner
that one must be able to say that it has been done simultaneously as part of
the same transaction. T.C. Raghavan J. (as he then was) took the same view in
Kuruvila Marhose v. V. Varkey [1966] KLT 603; AIR 1966 Ker 315, relying on the
ruling of the Division Bench of the Madras High Court in Surij Mull v. Hudson
[1900] ILR 24 Mad 259. We are in respectful agreement with the view taken by
the earlier Kerala decision, as that is the only practical and reasonable way of
interpreting section 12 of the Stamp Act". (see K.A. Lona v. Dada
Haji Ibrahim Hilari and Co., AIR 1981 Ker 86, 97).
We have now
to probe into the object sought to be achieved by the sections contained in
Chapter IV of the Stamp Act. The caption given to this Chapter indicates that
the sections included in this Chapter are intended to deal with instruments not
duly stamped. The scheme of the sections contained in this Chapter reflects the
clear and unambiguous intention of the Legislature that an instrument not duly
stamped cannot be admitted in evidence for any purpose by any person having by
law or consent of parties authority to receive evidence, or shall be acted
upon, registered or authenticated by any such person or by any public officer.
These instruments, however, can be impounded by the persons mentioned in
section 33. On the payment of the duty and penalty, if any, under section 35,
section 40 or section 41, the person admitting such instrument in evidence, or
the Collector, as the case may be, shall certify by endorsement thereon that
the proper duty, or, as the case may be, the proper duty and penalty (stating
the amount of each) have been levied in respect thereof and the name and
residence of the person paying them (see sub-section (1) of section 42).
Section 42(2) says that every instrument so endorsed shall thereupon be
admissible in evidence and may be registered and acted upon and authenticated
as if it had been duly stamped. It is relevant in the context to keep in mind
the significance of section 44. This section provides that when any duty or
penalty has been paid under section 35, section 37, section 40 or section 41,
by any person in respect of an instrument, and, by agreement or under the
provisions of section 29 or any other enactment in force at the time such
instrument was executed, some other person was found to bear the expenses or
providing the proper stamp for such instrument, the first-mentioned person
shall be entitled to recover from such other person the amount of the duty or penalty
so paid. It can be inferred from the words employed in the section that it
applies only to the person who is not liable for payment of stamp duty; but,
however, has to pay the deficiency and penalty and not to the person who is
bound to pay the duty. These provisions read along with sections 12, 17, 18 and
19 of the Stamp Act make it clear that only an instrument "duly
stamped" can be admitted in evidence, may be registered or acted upon. To
put it briefly the cumulative effect of the sections contained in Part B and
Part C of Chapter II and those contained in Chapter IV, is that, an instrument,
in order to be produced in evidence, registered or acted upon, must be duly
stamped. And, therefore, if the instrument is not properly executed or the stamp
affixed to the instrument is not cancelled before execution or at least at the
time of execution, the said instrument must be deemed to be unstamped. A catena
of decisions, referred to in para 9, cited at the Bar by counsel for the
respondents, in the light of the principles of law stated above, have no
application here. On these decisions being examined, it can be seen that in
these decisions the only question that was considered was, whether unstamped
instruments can be admitted in evidence, but what will be the effect of
impounding and the consequential payment of deficient duty and penalty has not
been considered in these decisions. These sections, meant to avoid evasion of
duty, in our view have declared in clear terms that only instruments duly stamped
can be produced in evidence, registered or acted upon.
It can
accordingly be opined without fear of contradiction that section 12, although
expressed in affirmative language, is having a negative impact. The provisions
contained in section 12, therefore, can be said to be absolute, explicit and
pre-emptory. A reference in this connection to the well-established principle
of interpretation, namely, every statute limiting anything to be in one form,
although it spoke in the affirmative, yet includes in itself a negative, is
relevant. In other words, if an affirmative statute which is introductive of a
new law, direct a thing to be done in a certain way, that thing shall not, even
if there be no negative words, be done in any other way (see Craies on Statute
Law, 17th edition, pages 264 and 265). We, on account of the above principle,
are emboldened to declare that the provisions contained in section 12 are
mandatory and, therefore, non-compliance with the requirements prescribed
thereunder make the instrument not duly stamped and, therefore, shall not be
received in evidence, registered or acted upon.
None the
less, the respondents could have availed of the benefit of subsection (2) of
section 42 if the board of directors of the company can be treated as a person
within the meaning of section 33 and hence empowered to rectify the
irregularity and thereby give a declaration that the instrument of transfer
must be deemed to be duly stamped, that is, the instrument bears adhesive or
impressed stamps of not less than the proper amount and such stamps have been
affixed or used in accordance with law for the time being in force. Such a
contention the respondents, in our view, cannot raise because the board of
directors of a company cannot be said to be a person in charge of a
"public office". The word "impounding" in section 33, in
the context in which it is used, takes in its fold the power not only to levy
the correct duty but to correct all irregularities like, for example, to return
the instrument to the party to get the stamps cancelled, if on examination
stamps affixed to the instrument are found not duly cancelled, etc. Failure on
the part of the person holding a public office to pass such orders may provide
the aggrieved party a cause of action to approach courts for the issue of
appropriate directions in that regard and not otherwise.
The argument
of learned counsel for the transferees that what is mandatory is only the
manner of cancellation of the stamps and if the stamps are cancelled in the
manner so that they cannot be used again, that will amount to substantial
compliance with the requirements of section 12 of the Stamp Act, in the light
of the principles enunciated hereinbefore, is not sustainable. So is the case
with the argument that the time at which the cancellation shall take place is
irrelevant for the purpose of deciding whether the instrument in question can
be acted upon as duly stamped.
Applying this
principle to the facts of the case, we are of the view that, inasmuch as the
instruments of transfer of the shares are not duly stamped, duly not stamped
because on the admitted facts the adhesive stamps had not been cancelled at the
time of execution, the board of directors of the company was justified in
rejecting the request of the transferees to have their names entered on the
register. The above view expressed by us is supported by the rulings of this
court in Malabar and Pioneer Hosiery (P.) Ltd., [1985] 57 Comp. Cas. 570 and
P.V. Chandran [1990] 69 Comp. Cas. 164 and of the Supreme Court in Mannalal's
case [1977] 47 Comp. Cas. 185. The learned single judge, however, is of the
view that non-compliance with the above requirements is not fatal to the
transaction in that the non-compliance with the requirements is only an
irregularity which can be corrected by giving the applicants for registration a
chance to correct them. The learned judge lost sight of the principles
enunciated in the decisions of this court and the Supreme Court aforementioned
when the learned judge rendered the above decision and, therefore, the said
decision is unsustainable.
It has come out in evidence that in some cases the
proper fee within the meaning of article 22 of Table A of Schedule I to the Act
has not been paid. The non-compliance with the requirements prescribed by this
article is fatal, it cannot be cured by offering to file the share certificate
and a demand draft for the fee in the court. The court has no jurisdiction to
accept the documents and the fee (see P.V. Chandran's case [1990] 69 Comp. Cas.
164 (Ker.)). The learned judge in that decision has observed thus:
"It is only after the instrument of transfer
along with the share certificate and the registration fee are delivered or left
at the office of the company duly, does the occasion for the directors to
consider the matter arise".
This decision of the learned single judge has been
confirmed in appeal by the Division Bench and ultimately by the Supreme Court
by rejecting the special leave application. The learned judge, therefore, was
in error in issuing a direction to the company to recognise the transfers after
receiving the fee the transferees are bound to pay in terms of article 22. This
decision of the learned single judge, in any view, shall be said to be per
incuriam.
Remaining questions we shall now consider. Touching
upon these questions, learned counsel for the appellants contended thus: Under
section 31 of the Act, a company has very wide power to alter its articles. The
only statutory limitation in the exercise of such power of alteration is the
one contained in section 38 of the Act. Of course, such power should also be
exercised bona fide for the benefit of the company as a whole. Even vested
rights of members can be affected by the alteration if the alteration is
"bona fide for the benefit of the company as a whole". Learned
counsel in this connection relied upon the following decisions:
Pepe v. City and Suburban Permanent Building Society
[1893] 2 Ch 311; Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch 656;
Sidebottom v. Kershaw Leese and Co. Ltd. [1920] 1 Ch 154; Shuttleworth v. Cox
Brothers and Co. [1927] 2 KB 9; Greenhalgh v. Arderne Cinerhas Ltd. [1951] 1 Ch
286; and Rights and Issues Investments Trust Ltd. v. Stylo Shoes Ltd. [1965] Ch
250; [1964] 3 All 628.
The Scottish case relied upon by the learned single
judge is the solitary decision which has struck a different note from the
principles laid down in the above cases, counsel further submits. The said
decision is solely based upon an ipsi
dixit and as such cannot be preferred to the above decisions enunciating
correct principles. The allegations of mala fides and other grounds highlighted
in the cross-appeals are baseless. However that may be, the validity of the
resolution passed at the extraordinary general meeting cannot be questioned by
initiating proceedings under section 155. It is all the more so in the case of
the transferors. The transferors can at best contend that the resolution is a
fraud played on the minority shareholders and if that be the position, in order
to invalidate the said resolution the transferors at best can have recourse
either to section 397 or to section 398 read with section 399. So far as the
transferees are concerned they are not entitled to challenge the resolution at
all because at the time the resolution was passed their names had not been
entered on the register and as such for all practical purposes the transferors
continue to be the shareholders. The allegation that the reasons shown in the
resolution rejecting the applications for registration are perverse/unreasonable,
in the circumstances, cannot be sustained.
Learned
counsel for the respondents refuted the above argument. According to him, the
question pertaining to registration of the transfer requires to be considered
with reference to the articles that existed at the time when the transfers were
made, that is, in January and February, 1989, or at the date of the lodgment of
the applications for registration. Dilating on this aspect he contended that
the articles reflect a contract between the member and the company and as such
a public document containing a representation to the public as to what the
contract is, so that the members of the public, who want to deal with the
company or its members in regard to various matters, can act upon the articles
pertaining to those matters. From the point of view of the transferor his share
is freely transferable without any restriction (see section 82 of the Act) and
the said right enures to the benefit of the transferees of the shares and if
that be so, the transferees have the right to challenge the resolution
rejecting their request to register the transfers based on a change introduced
in the articles particularly if the change is after the lodgment. The amendment
of the articles is made in violation of section 173 read with section 189 since
the resolution based on which the amendment is made is substantially different
from the resolution proposed. The resolution under the circumstances is mala
fide and suffers from want of good faith and application of mind. Right from
the beginning the directors appear to be of the view that the applications for
registration somehow or other shall be rejected and to accomplish this they got
the resolution passed in haste. He further contended that the issue arising in
this connection is directly covered by the Scottish case relied on by the
learned single judge to give a verdict in their favour. Assuming that the
resolution was defective for the reason that the instruments were not duly
stamped, the court has the jurisdiction to give an opportunity to the
respondents to correct the defect.
It is too
late in the day to contend that a company has no authority to alter the
articles. A company has the power to alter its articles by special resolution
passed at a general meeting. Such alterations will be valid provided they are
not inconsistent with the provisions of the Companies Act and the memorandum of
association (see para 4 to 7 of Gore-Browne on Companies, volume 1,44th
edition). A reference in this connection to sections 31 and 38 of the Act also
is profitable. We shall reproduce these sections (leaving out parts which are
not very material here):
"31.Alteration of articles
by special resolution.- (1) Subject to the provisions of this Act and to the conditions contained in its memorandum, a
company may, by special resolution, alter its articles:
Provided that
no alteration made in the articles under this sub-section which has the effect
of converting a public company into a private company, shall have effect unless
such alteration has been approved by the Central Government.
(2) Any alteration so made
shall, subject to the provisions of this Act, be as valid as if originally
contained in the articles and be subject in like manner to alteration by
special resolution".
"38.Effect of alteration in memorandum or
articles.-Notwithstanding anything in the memorandum or articles of a company,
no member of the company shall be bound by an alteration made in the memorandum
or articles after the date on which he became a member, if and so far as the
alteration requires him to take or subscribe for more shares than the number
held by him at the date on which the alteration is made, or in any way
increases his liability as at that date, to contribute to the share capital of,
or otherwise to pay money to, the company:
Provided that this section shall not apply—
(a) in any case where the member agrees in
writing either before or after a particular alteration is made, to be bound by
the alteration; or
(b) in any case where the company is a club or
the company is any other association and the alteration requires the member to
pay recurring or periodical subscriptions or charges at a higher rate although
he does not agree in writing to be bound by the alteration".
Construing
these provisions a Division Bench of the Madras High Court has opined
thus: (see Swaminathan (M.V.) v. Chairman and Managing Director, SIDCO [1988]
Writ LR 41).
"Section
31(2) of the Companies Act cannot be understood to mean that any alteration
made in the articles of association would have retrospective effect as if it
was there from the inception of the articles of association. The section is
intended only to confer validity on the alteration made to the articles. It is
only for the limited purpose of making the alteration valid it is to be treated
as if it was originally in the articles. It is seen from sections 29 and 30 of
the Companies Act that certain formalities are prescribed for articles of
association. Unless the requirements of sections 29 and 30 are satisfied, the
articles of association will not be valid in law. If the same formalities are
to be gone through whenever any alteration is made, it may lead to several
difficulties. For example, section 30(c) of the Companies Act requires the
articles to be signed by each subscriber of the memorandum of association. If
an alteration to the articles is also to be signed by all the subscribers to
the memorandum of association, it may not be possible at all. In order to avoid
such a situation, section 31(2) of the Act provides that the alteration made in
accordance with section 31(1) shall be valid as if it was part of the original
articles. It is only for this limited purpose that the legal fiction is
introduced by the said section. We cannot extend the scope of the fiction so as
to make the alteration itself retrospective in effect for all purposes".
With respect
we agree with the view expressed by the Madras High Court. It is pertinent to
note in this connection that counsel representing both the appellant and the transferees
have very fairly conceded that the amended article has no retrospective
operation. An incidental question, however, would arise immediately and it is
this: Whether the altered article would interfere with the transfer of shares
effected by the shareholder prior to the resolution amending the articles. We
are of the view that the transferor remains subject to the altered article if
it is shown that he continues to be a shareholder of the company. We are
fortified in this view by the decision in Pepe's case [1893] 2 Ch 311, where
after considering an amendment to the rule divesting a member of the society of
his vested right to withdraw his shares, passed after the issue of the notice
in writing expressing his desire to withdraw the shares, was held binding on
the member because at the time of altering the article he continued to be a
member of the society. We shall in this connection reproduce relevant parts of
the ruling in Pepe's case [1893] 2 Ch 311, 313.
"It has
been settled by a series of authorities that a person in such a position is
still a member of the society, and it follows that, under his contract with a
society which has power to alter its rules, he remains subject to the rules
when duly altered".
The High
Court of Australia, after reviewing the decisions in Pepe [1893] 2 Ch 311 and
Sidebottom [1920] 1 Ch 154, have held in Peters'American Delicacy Company Ltd.
v. Heath (61 CLR 457) thus:
"(1) Section 20 (corresponding to section 31 of the
Act) empowers-a company to alter its articles only subject to the conditions
contained in the memorandum of association.
(2) An alteration in a particular case may
constitute a breach of contract with a shareholder, but such a breach of
contract does not invalidate the resolution to alter the articles (see Deri's
case [1900] 1 Ch 656 at p. 672).
(3) The fact that an alteration prejudices or
diminishes some of the rights of the shareholders is not in itself a ground for
attacking the validity of an alteration (see Sidebottom [1920] 1 Ch 154,
Shuttleworth [1927] 2 KB 9 and Mien's [1900] 1 Ch 656 cases). Any other view
would, in effect, make unalterable and permanent any articles of association
which conferred rights upon a class of shareholders, or possibly upon any
shareholder, if they or he desired that those rights should continue to exist
unchanged. It is plainly not the law that the fact that an alteration of
articles alters the rights or prejudices the rights of some shareholders is
sufficient to prevent the alteration from being validly made.
(4) The power to alter articles must be exercised
bona fide. It is generally said that the power must be exercised bona fide for
the benefit of the company as a whole, and all the recent authorities refer to
the statement by Lindley M.R. in Allen's case [1900] 1 Ch 656. ... It must be
exercised, not only in the manner required by law, but also bona fide for the
benefit of the company as a whole, and it must not be exceeded.
(5) It is riot for the court to impose upon a
company the ideas of the court as to what is for the benefit of the company. It
is for the shareholders to determine whether an alteration of the articles is
or is not for the benefit of the company, subject to the proviso that the
decision is not such as no reasonable man could have reached.
(6) An alteration which is made bona fide and for
the benefit of the company, if otherwise within the power, will be good, but it
is not the case that it is necessary that shareholders should always have only
the benefit of the company in view .... But though a shareholder may vote hi
his own interests the power of shareholders to alter articles is limited by the
rule that the power must not be exercised fraudulently or for the purpose of
oppressing a minority.
(7) When the validity of a resolution of shareholders
is challenged, the onus of showing that the power has not been properly
exercised is on the party complaining. The court will not presume fraud or
oppression or other abuse of power. . . . It cannot be the law that a
resolution of shareholders is to be presumed to be invalid until the defendants
in an action positively establish that it is valid.
If, however,
the resolution was passed fraudulently or oppressively or was so extravagant
that no reasonable person could believe that it was for the benefit of the
company, it should be held to be invalid".
The Scottish
decision relied on by counsel for the respondents for the following reasons,
has no application here. (1) Even, according to the learned judges, there was
no evidence that the alteration of the company articles in that case was
required in the general interest of the company. A reference in this connection
to the following excerpt from the judgment is profitable:
"The
alteration come into force at its own date, and, if so, section 50 is no
authority for Mr. Sandeman's proposition. There is also this further element
that the alteration was made, not so much because the directors deemed it to be
an alteration required in the general interests of the company, but simply in
order to meet the particular case of the petitioner's transfer".
(2) There was no dispute as regards the valid lodgment of the
application for registration. A reference in this connection to the following
findings is profitable:
"It is
admitted that at the time when he presented the transfer for registration he
was, according to the existing regulations of the company, entitled to have it
registered".
Here in the
case on hand there was no valid lodgment of the application for registration.
If that be the position the question as to whether the transferee has the right
to demand that the transfer shall be registered, does not arise. Under these
circumstances, we are of the view that the Scottish case has no application to
the facts of this case. It should, however, be borne in mind that the company
will always be liable in damages in case the alteration of the article results
in a breach of the contract the company had entered into with any persons. To
put it differently, by effecting alterations in its articles a company cannot
defeat or escape from its contractual obligation with any person. The power to
alter the articles subject to what is stated above is indisputably very wide.
But the article shall not be so altered as to deprive the minority of their
rights (see Southern Foundries [1926] Ltd. v. Shirlaw [1940] AC 701; [1940] 2
All ER 445). That means that no majority of shareholders can, by altering the
articles retrospectively, affect, to the prejudice of the non-consenting owners
of shares, the right already existing under a contract, nor take away the right
already accrued, e.g, after a transfer of shares is lodged, the company cannot
have a right of lien so as to defeat the transfer (see paras 4 to 7 of
Gore-Brown). Before we go into the ramifications of this power, we have to
focus our attention on the meaning of the phrase "bona fide for the
benefit of the company as a whole". It can be seen from the authoritative
decision in Allen [1900] 1 Ch 656 that the court, instead of straightaway defining
this phrase, have stated thus:
"A
resolution constitutes a fraud on the minority if it is not passed 'bona fide
for the benefit of the company as a whole', or, its effect is 'to discriminate
between the majority share holders and the minority shareholders so as to give
to the former an advantage of which the latter was deprived".
(See
Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 All ER 1120 at page 1126
(CA) and Rights and Issues Investment Trust Ltd. v. Stylo Shoes Ltd. [1965] Ch
250 at page 256, Sidebottom v. Kershaw, Leese and Co. Ltd. [1920] 1 Ch 154 and page 768 of Palmer's Company Law, 23rd
edition).
The above
rules were evolved in the so-called "expropriation cases" in which
the issue was whether a special resolution altering the articles of the company
was valid. Sidebottom's case [1920] 1 Ch 154 provides an example of an
expropriation case. Here, the company, which carried on the business of cotton
spinners, passed a special resolution introducing a clause in the articles
whereby a person carrying on "any business which is in direct competition
with the business of the company" could be required to sell out his shares
to nominees of the directors upon payment of the fair value of the shares at a
price to be certified by the auditors. The resolution was plainly against the
plaintiffs, but the Court of Appeal held that it was in the interest of the
company as a whole to be protected against competition, and upheld the
resolution. To appreciate the above principle one should refer to the decision of
Astbury J. in Brown v. British Abrasive Wheel Co. Ltd. [1919] 1 Ch 290 where
the learned judge held that the alteration was not for the benefit of the
company but for the benefit of the majority who got the resolution passed. This
view the learned judge formed at a time when the true meaning of the test
"that the alteration must be 'bona fide for the benefit of the company as
whole' " was not yet ascertained. For the first time this view was
expressed in Sidebottom's case [1920] 1 Ch 154. Taking all these aspects into
account, Palmer has stated thus:
"The
true distinction between these two cases is that in Sidebottom's case [1920] 1
Ch 154, the expropriating article was not discriminatory in character and, in
appropriate circumstances, would likewise have operated against the majority,
but that in British Abrasive Wheel Co.'s case [1919] 1 Ch 290, the article was
plainly and unashamedly discriminatory". (See Para 58.16 of Palmer)
The power
conferred on the company under section 31 of the Act to alter the articles by
special resolution, however, shall not be abused by the majority of
shareholders so as to oppress the minority. A question immediately would arise,
namely, what action the minority shareholders who contend that the resolution
altering the articles cannot be said to be "bona fide for the benefit of
the company as a whole" can initiate ? This question can be answered only
if we keep in mind the difference between "qualified minority rights"
and "individual membership rights" of a shareholder. The difference
is this: The individual membership rights can be exercised by any individual
shareholder. But to enforce the qualified minority rights the co-operation of
the minority group of a specified size within the corporate body is required
(Paras 59.02 and 58.04 of Palmer). What then is an "individual membership
right" ? It can be defined thus: The right to maintain himself in full
membership with all the rights and privileges pertaining to that status. This
individual right implies that the shareholder can insist on the strict
observance of the legal rules, statutory provisions and provisions in the
memorandum and articles which cannot be waived by a bare majority of
shareholders. The qualified minority rights enable the minority to preserve in
important matters, the status quo which is founded oh the original contract of
shareholders and the company. Proceedings to enforce qualified minority rights
under the Act can be initiated only under section 397 or section 39.8 read with
section 399 of the Act.
It is in this
backdrop that we have to tackle the questions. Learned counsel for the
transferees contended that inasmuch as the resolution altering the articles by
incorporating article 17 was passed only after the instrument of transfer had
been delivered to the company along with the certificate relating to the.
shares, it should be said that the alteration was effected with a view to
defeat their rights to get their names entered on the register. This argument
both in law and in fact, counsel for the company submits, is not sustainable
because pending registration the transferees have only an equitable right to
the shares transferred to them. There is no substance in this counter-argument,
counsel for the transferees submits, because when once the transfer is
completed and recognised by the company it relates back to the time when the
transfer was first made. In support of this argument he pressed into service
the following rulings including a ruling of this court.
Killick Nixon Ltd. v. Dhanraj Mills (P.) Ltd. [1983]
54 Comp. Cas. 432 (Bom), Travancore Electro Chemical Industries Ltd. v.
Alagappa Textiles (Cochin) Ltd. [1972]
42 Comp. Cas. 569 (Ker) and two decisions of the Supreme Court in LIC of India
v. Escorts Ltd. [1986] 59 Comp. Cas. 548 and Vasudev Ramchandra Shelat v.
Pravlal Jayanand Thakar [1975] 45 Comp. Cas. 43 (SC).
The question,
therefore, is: when would the transfer become effectual as between the company
and the transferees ? The deed of transfer shall not have any effect so as to
put the transferee into the position of the transferor until it has been lodged
with the company, and it must be not only lodged, but accepted by the company
as properly lodged, because if the company finds that it does not comply with
the provisions of the Act it is its duty to refuse to receive it (see the
decision of the Chancery Division in Nanney v. Morgan [1888] 37 Ch 346). Until
the lodgment, the transfer may be effective between the transferor and the
transferee. The transfer, however, becomes complete and the transferee becomes
a shareholder in the true and full sense of the term with all the rights of a
shareholder, only when the transfer is registered in the company's register. In
the same strain is the statutory mandate to the company discernible from
section 108, not to register the transfer of shares unless a proper instrument
of transfer duly stamped and executed is delivered to the company. Until such
time as. registration is granted, the person whose name is found in the
register alone need be treated as the shareholder by the company. During the
interregnum, that is, from the date of the transfer till the date of lodgment
the transferee no doubt, becomes the owner of the beneficial interest though
the legal title continues with the transferor. This antecedent right in the
transferee is enforceable, so long as no obstacle to it is shown to exist in
any of the articles of association of a company or a person with a superior
right or title, legal or equitable, does not appear to be there. This in brief
is the law stated by the Supreme Court in the decision in Pranlal's case [1975]
45 Comp. Cas. 43 (SC) and Escort's case [1986] 59 Comp. Cas. 548. The
principles deducible from the above judicial pronouncements can be stated thus:
Until the transfer of the shares is actually registered it should be held that
the transferee's title to the share is inchoate, and that the legal title
remains vested in the transferor (see Colonial Bank v. Hepworth [1887] 36 Ch 36
at page 54). This line of reasoning is reinforced by article 19 of Table A of
Schedule I to the Act which provides that until the name of the transferee is
entered in the register of members, the transferor shall be deemed to remain
the holder of the shares transferred, thereby clearly stating that the legal title
remains vested in the transferor. It is true that delay in the registration
involves danger to the transferee if some already existing prior equity may
come to light, as in the case in Ireland v. Hart [1902] 1 Ch 522, where a
husband mortgaged shares of which he was trustee for his wife and, before the
mortgagee had become the registered holder of the shares, the wife took
proceedings claiming that her equitable title prevailed over that of the
mortgagee, a claim which the court upheld; or a second transfer may be passed
and registered and thus the first transfer may be defeated (see para 39.07 of
Palmer, 23rd edition). The position has been illustrated by Palmer thus:
"The
rule on this point is that, as between two persons claiming title to shares in
a company like this, which are registered in the name of a third party,
priority of title (i.e., equitable title) prevails, unless the claimant second
in point of time can show that as between himself and the company, before the
company received notice of the claim of the first claimant, he, the second
claimant, has acquired the full status of a shareholder; or at any rate that
all formalities have been complied with, and that nothing more than some purely
ministerial act remains to be done by the company, which as between the company
and the second claimant the company could not have refused to do forthwith; so
that as between himself and the company he may be said to have acquired, in the
words of Lord Selborrie, 'a present, absolute, unconditional right to have the
transfer registered, before the company was informed of the existence of a
better title' ".
It,
therefore, follows that the equitable right of the transferee gets:
metamorphosed into the absolute right of a shareholder only when the names of
the transferees after the recognition of the transfer, are entered on the
register. This can be viewed from another angle and it is this: when once the
transferee does everything that he is required to do under law, to get his name
entered on the register by proper lodgment of the instruments of transfer and
no other obstacles remain in enforcement of the said right, the transfer
becomes effective as against the company also. Thereafter, the company cannot
unilaterally alter its articles affecting the aforesaid right of the
transferee. Mere delay in the actual registration of the name of the transferee
on the register provided there is a proper lodgment of the instrument of
transfer cannot affect the above right of the transferee. If that be the
position, the right of the transferee to get his name entered on the register
gets crystallised when proper lodgment is effected and the transfer from the
date of the proper lodgment becomes effective as against the company also, and
such rights cannot be affected by subsequent actions of the company like
amendment of articles, etc. Subject to what is stated above, the transfer, once
the company after recognising the transfer enters the name on the register,
relates back to the time when the transfer was first made (see Howrah Trading
Co. Ltd. v. CIT [1959] 29 Comp. Cas. 282; AIR 1959 SC 775).
In the light
of our finding that there was no proper lodgment and the transfer has not
become effective as against the company, the transferees cannot be heard to
contend for the position that the company in exercise of the power conferred on
it under section 31 of the Act cannot alter the articles to their detriment. It
should in this connection be remembered that the right of a shareholder to
transfer his shares is always subject to the provisions in the articles of
association as well as section 31 of the Act. The transferee, therefore, cannot
have a better right than the transferor and, therefore, his right as a
transferee until the transfer becomes effective as against the company will
again be subject to the provisions in the articles of association and the
relevant provisions of the Act. The alterations effected to the articles of
association in exercise of the said power cannot, therefore, be challenged by
the transferee on the ground of mala fide. The transferees in other words have
no manner of right to challenge the resolution.
Now, we shall
consider the question as to whether the transferors have any right other than
the one recognised under sections 397 and 398 read with section 399 to
challenge the resolution amending the articles in a proceeding under section
155. As answer to this question it can be conceded that they have certain
rights which can be called as "individual shareholder's right". Such
individual shareholder's right pressed into service in this case by the
transferors have been dealt with by the learned single judge in paragraphs 28,
29 and 30 of the judgment. They can be formulated thus: The questions that were
considered in this connection are: Whether the notice and explanatory statement
of the extraordinary general meeting are legal and valid, whether the
resolution as passed was materially different from the resolution as proposed
in the notice. The learned single judge, after considering the various aspects
of these questions and also the relevant provisions contained in sections 171,
172, 173(2) and 189 has found that the notice and explanatory statement of the
extraordinary general meeting were legal and valid. We shall in this connection
reproduce the findings as regards question No. 1.
"... As
such, there was no suppression of any material fact. The personal concern or
interest of the directors in the special resolution suggested by learned
counsel for the petitioner is far-fetched. Sub-section (2) of section 173 only
mentions 'the nature of the concern or interest, if any' of every director in
the concerned item of business. By the alteration the power is conferred on the
board of directors as a whole and not on any single director. In any view of
the case the wording of the resolution itself was self-explanatory which did
not require any further explanatory statement about the powers to be conferred
on the board of directors. Accordingly I hold that the notice and explanatory
statement of the extraordinary general meeting were legal and valid".
The findings
based on which the learned single judge answered the second question in favour
of the company are extracted hereunder:
"In the resolution
as proposed in the notice there were two clauses in the new article 17. Clause
(b) related to forfeiture of equity shares. The minutes of the extraordinary
general meeting (Annexure R-1(e) to the counter-affidavit on behalf of the
first respondent in C.P. No. 29 of 1989 dated 9th November, 1989), shows that
the alteration as proposed in the notice was proposed, duly seconded and the
chairman said that the formal special resolution was before the meeting.
Subsequently, Dr. N.V. Krishna Warrier as well as Sri P. Kumarariunni moved
amendments to the special resolution. The amendment proposed by Sri Kumaranunni
was supported by the transferors of shares as well as Sri P. R. Krishnamoorthy,
Executive Director of the Times of India and Dr. Ram S. Tarneja, who were
allowed to participate in the meeting on the basis of the powers of attorney in
their favour. The amendment proposed by Sri Kumaranunni was rejected after
putting it to vote. The amendment proposed by Dr. Krishna Warrier was approved
by the general body. The proposed clause (b) in article 17 was accordingly not
approved. There was also some variation in the wording of clause (a) by which
the board was given absolute discretion to decline to register the transfer
without assigning any reasons. This was an amendment which was duly moved in
the extraordinary general meeting in which the petitioners also participated.
They cannot now be heard to say that the resolution as passed was different
from the resolution as proposed in the original notice, even though the power
given to the board to decline to register transfer without assigning any
reasons in its absolute discretion was not envisaged in the original
proposal".
On seeing the
evidence dealt with by the learned single judge we are of the view that there
is little scope to interfere with the said finding. We accordingly concur with
the said findings.
Learned
counsel for the transferors, Mr. Pathrose Mathai, has then submitted that even
if the amendment of the articles is held to be valid, article 17 in so far as
it confers absolute discretion on the board to reject transfers is void being
repugnant to the provisions in section 82 read with section 9 of the Act. It
amounts to an absolute restriction regarding transferability of shares.
Further, he submitted that the article is opposed to public policy and as such
void and inoperative and cannot be relied upon to reject the transfer applied
for. We do not find any merit in the above contentions. The object of the
provision is to arm the directors with power to be exercised in special and
exceptional cases where the transfer of shares may be found to be undesirable
in the interests of the company. The articles of association of almost all
public companies vest in the board of directors absolute and uncontrolled
discretion to decline to register any transfer of shares. The adoption of such
an article does not mean that there is a restriction on the free transfer of
shares as in the case of private company. Even though the articles may give the
directors absolute and uncontrolled discretion to refuse registration of
transfers, a fiduciary power of this sort must be exercised bona fide in the
interest of. the company and if it is misused certainly the court and, after
the 1988 amendment, the Company Law Board has wide powers to interfere with
such abuse of power by the board.
The
conclusion, therefore, is that the validity of the resolution in dispute can be
challenged by the transferors not by initiating proceedings under section 155
meant only to enforce individual membership rights but only by initiating
proceedings if so advised either under section 397 or section 398 read with
section 399.
We,
therefore, are of the view that the rejection of the application to register
transfer of shares on the ground that there was no valid lodgment of the
application is beyond challenge. We, accordingly, answer questions (i), (ii)
and (iii) in para 7 in favour of the appellant. Question No. (iv), in the
circumstances, in our view, does not arise for consideration and, therefore, we
are not going into the merits of the case covered by this question.
In the light
of our answer to questions (i) to (iii), the cross-appeals are liable to be
dismissed, They are, therefore, dismissed.
The appeals
are allowed. But, in the circumstances, no order as to costs.
Learned
counsel for the respondents, immediately after the passing of the judgment,
made an oral application for certificate for appeal to the Supreme Court. We
are satisfied that the case involves substantial questions of law of general
importance and, therefore, we certify that the said questions need to be
decided by the Supreme Court.
Issue
photostat copy on usual terms.
[1984]
55 COMP. CAS. 70 (KAR.)
HIGH COURT OF KARNATAKA
State of
v.
M.P. CHANDRAKANTARAJ URS J.
JANUARY 20, 1982
Jayaram and Jayaram
for the respondent.
Chandrakantaraj Urs. J.—In
this petition under ss. 106 and 107 of the Companies Act (hereinafter referred
to as "the Act"), the State of
This
court issued emergent notice to the respondent regarding admission of the
petition and, in the meanwhile, issued stay of the operation of any resolution
passed at the general meeting of the company held on December 9, 1981, relating
to the amendment of the aforementioned articles of the articles of association
of the company.
The
respondent company has entered appearance and filed its counter affidavit by
way of objections. It is not necessary to traverse in detail the averments made
in the counter affidavit. The main points made out by Sri A.N. Jayaram, learned
advocate for the respondent company, are:
(1) That the petition is not
maintainable under s. 106 or s. 107 of the Act as the proposed amendments do
not affect the rights of any class of shareholders of the company as the rights
attached to such shares of such classes are in no way affected by the proposed
amendments to arts 70(a) and 97 of the articles of association of the company,
and
(2) That the right of the company to
amend its articles is a right not fettered by any contractural impediment which
is not specially provided for under s. 31 of the Act.
He,
therefore, submits that the petition seeks to restrict the statutory right
conferred on companies to amend its articles of association and the petition
deserves to de dismissed.
To
appreciate the arguments of the learned counsel, it is necessary to set out
briefly the facts which are not in dispute.
The
Mysore Coffee Curing Works Limited (respondent herein) was duly incorporated on
13th September, 1938, and is deemed to be a company registered under the Act.
In accordance with article 5 of the memorandum of Association of the company,
the share capital of the company is Rs. 50,00,000 divided into 4,00,000 equity
shares of Rs. 10 each and 10,000, 9.5% cumulative preference shares of Rs. 100
each.
In
the counter affidavit filed, it is stated that the cumulative preference shares
have, however, never been issued and the subscribed capital of the company is
Rs. 19,74.620 consisting entirely of the wholly paid-up equity shares of Rs. 10
each. It is further stated that in 1980 the company issued right shares in the
ratio 1:1 permitting its shareholders to buy ordinary equity shares in
proportion to their existing holding and that the Government (petitioner) did
not act on that offer while the other shareholders did. In the result, as on
the date of the petition the Government held equity shares amounting to 19.6%
of the total subscribed capital. It was in these circumstances having regard to
the altered capital ratio between the Government on the one hand and the other shareholders on the other hand that arts. 70(a) and 97 of
the articles of association of the company were required to be amended.
It is useful to state that
art. 70(a) of the articles of association of the company provides for the State
Govt. to nominate three directors on the board of directors of the company in
consideration of having subscribed to the capital of the company, while art. 97
provides for the Governor of the State of
The learned counsel for the
respondent contends that these are not rights attached to the shares as such,
but original contractual obligation between the promoters of the company and
the State Govt. at the time of its inception and like any other article, is
liable to be altered or amended or deleted whenever the company thinks it fit
to do so. In other words, the thrust of the argument is that the right to
nominate directors as well as the chairman of the board of directors flow not
from the shares held by the State Govt., but the rights conferred on the State
Govt. are only by virtue of the relevant articles of the articles of
association of the company as a result of agreement.
There is force in the above
contention. Sections 106 as well as 107 of the Act provides for a particular
class of shareholders to move this court whenever the rights attached to that
class of shares are sought to be altered by the company and in no other circumstances.
Normally if one is to take into consideration the class of shares of the
respondent company, i.e., ordinary equity shares and the cumulative preference
shares, the rights attached to those shares can be easily stated as being;
(1) Equity
Shares :
(i) Right to vote,
(ii) Right to receive
dividends,
(iii) Right to
maintain its face value, and
(iv) Right to transfer
freely, without restriction, the share to another.
(2) Cumulative
Preference Shares :
(i) Right to receive
the prescribed dividend,
(ii) Right to
transfer, and
(iii) Right to vote in case the company has not
paid the prescribed dividend in respect of that class of shares.
Beyond these rights,
nothing else is provided for in the memorandum and articles of association of
the company.
It is not disputed that
there are no other class of shares which the Government holds by virtue of
which they have the right of nomination of directors and the chairman of the
board of directors. Therefore, the proposed amendment of arts. 70(a) and 97 of
the articles of association of the company, by depriving the State Govt. of the
power of nomination of the directors as well as the chairman of the board of
directors, is not a matter falling within the scope of interference by this court
under ss. 106 or 107 of the Act.
Section 31 of the Act
provides for the alteration of articles by special resolution. Sub-s. (2) of s.
31 of the Act provides that:
"Any alteration so made, shall, subject to
the provisions of the Act, be as valid as if originally contained in the
articles of association and be subject in like manner to alteration by special
resolution".
The only restriction on the
unfettered power under sub-s. (1) of s. 31 of the Act is the restriction
imposed by the proviso to that section and it is that, a public company cannot
convert itself into a private company by merely carrying out an amendment of
the articles of the articles of association of such a company. If the power
conferred under sub-s. (1) of s. 31 of the Act is to be given full effect by
the court, then the provisions contained as contractual obligations in art.
70(a) and art. 97 of the articles of association of the company, cannot be
construed as controlling the amending powers given to a company under s. 31(1)
of the Act.
In the light of the above
discussion it is clear that the State Govt. cannot invoke the protection of
this court to continue a state of affairs which no longer is warranted having
regard to the pattern of shareholders and the proportion of shares held by the
Government and the other shareholders. If the Government has 1/5th of the
shares only, then it cannot certainly have the right to nominate the directors
or appoint the chairman of the board of directors of the company unless the
other shareholders permit the same. Evidently other shareholders are not
willing to continue the existing provisions of art s. 70(a) and 97 of the
articles of association of the company.
I, therefore, hold that
this petition is not maintainable under s. 106 or s. 107 of the Act.
The learned counsel for the
petitioner has not pointed out any other provision of the Act under which this
petition can be maintained.
In the result, this petition is dismissed. There will be no order as to costs.
[1988]
64 Comp. Cas. 651 (
High
Court of
v.
B.N. Khanna
D. P. Wadhwa, J.
K. K. Mehra and S.K.
Chaudhary for the petitioner.
Vinay Bhasin for all the
respondents except respondents Nos, 17 and 18.
Satish Soni (member) in
person.
D. P. Wadhwa, J.—-This is a petition filed under section 155 of the Companies
Act, 1946 (for short "the Act"), The petitioner has prayed that the
register of members of the company be rectified by deleting the names of all
the persons who became members of the company beyond the figure of 1,500. The
company is the
The petitioner, who claims
to be a member of the DDCA, states that the DDCA is a company limited by
guarantee without share capital. Though it was contended on behalf of the DDCA
that it was now a company registered under section 25 of the Act, yet that fact
was denied by the petitioner. Reference was made in this connection to a letter
dated June 28, 1985, of the Regional Director, Company Law Board,
Article 2 of the articles
of association of the DDCA is as under:
"For the purpose of
registration, the number of members is 1,500. This may be reduced or increased
from time to time by the general committee".
Based on this article, the
principal submission of the petitioner has been that DDCA could not enroll any
member beyond 1,500 and that the appearance of the names of the persons
thereafter on the register of members was wrong and the register of the members
had to be rectified by deleting the names of the members from serial No. 1,501
onwards. It was submitted that the petitioner had no knowledge about the exact
number of members enrolled beyond 1,500 and that the petitioner estimated that
number also as 1,500. The petitioner thus contends that the names of all those
persons who have been shown/entered in the register of members of the DDCA
beyond the figure 1,500 have been so entered without any sufficient cause and
that they cannot be treated as members and the register of members, therefore,
needs rectification.
Before I discuss this case
further, it would be necessary to refer to the proceedings in Suit No. 1587 of
1982 filed by the petitioner and others in this court. In this suit, there were
15 plaintiffs and 27 defendants, the DDCA being defendant No. 1. This suit was
filed on November 26, 1982, and was for declaration and an injunction. A
declaration was sought in favour of the plaintiffs and against the defendants
declaring that the annual general meeting of the DDCA held on September 30,
1982, and the election of the executive committee and the office-bearers of the
DDCA in that meeting were all illegal and of no consequence. The plaintiffs
wanted to have that election set aside and also sought a permanent injunction
restraining the defendants from acting as office-bearers or as members of the
executive committee of the DDCA. Some of the grounds on the basis of which the
relief of declaration and injunction was sought, and which are relevant to the
present petition as well, were:
"VII. That inasmuch as article 2 of the articles
of association of the DDCA fixed the number of members as 1,500, any change in
the said article could have only been done by a special resolution of the
general meeting of the DDCA and, therefore, the purported addition of new
members in any event was illegal and without any authority".
"IV. That the enrolment of more than 400 new
members during the six months preceding the election was illegal and mala fide
and had been done in order to manipulate a majority in favour of those who were
then controlling the affairs of the DDCA".
"V. That no decision was taken in any meeting to
increase the number of registered members of the association and even assuming
without admitting that any such decision was taken, the same was not valid
inasmuch as no notice under section 97 of the Act of the said increase has been
given to the Registrar. Moreover, the proper procedure was not followed in
enrolling new members".
If reference is made to the
title of this suit, Mr. K. K. Mehra who is now appearing as counsel for the
petitioner was also a plaintiff (plaintiff No. 5) in that suit and most of the
defendants in that suit are now respondents in the present petition. That suit
was settled, and the statements of the parties and the order thereon are as
under:—
"17-8-1983
|
Present: |
Mr.
S. C. Malik with Mr. K. K. Mehra, K. N. Kataria and Vijay Kishan, counsel for
the plaintiff. |
|
|
Mr.
Lalit Bhasin and Vinay Bhasin, counsel for the defendant. |
I.A. No. 4531 of 1982 :
Counsel for the parties
have arrived at a settlement. Let the same be recorded.
August 17, 1983.
J. D.
Jain
JUDGE"
Statement of Shri S. C.
Malik, counsel for the plaintiff and Mr. Lalit Bhasin, counsel for the
defendant.
It is agreed between the
parties that the number of directors, viz., members of the general committee shall
be 15, as prescribed in the articles of association of defendant No. 1. However
it will be open to the general body at an annual general meeting or
extraordinary meeting to enhance or decrease the number of directors/members of
the general committee in accordance with the provisions of law. The next annual
general meeting/election of the association defendant No. 1 shall be held on or
before September 30, 1983, without fail. The present general committee shall
chalk out programme for the next election and shall fix dates for (i) filing of
nomination papers, (ii) date for scrutiny of nomination papers, (iii) date for
withdrawal of nomination, and (iv) date for filing proxies in accordance with
law and articles of association. The filing of nomination papers, scrutiny
thereof and withdrawal of nominations and the filing of proxies shall be done
in accordance with law and the rules of the association subject to the
supervision of the observer-cum-supervisor to be appointed by this court.
Parties agree that Shri M.
S. Joshi, a retired judge of this court, be appointed observer-cum-supervisor.
He shall ensure that the entire process of election and holding of annual
general meeting is carried out under his supervision. He will be competent to
sign all the relevant papers including ballot papers and proxies. He will be
associated with the entire election process and proxies and ballot papers will
be duly serialised and initialled by him. The general committee shall extend
full co-operation and assistance to him in the discharge of his functions.
Each member shall be
entitled to one proxy only. Proxy form and notice of annual general meeting
shall be sent by registered post only. The ballot papers and proxies will be
issued by the supervisor himself.
The right to east vote
shall be available to all the members of the association who had been enrolled
up to November 29, 1982, i.e., the date when the interim order was made by this
court. It is admitted that there has been no enrolment of members thereafter.
On the completion of election of the general committee, the suit shall be
dismissed as withdrawn.
|
RO
& AC |
J.D. Jain, |
|
August
17, 1983. |
Judge. |
In view of the joint
statement made by the counsel for the parties. I direct that the annual general
meeting/election of the association, defendant No. 1 shall be held by or before
September 30, 1983, without fail. The present general committee shall decide
upon the necessary steps towards holding of annual general meeting and
election, etc., as indicated above forthwith. Shri M. S. Joshi, a retired judge
of this court, is appointed observer-cum-supervisor to ensure that the annual
general meeting and the election of the next general committee are held fairly
and properly and that all the processes involved in holding the election are
duly observed. The supervisor-cum-observer shall be competent to sign all the
relevant papers relating to the holding of any annual general meeting and
election including the ballot papers and proxies, etc. The general committee
shall extend all co-operation and assistance to the observer-cum-supervisor in
the matter. If there is any difficulty or controversy, the parties as well as
the observer-cum-supervisor will be entitled to seek directions from this
court. Fee of the observer-cum-supervisor is fixed as Rs. 5,000. It will be
paid by defendant No. 1. A copy of this order as also the joint statement be
sent to the observer-cum-supervisor for information and necessary action.
This LA. stands disposed of
accordingly.
Suit No. 1587 of 1982 :
Adjourned to October 6,
1983, for further orders.
|
|
J. D. Jain |
|
August
17, 1983. |
Judge". |
It appears that in
pursuance of the aforesaid order in the suit, elections were held on September
30, 1983, and the report of the observer was submitted on October 10, 1983. The
plaintiffs then filed an application (IA No. 2980 of 1984) in the suit
purportedly under Order 39, rules 1 and 2, and section 151 of the Code of Civil
Procedure, 1908 (for short "the Code"), but in fact raising certain
objections to the report of the observer as well. It was prayed that the
defendants be restrained from enrolling new members till the decision of the
suit and further restrained from postponing the annual general meeting beyond
September 30, 1984. It was again mentioned in the application that membership
of the DDCA could not be increased without the approval of the general house
and that too by an amendment of the articles by a special resolution. The
court, however, by order dated September 6, 1984, dismissed this application
holding that the order dated August 17, 1983, was specific and the plaintiffs
could not go behind that order and they would be held bound to the settlement
arrived at between the parties and recorded in the proceedings of August 17,
1983. The court then observed:
"It may also be pointed out here that by the
holding of the fresh elections of the DDCA on September 30, 1983, the suit as
laid stands virtually decreed. No attempt was even made by the plaintiffs to
amend their plaint suitably in case the plaintiffs were not satisfied by the
fresh elections as held on September 30, 1983. They may seek appropriate
remedy, i.e., by way of a fresh suit or other proceedings. The present suit,
however, does not survive any longer. In conclusion, I hold that the suit is
liable to be dismissed forthwith".
The aforesaid observations
of the court in Suit No. 1587 of 1982, it appears, led to the filing of the
present petition. Obviously, the petitioner and his group lost the elections
held on September 30, 1983, and September 30, 1984. Elections for subsequent
years were stayed by this court by order dated August 28, 1985, and the
respondents were also restrained from admitting new members.
Respondents Nos. 17 and 18,
who are nominees of the Central Government as directors in the DDCA, did not
choose to appear in these proceedings. Reference to the respondents would,
therefore, mean respondents Nos. 1 to 16.
The respondents, in their
reply, denied the allegations of the petitioner and submitted that members had
been enrolled validly under article 2 of the articles of association. It was
admitted that membership exceeded the figure of 1,500 and at present it was
3,200. It was stated that nobody, not even the petitioner, raised any
objections when the members were enrolled. Reference was made to the
proceedings in Suit No. 1587 of 1982 mentioned above. It was stated that all
the members whose names were sought to be removed by rectifying the register of
members were necessary parties and that in the absence of those members, the
present petition was not maintainable and no relief could be granted to the
petitioner. It was also submitted that when settlement was arrived at in Suit
No. 1587 of 1982, at that time also, admittedly the number of members of DDCA exceeded
the figure 1,500 and they all participated in the annual general meeting of
September 30, 1983, when elections were held and the respondents elected to the
executive committee of the DDCA. The petitioner did not think that the members,
whose names were sought to be removed from the register of members of the DDCA
after rectification were necessary parties and stated that new members were
being enrolled indiscriminately to perpetuate the hold of the respondents on
the DDCA.
Evidence in the case was led
by means of affidavits. In support of his case, the petitioner filed only his
own affidavit. The respondents filed the affidavit of Mr. L. N. Tandon, general
secretary of the DDCA and also a respondent in these proceedings. This
affidavit of Mr. Tandon was filed on September 13, 1985.
On March 4, 1986, the
petitioner filed an application (CA No. 344 of 1986) under Order 6, rule 17,
read with Order 1, rule 10 and section 151 of the Code. In this, it was
mentioned that the respondents had taken an objection that all the persons
numbering more than 1,820 be added as parties and that this was a technical
objection and further that in order to meet this technical objection, the
petitioner might be allowed to sue all these 1,820 new members "in
representative capacity and the respondents already on record may be directed
to defend the suit on behalf of all such persons". It was further
mentioned that "even otherwise, the details, viz., names and addresses of
these persons, are within the exclusive knowledge of the respondents, and the
defence is bound to be the same as they have identical interest". It was
also mentioned that it was not reasonably practicable to effect personal
service on all these members as their number was large and that they could be served
by a public advertisement. The prayer in the application was that the
petitioner be allowed to amend the petition by suing the members beyond 1,500
in the representative capacity and that the respondents be directed to defend
the suit on their behalf and further that notice of the institution of the
petition be ordered to be published in some newspaper as required under Order
1, rule 10, of the Code. The respondents opposed this application. It was
submitted that the application was much too belated as the respondents had
taken the objection about the non-impleading of the members in their reply to
the petition and thereafter the petitioner even filed his rejoinder and then an
affidavit by means of evidence wherein he had taken the stand that the members
beyond 1,500 were not necessary parties to these proceedings. Then the
respondents stated that the petition had been set for hearing on many occasions
and that this application was filed to delay the proceedings inasmuch as the
annual general meeting of the DDCA had been stayed by an order of the court and
that the annual general meeting was urgently required to be held to meet
certain requirements of the licence granted under section 25 of the Act. Then
it was submitted by the respondents that the petitioner had not given the names
of the members whom he wanted to implead, nor was there any averment in the
application as to what amendments the petitioner was seeking. The averment in
the application that the respondents might be directed to defend the petition on
behalf of other persons was termed as "strange". It was stated that
the respondents could not defend the interest of other persons unless and until
they were duly served and the respondents authorised to defend on their behalf.
On May 22, 1986, the court, while adjourning the matter, passed the following
order:
"22-5-86
Present: Mr. K. K. Mehra, advocate.
Mr.
Vinay Bhasin, advocate.
CP
No. 100 of 1984, CA No. 883 of 1985 and CA No. 344 of 1986.
Adjourned to July 14, 1986.
In the meanwhile, the
petitioner shall publish the notice of hearing in the Hindustan Times, Times of
India and Tribune (Delhi & District Cricket Association Ltd). The office
may draft the notice on the lines of the notice to the creditors in Form No. 6
of the Companies Act. There is urgency in the matter as there is already a stay
order issued by the court in holding the general body meeting. Counsel for the
respondent states that the meeting of the general body is overdue according to
the requirements of the Companies Act.
|
|
S. B.
Wad, |
|
May 22, 1986. |
Judge". |
In terms of this order, the
following notice was published:
"In
the High Court of Delhi at New Delhi
C. P.
No. 100 of 1984
In the matter of:
Delhi and District Cricket Association Ltd.
|
Dharam Pal Bhasin |
… |
Petitioner |
|
v. |
||
|
B. N. Khanna and Others |
… |
Respondents |
To
All Members of the
Delhi and District Cricket
Association Ltd.
Willingdon Pavilion,
New Delhi.
Take Notice that a petition
under section 155 of the Companies Act, 1956, for rectification of the register
of members presented by Shri K.K. Mehra, advocate, on 22nd May, 1986, was
admitted and the said petition is fixed for hearing before the company judge on
14th day of July, 1986. If you desire to support or oppose the petition at the
hearing, you should give me notice thereof in writing so as to reach me not
later than two days before the date fixed for the hearing of the petition, and
appear at the hearing in person or by your advocate. If you wish to oppose the
petition, the grounds of opposition or a copy of your affidavit should be
furnished with your notice. A copy of the petition shall be furnished to you if
you require it on the payment of prescribed charges for the same.
|
|
(Sd.)
(K.K. Mehra), |
|
|
Advocate
for the petitioner |
|
Dated the |
B-6,
Asaf Ali Road, |
|
28th May, 1986. |
New
Delhi". |
In pursuance of this
notice, four members, namely, Mr. Sneh Prakash Bansal (membership No. B-153),
Mr. Ratan Lal (membership No. R-57), Mr. Shravan Kumar Lodha (membership No.
L-31) and Mr. Satish Soni (membership No. S-500), appeared and filed their
replies. They all opposed the petition. The matter rested at that. The
petitioner did not seek any further orders on his application (CA No. 344 of
1986). Rather, I would say that the application was not pressed further. As I
understood, according to Mr. Mehra, learned counsel for the petitioner, nothing
more was required on his application and that the provisions of Order 1, rule
8, of the Code, had been complied with. It was submitted by Mr. Vinay Bhasin,
learned counsel for the respondents, that the notice published in pursuance of
the order dated May 22, 1986, did not meet the requirements of Order 1, rule 8,
of the Code in that it could not be said that the provisions of this rule were
complied with and that it could not be said that the petition had been filed
against all the members of the DDCA in a representative capacity. Thereafter,
on subsequent dates, arguments were heard and during the course of hearing, it
was brought to my notice that respondent No. 7, Mr. Gulshan Rai, had since
expired and this fact was recorded in the proceedings. I will also note that
the parties did not wish to cross-examine any of the witnesses.
I am of the view that on the preliminary
objections raised by the respondents, this petition has to fail. The question
whether the DDCA could enrol members beyond the figure 1,500 in contravention
of the provisions of the Act, as has been contended in the petition, was very
much in issue in Suit No. 1587 of 1982. After a settlement was arrived at in
that suit on August 17, 1983 (see the proceedings reproduced above), the
plaintiffs, the petitioner being one of them, abandoned their claim on the issue
whether the executive committee could increase the membership beyond 1,500. The
petitioner did not seek any leave of the court in the suit for filing fresh
proceedings on the same issue. Applying the principles as contained in
sub-rules (1) and (4) of rule 1 of Order 23 of the Code, the present petition
would be barred. Then, in a petition under section 155 of the Act, the member
who is sought to be removed from the register of members is certainly a
necessary party, though it was contended to the contrary by Mr. Mehra. It is
unthinkable to dispose of a petition under section 155 of the Act without
notice to the party affected. This is perhaps what led the petitioner to file
an application seeking impleading of the members beyond 1,500 as parties to the
present petition in spite of his crying hoarse that those members would not be
necessary parties. The question that arises is whether all those members who
are to be affected have been made parties in the petition or not.
On the arguments of Mr.
Mehra, the DDCA can have members up to 1,500 at a given time. Article 16 of the
articles of association of the DDCA provides for termination of membership. It
can be terminated in various ways. Then, if reference is made to the replies of
the four members mentioned above, the members are not allotted numbers
seriatim. For example, Mr. Soni has been allotted membership No. S-500. It is
not possible for any member to know at a given time whether his number exceeds
the figure of 1,500, Also the articles provide for different types of
membership like life member, ordinary member, honorary member, etc. Still,
enrolment of a member beyond 1,500 cannot be challenged after three years of
his becoming a member in view of the bar of limitation. It is thus an
ever-changing scenario. In such a circumstance, it cannot be said that the
interest of all the members would be common. The petitioner had not sought to
implead all the members against whom he had a cause of action. Rather he wanted
to invoke the provisions of Order 1, rule 8, of the Code though styling his
application (CA No. 344 of 1986) as one under Order 6, rule 17, and Order ],
rule 10, of the Code. For the provisions of rule 8 of Order 1 to be applicable,
it has to be shown that (1) there are numerous persons having the same
interest, and (2) one or more persons with permission of the court be sued or
may defend such suit on behalf of, or for the benefit of, all persons so
interested or the court may direct one or more of such persons to defend such
suit on behalf of, or for the benefit of, all persons so interested. It is only
when these two conditions are fulfilled that a court is to give notice of
institution of the suit to all persons so interested either by personal service
or where such service is not reasonably practicable, by public advertisement as
the court may consider appropriate.
No argument is needed to show, firstly, that all
the persons beyond the figure of 1,500 have not the same interest, and,
secondly, there is no permission or direction of the court for any person or
persons to defend the suit on behalf of, or for the benefit of, all the persons
so interested. The notice which is to be given to all the persons either
personally or through public advertisement has to show that any person or
persons have been so nominated by the court to defend the suit. The order dated
May 22, 1986, could not be said to be an order under Order 1, rule 8, of the
Code. It was merely an interim order. The present petition cannot, therefore,
be said to have been instituted against the members beyond the figure 1,500 in
a representative capacity as is commonly understood. In the absence of members
who are likely to be affected, not being parties, no relief can be granted to
the petitioner in the present petition.
It was the submission of
Mr. Bhasin that jurisdiction under section 155 of the Act is of a summary
nature and the parties in the present case should be relegated to a civil suit
inasmuch as complicated questions of law and fact arise. I do not think I can
agree with him. Assuming his argument to be correct, the points involved in the
present proceedings are not such as cannot be decided by a judge exercising
jurisdiction under the Act.
Having held that the
present petition is not maintainable, I think I should nevertheless give a
finding whether the executive committee (general committee) is competent to
increase the membership beyond 1,500 at a time as considerable arguments were
addressed on this question. My answer is simple. The committee has no such
power and I would say that article 2 of the articles of association of the DDCA
which says that the number of members can be reduced or increased from time to
time by the general committee is void to that extent.
Under sub-section (2) of
section 27 of the Act, the articles, in the case of a company limited by
guarantee, shall state the number of members with which the company is to be
registered. This number is 1,500. A company under section 31 of the Act may, by
special resolution, alter its articles. As to how a special resolution is to be
passed, reference may be made to section 189 of the Act. Sub-section (2) of
section 173 requires that a statement of all material facts concerning the
reduction or increase in the membership should be annexed to the notice of the
meeting for the purpose of passing a special resolution. Section 9 of the Act
prescribes that the provisions of the Act would have overriding effect and
anything to the contrary either in the memorandum or articles of a company
would be void and the provisions of the Act would have effect. Under section
97, where a company has, as in the present case, increased the number of its
members beyond the registered number, it has to file with the Registrar notice
of increase of members within 30 days after the passing of the resolution
authorising the increase, and the Registrar shall record the increase and also
make any alterations which may be necessary in the company's memorandum or
articles or both. Then, the Act also prescribes the form in which notice is to
be given to the Registrar. It is Form No. 5.
Under this form, notice is to be given to the
Registrar of Companies in accordance with section 97 of the Act that by a
special resolution of the company of the particular date "the number of
members in the company has been increased by the addition thereto of…members
beyond the present registered number of…". Mr. Bhasin, however, referred
to Table C of Schedule I to the Act which sets out the memorandum and articles
of association of a company limited by guarantee and not having a share capital
in which article 2 is as under:
"2. The number of members with which the company
proposes to be registered is 500, but the board of directors may, from time to time,
whenever the company or the business of the company requires it, register an
increase of members".
He said that article 2 of
the articles of association of the DDCA is couched somewhat in the same
language as article 2 in Table C set out above. I do not think Mr. Bhasin is
right in his contention that under article 2 of Table C, the board of directors
may increase the number of members with which the company was registered.
Increase in the number of members calls for an amendment of the articles and can
only be done by a special resolution by the general body but the actual
enrolment of the members up to the limit set by the general body can be done by
the board of directors, i.e., the executive committee or the general committee
in the present case. Article 2 of Table C does not authorise the board of
directors to usurp the functions of the company for the purpose of increasing
or decreasing the number of members. Mr. Mehra also said that in any case the
action of the executive committee in increasing the number of members was mala
fide inasmuch as members were enrolled on the eve of an election to perpetuate
the hold of the executive committee for all times to come. Mr. Mehra then said
that the executive committee as now constituted was not legal inasmuch as under
sub-section (5) of section 408 of the Act, a change in the executive committee
had to be confirmed by the Central Government. Both these arguments do not
merit consideration. It will be seen that when the petitioner and his group
were in power earlier to the respondents, they were also enrolling members and
even beyond the figure 1,500 on the eve of elections. The very argument which
Mr. Mehra has now advanced would have applied to the petitioner and his group.
It is not the case of the petitioner that at that time when he and his group
were in power, the action of the executive committee in enrolling new members
was not bona fide. It is the petitioner who has shown the way to the present
executive committee and he cannot be heard to complain though one would suspect
the bona fides of the executive committee in enrolling members indiscriminately
for the purpose of winning elections. Along with the affidavit dated March 12,
1987, of Mr. L. N. Tandon, general secretary of the DDCA, there is an annexure
"D" which is a letter dated September 25, 1986, from the Central
Government to the DDCA. In this letter it is mentioned with reference to a
letter dated August 4, 1986, of the DDCA that the Company Law Board in exercise
of the powers conferred on it under section 405(5) of the Act approves the
co-option of Mr. Manmohan Sood, National Selector, in the board meeting held on
July 4, 1986. This clearly shows that the Central Government did approve the
constitution of the executive committee of the DDCA as constituted.
In the result, the petition
is dismissed. In the circumstances, however, there will be no order as to
costs.
[1940] 10 COMP. CAS. 133 (
JUDICIAL COMMISSIONER'S COURT OF SIND
v.
Yeotmal Electric
Supply Co.,
WESTON, J.
SUIT NO. 145 OF 1939
AUGUST 18, 1939
Khanchand Gopaldas, for the Plaintiff.
Hakumatrai M. Eidnani and Kimatrai Bhojraj, for the Respondent.
JUDGMENT
Weston,
J.—Plaintiff is a
shareholder and a director of the defendant company, the Yeotmal Electric
Supply Co., Ltd., which for some reason has its registered office at
Plaintiff bases his case upon three main grounds. The first is that the meeting of 28th May 1939 was not properly convened and that all resolutions passed at that meeting are therefore invalid. The second is that even if the meeting was validly convened, the first resolution set out in para. 4 of the plaint alters one of the articles of association of the company, namely Art. 98. Under Section 20, Companies Act, an article of association can be altered only by special resolution, which admittedly was not done in the present instance. If then the first resolution is invalid, the second resolution appointing four additional directors is also invalid. The third ground is that even if the first resolution is valid the power to appoint additional directors vests in the directors and not in the company under Art. 102 of the articles of association, and the second resolution appointing specific persons as additional directors is ultra vires. Mr. Khanchand for plaintiff has accepted my suggestion that the remaining resolutions on other matters are only recommendatory, or commendatory, and therefore of no practical importance, and he has confined his objections to the first two resolutions. Of course, if the meeting was not validly convened, all the resolutions would be as if they had not been passed.
The first objection to the validity of the meeting is that the requisition is dated 25th March 1939 while the meeting was convened for 28th May 1939. This is said to contravene Art. 63 of the articles of association which provides that a meeting convened on requisition shall be held not more than two months after the date of delivery to the company of the requisition. Evidence has been led by the company to show that although the requisition is dated 25th March 1939, it was not delivered at the company's office until 15th April. Plaintiff's witness K. C. Advani one of the directors, admits that he received a copy of the requisition with notice dated 24th April 1939 of a directors' meeting, and that the copy of requisition sent to him bore a note that it had been received on 15th April 1939. Mr. Khanchand argues that the presumption is that the requisition was received on the date it bears, but I know of no authority to justify such a presumption being made. I see no reason to doubt the evidence of the managing agent and his clerk that it was received on 15th April 1939. This assertion is shown to have been made on 24th April 1939 when there was no reason for any false assertion, for the meeting could have been convened for 21st or 24th May as easily as for 28th May 1939. I accept therefore that the meeting was convened in accordance with Art. 68. It is further argued that as the notice to shareholders did not show, as the copy to directors showed the date of requisition, the shareholders were not put in possession of all facts necessary to enable them to determine whether they should attend the meeting. It has no doubt been held in many cases that a shareholder is entitled to be given adequate information as to the business to be transacted, as Section 78, Companies Act, in fact requires ; but I am not aware that it has ever been held that unless the notice of the meeting recites all facts necessary to meet every technical objection which may be raised as to its validity, the meeting held in pursuance to such notice must be invalid.
I may also remark that Art. 68 is not in accord with Clause (3) of Section 78, Companies Act, which provides a period of three months from the date of deposit of the requisition within which an extraordinary general meeting must be held. It is very doubtful if a meeting valid under the substantive law could be invalidated by an article of association. On this question, it is not necessary for me to express a definite opinion. I hold that the meeting was held within two months of the receipt of the requisition, and that the absence of the date of receipt in the notice of meeting does not invalidate the meeting. The first ground of objection taken by plaintiff therefore has no substance. The first resolution passed at the meeting is in the following terms :
"That until otherwise determined by a general
meeting the number of directors shall be not less than 3 or more than 11, and
the present strength of the Board be increased to 11."
It is claimed for plaintiff that this resolution alters and in fact replaces Art. 98 of the articles of association which reads :
"Until otherwise determined by a general meeting
the number of directors shall be not less than 3 or more than 7."
It is true that the language of the resolution suggests the replacement of Art. 98 by the resolution but I can see no difficulty in holding that this resolution is a resolution made under Art. 98. It does what this Article contemplates may be done. There is nothing in the Companies Act which requires that articles of association must be rigid and may not in themselves provide for varying sets of circumstances. The form of Art. 98 is identical with the specimen article given at p. 668 of Palmers Company Precedents, Part I, Edition 15, and the learned author's note is:
"In the absence of the first seven words it seems
that the number cannot be reduced without a special resolution."
In Gur Prasad v. Rameshwar Prasad, (55 All. 399), the same question arose as in the present case. The relevant articles of association were identical with those of the Yeotmal Electric Supply Company. It was held that a resolution at a general meeting that the number of directors should be increased to 16 was valid and that no special resolution was required. In this the Bombay case, Nav Navnitlal Chabildas v. Scindia Steam Navigation, Co. Ltd., (A.I.R. 1927 Bom. 609), relied on by Mr. Khanchand is distinguished and the same points of distinction arise in the present case. On the second ground also, I consider plaintiff must fail. On the last ground Mr. Khanchand relies mainly upon the case in Blair Open Hearth Furnace Co. v. Reigart, [1913] (108 L.T. 665), in which Eve, J., held on the articles of association of that company that the power of appointing additional directors had been divested from the company and had been entrusted to the board of directors to the exclusion of the company. This case was considered by the Court of Appeal in Worcester Corsetry Ltd. v. Wittings, [1936] (7 Comp. Cas. 296). The principle accepted in both cases is that the power of appointing additional directors will lie with the company in general meeting unless the company by its articles of association has divested itself of this power. This principle also is expressed in Section 83-B, Companies Act. In Worcester Corsetry Ltd. v. Wittings, [1936] (7 Comp. Cas. 296), the articles were not the same as in Blair Open Hearth Furnace Co. v. Reigart, [1913] (108 L.T. 665), but appear to be practically identical with those in the present case. In Worcester Corsetry Ltd. v. Wittings, [1936] (7 Comp. Cas. 296), it was held that on the articles in that case the rights and powers of the company in general meeting to appoint directors had not been circumscribed so as to prevent their being exercised by the corporators. Art. 102 in the present case is as follows:
"The directors shall
have power, at any time, and from time to time, to appoint any other qualified
person to be a director, either to fill a vacancy or as an addition to the
board, but so that the total number of directors shall not at any time exceed
the maximum number fixed by Art. 98, and any person so appointed shall retain
his office only until the next following ordinary meeting, and shall then be
eligible for re-election".
Other material articles are Nos. 110, 111, 112 and 113 which are as follows:
"110.The company at any general meeting at which any directors retire in manner aforesaid shall fill up the vacated offices by electing a like number of persons to be directors and without notice in that behalf may fill up any other vacancies.
111.If at any general meeting at which an election of directors ought to take place, the place of any retiring director is not filled up, such director shall, if willing to continue in office, be deemed to have been re-elected at such meeting.
112.The company in general meeting may, from time to time, increase or reduce the number of directors, and may alter their qualification and may also determine in what rotation such increased or reduced number is to go out of office and may remove any director (not being the director representing the managing agents) before the expiration of this period of office and appoint another person in his stead. The person so appointed shall hold office during such time only as the director in whose place he is appointed would have held the same if he had not been removed.
113.No person, not being a retiring director, shall, unless recommended by the directors for election, be eligible for election to the office of director at any general meeting unless he or some other member intending to propose him has at least seven days before the meeting left at the office a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him".
For consideration of these articles, I do not think I can do better than repeat the observations of Slesser, L. J., in Worcester Corsetry Ltd. v. Writings, [1936] (7 Comp. Cas. 296):
"I proceed to consider the matter from the other end and to ask myself, first, what are the powers of the directors to appoint additional directors at all? In my view the powers of the directors to make appointments are limited to the powers given to them in Art. 85 of table A to the following effect: 'The directors shall have power at any time, and from time to time, to appoint a person as an additional director who shall retire from office at the next following ordinary general meeting'.
That provision indicates to me that a special emergency power for a limited period of appointing an additional director is given to the directors, which appointment lapses when the corporators would normally assume control over the appointment or the removal, as the case may be, of directors at their ordinary general meeting. I can find here no other power given to the directors to appoint directors at all. When we contrast that power with the power given to the directors by Art. 93 in Blair Open Hearth Furnace Ltd. v. Reigart, [1913] (108 L. T. 665), we see that there the directors may from time to time appoint additional directors, but so that the total number of directors shall not exceed the prescribed maximum.
There is no limitation there as to the time for which such additional directors shall serve, and that is one matter which distinguishes this case from Blair Open Hearth Furnace Ltd. v. Regart, [1913] (108 L. T. 665). In addition to that limitation of power of the directors to appoint in the present case, in my opinion, the company are in terms by Art. 83 given a power themselves to appoint directors, which power is not directly to be found in the articles in Blair Open Hearth Furnace Ltd. v. Regart, [1913] (108 L. T. 665). In my view Art. 12 of the plaintiff company's articles, which says: 'Until otherwise determined by a general meeting the number of directors shall not be less than two nor more than seven,' is dealing with a different subject-matter and has a different intent from Art. 83. I think that Art. 12, which corresponds in terms with Art. 82 in Blair Open Hearth Furnace Ltd. v. Regart, [1913] (108 L.T.665), is dealing with the total number of possible directors. The machinery for varying that number is contained in Art. 12, because it says that the number of directors shall not be less than two nor more than seven until otherwise determined by a general meeting. That article contains within itself all the machinery for fixing the maximum and minimum number of directors. I do not think that Art. 83 is dealing with such a matter. Art. 83 gives to the company in terms power to increase the number of directors. I put this question to the respondents' counsel for my information: Supposing the company increased the number of directors, or purported to do so, under Art. 83 and then the directors, who, on the respondents' counsels' argument, have the power alone to make the appointment, do not make the appointment ; have the company increased the number of the directors or have they not, because in fact the increase which they had authorized under Art. 83 would never have been made? The more natural view of Art. 83 is that it is not redundant or merely introducing unnecessary machinery which is already provided by Art. 12 in dealing with the maximum and minimum, but as, Lawrence, L.J., has indicated, is itself conferring a power not only to increase the number but to increase that number by itself appointing directors to the extent to which it is intended to increase the number. That view is supported by the considerations urged by my Lord with regard to the latter part of that clause, which gives to the company power to determine in what rotation the increased or reduced number of directors is to go out of office. It clearly, in my opinion, contemplates, among other things, that the rotation of those persons may be a rotation indicated by their names as well as by the proportion in which they are to retire. Finally, I draw attention to the last part of Art. 85 of Table A which in terms says, that in any event the directors who have been appointed as additional directors are eligible for re-election by the company which indicates that in that case at their ordinary general meeting the company have power to elect directors. That power is also missing in Blair Open Hearth Furance Co. v. Reigart, [1913] (108 L.T. 665).
For these reasons, and also because I do not think that the inherent power of the corporators to direct the control of their own company by nominating the directors is excluded by any contract contained in the articles of association, I think this appeal must be allowed."
This reasoning applies equally to the present case, and I must hold that the ordinary power of the company in general meeting to appoint additional directors has not been excluded by the articles of association and that the second resolution appointing defendants 2 to 5 viz., Fatehchand Assudomal Jhangiani, Chandiram Bulchand Advani, Gaganmal Rijhumal Jhangiani, and Hiranand Hassamal Sararangani, is not ultra vires the powers of the meeting. On these findings the suit must fail and it is dismissed with costs.
[1933] 3 COMP. CAS. 153 (ALL.)
v.
NIAMATULLAH
AND BENNET, JJ.
JANUARY
19, 1933
P.L. Banerji, M.N. Raina and
Govind Das for the Appellant.
Bhagwati Shankar, S.N.
Seth,
Niamatullah, J.—This is an appeal from an order of temporary injunction
passed by the learned Additional District Judge,
The suit was instituted by
eight plaintiffs for themselves and for plaintiff No. 9, a limited liability
company, styled as Ramchand Gursahaimal Cotton Mills., Ltd., registered under
the Indian Companies Act, of which the first eight plaintiffs claim to be the
directors. Eight persons were impleaded as defendants. B. Panna Lal Burman,
defendant No. 8, was the general manager of the company; but the plaintiffs
allege that he was lawfully dismissed in July 1932. Defendants 1 to 7 claimed
to be the directors of the company—a fact which is denied by the plaintiffs,
according to whom most of the defendants had either never been appointed
directors by any lawful authority or had ceased to be such prior to the
institution of the suit. The plaintiffs' case, as set forth in the plaint, is that
the defendants have practically excluded the plaintiffs from participation in
the management of the affairs of the company, the actual control of the
business being with defendant 8, who is in collusion with defendants 1 to 7.
The reliefs prayed for in the plaint include one for a declaration that
plaintiffs 1 to 7 are directors of the company. The position of plaintiff 8 as
a lawfully appointed director was never disputed by the defendants but the
plaintiffs pray for a declaration that plaintiff 8 is also the chairman of the
board of directors. A further declaration is sought to the effect that
defendants 1 to 6 are not the directors of the company and that defendant 8 is
no longer the general manager thereof.
The suit was instituted on
August 18, 1932. On September 3, 1932, the plaintiffs presented an application
asking for a temporary injunction in somewhat indefinite terms. In substance
they prayed for an injunction directing all the defendants to refrain from
interfering with the plaintiff's management of the affairs of the company,
defendant No. 8 to refrain from acting as the general manager of the company
and Gur Prasad and defendant 1, to refrain from acting as the chairman of the
board, of directors, a position which he claimed as against plaintiff 8. The
application was supported by an affidavit, and the parties produced a number of
documents which enabled the learned Additional District Judge to arrive at
findings on certain questions having an important bearing on the plaintiffs'
application for injunction.
That plaintiffs 1 to 7 are
directors of the company is denied by the defendants. If the determination of
the question had depended upon facts seriously controverted, it would not have
been desirable for the court to prejudge the case; but facts, either admitted
or proved by unimpeachable evidence, enabled the learned Judge to determine the
question at an early stage of the case. We were addressed on that question at
length and reference was made to facts admitted or sufficiently proved, and we
are in a position to safely pronounce an opinion on the question already
referred to for the purposes of these proceedings.
If plaintiffs 1 to 7 are
found to be the directors of the company but are being excluded from
participation in the management of the affairs of the company by the
defendants, it is clear that there is a continuing invasion of the plaintiffs'
rights, and the case is a fit one in which the court should grant a temporary
injunction to prevent what is undobutedly an injury to the plaintiffs, rights.
It has not been argued by the learned advocate for the defendants that the
court has no power, in the circumstances of the case, to grant a temporary
injunction. Order 39, Rule 2 of the Code of Civil Procedure, which is clearly
applicable, gives very wide power to the court to give protection against
injury to the plaintiffs during the pendency of suit.
Under the articles of
association of the company the maximum number of directors should be nine, with
a minimum of five. It is common ground that prior to March 29, 1930 the
following seven persons were the directors of the company:—
(1) R.B. Vikramajit Singh,
plaintiff No. 8. (2) B. Dwarka Prasad Singh, defendant No. 6 (3) B. Ram Gopal,
defendant No. 7. (4) B. Parshotam Das, since deceased. (5) L. Ram Kumar,
plaintiff No. 6. (6) B. Behari Lal, defendant No. 5, and (7) B. Sri Ram Khanna,
since resigned.
Parshotam Das died sometime
before March 29, 1930, so that there were only six directors left, and three
more could be appointed. Three new directors were elected by the Board of
directors on that date. They were Mr. Gur Prasad Kapoor, defendant 1, Mr.
Ranjit Singh, plaintiff 2, (who is the son of R.B. Vikramajit Singh, plaintiff
8) and Mr. Sri Kishen Khanna. Sometime afterwards, but before the next general
meeting of the shareholders, Sri Kishen Khanna resigned. On March 21, 1931, L.
Harcharan Das, defendant 2, was elected by the board of directors in place of
Sri Kishen Khanna. The general meeting of the shareholders took place on April
18, 1931, when the appointment of Gur Prasad, Ranjit Singh and Harcharan Das
was brought up for confirmation. Gur Prasad and Harcharan Das were duly elected
by the shareholders, but Ranjit Singh was not. It should be mentioned at this
stage that the election of a person by directors as a director entitles him to
hold office till the next general meeting; while if he is elected at the
general meeting of the shareholders, he is entitled to hold office for three
years.
Sri Ram Khanna, who was an
old director, resigned sometime before February 6, 1932, on which date the
Board of directors elected Rameswhar Prasad Bagla, plaintiff 1, and Ranjit
Singh, plaintiff 2, to fill the two vacancies which existed: one in consequence
of the resignation of Sri Ram Khanna, and the other in consequence of Ranjit
Singh not having been elected at the general meeting of the shareholders. There
was some controversy as regards the legality of this election. It was urged as
against Ranjit Singh that he, having been rejected by the shareholders, was not
eligible for re-election by the directors. Nothing definite was urged as
against Rameshwar Prasad Bagla. We do not think that any flaw exists in the
election of Ranjit Singh by the directors on February 6, 1932 in view of the
provisions of Rule 100 of the Articles of Association. The circumstance that he
failed to secure his election at the general meeting merely implied that he was
not elected for a longer term. It did not, in any way, detract from the
authority of the directors to co-opt him for the limited time which would
expire on the next general meeting.
An extraordinary general
meeting of the shareholders was convened on February 14, 1932. One of the
resolutions moved at that meeting was that the number of directors be increased
to sixteen. The resolution was carried, and the plaintiffs 1 to 5 were elected
directors for a full term of three years. It is not disputed by the plaintiffs
that this resolution was not a "special resolution" within the
meaning of Section 81 of the Indian Companies Act. A special resolution to be
valid must be confirmed at a subsequent meeting. Section 20 of the Indian
Companies Act lays down that no alteration in the Articles of Association can
be made except in pursuance of a special resolution. The learned abvocate for
the appellants contended that, in so far as the increase in the number of
directors involved an alteration of Article 98 of the Articles of Association,
it should have been sanctioned by a special resolution and that, in the absence
of such a resolution, the number of directors could not be increased. Article
98 is worded as follows:—
'Until otherwise determined
by a general meeting, the number of directors shall not be less than five, nor
more than nine.'
Having carefully considered
the argument addressed to us , on behalf of the appellants, I think that merely
increasing the numbers of directors does not involve any alteration in Article
98, which itself gives latitude to the shareholders in that respect. The words
"Until otherwise determined by a general meeting" clearly imply that
it was open to the shareholders to alter the number of directors mentioned in
Article 98. If the shareholders do alter it, their action is in pursuance of
Article 98 and not otherwise. If the contention put forward on behalf of the
appellants be accepted, the article will have to be read as if the aforesaid
words were not part of it. No clear authority was quoted in support of the view
urged on one side or the other. The cases that were referred to in course of
the argument are those in which the question did not directly arise and no
opinion was definitely expressed. It is, therefore, unnecessary to examine them
in this connection. In my opinion the right construction of the articles is, as
already indicated, that it is open to the shareholders to vary the number of
directors therein referred to without in any way necessitating an alteration in
the article itself. In the view of the case I have taken, it must be held that
plaintiffs 1 and 2, who had been previously elected by the directors at their
meeting of February 6, 1932, and plaintiffs 3 to 5 were validly elected for the
normal term at the general meeting of shareholders held on February 14, 1932.
The learned Additional District Judge has taken a different view on this part
of the case, but the above conclusion affords an additional ground in support
of his order.
Another crucial point in
the case relates to what transpired on June 25, 1932, and April 22, 1932. At a
meeting of directors held on the former date, it was resolved that R.B.
Vikramajit Singh, plaintiff 8, be authorised by a power of attorney to be
executed by two of the directors named in the resolution, "to appoint at
his discretion, remove, or suspend agents, secretaries, managers, officers,
clerks and servants of the company." Such power of attorney was, in fact,
executed, and Mr. Vikramajit Singh passed an order dismissing B. Panna Lal
Burman, defendant 8, who was the general manager. On July 22, 1932, the
directors themselves passed a resolution terminating the services of B. Panna
Lal Burman as general manager. The plaintiffs' case is that defendant 8 ceased
to be the general manager on the order of dismissal passed by Mr. Vikramajit
Singh and, at any rate, on July 22, 1932, when the directors resolved to that
effect. As regards the resolution of the directors passed on July 22, 1932,
dismissing defendant 8, it is pointed out by the defendants that no notice of
the meeting was given to some of the directors, particularly defendants 1 and
2. It is not necessary to consider the legality or otherwise of the directors'
resolution of July 22, 1932, in reference to defendant 8, as the resolution of
July 22, 1932, authorising two of their numbers to execute a power of attorney
in favour of R.B. Vikramajit Singh, authorising him to dismiss servants of the
company, coupled with what happened in pursuance thereof is enough to make out
the plaintiffs' case as against defendant 8. It cannot be disputed that the
board of directors had power to terminate the services of any of the company's
servants. It is equally undeniable that they could delegate their power in this
respect to one of themselves acting as their agent. There is no flaw in the
argument addressed to us on behalf of the plaintiffs, namely, that the two
director who executed a power of attorney, had the power to do so and that R.B.
Vikramajit Singh became vested with the authority which was conferred on him by
the power of attorney. This being so, his order terminating the services of
defendant 8 as general manager is unquestionable, and defendant 8 ceased in law
to be the general manager of the company from the date of that order. It is, of
course, true that some other persons, who were either directors or claimed to
be such, took a different view and continued to recognise defendant 8 as the
general manager, who has had the control of the affairs of the company up to
date. We are, however, concerned with the legal aspect of the matter and as
already indicated, defendant 8 was lawfully dismissed by the order of R.B.
Vikramajit Singh.
July 16, 1932 is another
eventful date. A general meeting of shareholders took place on that date. A
meeting of directors had also been fixed for that date to be held at 2 p.m., at
the registered office of the company. Defendants 1 and 2 issued a notice
calling another meeting of the directors to be held at 1-45 p.m. at the
residence of L. Gur Prasad Kapoor, defendant 1.
It is in evidence that the
meeting which was to be held at the registered office of the company had been
decided on several days before July 16, 1932, and due notice thereof had been
given to all the directors. Of the other meeting, convened by the defendants'
party, very short notice was given to some directors and none to those who had
been elected on February 14, 1932. Apparently the defendants did not recognise
them as lawfully elected directors, as they have now been found to be. The
meeting cannot, therefore, be considered to be that of the directors of the
company and any resolutions passed at such meeting cannot be deemed to be
valid. The question assumed importance because at the meeting of the directors
held at the registered office of the company defendant 1 L. Gur Prasad Kapoor,
defendant 5, B. Behari Lal, and defendant 6 B. Dwarka Prasad, were declared to
have retired according to the rule of retirement by rotation. At the meeting
held at the residence of defendant 1, Gur Prasad Kapoor, defendant 1 was
elected chairman of the board of directors, while at the other meeting R.B.
Vikramajit Singh was elected chairman of the board of directors. One of the
important questions raised in the case is whether R.B. Vikramajit Singh is the
chairman. Reference has already been made to the fact that Mr. Gur Prasad
Kapoor and L. Harcharan Das, who called the meeting of directors held at the
residence of the former, did not send notices to plaintiffs 1 to 5, who in my
view had been duly elected on February 14, 1932, and, as already held, no
resolution passed at that meeting can be regarded as valid and binding. In this
view, Gur Prasad Kapoor, defendant 1, cannot be considered to have been duly
elected as chairman. As regards the meeting held at the registered office of
the company, no flaw has been suggested. The meeting had been duly called.
There was a quorum, and the directors had the power to elect one of their
number as the chairman. In these circumstances, R.B. Vikramajit Singh,
plaintiff 8, should be considered to have been duly elected as the chairman of
the board of directors.
On the same day, July 16,
1932, a general meeting of shareholders was held at which Lalas Behari Lal,
defendant 5, Dwarka Prasad, defendant 6, and Gur Prasad Kapoor, defendant 1,
were declared to have retired in accordance with rules, as had been done at the
meeting of the directors. The question whether these persons were in fact due
to retire, as was declared at the meetings of directors and shareholders held
on July 16, 1932, is highly controversial, and it is not desirable to express a
definite opinion on it. That question will have to be decided after the entire
evidence, oral and documentary, have been examined by the lower court.
L. Kamlapat and L.
Balmakund Burman, defendants 3 and 4, claim to be the directors by virtue of a
resolution passed at the meeting of directors held at the residence of L. Gur
Prasad Kapoor, defendant 1, on July 16, 1932, the regularity of which has been
already considered in relation to the appointment of L. Gur Prasad, as chairman
of the board of directors. For the same reasons, defendants 3 and 4 cannot be
considered to have been fully elected directors of the company.
The learned advocate for
the appellants impugned the elections held on February 6, and 14, 1932, also on
the ground that the proceedings on those dates had not been taken in good faith
to further the interests of the company but had been designed merely to give a
clear majority to the party of R.B. Vikramajit Singh. His contention was that
any proceeding, not taken in good faith for advancing the interests of the
company, is invalid in law. The propositions involved in this contention are of
facts and law. It is not possible to examine them at this stage and to
pronounce a definite opinion as to whether or not the proceedings on February 6
and 14, 1932, had been taken bona fide, and whether, as the law stands, they
were illegal, even though they were not characterised by any error of
procedure. This is a question which will have to be decided by the trial court,
if it is persisted in. Similarly, it cannot be held at this stage that L.
Kishan Lal, plaintiff No. 7, who claims to be the director under a resolution
passed at the meeting of July 22, 1932, was validly elected on that date, as
the legality of that meeting is in issue and cannot be satisfactorily examined
in these summary proceedings.
The result is that the
plaintiffs 1 to 6 and 8 and defendants 2 and 7 may, subject to what the court
may eventually decide and for the purposes of these proceedings, be accepted as
directors. Defendants 3 and 4 cannot be accepted as such. The position of
defendants 1, 5 and 6 is problematical and is left to-be decided after the
trial of the case. The plaintiffs 1 to 6 and 8 are entitled to discharge their
duties as directors of the company and the defendants have no right to do anything which may
amount to an infringement of their right. I have also found that B. Panna Lal
Burman, defendant 8, ceased to be the general manager sometime in June 1932.
The suit, which is pending before the learned Additional District Judge, may
have protracted trial: and in the meantime, unless a temporary injunction is
granted, the plaintiffs will not be allowed by the defendants to participate in
the management of the affairs of the company. In my opinion a case has been
made out for the exercise by the court of its powers under under Order 39 Rule
2 of the Code of Civil Procedure.
The
terms in which the injunction has been prayed for by the plaintiffs are
somewhat vague and indefinite. The learned Judge has granted an injunction in
terms of the application. I think he meant to pass the same order substantially
as I think should be passed. In my opinion the injunction should be in precise
terms. Accordingly I direct the defendants to refrain from interfering with the
discharge by the plaintiffs 1 to 6 and 8 of their duties, and with the exercise
by them of their powers, as directors of the Ramchand Gursahaimal Cotton Mills
Co., Ltd. I direct B. Panna Lal Burman, defendant 8, to refrain from performing
the functions of the general manager. I further direct the defendants to
refrain from interfering with R.B. Vikramajit Singh, plaintiff 8, in performing
the function of the chairman of the board of directors. B. Gur Prasad,
defendant 1, is directed to refrain from acting as chairman of the board of
directors. Subject to the directions set out above, I confirm the order
appealed from and dismiss this appeal with costs.
Bennet,
J.—I agree with
the judgment of my learned brother and desire to add a few words on the
argument of the appellants on Article 98 of the Articles of Association. The
appellants correctly pointed out that, under Section 20 of the Indian Companies
Act, any alteration or addition to the Articles of Association must be by a
special resolution. The chief points about a special resolution are that, under
Section 81 of the Indian Companies Act, a special resolution must be passed by
a majority of not less than three-fourths of the members entitled to vote at a
general meeting, and the special resolution must be confirmed by a majority of
the members entitled to vote at a subsequent general meeting under certain conditions of notice. The Act draws a distinction between
the matters which are to be dealt with by special resolutions and the ordinary
matters. The matters which are to be dealt with by special resolutions are
those which relate to the constitution of the company, that is, its articles of
association. The question before us is whether there was alteration or addition
to Article 98 by the resolution passed at the general meeting of February 14,
1932. The article states that, until otherwise determined by a general meeting,
the number of directors shall not be less than five, nor more than nine. The
resolution altered the maximum from 9 to 16. The argument for the appellants is
that, by this alteration, the article has been altered. No direct authority was
shown for this proposition. There are the following reasons to consider that
the raising of the maximum is not an alteration of the article:—
Firstly, the increase in
the number of directors is not a matter which the Act lays down in any part as
requiring a special resolution. On the contrary, we find in Schedule 1, Table
A, Regulation 83, the following provision:—
"The company may from
time to time in general meeting increase or reduce the number of
directors..."
The lower court took a
peculiar view that this Table A was no part of the Act; but in Section 17,
Sub-section 2, it is stated that articles of association may adopt all or any
of the regulations contained in Table A in the First Schedule. I consider that
there is an analogy between this Regulation 83 of Table A and the Article 98 in
question. It is true that Regulation 83 does not lay down the number of
directors; but there is a provision in Regulation 68 that the number of
directors shall be determined in writing by a majority of the subscribers of
the memorandum of association. Regulation 83, therefore contemplates a change
being made in the original number of directors, and that change to be made by a
general meeting and not by a special resolution.
Another authority against
the appellants is Palmer's Company Precedents, 13th Edition, 1927, Part I, page
698, where there is a specimen of one of the articles of association exactly
similar to Article 98. This specimen says,
"Until otherwise
determined by a general meeting, the number of directors shall not be less than
three or more, than seven."
This
article gives the English practice, and apparently under this article the
number of directors is altered by a general meeting, as a note given by Palmer
states that there is only a doubt in the absence of the first seven words as to
whether a special resolution is necessary. Palmer, therefore, considers that,
when these first seven words were present, there was no doubt that a general
meeting could make the alteration required.
Lastly,
in regard to the ruling quoted by the lower court, Navnitlal Chabildas v.
Scindia Steam Navigation Co., Ltd., that ruling has been reported more fully in
29 Bom. L.R. 1362. In the Law Reporter the terms of the article in question are
given, and we find that the words "unless otherwise determined by a
general meeting" do not appear in the article which was the subject-matter
of that case. That case, therefore, is no authority for the case before us.
For
these reasons I consider that the number of directors was validly altered by
the resolution of the general meeting of February 14, 1932.
By
the Court—We grant an injunction to the plaintiffs directing the defendants to
refrain from interfering with the discharge by the plaintiffs 1 to 6 and 8 of
their duties, and with the exercise by them of their powers, as directors of
the Ramchand Gursahaimal Cotton Mills Co., Ltd., and directing B. Panna Lal
Burman, defendant 8, to refrain from performing the function of the general
manager. The defendants are further directed to refrain from interfering with
R. B. Vikramajit Singh, plaintiff 8, in performing the functions of the
chairman of the board of directors. B. Gur Prasad, defendant 1, is directed to
refrain from acting as chairman of the board of directors. Subject to the
directions set out above, we confirm the order appealed from and dismiss this
appeal with costs.
[1940] 10 COMP CAS 255 (HL)
HOUSE OF LORDS
Southern Foundries [1926], Ltd. and
v.
Shirlaw
VISCOUNT MAUGHAM, LORD ATKIN, LORD WRIGHT,
LORD ROMER, LORD PORTER.
MARCH 6, 7, 11, 12. 13. APRIL 22, 1940
Valentine Holmes and J.G. Strangman, for the Appellant.
Willink, K.C., and J.P. Ashworth, for the Respondent.
Viscount Maugham.—The facts in this case are not in dispute and may be stated as follows:
The appellants (whom I shall call "Southern") were incorporated in the year 1926 as a private company with the object of carrying on the business of ironfounders. The respondent became a director of Southern in the year 1929. The articles of association of Southern which regulated his position as such director included the following articles: 84, Until otherwise determined by a general meeting, the number of directors shall be not less than two nor more than eight. Subject to the rights of the holders of any of the debentures hereinafter mentioned for the time being outstanding four directors shall be appointed by the subscribers to the memorandum of association. 85. The qualification of a director shall be the holding in his own right alone, and not jointly with any other person, of not less than 200 ordinary shares of the company, and such qualification shall be acquired within two months after appointment as director. 89. Subject as herein otherwise provided, or to the terms of any subsisting agreement, the office of a director shall be vacated: (A) If he become bankrupt or insolvent or compound with his creditors, (B) If he become of unsound mind or be found a lunatic, (C) If he be convicted of an indictable offence. (D) If he cease to hold the necessary qualification in shares or stock, or does not obtain the same within two months of the date of his appointment, (E) If he wilfully absent himself from the meetings of the directors for a period of six consecutive calendar months without special leave of absence from the other directors and they pass a resolution that he has by reason of such absence vacated his office, (F) If he gives the directors one month's notice in writing that he resigns his office.
90. The directors may from time to time appoint any one or more of their body to be managing director or managing directors for such period and upon such terms as they think fit, and may vest in such managing director or managing directors such of the powers hereby vested in the directors generally as they may think fit, and such powers may be made exercisable for such period or periods, and upon such conditions and subject to such restrictions and generally upon such terms as to remuneration and otherwise as they may determine. The remuneration of a managing director may be by way of salary or commission or participation in profits, or by any or all of these modes.
91. A managing director shall not while he continues to hold that office be subject to retirement by rotation, and he shall not be taken into account in determining the rotation of retirement of directors, but he shall, subject to the provisions of any contract between him and the company, be subject to the same provisions as to resignation and removal as the other directors of the company, and if he cease to hold the office of director he shall ipso facto and immediately cease to be a managing director.
105. The company may be extraordinary resolution remove any ordinary director before the expiration of his period of office, and may, if thought fit, by ordinary resolution appoint another director in his stead ; but any person so appointed shall retain his office only until the next following ordinary general meeting of the company, and shall then be eligible for re-election.
On December 21, 1933, an agreement was
entered into between Southern, the respondent, and Sir
The agreement provided for payment of a salary to the respondent as managing director of £ 1,700 rising by annual increments of £ 100 to £ 2,000 a year and of commission at the rate of 5 per cent. on the net profits of the company available for dividend in any year. The respondent bound himself not during the continuance of the agreement or within three years after its termination without the consent of the company to carry on or be engaged in the business, of a foundry within one hundred miles of the company's works at Croydon. The agreement also contained provisions relating to the furnishing by Sir Berkeley Sheffield of finance for a company. Steel Parts, Ltd., in which the respondent was interested.
Clause 10 (referred to in clause 3, supra) provided that the respondent might hold a directorship in Steel Parts, Ltd., and devote a specified part of his time to that company.
In the year 1935 it was agreed by Southern and some ten other companies engaged in similar businesses to effect what was called an "Ironfounders' Merger", and with that object in view the appellants, Federated Foundries, Ltd. (whom I shall call "Federated") were incorporated on December 6, 1935.
The amalgamation was carried through by transfers of all the shares in the capital of the associated companies to the Federated or its nominees on the terms of the accountants' report. The holders of the shares so transferred were to receive and did receive in exchange allotments of preference and ordinary shares in Federated credited as fully paid. Part of the arrangement for amalgamation was that the associated companies would adopt new articles of association in similar terms. This was done at extraordinary general meetings of the companies, the resolution in the case of Southern being passed on April 17, 1936. The matter had been completed by April 23, 1936, except that certain transfers of shares had to be executed in relation to qualification shares in the associated companies; and, in order to provide the associated companies with one shareholder in addition to the Federated, one share in each of those companies had to be transferred to a nominee of Federated. When all these things had been done the position was that Federated owned beneficially every share in each of the associated companies and was in complete control of those companies, and each of them had adopted new articles of association in order to make such control effective to the same extent in relation to each of those companies. The new articles were very different in many respects from the previous articles of the associated companies including those of Southern. Table "A" of the First Schedule to the companies Act, 1929, so far as not excluded or altered was to apply; but the articles as regards the directors were almost entirely new. The following seem to be of some importance, and it is article 8 which has led to this litigation : 7. The number of the directors shall be not less than two or more than ten. 8. Subject to the immediately preceding article, Federated Foundries, Ltd. shall have power at any time and from time to time by an instrument in writing subscribed on its behalf by two of its directors and its secretary to appoint any person to be a director of the company and to remove from office any director of the company. Every such instrument shall be deposited at the registered office of the company and shall take effect as at the time of such deposit.
Article 68 of Table "A" in the companies Act, 1929, was incorporated in the articles. It is as follows : 68. The directors may from time to time appoint one or more of their body to the office of managing director or manager for such term and at such remuneration (whether by way of salary, or commission, or participation in profits, or partly in one way and partly in another) as they may think fit, and a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation or retirement of directors; but his appointment shall be subject to determination ipso facto if he ceases from any cause to be a director, or if the company in general meeting resolve that his tenure of the office of managing director or manager be determined.
Article 72 of Table "A" which provides that the office of director shall be vacated in a number of events, including bankruptcy, lunacy, and resignation in writing, was not incorporated ; and apparently the only way of terminating the appointment is under article 8.
The new article clearly put it in the power of Federated to remove the respondent from his office as a director whenever it seemed to Federated desirable so to do. Directors of the other companies were in the same position. There is no suggestion, however, that this article was aimed in any way at the respondent, or that it was unreasonable from the point of view of an amalgamation of the interests of the eleven companies. Nor is it pleaded in the action that the adoption of the articles was a breach of the contract of December 21, 1933, and counsel for the respondent disclaimed at the Bar any intention to set up such an argument. It must therefore be accepted that the articles of Southern were lawfully and properly changed without a breach of the contract with the respondent.
There is no reason to think that the events which followed and led to this action were anticipated by any of the parties. Negotiations took place in November, 1936, and subsequently between Federated and the managing directors of the associated companies including, of course, the respondent, with a view to the adoption of fresh agreements with all the managing directors. The respondent declined to accept the new agreement proposed to be entered into between himself and Southern, the terms of which were less favourable to him than those of the existing agreement. After various efforts to settle the dispute, the directors of Federated on March 25, 1937, came to the conclusion that an exception could not be allowed in the respondent's case from the principle that the managing directors of all the associated companies should accept the new agreements offered by Federated in lieu of their current agreements (as all the other managing directors had done), and a resolution was passed that the respondent be removed forthwith from the board of Southern. On March 25, 1937, an instrument in writing removing the respondent from his office as a director of Southern was signed on behalf of Federated by two directors and the secretary, and was delivered to Southern and deposited at the registered office of Southern on March 27, 1937. The respondent thereupon ceased to be a director of Southern, and, as is admitted, necessarily ceased at the same time to be the managing director of Southern.
The respondent issued his writ on June 10, 1987, against Southern and Federated. The statement of claim (paragraph 4) alleges that Federated wrongfully resolved to remove the plaintiff from his directorship of Southern and purported to do so by the instrument in writing of March 25, 1937. Paragraph 5 alleges that Southern adopted and accepted the said removal and thereby wrongfully repudiated the agreement of December 21, 1933, or, alternatively, had treated the plaintiff's appointment as managing director as terminated and had refused to allow him to perform his duties as managing director. There is no other breach of contract alleged. The claim against Federated (paragraph 6) is that that defendant wrongfully caused and induced Southern to be guilty of "the aforesaid breaches of the said agreement". It was agreed in the Court of Appeal and before your Lordships that if the claims against Southern were well founded, Federated was also liable for the reason alleged. I need not therefore say anything further on this part of the case.
The trial Judge (Humphreys, J.) decided in favour of the respondent and gave judgment in his favour for £ 12,000 and costs. In the Court of Appeal (MacKinnon, L.J., and Goddard, L.J., the Master of the Rolls dissenting) affirmed Humphreys, J.
I think this case, like many cases which involve written agreements between limited companies and their officers—agreements which are necessarily affected to some extent by the articles of association—is a difficult case. It is indisputable that the agreement of December, 1933, did not and could not appoint the respondent to be director of Southern. He had already been appointed to be a director in the only possible way, namely, according to the articles, and it is plain, I think, that he would cease to be a director in any of the events specified by the articles. If some new terms as to his directorship were desired, the only course was to alter the articles. It is equally indisputable, as I think, that the respondent would cease to be managing director as soon as he ceased to be a director; and that, as the Master of the Rolls pointed put, the two positions, that of director and that of manager, involve different qualifications, duties and responsibilities. It is quite erroneous, in my opinion, to contend that there was anything in the provisions of article 89 (above set forth) which did not apply to the respondent after the agreement, though on the other hand it is possible that there was an implied term in the agreement that he would not during the ten years give notice to resign his office and would be committing a breach of this implied agreement if he did.
There are, however, a number of difficult questions which do arise as to the agreement, and one or two of them require an answer. In my opinion it is quite impossible having regard to article 89 to treat the agreement as containing any sort of guarantee that the respondent should remain a managing director during the term of ten years. That suggestion has indeed been given up. It is, I think, equally impossible to agree to the argument which was pressed upon the Court of Appeal that it was an implied term that the respondent should not cease to hold the office of director "by any means within the control of himself or the company". For myself I agree with nearly the whole of the judgment of the Master of the Rolls. The only doubt I have felt is in regard to the well-known principle laid down by Cockburn, C.J., in Stirling v. Maitland, where he said (34 L. J. Q.B., at p. 3; 5 B. & S., at p. 852): "If a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative".
This, as the Master of the Rolls observed, is not a rigid rule; it is capable of qualifications in any particular case ; and it is a rule the application of which depends on the true construction of the agreement. An excellent example of this is to be found in the decision of this House in Rhodes v. Forwood (47 L.J. Ex., at p. 405; 1 App. Cas., at p. 274), where the rule contrary to the decision of the Exchequer Chamber was held to be inapplicable. On the whole, however, I have come to the conclusion in this case, reading the agreement in the light of the surrounding circumstances, that a negative stipulation such as that formulated by Cockburn, C.J., may properly be implied; but in my opinion the words "of his own motion" should be borne in mind, and the implication must be taken to extend only to direct acts and not to the indirect and unforeseen consequences which may follow from acts of the party which, on the face of them, do not necessarily, or even probably, alter "the state of circumstances under which alone the arrangement can be operative". In my view it would be unwarrantable in this case to imply a term that the articles of Southern should not be altered, however essential it was in the interests of the company, merely because such an alteration might possibly at some future date lead to the termination of the respondent's position as a director. The right of a company under the Companies Act, 1929, Section 10, to alter its articles is statutory. It is conferred in the widest terms, and is, I think, subject only to the implied qualification that it must be exercised in good faith for the benefit of the company (Allen v. Gold Reefs of West Africa (69 L.J. Ch., at p. 272 ; [1900] 1 Ch., at p. 671); but the alteration may not excuse a breach of contract, for which the company may be liable in damages (Baily v. British Equitable Assurance Co. (73 L. J. Ch., at p. 244; [1904] 1 Ch., at p. 385).
The right to alter the articles being inherent, if it is desired by a contract to give an employee or a third person a right of action if there should be an alteration of the articles which causes damage to him, I think it is very desirable to express such a term in clear language. Such a prohibition cannot be implied without very strong reasons (See Swabey v. Port Darwin Gold Mining Co.; Argus Life Assurance Co., In re; Baily v. British Equitable Assurance Co., supra).
In my opinion it would have been a breach of the nagative term properly understood for Southern to have removed the respondent under article 105 from his position as director during the ten years ; but I am also of opinion that it was not a breach of any implied term in the agreement for Southern to alter its articles as was done and to include in the altered articles the new article 8. I may and that clause 9 of the agreement shows clearly that the exact words of the term suggested by Cockburn, C.J., would not be applicable without some qualification, for that clause makes it clear that Southern could wind up and distribute its assets without committing a breach of the agreement, though that would involve the dismissal of the respondent.
For the above reasons and those given by the Master of the Rolls, I cannot agree with the view of MacKinnon, L.J., that we can properly imply a term in the agreement that the company should not exercise or create any right to remove the respondent from his directorship, if that involves the results of an alteration of the articles. It seems to me that a winding-up resolution would be within these words. Nor can I agree with the opinion of Goddard, L.J., that it was a breach of the agreement for Southern to put it within the power of some other person or company under new articles and under different circumstances to remove the respondent. After all, an implied term ought to be one which the parties must necessarily have intended at the date of the agreement, and I do not myself think that either of the parties can be taken to have been providing for a state of things which would result from the de facto amalgamation of interests which no one contemplated at the date of the agreement but which in fact took place.
The question which remains is whether the act of Federated, under Art. 8 of the articles of Southern, in removing the respondent from his office of director of that company by an instrument in writing signed by two directors and the secretary of Federated, was a breach by Southern of its agreement with the respondent or a repudiation of that agreement. It was the act of Federated which had the effect of removing the respondent from his directorship. After the new articles had been adopted Southern was powerless to prevent that act. Southern, indeed, was completely controlled by Federated, who held beneficially every share in Southern as in all the other associated companies. With all respect to those who think otherwise, I cannot understand the suggestion that Federated were acting as agents, or, which is the same thing, as mandatories, of Southern in that matter, since Southern had not and, indeed, never had any power or influence whatever over Federated. It held not a single share in Federated. It was Federated who held the shares in Southern. Nor was there any contractual relation between Federated and Southern which might have enabled Southern to object to the act of Federated under article 8. I think I understand the doctrine of anticipatory breach, but it is not alleged to apply here. If, under an agreement between A and B, A can lawfully do an act (for example, by a sale of property) which gives power to an independent third party, C, to do a number of things some one of which may injure B, I do not see that A can be sued for a breach of the agreement which he cannot prevent. I repeat that it is not alleged in the pleadings, or at the Bar, that the adoption of the new articles by Southern was a breach of the contract with the respondents or was done in bad faith as regards him. If A enters into a contract of service with B, and then gives power to C to discharge B, and C does so contrary to the terms of the contract, A is plainly liable because C has acted with his authority and in that sense as his agent in breaking the contract. In the present case, however, the contract is between a limited company and a director, and it was an implied term of the contract that the company, by altering its articles, could give wide powers to a third party, including a power to dismiss the company's directors. B cannot complain if he is so dismissed by the third party, for it is as I think, impossible for B to take up the position that he is bound under his contract by the new articles but can sue the company for breach of that contract based on things lawfully done under the new articles.
In my opinion it has not been established in this case that Southern has committed any breach of the agreement or has repudiated the agreement, and the action therefore fails.
The Master of the Rolls, at the conclusion of his judgment, expressed a view on the hypothesis which he did not accept, that a certain implied undertaking, which I think his colleagues were accepting, had been broken. I do not think he would have expressed himself as he did if the hypothesis had included a statement that the alteration of the articles and the insertion of article 8 was not prohibited by any implied term in the agreement.
For the reasons stated I should be in favour of allowing this appeal; but if a majority of your Lordships are of a contrary opinion it must be dismissed.
Lord Atkin.—The question in this case is whether the appellant company have broken their contract with the respondent made in December, 1933, that he should hold the office of managing director for ten years. The breach alleged is that under the articles adopted by the company, after the agreement, the respondent was removed from the position of director of the company by the Federated Foundries, Ltd. There can be no doubt that the office of managing director could only be held by a director, and that upon the holder of the office of managing director ceasing for any cause to be a director the office would be ipso facto vacated. Under the articles in existence at the date of the agreement, by article 92 the office of a director could be vacated on the happening of six various events, bankruptcy, lunacy, etc., including the giving by the director of six months' notice to resign; while by article 105 the company, by extraordinary resolution, could remove him from his office. I feel no doubt that the true construction of the agreement is that the company agreed to employ the respondent and the respondent agreed to serve the company as managing director for the period of ten years. It was by the constitution of the company a condition of holding such office that the holder should continue to be a director; and such continuance depended upon the terms of the articles regulating the office of director. It was not disputed and I take it to be clear law that the company's articles so regulating the office of director could be altered from time to time; and therefore the continuance in office of the managing director under the agreement depended upon the provisions of the articles from time to time. Thus the contract of employment for the term of ten years was dependent upon the managing director continuing to be a director. This continuance of the directorship was a concurrent condition. The arrangement between the parties appears to me to be exactly described by the words of Cockburn, C.J., in Stirling v. Maitland (34 L.J.Q.B., at p. 3; 5 B. & S., at p. 852): "If a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances." In such a state of things the Lord Chief Justice said : "I look on the law to be there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances under which alone the arrangement can be operative." That proposition, in my opinion, is well-established law. Personally I should not so much base the law on an implied term as on a positive rule of the law of contract that conduct of either promisor or promisee which can be said to amount to himself "of his own motion" bringing about the impossibility of performance is in itself a breach. If A promises to marry B and before performance of that contract marries C, A is not sued for breach of an implied contract not to marry anyone else, but for breach of his contract to marry B. I think it follows that if either the company of its own motion removed the respondent from the office of director under article 105, or if the respondent caused his office of director to be vacated by giving one month's notice of resignation under article 89, either of them would have committed a breach of the agreement in question. As Kennedy, L.J., said in Measures Brothers, Ltd. v. Measures (79 L.J. Ch., at pp. 717, 718; [1910] 2 Ch., at p. 258) in discussing this very question of the effect upon a contract of employment as managing director of the managing director resigning his office of director it is elementary justice that one of the parties to a contract shall not get rid of his responsibilities thereunder by disabling the other contractor from fulfilling his part of the bargain. I cannot agree with the view of the contract taken by the Master of the Rolls that the parties must be taken to have agreed that the term, though expressed to be for ten years, was subject to be determined by any cause including the will of either party expressed in accordance with the articles; and that such determination, therefore, could not constitute a breach. I should have construed the agreement as I do on the first two clauses alone, but the remaining clauses, and particularly those dealing with the mutual obligations between the respondent and Sir Berkeley Sheffield in this tripartite agreement, in my view strongly reinforce that construction. I agree, therefore, with the trial Judge, with the majority of the Court of Appeal, and with, I believe, all your Lordships in thinking that if during the term the respondent had given a notice of resignation, or if the company had exercised its power of removal under article 105, either would have committed a breach of the contract.
The question that remains is whether, if the removal by the company would have been a breach by the company, the removal under the altered articles by the Federated Foundries, Ltd., was a breach by the company. In this matter the Master of the Rolls agreed with the other members of the Court of Appeal; but all the members of this House are not agreed. It is obvious that the question is not as in the case just considered of the removal being by the Southern Foundries, Ltd.; but I venture respectfully to think that the result must be the same. The office of director involves contractual arrangements between the director and the company. If the company removes the director it puts an end to the contract; and, indeed, the contract relations cannot be determined unless by events stipulated for in the contract, by operation of law, or by the will of the two parties. The altered article 8, which gives power to the Federated Foundries, Ltd., to remove from office any director of the company, is, when analysed, a power to the Federated to terminate a contract between the Southern and its director. It is an act which binds the Southern as against its promisee; and if a wrong to the respondent if done by the Southern it surely must be a wrong to the respondent if done by the Federated, who derive their power to do the act from the Southern only. If a landlord gives power to a tenant to discharge the landlord's servants, gardener or gamekeeper, it is the master, the landlord, who is bound by the consequences of that discharge whether rightful, or whether wrongful and so involving the payment of damages. If a man buys goods, and contracts with a sub-purchaser to take delivery direct from his vendor, and contracts with his vendor to give delivery to the sub-purchasers, the latter's recourse for breach of contract to deliver is against his own intermediate seller and not against the head vendor. If then the Federated of their own motion determine the concurrent condition it appears to me that necessarily they cause the Southern to break the contract. I can quite see that the position may be altered where the Federated remove a director from office for such reasons as those contained in the old article 89 or in article 72 of Table A, which was not incorporated in the new articles. In such a case it may well be said that the company is not acting of its own motion, but is reasonably moved to act by the acts or omissions of the director. But in the present case no such question arises. The action of the Federated was, I think I may say, avowedly taken for the sole purpose of bringing the managing director's agreement to an end. I do not think that it could be said that the Southern committed any breach by adopting the new articles. But when the Federated acted upon the power conferred upon them in the new articles they bound the Southern if they acted in such a way that action by the Southern on the same articles would be a breach. It is not a question of agency but of acting under powers conferred by contract to interfere with a contract between the party granting the power and a third person. For these reasons I am of opinion that this appeal should be dismissed with costs.
Lord Wright. —The respondent in this action is claiming damages from the appellants for breach by them of their contract to employ him as managing director for ten years.
The respondent has been held entitled to succeed in his claim for damages by Humphreys, J., and in the Court of Appeal by MacKinnon, L.J., and Goddard, L.J., the Master of the Rolls dissenting. The only claim considered in this House has been that against the appellant company Southern Foundries (1926), Ltd. A claim against the second appellant company for procuring a breach of contract has wisely been withdrawn.
The agreement founded upon which was under seal dated December 21, 1933, was made between the Southern company and the respondent and Sir Berkeley Sheffield. The provisions directly material to this appeal are those between the Southern company and the respondent. Clauses 1 and 2 must be quoted in full.
1. Mr. Shirlaw shall be and is hereby appointed managing director of the company and as such managing director he shall perform the duties and exercise the powers which from time to time may be assigned to or vested in him by the directors of the company. 2. Mr. Shirlaw shall hold the said office for the term of ten years from December 1, 1933.
Then followed clauses providing for his faithful discharge of his obligations. He was to be paid a commencing salary of £1,700 per annum, rising by annual instalments to £2,000 and further a commission on net profits. Clauses 8 and 9 were as follows : 8. If Mr. Shirlaw shall fail for six consecutive months to fulfil his obligations to the company hereunder the company may by notice in writing determine this agreement. 9. If before the expiration of this agreement the tenure of office by Mr. Shirlaw shall be determined by the winding-up of the company (other than for the purpose of reconstruction or amalgamation) Mr. Shirlaw shall have no claim against the company or Sir Berkeley Sheffield for damages in respect of such determination.
There were other clauses not directly material. The respondent agreed to be subject to stringent restrictive covenants for three years after the termination of the agreement. Sir Berkeley Sheffield, who was a director of the Southern company, agreed to pay the respondent his living expenses in London for a period and the cost of removing himself and his family from Birmingham to London.
This agreement is unqualified in regard to the term of ten years save in the two events in which the Southern company was to be entitled to determine the agreement before the expiration of the term. But apart from the express language, the period of ten years is also qualified by the general rules of the law of employer and employed. Thus, the agreement would end if the respondent were to die or became permanently incapacitated, and the Southern company would presumably have a right to dismiss him on the ground of misconduct as, for instance, embezzlement or disgraceful conduct leading to conviction for an indictable offence. These and similar matters would not specifically fall within clause 8. The employment has a double aspect. The respondent is both manager and director. It is clear merely ex vi termini that the respondent could not cease to be director without ceasing to be managing director. The directorship is an integral and necessary element in the composite office. Hence if the Southern company were to remove him from his directorship during the term, save for some legal excuse, they would necessarily break their agreement to employ him for ten years as managing director. To do so would be a breach of their express promise and not of any implied term. The articles of association are not referred to in the agreement, but the respondent's claim in this case would not be prejudicially affected by anything in the articles of association as they existed at the date of the agreement. Article 90 gave the" directors power to appoint out of their body a managing director or directors for such period and upon such terms and with such powers as they should think fit. Article 91 provided that a managing director should not while in the office be subject to retirement by rotation "but he shall subject to the provisions of any contract between him and the company be subject to the same provisions as to resignation and removal as the other directors of the company and if he ceases to hold the office of director he shall ipso facto and immediately cease to be a managing director". Article 91 was thus expressly subject to the provisions of the agreement, so far as, or rather if, in any event, it should conflict with the provisions of the agreement, such as the ten years' term of engagement. It is also necessary to mention article 89 which contained an enumeration of events upon any one of which the office of a director should be vacated, such as bankruptcy or insolvency, lunacy, conviction of indictable offence, and similar matters which do not affect this case. Head (F) calls for special notice. It provides that the office of a director is to be vacated "if he gives the directors one month's notice in writing that he resigns his office". That provision is clearly excluded under article 91 as being inconsistent with the agreement to serve for ten years under clauses 1, 2 and 3. The respondent could not without just cause rightfully give such a notice, that is if he did so he would break his agreement and be liable to a claim for damages. But as the agreement would not be specifically enforced against him, his resignation, though a breach of contract, would have the effect of vacating his directorship and hence his office as managing director. In the same way article 105 which empowers the company by extraordinary resolution to remove any director is equally excluded in the case of a managing director by article 91. If the company under article 105 had passed an extraordinary resolution to remove the respondent during his term of ten years he would no doubt have ceased to hold office, because a claim by him for specific performance or kindred relief would, I assume, fail, but the removal would have been a breach of the agreement, unless for good cause.
In the result then, the articles, if they were regarded as qualifying the express agreement, would not in any substantial respect affect it. In my opinion the Southern company would beyond question have been guilty of a breach of contract sounding in damages if without just cause they had removed him from his directorship and thus terminated his tenure of office, as was done in April, 1937, in the circumstances which will appear later. The case would have been simply a case of wrongful dismissal of a servant or employee. The servant or employee is in such a case effectively dismissed. His employment is terminated but the termination is wrongful, and the employer has to answer in damages. The employers here are the Southern company, but for this purpose they are like any other employers. The articles may give them the power to dismiss, but the power to dismiss is to be distinguished from the right to dismiss. I do not think that in this particular case the fact that the office includes that of a director affects this conclusion. It is said that it is impossible to accept that a company would guarantee to a director a ten years' tenure of his office. But the answer is that they have actually done so, according to the terms of the contract, though subject to the express exceptions of the contract and to the general exceptions which the law reads into the contract. The word guarantee is inappropriate. No one, individual or company, can be compelled against his or their will to employ a man, though if the contract is broken damages will have to be paid. When the respondent was appointed managing director for ten years, the contract necessarily meant that the Southern company would not, without good cause, remove him from his directorship during that period, because if they did so they would ipso facto terminate his employment. There is no question of implying a term that the Southern company would not remove the respondent from his directorship. He could not serve for the agreed term of ten years unless the Southern company continued him in his office. As Lord Blackburn said in Mackay v. Dick (6 App. Cas., at p. 263): "Wherein a written contract it appears that both parties have agreed that something shall be done" [as here that the respondent shall hold office for ten years] "which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for carrying out of that thing." The agreement involved for its fulfilment the concurrence of the Southern company and the respondent, and imported that each should do its part in carrying it out.
But the question in the case arises out of an alteration in the articles of association made in 1936, when the agreement had still about seven years to run. It had been decided to effect a combination of the operations of a number of companies engaged in the iron foundry trade, including the Southern company. A new company, the second appellant, was incorporated, named Federated Foundries, Ltd., with that object, and it acquired the whole share capital of these companies. The respondent took part in these transactions and became one of the first directors of Federated Foundries, Ltd., and was present at a meeting of the board of that company, which unanimously resolved that each of the amalgamated companies should adopt similar articles of association. On April 17, 1936, at an extraordinary general meeting of the Southern company, at which the respondent was present, it was unanimously resolved by a special resolution that the existing articles of association should be abrogated and new articles decided upon by the Federated company should be adopted. It is not suggested that the action of the respondent as a director or shareholder had any bearing on his contractual rights. Of these new articles, article 8 is so material that it should be set out in extenso: 8......... Federated Foundries, Ltd., shall have power at any time and from time to time by an instrument in writing subscribed on its behalf by two of its directors and its secretary to appoint any person to be a director of the company [sc. the appellant Southern company] and to remove from office any director of the company. Every such instrument shall be deposited at the registered office of the company. Article 68 made a managing director's appointment subject to determination if for any cause he should cease to be director, and omitted the reservation of existing contracts. It likewise gave the company power to determine the tenure of a managing director's office.
Negotiations took place between the respondent and the Southern company in which it was sought to vary the terms of the respondent's appointment, but these failed. On March 23, 1937, the Federated Foundries company served on the respondent company a notice pursuant to the new article 8, whereupon under that article his appointment as director terminated, and consequently, by article 63 of Table A, his appointment as managing director also terminated. But the question is whether the appellant Southern company can claim that it was rightfully terminated and resist the judgment for damages made against them. Assuming that there was the power under the articles to terminate the appointment, I repeat that the power to dismiss and the right to dismiss are two different things. This is true both of companies and individuals in their capacity of employers. The Southern company, however, take a more subtle point. They say that the employment was in fact terminated but not by them or by their responsibility, but by an outside person, Federated Foundries, exercising the powers vested in that company by the Southern company when it altered its articles in 1936.
Before dealing with this submission, it
will be convenient to refer shortly to certain authorities. In Boston Deep-Sea
Fishing and Ice Co. v. Ansell the question arose whether the managing director
who had been rightfully dismissed was entitled to be paid his salary quarterly
or yearly. The articles provided that salaries were to be paid quarterly.
Cotton, L.J., said (39 Ch. D., at p. 359): "What we have to consider is
not whether as a shareholder he could have insisted on their performing that
agreement, but whether under the contract he had that right." It was held
that the contract prevailed. The converse case is illustrated by Allen v. Gold
Reefs of West Africa, where it was held that a company, by altering its
articles under which there was no lien on fully paid shares so that the altered
articles did impose such a lien, could enforce that lien against a shareholder
indebted to the company. The members' rights depended on the articles, which
were altered in good faith by the company under its statutory powers. But
Lindley, M.R., observed (69 L.J. Ch., at p. 272; [1900] 1 Ch , at p. 672):
"It does not by any means follow that the altered article may not be
inapplicable to some particularly fully paid up shareholder. He may have
special rights against the company, which do not invalidate the resolution to
alter the articles, but which may exempt him from the operation of the articles
as altered." Later (69 L.J. Ch., at p. 273; [1900] 1 Ch., at p. 673) he
considers the case of a special contract made with a company in the terms of or
embodying one or more of the articles, and adds that this may raise the
question whether, in such a case, an alteration of the articles so embodied is
consistent or inconsistent with the real bargain the parties. He points out
that "a company cannot break its
contract by altering its articles". The Master of the Rolls is emphasising
the distinction between power or capacity and right. Romer, L. J. (69 L.J. Ch.,
at p. 276; [1900] 1 Ch., at p. 680) said that the "shares became bound by
the company's alteration of its articles unless he [the shareholder] can show
some special bargain with the company, or some special obligation incurred
towards him by the company, in respect of his fully paid up shares". This
he failed to do. The alteration must, of course, be made in good faith.
In Baily v. British Equitable Assurance Co., the question did not relate to articles of association but to bylaws of the insurance company. The Court of Appeal treated the bylaws as comparable to articles of association and the question as being whether the alteration of the bylaws which prejudiced the rights of policy holders as regards sharing in profits, was effective against them under the principles laid down in Allen's Case, supra. Cozens-Hardy, L.J., in delivering the opinion of the Court, said (73 L.J. Ch., at p. 245; [1904] 1 Ch., at p. 385): "It would be dangerous to hold that in a contract of loan or a contract of service or a contract of insurance validly entered into by a. company there is any greater power of variation of the rights and liabilities of the parties than would exist if, instead of the company, the contracting party had been an individual. A company cannot, by altering its articles, justify a breach of contract." This expression of opinion with which I agree is very pertinent to this case. That case went to this House which reversed the decision of the Court of Appeal on the ground that no special contract existed, British Equitable Assurance Co. v. Baily, but did not question the principle stated by the Court of Appeal.
In Nelson v. Nelson & Sons, Ltd., the plaintiff was appointed managing director of the defendant company under an agreement which provided that he was to hold the office so long as he should remain a director of the company and should perform his duties efficiently. The appointment was made under articles of association which empowered the directors to appoint the managing director for such period as they deemed fit, "and might revoke the appointment". The Court of Appeal held that the directors' power, was in effect to appoint for a fixed time, and that this power was inconsistent with a power in the board to revoke the appointment at any time. As Swinfen Eady, L.J., said (83 L.J.K.B., at p. 830 ; [1914] 2 K.B., at p. 781): "The power to appoint and the power to revoke the appointment are in the board, but the power to revoke is to be subject to the terms of the contract for the time being between the managing director and the company." Hence when the directors dismissed the plaintiff without just cause while still fulfilling the conditions of his contract, he was held entitled to recover damages for wrongful dismissal against the company.
It follows, I think, in the present case that if the appellant Southern company had dismissed the respondent either under article 105 of the original articles or article 8 of the altered articles (assuming for the moment that the power to remove was vested in them) they would have committed a breach of their contract, there not being any just cause for dismissal. The special bargain would override the article. The article must either be construed as not applying to the respondent, or as qualified by and subject to the express contract.
But the appellant Southern company rely on the further point to which 1 have referred, which is that altered article 8 vests in Federated Foundries the right to remove a director by means of a written instrument deposited at the appellant Southern company's office. The article has been validly passed by the appellant Southern company. Under that article, it is claimed, the respondent has been removed from his directorship. He has not been removed, it is said, from his office of managing director though that consequence follows inevitably. In that removal the appellant Southern company say they have no part or lot and no responsibility. It is the act of an independent person, but all the same is effective to terminate the employment. If it is a wrongful termination, the appellant Southern company are not liable for it and hence are entitled to succeed in this appeal. Such is the argument.
The appellant Southern company's case on this point found favour with no member of the Court of Appeal. It depends purely on a question of the law of contract. For the reasons already explained I do not consider that questions of company law, for instance those relating to the original or altered articles, materially affect the question. They go to questions of powers as between the two companies, whereas the question is as to right to dismiss. As I follow the appellant Southern company's case, it is that a contract between A and B can, apart from any express or implied condition in the contract, be dissolved at the will of C, a stranger to the contract, without the consent of B, one of the contracting parties. It is contended that this is so because by an arrangement between A and C, A has vested this power in C. No authority is cited to justify such a proposition. A contract is a consensual agreement between A and B, between whom the rights and liabilities exist. I do not understand on what principle B can be ejected from his contractual rights by the stranger C, with whom he has no privity. The Southern company promised that the respondent should hold the office of managing director for ten years, subject to the express or implied conditions. The Southern company now have to justify his removal while the contract period was running. No doubt there might be cases in which apart from the contract provisions the Southern company could resist a claim for damages. There might for instance be a change in the law or there might be a requisition by the Government of the works and undertaking of the Southern company which might in certain events frustrate and dissolve the contract irrespective of the will of the parties. But even in such cases it has been held that the requisition must not be self-induced, to use the phrase employed in Maritime National Fish Co. v. Ocean Trawlers, Ltd. Even if the present case were, what it was not, analogous to such a case, the Southern company could not say that the intervention of the Federated was not self-induced, since in fact if article 8 had not been adopted in place of the earlier articles, Federated would have had no power to intervene. But it is clear that such intervention has no analogy to a requisition by government or any change by operation of law. It follows from a private arrangement between the Southern company and Federated, which is res inter alios acta so far as concerns the respondent's contractual rights even if in fact it terminates his directorship and managing directorship. Apart from government interference or the like, the contract can only rightfully be dissolved by the will of the parties who entered into it. That will may be evinced by the conditions, express or implied, which were originally agreed to, and by action in accordance with them, or by a subsequent agreement to rescind the contract. But nothing of the sort can be shown by the Southern company. They have to justify the determination of the contract, or the case will be one of breach or repudiation. If their only justification is the action of Federated Foundries, that in my opinion is no defence. The alteration of the articles did not constitute a breach of contract by the Southern company as against the respondent, but his removal the following year did, and entitled him to damages.
In my opinion the Southern company fail in their defence and the appeal should be dismissed.
Lord Romer.—The question to be determined upon this appeal is whether the appellants Southern Foundries (1926), Ltd., to whom I shall hereafter refer as Southern, have committed a breach of any of the obligations, express or implied, imposed upon them by their contract with the respondent of December 21, 1933. If they have not, the respondent has no cause of action against either Southern or their co-appellants, Federated Foundries, Ltd., and this appeal must necessarily succeed.
That there has been no breach by Southern of any express provision of this agreement is, in my judgment, quite plain. It is true that the respondent was appointed managing director of Southern for ten years from December 1, 1933, and that Southern ceased so to employ him on March 27, 1937. But that was because on this latter date he ceased to be a director of Southern. His appointment as managing director for ten years was necessarily subject to the implied qualification "if he shall so long remain a director" ; because, as was pointed out by the Master of the Rolls, a managing director who is not a director is a contradiction in terms; and also because of the concluding words of article 91 of Southern's original articles of association. If, therefore, any one of the events specified in article 89 of Southern's original articles of association had occurred or Southern had removed the respondent from the board under the power conferred upon it by article 105, the appointment of the respondent as managing director would have come to an end in accordance with the terms of his employment. And even if his directorship had been terminated by the action of Southern themselves there would have been no breach by them of any express provision contained in the agreement. Nor would there have been any breach by the respondent of any express obligation on his part contained in the agreement had his directorship been brought to an end by his resignation under article 89 (F).
But the agreement by Southern to employ the respondent, or his agreement to serve them, could only take effect for the full ten years if the respondent continued to be a director during that period. In these circumstances there was, in my opinion, an implied engagement on the part of Southern that they would not during that period exercise their power of removing him from his directorship under article 105, and an implied obligation on his part that he would not during that period serve notice of resignation under article 89 (F). "If", said Cockburn, C. J., in Stirling v. Maitland 31 L.J. Q.B., at p. 3; 5 B. & S., at p. 852) "a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances under which alone the arrangement can be operative". The principle so enunciated does not, however, warrant the implication in the present case of any further obligations on the part of Southern and the respondent than those I have mentioned. For the principle is one that is founded upon good reason and good sense, and is therefore to be applied in any particular case only so far as in the circumstances of the case good reason and sense may require. It would be impossible, for instance, to suppose that the respondent committed a breach of an implied obligation under the agreement if he were to compound with his creditors or be convicted of an indictable offence. It would be equally impossible to suppose that Southern committed a breach of any implied obligations if the respondent were made bankrupt on their petition, or if, before paragraph (D) of article 89 was deleted in January, 1936, Southern had enforced by sale any lien they might have held on the respondent's qualification shares. In my opinion the only obligation on the part of Southern that the principle requires to be implied is an obligation to abstain from any act of which the direct object is to bring the respondent's directorship to an end and not an obligation to abstain from every act of which the cessation of the respondent's directorship may be the indirect and unintended consequence.
For these reasons I am of opinion that when Southern exercised their statutory right of altering their articles of association they committed no breach of any implied obligation that they were under towards the respondent, even though one of the indirect and unintended consequences of the alteration was that the respondent was removed from his directorship. That his removal was both an indirect and unintended consequence of the alteration is plain. In view of what has been called, though incorrectly called, the merger of the Southern and the other nine companies, it was obviously convenient and in the best interests of Southern that all ten companies should have identical articles of association. There was, therefore, nothing sinister about the adoption by Southern of the new articles. No one can suggest, or indeed ever has suggested, that the adoption was made for the purpose of having the respondent removed, or that the possibility of such removal resulting from the adoption was ever in the contemplation of Southern. He was in fact removed, as we know, by the exercise by the appellants, Federated Foundries, Ltd. (hereinafter referred to as Foundries) of the general power over the directors of Southern conferred upon them by article 8 of the new articles of association. But the conferring of this power on Foundries was no breach of any obligation they owed the respondent, as I have already pointed out; and I am wholly unable to see how it could become a breach by any subsequent exercise of the power by Foundries. Had Southern in any way instigated the subsequent exercise of the power by Foundries their instigation could no doubt have been regarded as a breach of their implied obligation. But of any such instigation no trace is to be found. The removal of the respondent would appear to have been the spontaneous act of Foundries in the exercise of their free and unfettered discretion. Nor can Foundries be regarded as being in any way the agents of Southern in effecting the respondent's removal. It must be remembered in this connection that in the new articles of association article 72 of Table A was not incorporated. There was, therefore, no article corresponding to article 89 in the original articles. The result of this was that no director of Southern would vacate his office on the occurrence of any of the events specified in article 89, and this no doubt was the reason for conferring upon Foundries, as being the beneficial owners of all the shares in Southern, the general power of removal of the Southern directors. Should one of them, for instance, become bankrupt, or of unsound mind, or be convicted of an indictable offence, he would nevertheless continue to be a director unless and until Foundries chose to remove him. Had one of these calamities befallen the respondent, and Foundries had removed him from his directorship, could it be said that Southern had committed a breach of their implied obligation? Plainly not. But this being so, the alleged breach of contract on their part is reduced to this, namely, that they omitted to insert in the new articles a provision that until December 1, 1943, Foundries should not remove the respondent from his directorship for any reason other than those specified in paragraphs (A), (B), (C), (E) and (F) of the old article 89, and that this breach of contract on their part resulted in the respondent being damaged when Foundries removed him in March, 1937.
I have already given my reasons for thinking that Southern were under no implied obligation to make any such provision in the new articles. Their only implied obligation so far as I can see was not to remove him themselves except for one of the reasons specified in the old article 89. The fact that when they adopted the new articles of association they took a step which indirectly and without any intention on their part made it possible for Foundries to remove him, seems to me beside the mark. If a landowner agrees that he will himself do nothing on his land that may interfere with the light coming to the windows of his neighbour's house, he does not commit any breach of that agreement by selling his land to a third party who subsequently interferes with the light. Such interference would be merely an indirect and unintended result of the sale.
For these reasons I would allow the appeal.
Lord Porter stated the facts, read the relevant articles of association and continued: On March 25, 1937, the board of directors of the Federated company passed a resolution removing the respondent from his office as a director of the Southern company, and an instrument in writing subscribed on behalf of the Federated company by two of its directors and its secretary was sent to the office of the Southern company and was received by it on March 27, 1937.
Upon receipt of this document the respondent admittedly ceased to be a director of the Southern company and consequently ceased to be managing director. The respondent, however, contends that he was thereby wrongfully dismissed from his office as managing director by the Southern company and that that company is liable to him in damages for breach of the agreement of December 21, 1933. He also contends that the Federated company is liable to him in damages for procuring that breach. No question arises for the determination of your Lordship's House as to whether the latter claim is or is not sustainable, since the appellants were content to treat the result of the action against the Southern company as binding also upon the Federated company, and in the remarks which follow I deal only with the right of action of the respondent against the Southern company.
Humphreys, J., before whom the action came in the first instance, decided in favour of the respondent, and in the Court of Appeal this decision was upheld by MacKinnon, L.J., and Goddard, L.J., the Master of the Rolls dissenting.
Before dealing with the more difficult question whether the removal of the respondent from his position as director either by the Southern or the Federated company constituted a breach of his contract of service as managing director, it is necessary to determine whether that contract was itself at the time at which it was made one for ten years certain or was only for such period as the Southern company chose to retain him as a director. The same question might perhaps be put in another way, namely, to what extent was the respondent subject to the terms of articles 89, 98 and 105 of the original articles.
It is to be observed that the contract provides for his engagement for ten years without qualification, that article 90 authorises the appointment of a managing director for such period as the directors think fit, and that article 91 provides that when so appointed, though he is not subject to article 98, yet unless his contract otherwise provides he is subject to removal under article 105, and authorised to resign under article 89 (F). I think that your Lordships are agreed that the contract does, however, otherwise provide. Clause 2 states that the respondent shall hold the office for the term of ten years. Clause 3 provides that throughout the said term he shall devote the whole of his time to the business. Clause 4 fixes his salary at a rate which increases until the fourth year is reached. Clauses 8 and 9 provide in the event of the winding up of the company except for certain purposes for the respondent's dismissal and light to damages in terms which are more consistent with a fixed tenure of ten years than a contract terminable at the will of the company or of the respondent. And clauses 11 and 12 which prohibit the setting up or joining a competing business and soliciting or dealing with customers of the Southern company contain provisions which would be surprising in the case of a man whose office might rightfully be determined at any moment, more particularly as he is by clause 12 prohibited from dealing with or soliciting any person who has been a customer during three years before his appointment ends—a period which if the company could get rid of him at any time might long precede the beginning of the contract.
But apart from these considerations it has to be borne in mind that Sir Berkeley Sheffield was also a party to the contract and that he not only undertook by clause 13 to pay an extra sum for the respondent's living expenses and the cost of his removal to London up to twelve months after the date of the contract, but also entered into an arrangement with the respondent as to the subscription for and the non-transference of preference shares in another company so long as the obligations of the respondent under the contract were duly and punctually performed. In my view, therefore, the terms of the contract lead to the conclusion that it is one for ten years and in my view is not subject to the provisions of articles 89 (F), 98 and 105. Having regard to the provisions of articles 90 and 91 it could not be and was not contended that such an appointment was ultra vires.
The application of the rest of the terms of article 89 to a managing director is somewhat different. The true view may well be that in the case of the happening of any of the events foreshadowed in (A) to (D) the respondent would cease to be a director and therefore a managing director. The same is, I think, true in the case of 89 (E), but as a singular provision is contained in clause 3 of the contract its materiality is not great. In none of these events, however, would either party be liable to an action for breach of contract and this result follows whether one regards the contract as incorporating the articles save where its terms are inconsistent with them, or whether the termination of the directorship in such cases is regarded as not being due to the intervention of either party. However this may be, in my view, unless the articles were altered the company except in certain specified cases could not dismiss the respondent nor the respondent leave the company for ten years without being liable to be sued for breach of contract. This was, in my view, the position when the contract was entered into. What then was the effect of the arrangement with the Federated company and the alteration of the articles?
It is common ground, and, indeed, long-established law, that a company cannot forgo its right to alter its articles, but it does not follow that the alteration may not be or result in a breach of contract. The principle is perhaps most clearly enunciated in Allen v. Gold Reefs of West Africa, a case in which a company was held entitled to alter its articles so as to obtain a lien on fully paid shares, though before the alteration it had a Hen only upon partially paid shares. But Lindley, M.R., states the position in two passages (69 L. J. Ch., at p. 273; [1900] 1 Ch., at p. 673, 674): "A company cannot break its contracts by altering its articles, but when dealing with contracts referring to revocable articles, and especially with contracts between a member of the company and the company respecting his shares, care must be taken not to assume that the contract involves as one of its terms an article which is not to be altered", and "It is easy to imagine cases in which even a member of a company may acquire by contract or otherwise special rights against the company which exclude him from the operation of a subsequently altered article." And in Baily v. British Equitable Assurance Co. (in the Court of Appeal, but reversed on another point), in which a participating policy holder had taken out a policy which the Court of Appeal thought entitled him to have the whole of the profits distributed, was held entitled to a declaration that the assurance company ought to distribute the whole of such profits. The action was necessitated because the company, which, when the policy was taken out, had been formed and was operating under a deed of settlement providing for the distribution of the whole of the profits, at a later date proposed to register itself with limited liability, to substitute a memorandum and articles for the deed of settlement, and under the terms of the articles to carry part of the profits to a reserve fund.
The Court of Appeal affirmed a declaration by Kekewich, J., that the company ought to continue to distribute the entire profits arising from the participating branch of its business, and Cozens-Hardy, L. J., said (73 L. J. Ch., at p. 245; [1904] 1 Ch., at p. 385): "But the case of a contract between an outsider and the company is entirely different, and even a shareholder must be regarded as an outsider in so far as he contracts with the company otherwise than in respect of his shares. It would be dangerous to hold that in a contract of...........service................validly entered into by a company there is any greater power of variation of the rights and liabilities of the parties than would exist if, instead of the company, the contracting party had been an individual."
The general principle, therefore, may, I think, be thus stated: (1) A company cannot be precluded from altering its articles, thereby giving itself power to act upon the provisions of the altered articles—but so to act may, nevertheless, be a breach of contract if it is contrary to a stipulation in a contract validly made before the alteration. (2) Nor can an injunction be granted to prevent the adoption of the new articles ; in that sense they are binding on all and sundry, but for the company to act upon them will, none the less, render it liable in damages if such action is contrary to the previous engagements of the company. If, therefore, the altered articles had provided for the dismissal without notice of a managing director previously appointed, the dismissal would be intra vires the company but would, nevertheless, expose the company to an action for damages if the appointment had been for a term of (say) ten years and he were dismissed in less.
Once it is established that the appointment is for a time certain and the dismissal before its termination, the result follows, and I do not understand the appellants to contend to the contrary. The complication lies in the fact firstly that the respondent has been dismissed, not from his office of managing director, but has been removed from his position of director, and secondly, that the removal has been effected not by the Southern but by the Federated company.
So far as the first matter is concerned the decision must, I think, be reached by applying the well-known principle laid down by Cookburn, C.J., in Stirling v. Maitland (34 L.J Q B., at p. 3. 5 B. & S., at p. 852), which I quote in extenso: "I look on the law to be that, if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative. I agree that if the company had come to an end by some independent circumstance, not created by the defendants themselves, it might very well be that the covenant would not have the effect contended for; but if it is put an end to by their own voluntary act, that is a breach of covenant for which the plaintiff may sue. The transfer of business and the dissolution of the company was certainly the act of the company itself, so that they have by their act put an end to the state of things under which alone this covenant would operate".
If, therefore, the Southern company had altered their articles in such a way as to enable them to remove the respondent from his directorship at will, and had so removed him, I, in common I believe with all your Lordships, would regard their action as coming under Sir Alexander Cockburn's dictum as an actionable breach of contract.
In reaching this conclusion I find myself unable to accept the dissenting judgment of the Master of the Rolls, who took the view that under the contract the plaintiff was not expressly appointed managing director for ten years but only for such a period not exceeding ten years as he remained a director and that no term could be implied which would prevent the company from terminating the respondent's directorship with the result that he ceased to be capable of retaining his position as managing director. But no such alteration was made—the new articles did away with all former grounds of removal and termination of the director's office and left it to the Federated company at their absolute discretion to keep or remove a director of the Southern company. That change, it is said, is no breach, or at any rate is not contended to be a breach of the respondent's contract, and his later removal is the act of the Federated and not of the Southern company and one therefore for which the latter company is not responsible. This contention was negatived by the Master of the Rolls as well as the other two members of the Court of Appeal. As, however, the main argument appears to have been grounded upon the question of the true construction of the contract, the matter now under consideration was treated as subsidiary, with the consequence that it is dealt with very shortly in the Court of Appeal.
I cannot say that I have found the solution an easy one and obviously having regard to the divergence of view in your Lordships' House the matter is one which lends itself to a conflict of opinion. Some support for the appellant's contention was sought in the case of Bluett v. Stutchbury's, Ltd. The case is very shortly reported and the exact grounds of the decision are not easy to ascertain, but they lend some countenance to the appellants' argument inasmuch as in that case, as in this, the articles had been altered so that the retention or dismissal of the director from his directorship was left to the determination of a third party. Cozens-Hardy, M.R., is reported to have said that in such circumstances if the third party deprived the managing director of his directorship he necessarily ceased to be managing director, the company could not prevent that action and were in no sense the authors of the dismissal.
If the true view be that the only action
taken by the company was the alteration of the articles, and if indeed
thereafter they were in no way implicated in the act of the Federated company
in removing the respondent and could not help themselves, then the appeal must
succeed. But though it is true that ultimately the Southern company could not
prevent the Federated company from removing the respondent from his
directorship, the act of removal is not, I think, solely the act of the
Federated company. Rather it is the combined act of both, an act impossible to
the latter but for the act of the former and not resulting in a breach of
contract until the power of dismissal
given by the former was acted upon by the latter. To say that the Southern
company could have helped themselves if they removed the respondent from his
directorship but could not do so where they authorised the removal by another
would seem to me to treat what is at best a technicality as if it were the
substance of the case. It is the Southern company's act which has resulted in
the respondent's removal and none the less so though his dismissal required two
acts and not one for its accomplishment.
I would affirm the judgment of the Court of Appeal.
[1986] 59 COMP. CAS. 898
(KER.)
v.
Travancore Rubber & Tea Co.
Ltd.
K. BHASKARAN, ACTG., C.J.
AND M. FATHIMA BIVI, J.
MFA
NOS. 466 OF 1982 AND 38 TO 47, 50 TO 56, 66, 67 AND 75 TO 77 OF 1983.
DECEMBER 22, 1983
Mani J. Meenattoor for the Appellants.
M. Pathrose Mathai for the
Respondents.
Bhaskaran, Actg, C.J.—These are appeals under sub-section (4) of section 155 of
the Companies Act, 1956 ("the Act"), directed against the decision by
our learned brother, M.P. Menon J., in C.P. Nos. 8 to 30 of 1980, which were
petitions under section 155 of the Act and rule 9 of the Companies (Court)
Rules, 1959 ("the Rules"), for rectification of the register of
members of the first respondent company (the Travancore Rubber and Tea Co.
Ltd.) by removing the name of the second respondent in the respective petitions
from the register of members in respect of equity shares alleged to have been
purchased by the respective petitioner from the second respondent in the
respective petitions at the prevailing market rate through brokers and in
respect of which, share transfer deeds duly executed by the transferors and the
transferees, together with the share certificate relating to the said shares,
were forwarded to the registered office of the company for registering the
transfers and duly entering the names of the respective petitioners in the
register of members of the company as the holders of those shares. It has been
averred that the company instead of registering the said transfers of shares
and entering the names of the respective petitioners as the owners of the said
shares, by its letter dated January 29, 1980, informed the respective petitioners
that the transfer applications were considered by the board of directors of the
company at its meeting; and that the board has declined to register the
transfer of shares in exercise of the powers conferred on the board under
article 24 of the articles of association of the first respondent company read
with section 111 of the Act; in consequence, the first respondent company
returned the share certificates relating to the said shares to the petitioners.
Issues Nos. 1 and 2
formulated for trial by the learned judge (issues Nos. 3 to 6 not being
relevant for our present purpose) read as follows:
"(1) Are the petitioners competent to challenge the
validity of article 24 (as amended in 1965) of the first respondent-company's articles
of association in these proceedings? and
(2) If so, is article
24 (as amended in 1965) invalid as alleged? "
The first
respondent-company was incorporated under the Travancore Companies Act (IX of
1114 ME). Exhibit A-l contains the articles of association of the company as it
stood prior to 1965; and regulation 20 thereof was in the following terms:
"20. The directors may
refuse to register any transfer of a partly paid share (a) where the company
has a lien on the share; or (b) where it is not proved to their satisfaction
that the proposed transferee is a responsible person; or (c) where the
directors are of opinion that the proposed transferee (not being already a
member) is not a desirable person to admit to membership, but the directors
shall not be bound to state their reason for refusing to register any transfer.
Notice of refusal to transfer shall be given to both parties to the deed or
application for transfer within two months after the decision of the board of
directors is made".
M/s. Aspinwall & Co.
(Travancore) Ltd. were originally the managing agents of the company; and it
appears that some time prior to 1965, that arrangement was terminated. This
change in regard to the managing agency and the far reaching changes brought
about in the company law by the Companies Act, 1956, made the directors think
that the articles of association as a whole had to be recast and replaced by a
new set of articles. Accordingly, they gave notice of the following special
resolution for the 21st annual general meeting of the company held on June 24,
1965:
"Resolved that the
regulations contained in the printed document submitted to this meeting and for
purposes of identification signed by the chairman of the meeting, be and are
hereby approved and that such regulations be and are hereby adopted as the
articles of association of the company for and to the exclusion of all existing
articles".
The notice also stated:
"An explanatory
statement under section 173 of the Companies Act in respect of the above items
of business and a copy of the proposed new set of articles are attached hereto.
Copies of the existing memorandum and articles of association of the company
are available for inspection at the company's registered office during business
hours".
The explanatory note itself
was in the following terms:
"As you know, this is
a company registered under the Travancore Companies Act (IX of 1114 ME), which
has been superseded by the Companies Act, 1956, which has brought into force
far reaching changes in the law relating to companies. Further, the
existing articles of the company were framed with a view to have the company
managed only by managing agents. There are no managing agents at present, and
it is desirable to take power in the articles for the management of the company
by any type of management permitted under the Companies Act. It has, therefore,
been considered necessary and desirable that the existing articles of
association of the company framed under the old Travancore Companies Act (IX of
1114 M E) should be amended to make suitable provisions for the aforesaid purposes.
In
view of the large number of amendments required, it has been considered more
convenient to frame a completely new set of articles and to adopt the same in
substitution for and to the exclusion of the existing articles. Under the
Companies Act, 1956, articles can be altered by special resolution. The special
resolution notified is for the purpose of approving and adopting the new
articles".
The
annual general meeting passed the resolution and adopted the new set of
articles with some modifications; and exhibit A-4 contains these articles.
Regulation 24 in exhibit A-4 reads as follows:
"The
board may, in their absolute discretion and without assigning any reason,
decline to register:
(a) the
transfer of a share to a person of whom they do not approve; or
(b) any
transfer of shares on which the company has a lien".
The
substantial difference between old regulation 20 and new regulation 24 is that
whereas under the former, the directors could have refused transfers only in
respect of partly paid shares, under the new regulation 24 they could refuse
transfers of fully paid shares also. The petitioners are transferees of fully
paid shares and, therefore, if the amendments made in 1965 were to be held
invalid and inoperative, the refusal on the part of directors to register the
transfer of shares in these cases could not obviously be justified. The only
ground raised in the petitions against the validity of the amendments is that
the explanatory statement under section 173(2) to the notice of the special
resolution for the 21st annual general meeting of the company held on June 24,
1965, at which the new regulations are stated to have been considered and
adopted, fell short of the statutory requirements. Our learned brother, M.P.
Menon J., dealt with the explanatory statement under section 173(2) at some
length without, however, deciding issue No. 2 touching the validity of article
24 in exhibit A-4. In the light of the decision on issue No. 1, that the
petitioners were not competent to challenge the validity of article 24 in
exhibit A-4 articles of association in the proceedings before the company
court, the company petitions were dismissed by a combined order challenged in
these appeals.
Section
31 of the Act permits a company, by special resolution, to alter its articles
of association subject to the provisions of the Act and the conditions
contained in the memorandum. Section 36 provides:
"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."
Sub-section
(2) of section 189 of the Act is to the following effect:
"(2)
A resolution shall be a special resolution when—
(a) the intention to propose the resolution as a
special resolution has been duly specified in the notice calling the general
meeting or other intimation given to the members of the resolution;
(b) the notice required under this Act has been
duly given of the general meeting; and
(c) the votes cast in favour of the resolution
(whether on a show of hands, or on a poll, as the case may be) by members who,
being entitled so to do, vote in person, or where proxies are allowed, by
proxy, are not less than three times the number of the votes, if any, cast
against the resolution by members so entitled and voting".
In
our view, the dismissal of the company petitions, which has given rise to these
appeals, on the basis of the decision on Issue No. 1 that the petitioners
(appellants) were not competent to question the validity of regulation 24 of
the new regulations (A-4 articles of association) could not be assailed on the
ground that regulation 24 is null and void".
Gore-Browne
in his Handbook on Joint Stock Companies, 41st edition, at page 51, has stated as follows:
"Even when articles
have not been formally altered, the court may have regard to a long course of
practice, and recognise as valid articles which have been used for many years,
although not regularly adopted, and may also act upon a distribution of assets
not in strict accordance with articles if there has been a general adoption of
the method of distributing. Moreover, where an article is one which the company
has power to adopt, the fact that there has been a defect in the procedure of
its adoption will not prevent a person dealing with the company on the faith of
the article from insisting that it shall be treated as binding on the company,
and the company can equally insist upon such article where it has been made the
basis of a contract with a stranger.
The court will not at the
instance of the company rectify mistakes in the articles. Even where
rectification is sought by one or more of the signatories of the articles, and
it is proved that the articles do not give effect to the agreement between
them, the court has no jurisdiction to order rectification".
It is true, as held by the
Gujarat High Court in Sheth Mohanlal Ganpat. ram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [
1964] 34 Comp Cas 777, section 173 enacts a provision
which is mandatory, not directory. Subsection (2) of section 173 of the Act
reads as follows:
"Where any items of
business to be transacted at the meeting are deemed to be special as aforesaid,
there shall be annexed to the notice of the meeting a statement setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein, of every director, the
managing agent, if any, the secretaries and treasurers, if any, and the manager,
if any".
Whether the statement
annexed to the notice of the meeting contains full and frank disclosure of the
material facts concerning each item of business must essentially depend upon
the facts of each case. The learned judge, though it might not have been
strictly necessary in view of the decision taken under issue No. 1, pointed out
some of the defects noticed in the explanatory statement under section 173(2)
of the Act, which might lead to a conclusion that it could not be said that
there was a full and fair disclosure of all the full material facts concerning
various items of business to be transacted in the annual general meeting. Apart
from the fact that if, as correctly pointed out by the learned judge, the
petitioner was not entitled to question the validity of regulation 24 of the
articles of association (as amended in 1965), there was no purpose in
conducting a postmortem on the process of amendment which took place in 1965.
The learned judge has guardedly refrained from entering a definite finding on
issue No. 2. We are not also persuaded to hold that the articles of association
registered with the Registrar of Companies in 1965, substituting the earlier
articles of association are ex facie void. A very minor defect arising out of
strict non-confirmity with the provisions contained in section 173(2) might not
render the amendment null and void. In any event, in our opinion, there is no
scope for an elaborate enquiry by us, at this distance of time, as to whether
the articles of association are void or voidable in' a proceeding under section
155, however much enlarged the scope of the enquiry under the said section is
now after the amendment of the Act in 1960. We have no doubt that in collateral
proceedings under section 155, it would not be expedient for the court to enter
a finding on such a basic question as to whether the amended or substituted
articles are void or voidable, much more so when it has to be borne in mind
that the transferor himself not having been entitled to do so in a suit, which
would have been clearly barred by limitation, to circumvent the provisions of
the Limitation Act through the backdoor by the transferee approaching the
company court under section 155, when he is told that the articles by which the
transferor was bound, authorised the board of directors to decline to register
the transfer. Section 155 of the Act, provides as follows:
"155.
Power of court to rectify register of members.—(1) If—
(a) the
name of any person—
(i) is without sufficient cause, entered in
the register of members of a company, or
(ii) after having been entered in the
register, is, without sufficient cause, omitted therefrom; or
(iii) default is made, or unnecessary delay
takes place, in entering on the register the fact that any person having
become, or ceased to be a member the person aggrieved, or any member of the
company or the company, may apply to the court for rectification of the
register.
(2) the court may
either reject the application or order rectification of the register; and in
the latter case, may direct the company to pay the damages, if any, sustained
by any party aggrieved.
In either case, the court in its discretion may make such
order as to costs as it thinks fit.
(3) On an application under this section, the
court—
(a) may decide any question relating to the
title of any person who is a party to the application to have his name entered
in or omitted from the register, whether the question arises between members,
or alleged members, or between members or alleged members on the one hand and
the company on the other hand; and
(b) generally, may decide any question which it
is necessary or ex- pedient to decide in connection with the application for
rectification."
We
do not think it expedient or necessary for the company court on an application
made by a person, who is said to have purchased shares in 1979, to decide
whether an amendment to the articles of association made as early as in the
year 1965 was void or voidable, particularly in the light of the fact that the
amended provisions were binding on the shareholders from whom he purchased the
shares. Be that as it may, regulation 24 is one of the regulations in the
articles of association registered with the Registrar of Companies, which is
binding on the company and the shareholders; and it authorises the directors to
decline to register the transfer of shares without assigning any reason
whatsoever. The scope of the question to be decided in an enquiry under section
155 of the Act at the instance of a transferee of shares, in our opinion, would
not extend to the scrutiny of matters which could not have been agitated by the
transferor of the shares in a suit on account of limitation. The scope of the
enquiry under section 155 has to be understood from the nature of the relief
that the applicant could expect from the
various clauses in sub-section (1) of section 155.
It is not disputed before
us that the owners of the shares, from whom the petitioners purchased the
shares, had they continued to be the owners of the shares, without the transfer
taking effect, would not have had the right to challenge the validity of the
new regulations (exhibit A-4, articles of association) in a suit, as it would
have became hopelessly barred by limitation on the date of the filing of the
company petitions. If that be the position with respect to the right of the
transferor of the shares, it would not be reasonable to hold that the
transferee of the shares from such a shareholder would have had a better right
to challenge the validity of the amendment when that right was not available to
the transferor by the operation of law, namely, the law of limitation.
If a person in whose name
the shares stood in 1965, at the time of the amendment to the articles of
association, comes to court, it is quite possible that he would have been
confronted with such questions as to whether he had not participated in the
deliberations at the annual general meeting which adopted the amendment to the
concerned regulation, and whether he had then raised any objection to the
proceedings on account of the failure to comply with the provisions of section
173(2) of the Act, in so far as it related to the explanatory statement to be
annexed to the notice. It might have been also possible for the company to
contend for the position that, even if there was no full and fair disclosure of
the impact of the amendment proposed on the company and the shareholders, the
shareholder had participated at the deliberations of the annual general meeting
and he having raised no objection to the resolution being carried, he had
waived his right with respect to the strict formalities under section 173(2) of
the Act.
Strong reliance was placed
by the counsel for the appellant-petitioners on the decision of the Bombay High
Court in Maneckji's case, AIR 1931 Bom 354. Having gone through the facts of
the case, we do not think the observations contained in that decision could be
applied to the facts of the present case. That was a case in which a company
was incorporated in 1876 and its articles of association which were then
registered having become out of date, the directors desired to substitute them
with a new set of up-to-date articles. At the same time, the managing agents of
the company, who had acted as such for 50 years without any agreement, desired
to have an agreement with the company, fixing the duration of the agency and
denning their powers. The directors convened an extraordinary general meeting
of the shareholders to pass the necessary resolutions for carrying out the said
purpose. The notice convening the meeting set out necessary resolutions and was
accompanied by a circular, but sufficient particulars regarding important
changes to be effected were not set out. The resolutions were passed and
confirmed. In a suit by a shareholder suing on behalf of himself and other
shareholders for a declaration that the resolutions were inoperative on the
ground of insufficiency of notice and for injunction, the court held that the
notice should have given sufficiently fully and frank disclosures of the facts
and the effect of the resolutions and agreement, and consequently, the
resolutions were inoperative and not binding upon the company.
Reliance was also placed on
the decision of the Calcutta High Court in Bimal Singh v. Muir Mills Co. [1952]
32 Comp Cas 248 Cal. That was a case in which there was no disclosure of
particulars of the proposed changes in the articles of association. Inasmuch as
a notice of a proposed meeting of a company at Kanpur for adopting certain new
"articles of association in substitution for and to the exclusion of all
existing articles", and for the appointment of managing agents were merely
accompanied by a circular stating that copies of the proposed new articles and
of the managing agency agreement were available for inspection at the office,
certain shareholders who received the notice at Calcutta applied to the High
Court at Calcutta, to set aside the resolutions made pursuant to the notice
alleging that they did not attend the meeting being misled by the notice that no
radical change would be made. On the facts and circumstances stated above, the
High Court held that the notice did not disclose fully and frankly the facts
upon which the shareholders were asked to vote and deliberately withheld
material facts from the knowledge of the shareholders. It was really a tricky
notice of concealing the real object and amplitude of the amendments for
adopting new articles of association in substitution and to the exclusion of
the existing articles. This decision also is not applicable to the facts of the
case. Further, it has to be noticed that, as in the case of the ManeckjVs case,
AIR 1931 Bom 354, in this case also, the decision was rendered in a suit, not
in proceedings before the company court in a proceeding under section 155 of
the Act.
Another decision cited on
behalf of the appellants-petitioners was the one in Bajaj Auto Ltd. v.N K.
Firodia [1971] 41 Comp Cas 1 (SC). This decision too, in our view, does not
advance the case of the appellant-petitioners. That decision was rendered in an
appeal against the order of the Company Law Board. In the last paragraph, at
page 6 of the report, it is stated as follows:
"If the articles
permit the directors to decline to register transfer of shares without stating
the reasons, the court would not draw unfavourable inferences against the
directors because they did not give reasons. In other words, the court will
assume that the directors acted reasonably and bona fide and those who allege
to the contrary would have to prove and establish the same by evidence."
In this case, it is not the
case of the appellants-petitioners that the directors while declining to
register the transfer of shares had given any reasons which they were able to
establish by evidence as being made without reasonableness and bona fides.
The
decision in Shaligram Jhajhariav. National Co. Ltd. [1965] 35 Comp Cas 706,
Mahuraj Singhv. Vulcan Insurance Co. Ltd. [1973] 43 Comp Cas 177 and Gulabrai
KalidasNaik v. Laxmidas Lallubhai Patel [1978] 48 Comp Cas 438 also have been cited, in support of the contentions put
forward by the appellant-petitioners. It is true that all these decisions
reiterated the principles laid down by the Bombay High Court in Maneckji's
case, AIR 1931 Bom 354. However, it has to be remembered that the question as
to whether there was a full, fair, complete and frank disclosure in the
explanatory statement annexed to the notice or whether the notice is a tricky
notice would depend upon the facts and circumstances disclosed in each case.
The facts of the present case could not be compared to those in the cases
referred to above. The decision of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas
Lallubhai Patel [1978] 48 Comp Cas 438, has been cited to contend for the
position that the jurisdiction of the company court under section 155 of the
Act is analogous to that of a civil court in a suit. The learned judge has
taken note of the expanded scope of the enquiry under section 155 of the Act
before the company court. Even then, the finding by the learned judge was that
in the present case, it was not necessary or expedient to enter a finding on
Issue No. 2 for reasons already stated.
These
appeals have been filed under sub-section (4) of section 155 of the Act. That
sub-section provides as follows:
"From
any order passed by the court on the application, or on any issue raised
therein and tried separately, an appeal shall lie on the grounds mentioned in
section 100 of the Code of Civil Procedure, 1908;
(a) if
the order be passed by a District Court, to the High Court;
(b) if the order be passed by a single judge of
a High Court consisting of three or more judges, to a Bench of that High
Court."
The
scope of the appeal, therefore, is analogous to that of a second appeal under
section 100 of the Code of Civil Procedure. It is well established that a
finding of fact recorded by a court of first appeal could be reversed by the
High Court in second appeal only if it finds that it is vitiated by substantial
error or defect in procedure or if it is not supported by any evidence
or in other words it is not based on a material defect or sub- stantial error within the meaning of section 100(1)(c) of
the Code, as laid down by the Supreme Court in Ramachandra v. Ramalingam, AIR
1963 SC 302. In the light of the dictum laid down by the Supreme Court in the
above case, it could be seen that no case for interference with the decision of
our learned brother, M. P. Menon J., has been made out.
It has also to be borne in
mind that an order, although void in law, remains for many purposes effective
and operative until it is challenged and its invalidity is declared by a
competent body or court. In the present case, if the shareholder felt aggrieved
by the substitution of the articles in 1965, it was open to him to get the amendment
declared null and void in appropriate proceedings at the appropriate stage. It
is not open to him or the transferee to ignore the amendment which was
registered before the competent authority, namely, the Registrar of Companies,
solely on the ground that the amendment was according to him null and void, or
to resist all consequences flowing from it. As pointed out by H.W.R. Wade in
his Administrative Law, 5th edition, at page 299:
"The correct conclusion
is probably that there can be no hard and fast rule for determining when the
court may or may not allow collateral challenge. In some situations, it will be
suitable and in others, it will be unsuitable, and no classification of the
cases is likely to prove exhaustive."
The same author has also
stated that a void order when quashed is deprived of all legal effect right
from its inception, whereas a voidable order remains valid even when it is
quashed for the period of its operation. The distinction between the
jurisdictional error and errors within jurisdiction also has to be borne in
mind.
For about twenty years,
several transactions might have taken place on the basis of Ext. A-4 articles
of association, and at this distance of time, if we declare that Ext. A-4
articles of association, with particular reference to regulation 24, are null
and void, the result would be that all the transactions entered into by and
with the company would be rendered ineffective and unenforceable in law. Viewed
from this angle also, it is not expedient or necessary for the company court to
enter a finding on issue No. 2.
For the foregoing reasons,
we find that the appeals are without merit, and, therefore, they are dismissed,
however, in the circumstances of the case, without any order as to costs.
Immediately, after the
judgment was pronounced, the counsel for the appellants made an oral request
for leave to appeal to the Supreme Court. We do not consider that this matter
involves any substantial question of general importance which in our opinion
requires to be settled by the Supreme Court and hence the leave requested for
is declined.
[1949]
19 COMP. CAS. 175 (MAD.)
HIGH COURT OF
v.
SATYANARAYANA RAO AND
PANCHAPAKESA SASTRI, JJ.
O.S.A NO. 22
OF 1948
OCTOBER 5, 1948
V.C. Gopalaratnam and N. Rajagopala Aiyangar,
for the Appellant.
O.T.G.
Nambiar instructed by King and Partridge and L.V. Krishnaswami Aiyar, for the
Respondent.
This appeal arises
out of an action by the members of the Madras Race Club. The action was tried
on the original side by
The Madras
Race Club is a body corporate registered under the Indian Companies Act of 1913
before it was amended in 1936. The object of the Club, as its name indicates,
is to carry on the business of a race club and to provide certain amenities to
its members. The Memorandum of Association and the Articles of Association are
contained in Ex. P-29. The Memorandum of Association prohibits the division of
profits by way of dividend amongst the members, and they have to be utilised
only for the purpose of the club. There are two classes of members, namely,
club members and stand members. There are about 260 club members, and they
alone are entitled to vote, while the stand members have certain other
privileges, but not the right to vote. The management of the business of the
Club is vested in six Stewards who must be club members. They occupy the
position of the directors of a company and discharge similar functions in
respect of the Club. The Articles provide as usual for the qualification for
Stewards, for their retirement by rotation, filling up of vacancies, and also
their powers and duties. After every annual general meeting of the club the
senior Steward is elected at the first meeting of the Stewards, who is to
preside at every meeting of the Stewards. The quorum for a meeting of the
Stewards is fixed at three. They are charged with the duty of calling for a
general meeting annually and also, on the requisition of a prescribed number of
members, calling for an extraordinary general meeting for special business.
Article 50 prescribes the period or notice and the manner of issuing the notice
for a general meeting. The senior Steward also presides as chairman at a
general meeting. Article 73 lays down the manner of serving notices on members.
After the Companies (Amending) Act of 1936 was passed the Articles of this Club
were also amended in 1941, and Ex. P-29 contains the articles which were in
force in 1947.
Some time in
April, 1947, 45 members of the Club sent a requisition to the Club for
convening an extraordinary general meeting, inter alia, to appoint a committee
to consider the revision of the Articles of Association and to suggest changes
wherever necessary (Ex. P-1). In pursuance of this, an extraordinary general
meeting was duly held on the 21st of June, 1947, and in that meeting a special
committee of seven members besides the Stewards, who were ex officio members
thereof, was constituted for the specific purpose of the revision of the
Articles of Association and the suggestion of changes. They were required to
submit a report on that behalf by the end of September, 1947, and it was also
decided that a meeting of the general body should be called for not later than
31st of October,. 1947, for the consideration of the report. The special
committee had several sittings, and in the meeting of the 13th of September,
1947, they proposed several alterations to the Articles, the most important of
which were that the management of the business of the Club should vest in a
managing committee of 12 members instead of the Stewards, and that from among the
members of the managing committee a senior Steward and five other Stewards
should be elected, who should be solely responsible for the racing. They also
recommended the abolition of the proxy system of voting. Under a licence
granted by the Central Government under Section 26 (2) of the Indian Companies
Act, 1913, the Club was permitted to be registered as a company with a limited
liability without the addition of the word "limited" to its name. The
Provincial Government on whom the duty of issuing licences subsequently
devolved framed regulations under the said section governing the issue of
licences (vide Development Department Notification, Fort St. George, March 6th,
1937, G.O. No. 549). Under clause 8 of this Notification, "If the
Memorandum and Articles of Association are altered without the previous
approval of the Government having been obtained in that behalf, the licence
granted by the Government shall be deemed to have become void."
In view of
this requirement the special committee directed the solicitors of the Club to
draft the necessary resolutions in proper form altering the Articles of
Association in the manner suggested, and at a subsequent meeting of the 26th of
September, 1947, in which some more alterations were suggested, the Club's solicitors
were also requested to further revise the draft and send it to the Government
for approval. The solicitors sent the revised draft to the Government on the
29th of September, 1947 (Ex. P-5). On the 11th of October, 1947, the Government
approved the revised Articles of Association proposed by the Club but with one
modification relating to Article 69. The Government also pointed out that the
revised Articles of Association should be adopted by passing a special
resolution under Section 81(2) of the Indian Companies Act. Section 20 of the
Indian Companies Act also requires a special resolution to alter or add to the
existing Articles. On the 15th of October, 1947, the special committee at its
meeting considered the order of the Government and resolved that an
extraordinary general meeting of the members be convened on the 7th of
November, 1947, at 6-30 p.m. to consider the report and pass a special
resolution and requested the solicitor, Mr. Small, to draft the resolutions.
The committee was adjourned to meet again at 5 p.m. on 7th November, 1947
(P-1). At this meeting of the special committee were present nine members of
whom one was the senior Steward, Mr. Annamalai Chettiar, and two Stewards. On
the 16th of October, notice was issued to the Club members of the extraordinary
general meeting on the 7th of November, 1947, at 6-30 p.m. The contents of this
notice (P-8) are material for the decision of this case, and therefore it is
necessary to set them out in extenso:—
"Notice
hereby is given, that an Extraordinary General Meeting of Club members of the
Madras Race Club will be held at the Members' Stand of the Club at Guindy on
Friday the 7th day of November, 1947, at 6-30 o'clock in the evening for the
following purpose:—
(1) To receive the report of the Chairman of the
Special Committee constituted to revise the Articles of Association of the Club
and to suggest developments to the Club's present amenities;
(2) To consider and, if thought fit, to pass as
a Special Resolution That the Article in the printed document submitted to the
meeting, and for the purpose of identification subscribed by the Chairman there
of be approved, with or without modification, and adopted as the Articles of
Association of the Club in substitution for and to the exclusion of all the
existing Articles of Association thereof".
(3) If the said Special Resolution be duly
passed ,then to elect twelve Club members as the first Managing Committee of
the Club to hold office until the Annual General Meeting of Club Members to be
held in November, 1948; and
(4) To
consider the Special Committee's following proposals for development of the
Club's amenities and to give directions to the Managing Committee thereon:—
(a) That the present lunch room be furnished
suitably to serve as a lounge for Club members:
(b) That the northern corner of the verandah
adjoining the lunch room be equipped to serve as a card room for Club members;
(c) That the present billiards room be
reserved for use only by Club members when a separate recreation room can be
provided for trainers and jockeys; and
(d) That
arrangement be made to serve Refreshments also.
N.B.—(1) A
print of the proposed amended Articles of Association will follow shortly.
(2) Each nomination of a Club member as a candidate for election to the
Managing Committee should be signed by two Club members and sent to the
Secretary fourteen clear days before the date of meeting."
This notice,
it is common ground, was posted at Guindy on the 16th October. About the same
time notice of the annual general meeting of the Club fixed to 18th November,
1947, was also issued to the members. The extraordinary general meeting was
also advertised in the Hindu of 18th October, 1947, (Ex. P-10) and the Madras
Mail of even date (Ex. P-11.) In pursuance of this notice, Ex. P-8, the Club
received 24 nominations for the membership of the Managing Committee which was
communicated to the members by notice, dated 27th October, 1947 (Ex. P-12). By
29th October, 1947, the Club received notice of amendments to the Articles of Association
from Messrs. T.T. Krishnamachari, G. Narasimham, A.R. Srinivasan and the Raja
of Vizianagaram, and these were notified to the members by a notice of 29th
October, 1947 (Ex. P-13). On the 21st of October, 1947 (it is admitted before
us by both sides, though there is no evidence regarding it) the Club sent the
printed draft of the proposed amendments to the Articles of Association (Ex.
P-30) to all the members. On the 5th of November, 1947, the Government of
Madras suggested that the Articles of Association might be suitably amended to
eliminate voting by proxy and to delete Articles 55, 56 and 57 altogether with
a view to make the members of the Race Club take full responsibility for the
proper conduct of racing. In the light of this suggestion the Government wanted
a fresh draft on those lines, or alternatively that the existing Articles
suitably altered and approved by the general body be submitted to them through
the Registrar of Joint Stock Companies, Madras, for approval before "it is
finalised". At 5 p.m. on the 7th November, 1947, the Special Co a-mittee
met and considered the proposal of the Government. They passed at that meeting
two resolutions:
"(1) Resolved that the letter be placed before the
General Body Meeting to be held at 6-30 p.m. with the recommendation that the
suggestion of the Government be accepted; and
(2) Resolved also that this Committee recommends
that the spirit of the letter of the Government of Madras be observed by
refraining from using proxies at today's meeting and subsequent meetings as
well as the Annual General Body Meeting."
These
resolutions were passed, one member Mr. Annamalai Chettiar dissenting. The
extraordinary general body meeting was held on the 7th November, 1947, at 6-30
p.m. which was presided over by Mr. P. Natesan as the senior Steward, Mr.
Annamalai Chettiar expressing his unwillingness to take the chair. What exactly
happened at that meeting is a matter of serious controversy between the
parties, and the fate of this case mostly depends upon our decision on this
point. What purported to be the proceedings of the meeting of the 7th November
were communicated by the Club to the members, and the plaintiffs filed the
communication received by them, which is marked as Ex. P-18. The solicitors of
the Club by their letter of 10th November, 1947, communicated to the Registrar
of Joint Stock Companies the proposed revised Articles which, it was alleged,
were adopted at the meeting of the 7th November. The Registrar of Joint Stock
Companies through a telephonic message of 14th of November, 1947, asked the
solicitors whether the revised set of Articles was adopted by a special
resolution at the meeting of the 7th, and that, if so, a copy of the resolution
and a copy of the notice convening the meeting should be sent to him for
reference. It was also pointed out by the Registrar that if the Articles were
adopted by a special resolution, prior sanction of the Government ought to have
been obtained and the Government might have to be addressed to condone the
omission. To this the solicitors replied by their letter of 15th November,
1947, pointing out that there was no such necessity. The general meeting was
held on the 18th at which some formal business was transacted, and the members
were informed that there was no necessity to elect the Stewards as at the first
meeting of the Managing Committee held on 10th of November, 1947, Mr. P.
Natesan was elected Chairman and five persons were elected as Stewards. Mr.
Annamalai Chettiar wrote to the Registrar of Joint Stock Companies on the 18th
(Ex. P-20) that the proposed special resolution had not been put to the meeting
at all by the Chairman, Mr. Natesan, on the 7th of November, 1947, and that it
had not been passed by the requisite statutory majority. The present plaint-iris
issued through their lawyers a notice to the Club questioning the legality of
the meeting of the 7th November and of the election of the members of the
Managing Committee on that date on the grounds elaborately specified in that
notice including the fundamental objection that the special resolution was not
moved or put before the meeting and was not voted upon. The notice demanded the
Managing Committee to accept the invalidity of the proceedings of the meeting
of 7th November failing which it was intimated a suit would be instituted for
appropriate reliefs. The reply of the Club is Ex. P-23, dated 25th of November,
1947, and was sent through their solicitors. In this the allegations in the
notice Ex. P-21 were denied.
This was
followed by the present suit which was filed on the 8th of December, 1947, by
two members of the Club for themselves and on behalf of the other members of
the Club other than those who were originally impleaded as defendants in the
suit after obtaining the necessary permission under Order 1, Rule 8, Civil
Procedure Code. The first defendant is the Race Club. Defendants 2 to 13 are
members of the Club who were elected as members of the Managing Committee. The
suit was originally filed impleading only defendants 1 to 13. Defendants 14 to
90 who are some of the other members of the Club were impleaded as parties at
their own request, as they wanted publicly to dissociate themselves from the
plaintiffs.
The main
reliefs claimed in the plaint were: (1) a declaration that the meeting of the general
body of the members of the Club held on the 7th November, 1947, was invalid and
void and that all business transacted thereat was invalid, null and void; (2) a
declaration that the Managing Committee comprising defendants 2 to 13 purported
to have been elected at the said meeting was not lawfully or validly elected
and were not entitled to assume office; (3) a declaration that the proposed
amended Articles have not been duly passed and are ineffective; (4) a
declaration that the Stewards who were in office prior to 7th November, 1947,
still continue to be in office and are the persons legally and lawfully
entitled to be in management and control of the Club; and (5) a declaration
that the proceedings of the general meeting of the 18th of November, 1947, are
illegal, invalid and void. There is also a relief for an injunction against
defenants 2 to 13.
The grounds
on which the reliefs claimed in the plaint were sought to be sustained before
us may be catalogued as follows: (1) The meeting of the 7th of November, 1947,
was not convened by the proper authority under the Articles, viz., the
Stewards. (2) The notice of the meeting (Ex. P-8) which was posted on the 16th
October, 1947, contravened the provision of Section 81 (2) of the Indian
Companies Act as 21 days were not allowed between the date of the meeting and
the receipt of the notice. (3) The notice of the meeting did not contain the
necessary particulars as it did not comply with the requirement that the
general nature of the business should be indicated in it, the proposed amended
Articles of Association not having been sent along with the notice so as to
give notice thereof of 21 clear days. (4) Item No, 2 in the agenda, the special
resolution relating to the proposed amendment of the Articles, was not moved or
put before the meeting for being voted upon. (5) In any event even if the
voting of 66 members at that meeting was in support of the special resolution,
that did not constitute the statutory three-fourths majority of the members
present, who numbered according to the plaintiffs 105. (6) The amendments moved
were not within the scope and ambit of the original resolution and could not
have been validly made. (7) The election of the 12 members of the Managing
Committee was illegal as the notice regarding it was insufficient as regards
the time and was also defective as the members were not informed of the
qualifications and the functions of the Managing Committee before they were
called upon to submit nominations. (8) The election of the entire Managing
Committee was illegal, or in any event that of Mr. Natesan, was clearly illegal
as he was disqualified to preside at the meeting, being himself a candidate for
election to the Managing Committee. (9) If the meeting of 7th November, 1947,
was void, the annual general meeting of 18th November, 1947, was equally void,
as proxies were illegally excluded.
These charges
are of course denied by defendants 2 to 8, 10, 12 and 13. In paragraph 5 ot the
written statement filed on behalf of the first defendant, the first defendant
stated with reference to the allegations in paragraph 6 of the plaint that
although 105 members signed the attendance sheet during the period of the
meeting and 49 proxies were registered, only 66 members were actually present
at the time when the resolution to adopt the new articles was put to vote. The
other defendants 2 to 8, 10, 12 and 13 filed a separate written statement
practically adopting the written statement filed on behalf of the first
defendant. Defendant 9 seems to have signed the written statement of defendants
2 to 8, 10, 12 and 13 but without looking into the written statement filed on
behalf of the first defendant. Mr. Vijayaraghavan, the 9th defendant, wanted to
see the written statement of the first defendant before their written statement
was actually filed into Court. For this purpose he wrote to his solicitors on
the 10th of January, 1948, communicating his intention to see the written
statement of the first defendant before the written statement bearing his
signature was actually put into Court. To this the reply of the solicitors
dated 12th January, 1947, was that their written statement was filed in Court
on that day as Mr. Small was otherwise engaged that morning and that it was too
late to withhold the filing of their written statement. Mr. Vijayaraghavan was
informed that the written statement signed by him merely adopted the written
statement filed on behalf of the Club. On the 15th January, 1948, Mr.
Vijayaraghavan by his letter protested against this action of the solicitors
and pointed out that paragraph 5 of the first defendant's written statement was
highly misleading and even incorrect. According to him, when the resolution was
put to vote at the meeting, 66 persons voted for, one member said he was neutral
and about 30 to 35 other members did not vote either way. He pointed out that
the statement in paragraph 5 of the written statement of the Club that only 67
members were present at that time was not true and that therefore he could not
subscribe to it. After this protest when the written statement of the
defendants 2 to 8, 10, 12 and 13 was returned the solicitors scored out his
name. Mr. Vijayaraghavan filed a separate written statement engaging another
counsel. Mr. Vijayaraghavan in his written statement denied the allegations in
paragraph 5 of the written statement, reaffirmed the facts as stated in his
letters and left other questions to be decided by the Court. Annamalai Chettiar
also filed a separate written statement setting out his contention.
The learned
Judge who tried the suit held that though there were some irregularities at the
meeting and though he was not prepared to accept it in their entirety the
contentions put forward by the Club relating to "waiver",
"estoppel" and the like, the plaintiffs had failed to substantiate
their contention on the material issues. He was of opinion that there was no
illegality in the proceedings of the meeting of 7th November, and that the
special resolution was validly passed at that meeting. He characterised the
action as a case of "a storm in a tea cup" and dismissed the
plaintiffs' suit.
At the outset
it is necessary to consider the question whether the suit as framed is
maintainable. The action was brought by two plaintiffs who are the members of
the Club for themselves and also on behalf of the other members after obtaining
the requisite leave under Order 1, Rule 8, Civil Procedure Code. The learned
Judge was of opinion that the suit was incompetent as what is known as the rule
in Foss v. Harbottle applied to
the case. The rule in Foss v. Harbottle is that a Court will not interfere with
the ordinary management of a company acting within its powers and has no
jurisdiction to do so at the instance of the shareholders. A shareholder is
entitled to institute a suit to enforce his individual rights against the
company such as his right to vote, or his right to stand as a director of a
company at an election. If the shareholder however intends to obtain redress in
respect of a wrong done to the company or to recover monies as damages alleged
to be due to the company, the action should ordinarily be brought by the
company itself. In order therefore to enable a shareholder to institute a suit
in the name of the company, in such a case, there must be the sanction of the
majority for corporate action. In ordinary cases, therefore, this principle
implies the supremacy of the will of the majority. It is open to a majority
always to set right a thing which was done by the majority either illegally or
irregularly, if the thing complained of was one which the majority of the
company were entitled to do legally and was within the powers of the company by
calling a fresh meeting. That is the reason why in such cases the Court refuses
to interfere at the instance of a shareholder even in a representative action
brought by him. If the majority however act in an oppressive manner, it is not
as if the minority are without a remedy. This possibility was foreseen by Sir
James Wigram, Vice-Chancellor who delivered the judgment in Foss v. Harbottle. At page 492
the Vice-Chancellor says:—
"If a case should arise of injury to a
corporation by some of its members, for which no adequate remedy remained,
except that of a suit by individual corporators in their private characters and
asking in such character the protection of those rights to which in their
corporate character they were entitled, I cannot but think that the principle
so forcibly laid down by Lord Cottenham in Wallwonh v. Holt , and other
cases would apply and the claims of justice would be found superior to any
difficulties arising out of technical rules respecting the mode in which
corporations are required to sue."
In such a case where action by a shareholder is
permitted, the plaintiffs would not have a larger right to relief than if the
company itself were the plaintiff and are not entitled to complain of acts
which are valid, if done with the consent of the majority of the shareholders
pr are capable of ratification by the majority.
The later decisions however have recognised
exceptions to what is conveniently known as the rule in Foss v. Harbottle. James, L.J.
in MacDougall v. Gardiner considered
the rule and stated the exceptions in the following passages at page 21 which
has since become classic:—
"I think it is of the utmost importance in all
these companies that the rule which is well known in this Court as the rule in
Mozley v. Alston
and Lord v. Copper Miners Co. and Foss v
Harbottle
,should be always adhered to ; that is to say, that nothing connected with
internal disputes between the shareholders is to be made the subject of a bill
by some one shareholder on behalf of himself and others, unless there be
something illegal, oppressive, or fraudulent—unless there is something ultra
vires on the part of the company qua company, or on the part of the majority of
the company, so that they are not fit persons to determine it ; but that every
litigation must be in the name of the company, if the company really desire
it."
From this it follows that a shareholder or
shareholders are entitled to bring an action (1) in respect of matters which are
ultra vires the company and which the majority of shareholders were incapable
of sanctioning (see Burland v. Earle); (2) where
the act complained of constitutes a fraud on the minority; and (3) where the
action of the majority is illegal. The decisions in Baillie v. Oriental
Telephone and Electric Co. Lte., and Cotter
v. National Union of Seamen, recognised
a fourth exception where a special resolution was required by the articles of
the company and the company obtained the assent of the majority to such special
resolution by a trick, or even where a company authorised to do a particular
thing only by a special resolution does it without a special resolution duly
passed as in such a case to deny a right of suit to the shareholders without
using the name of the company would in effect result in the company doing the
thing by an ordinary resolution. In other words, this means that where a
special resolution was improperly passed, if the rule that the company alone is
the proper plaintiff to institute a suit questioning such resolution were to be
enforced, the shareholders by a bare majority could defeat and prevent the
minority from using the name of the company. The result of such a course would
be indirectly to uphold the validity of a special resolution which was
otherwise invalid. To avoid this result this exception was recognised in the
two decisions. The rule and the exceptions thereto are also stated in Palmer's
Company Law, 17th Ed., at pages 236 and 237 and Halsbury's Laws of England (2nd
Ed.), Vol. 5, page 445, paragraph 728. The appellants' learned advocate placed
before us the authorities bearing on the rule and the exceptions, and the respondents learned advocate did not
challenge the position contended for by the appellant. It is needless to
consider the authorities in detail as the substance of the decisions is as
stated above.
The attempt
of the learned advocate for the appellants is to bring the present case under
the two exceptions, namely, that the acts complained of are illegal acts, and
secondly that if the special resolution was not passed or was passed illegally
the effect of applying the rule in Foss v. Harbottle to this
case would be indirectly to sanction by an ordinary resolution that which the
law requires to be passed only by a special resolution. For reasons given
below, in our judgment the present suit falls within these two exceptions and
that it is maintainable.
It will be
convenient to deal first with the objection that the' special resolution, item
2 in the agenda, was not put to the meeting and was not passed, for this
question goes to the root of the matter. If we find that no special resolution
was passed at the meeting of the 7th November, 1947, the whole proceedings of
that meeting fall to the ground. Section 20 of the Indian Companies Act
requires a special resolution to alter the articles. If there was no special
resolution sanctioning the alteration, the action of the Club in altering the
Articles without authority would be void and the alterations would have no
legal effect. It is unfortunate that in this case notwithstanding the presence
of the solicitor of the Club, Mr. Small, at the proceedings of the meeting and
notwithstanding the fact that the Chairman of the meeting and shareholders were
men of status in life there is no authentic record of the proceedings of the
meeting. This has made our task more difficult. ' According to the plaintiffs
one and only one resolution was put before the meeting on that day, that is,
resolution No. 1 of the special committee in Exhibit P-16, and that it was this
resolution that was passed by 66 voting for, and one remaining neutral out of
the members present. The plaintiffs categorically asserted in the plaint that
the special resolution (items in the agenda) was not put to the meeting and was
not passed. This of course was denied by the defendants. According to the
version of the defendants the special resolution alone was put to the meeting,
and it was in respect of that that the counting of the votes took place and it
was carried by 66 votes, one remaining neutral. According to both versions it
would be clear from the evidence that there was only one counting of the votes
at which it was found that 66 were in favour of the resolution, whether it was
the resolution of the special committee that was put to the meeting or the
special resolution itself. As regard the number of persons; present at that
sole count, there is also conflicting evidence,
[After
discussing the evidence bearing on this question their Lordships concluded.]
We,
therefore, hold agreeing with the contention of the plaintiffs that the special
resolution was not put to the meeting and was not passed.
If the
special resolution was, in: fact, pat to the meeting a passed by 66 voting for,
we have no doubt on the evidence adduced even by the plaintiffs that there were
no more than about 10 or 20, members who did not take part in the voting and
therefore the 66 would constitute the required majority for declaring the
resolution carried. In, view, of the finding that the special resolution was
not passed, the amendment of the Articles and the consequent election of the
members of the Managing Committee are wholly void.
This really
disposes of the suit in favour .of the plaintiffs. In this view it may not be
necessary to consider the other objections to the meeting. However we will deal
with the other objections also, as in our opinion, some of them are well
founded.
We now
proceed to consider them in the order in which they wore enumerated earlier.
The first of the objections is that the meeting was not convened by the proper
authority. The Stewards constitute the, authority under the articles (Article
49) to call for an extraordinary-general meeting as well as the annual general
meetings. The quorum for the meeting of Stewards is fixed at three. The notice,
Exhibit P-8 was signed by the Secretary. It is common ground that there was no
separate meeting of the Stewards in which "they decided that an
extra" ordinary general meeting should be convened on the 7th November. No
minutes of any such meeting have been placed on record. Of the six Stewards Mr.
Lawrence died some time ago, Mr. Chidambaram Chettiar was out of India and
according to Mr. Small, Mr. Hume was at the time of the notice in Ceylon,
though he had no personal knowledge of it. Mr. Hume was present on the 7th both
at the special committee and also at the extraordinary., general meeting. It
may that Mr. Hume also was not available at the time Exhibit P-8 was issuee.
The notice Exhibit P-8 did not indicate the authority under which the meeting
was called. The extraordinary general, meeting decided on the 21st June, 1947
(Exhibit P-2), that after the report of the special committee then constituted
for revising the Articles was submitted, a meeting of the general body should
be called for not later than 31st October, 1947, for the consideration of the
report. This authority would not avail, because the time fixed had expired and
the meeting was subsequently convened only 6n the 7th November, 1947. The.
defendants relied on Exhibit P-7 which contains a resolution of the special
committee passed on 15th October., 1947, that an extraordinary general body
meeting should be convened on the 7th November, 1947. This meeting of the
special committee was attended by 9 members of whom 3 were Stewards who were ex
ojficio members of the special Committee. As three of the Stewards who
Constituted the quorum for a meeting of the Stewards and who were the only
persons available in India at that time took part in the special committee
meeting, it is urged on behalf of the defendants that the resolution of that
meeting may be deemed to be a resolution of the Stewards and therefore
justified the calling of the meeting. Alternatively, it is also contended that in
any event this is at the most an irregularity and not an illegality which
justifies the setting aside of the resolution. If a general meeting is convened
by the Secretary without proper authority it is not valid. See Hay craft Gold
Reduction and Mining Company, In re and State
pf Wyoming Syndicate, In re. Where the
directors however met aad decided to convene a general meeting but the meeting
of the directors itself was not properly convened, it was held in Browne v. La
Trinidad,
that by reason of the irregularity of the Board meeting the general Meeting was
not incapacitated from acting. In the case in Harhenv. Phillips a Board
meeting of the directors was held which decided to convene an extraordinary
general meeting. At the Board meeting the plaintiffs who were the directors
were refused admittance to the meeting by the Secretary under the direction of
persons in possession of the Board room. The plaintiffs protested and withdrew.
The persons in possession of the Board room purporting to act as a Board
adjourned their meeting to the next day to a different place, the office of
their solicitor, and on the requisition presented to the meeting on the next
day which was attended by three of the defendants, appointed a special
committee to convene an extraordinary general meeting. At the meeting of the
Board there was unquestionably a person who took part in the meeting and who
was not a director. It was held that the meeting of the Board of Directors on
the two days were unlawful and that everything that was done at those meetings
was invalid. The. consequence was that the appointment of the special committee
and the notice convening the meeting were also invalid. It was pointed put in
answer to an argument that there was a quorum of the directors and therefore
the meeting was lawful and that it was not enough that there was a quorum as
the lawfully constituted directors were prevented from attending the meeting.
The convening of the meeting, according to this decision, was not a mere
ministerial act. The directors have to exercise their discretion and have to
fix the time within which and the place at which the meeting should be held,
and whether a meeting should at ail be held. In the light of these decisions it
is difficult to say that there was a valid meeting of the Stewards. There is no
doubt some force in the argument of the respondents that the proceedings of the
special committee in which three of the Stewards who were available in India
were present may be deemed to be a valid meeting of the Stewards. The objection
of the plaintiffs is technical. The mere presence of the other members of the
special committee at that meeting may not vitiate the resolution to which the
Stewards were a party. We do not however think it necessary to express any
final opinion on this question.
The next question for consideration is whether
the notice, Ex. P. 8, posted on the 16th October, 1947, complied with the
requirement of Section 81, sub-clause (2), of the Indian Companies Act that there
should be a notice of "Not less than 21 days." There were 260 Club
members of whom 23 were living outside British India, 51 members were absent
members and 59 members lived at places which could be served through post after
more than a day had elapsed from the date of posting. 127 members were within
one day's reach from the date of posting. The notice of the meeting therefore
posted on the 16th at Guindy could have been received by less than half the
members only on the 17th. More than a day was required at least in respect of
59 members. Excluding therefore the date of service of notice and the date of
the meeting there was only an interval of 20 days in respect of 127 members,
and a still less interval in the case of others. Section 81(2) of the Indian
Companies Act provides:—
"A
resolution shall be a special resolution when it has been passed by such a
majority as is required for the passing of an extraordinary resolution and at a
general meeting of which not less than twenty-one days' notice specifying the'
intention to propose the resolution as a special resolution has been duly
given.
Provided
that, if all the members entitled to attend and vote at any such meeting so
agree, a resolution may be proposed, and passed as a special resolution at a
meeting of which less than twenty-one days' notice has been given."
It is
obligatory to serve notice of the meeting of a company with a statement of the
business to be transacted at the meeting on every member in the manner laid
down for service of notice under the Articles. Article 49 of Table A of the
Indian Companies Act which is the same as Article 50 of the Articles of the
Club lays down;—
"Subject
to the provisions of sub-section (2) of Section 81 of the Indian Companies Act,
1913, relating to special resolutions fourteen days' notice at the least
(exclusive of the day on which the notice is served or deemed to be served, but
inclusive of the day for which notice is given) specifying the place, the day
and the hour of meeting and, in case of special business the general nature of
that business, shall be given in manner hereinafter mentioned, or in such other
manner if any, as may be prescribed by the company in a general meeting to such
persons as are under the Indian Companies Act, 1913, or the regulations of the
company, entitled to receive such notices from the company; but the accidental
omission to give notice to or the non-receipt of notice by any member shall not
invalidate the proceedings at any general meeting."
The manner of
serving notices is provided by Article 112 of Table A which is the same as
Article 73 of Ex. P-29. It states:—
"112. (1) A notice may be
given by the company to any member, either personally or by sending it by post
to him to his registered address or (if he has no registered address in British
India) to the address if any within British India supplied by him to the
company for the giving of notice to him.
(2) Where a notice is sent by
post, service of the notice shall be deemed to be effected by properly
addressing, prepaying and posting a letter containing the notice and, unless
the contrary is proved to have been effected at the time at which the letter
would be delivered in the ordinary course of post."
It is
admitted on behalf of the respondents that if regard be had to the expression
"not less than twenty-one days" occurring in Section 81 (2) there
should be an interval of 21 clear days and indeed this position could not be
disputed as it was established by decisions where similar expressions occurring
in the Companies Act and also other statutes were considered. See Railway
Sleepers Supply Company, In re, and Rex v.
Turner
The argument however that was pressed on behalf of the respondents was that the
section should be construed in the light of Article 49 of Table A which
includes the date of the meeting in cases where only 14 days' notice is
required. It was also argued that it was permissible to refer to the Articles
for the purposes of ascertaining the intention of the legislature in the body
of the Act. In support of this contention the decisions in Barned's Banking
Co., In re, Ex parte The Contract Corporation, Lock v.
Queensland Investment and Land Mortgage Company, and
Halsbury's Laws of England. Vol. 5, Second Edition, Page 292, para. 504 were
referred to. There cattle no dispute that the principle of construction
contended for On behalf of the respondents is correct. As Article 49 is
expressly made subject to the provisions of sub-section (2) of Section 81 it
cannot be inferred that in construing that sub-section the Legislature intended
to include the date of the meeting within the period of 21 days. It cannot be
assumed that because that date was included, in other cases the Legislature
intended to include it also in case of special resolutions covered by
sub-section (2) of Section 81. The very fact that a specific reference is made
in Article 49 to include the date of the meeting within 14 days in cases in
which a notice of 14 days is required is a clear indication that it was not
intended to apply to cases of meetings which require 21 days' notice. Under the
corresponding provisions of the English Companies Act of 1929 the Court of
Chancery had to consider a similar question. Sub-section (2) of Section 117 of
the English Act corresponds to sub-section (2) of Section 81 of the Indian Act,
and Article 42, of the English Act corresponds to our Article 49. In the case
reported in Hector Whaling Limited, In re a notice
convening an extraordinary general meeting of the company on 30th May, 1935,
was dated 8th May, 1935, and was posted on that day. By virtue of the Articles
of Association of the company the notice is deemed to have been served on the
following day, that is, 9th May, 1935. Excluding the date of the meeting it
would be noticed that in that case the interval was only 20 days. Article 138
of the company in question stated:—
"Any
notice or other document if served by post shall be deemed to have been served
on the day following that on which the letter containing the same is put into
the post, and in proving such service it shall be sufficient to prove that the
letter containing the notice or document was properly addressed and put into
the post office as a prepaid letter or prepaid registered letter as the case
may be."
On the
authority of the decisions in Rex v. Turner and
Chambers v Sniiih, Bennett,
J., held that the expression "not less than twenty-one days’ notice"
contained in sub-section (2) of Section 117 meant 21 clear days exclusive of
the day of service and exclusive also of the day on which the meeting was to,
be held. It was also pointed out that It was not open by the Articles of
Association to curtail the length of time which the statute had fixed. No doubt
in that decision, specific reference was not made to the language of Article
42, and the contention now advanced was not raised and considered. It cannot
however be assumed that the counsel who argued the case and the learned Judge
who decided it were not aware of the language of Article 42. In view of the
clear language of the./article the point does; not admit of any doubt, and
perhaps that was the reason why the contention was not raised as of no
substance.
It was next
argued that in any event we should count 21 days from the date of posting, and
that if that was done, there was an interval of clear 21, days even if the date
of the meeting was excluded. The argument, in our opinion, is opposed to the
clear language of Article 112, The Article states that, unless the contrary is
proved the notice must be deemed to have been effected at, the time at which
the letter would -be delivered in the ordinary course of post, and this would
be the 17th in the case of at least half the number of the members. This
extraordinary contention is not supported by any decisions. Form No VIII in
which a special resolution has to be communicated to the; Registrar of Joint
Stock Companies was relied on. In the form one of the columns is "Date of
dispatch of notice specifying the intention to propose the resolution as a special
resolution or extraordinary resolution." We do not think that it is
permissible to rely on the language of the form to interpret the section and
the article. The date of the meeting and the date of service of notice are
therefore to be excluded, and in-between the dates there should be an interval
of 21 days, The notice issued to all the members therefore was inadequate and
did not comply with the statutory requirement and is therefore illegal. The
meeting therefore was not legally convened.
The next branch of argument on behalf of the
respondents in., this part of the case was that as none of the members
including the plaintiffs, who though absent appointed proxies on their behalf,
objected at the time of the, meeting, it must, therefore be deemed that the members
Present either in person or by proxy
had waived the objection was not specifically raised in the, written statement
nor in, the issues. All that was said in paragraph 3 of the written statement
was that the plaintiffs had revived the notice pf the meeting iii due time arid
raised no objection (to the validity of the notice, at, any time or about, the
meeting though they were present by proxy at the meeting. Issue 3 raises, in a
general form the question whether the, plaintiffs were entitled to question the
validity of the notice of the meeting, or the proceedings of the meeting at the
general body of the 7th .November, 1947, as stated in paragraph 3 of the
written statement. As the. facts have been pleaded in the. written statement,
though the point was not specifically raised in the form of waiver, we thought
that 'the respondents should be allowed to argue the question. The respondents
wanted also to raise a point based on the proviso to sub-section (2) of Section
81 but as it was nowhere raised we refused to grant them permission to raise
and argue it for the first time in appeal. In 31 Halsbury, 2nd Edition at page
559 it is stated that, "a statutory right which is granted as a privilege
may be waived either altogether or in a particular case."
If the
plaintiffs had waived their right to question the legality of the notice, it is
urged that they are precluded from maintaining the suit not only on their
behalf but also on behalf of other members. Strong reliance was placed on the
decision in Burt v. British Nation Life Assurance Association, where it
was held that a plaintiff who has a right to complain of an act done to a
numerous society of which he is a member, is entitled to sue on behalf of
himself and all others similarly interested, though no other may wish to sue,
so although there are a hundred who wish and are entitled to sue, still, if
they sue by a plaintiff who is personally precluded from suing, the suit cannot
proceed, although other persons on whose behalf the suit was instituted might
maintain the action as plaintiffs. The question therefore resolves itself into
this, namely, whether in view of the imperative provision regarding the notice
in Section 81 (2) it is open to the plaintiffs to waive their right to object
to an illegality, the right being certainly not their personal right but a
right belonging to them in their corporate character. The proviso to Section
117(2) of the English Act was added for the first time in 1929 in view of the
decision in Oxford Motor Co., in re, which
decided that it was competent for the shareholders of the company acting
together to waive the formalities required by Section 69 of the Companies
(Consolidation) Act, 1908, as to notice of intention to propose a resolution as
an extraordinary resolution. In that case all the shareholders met and passed a
resolution without objection and it was held that the want of notice could be
waived. The Indian Companies (Amending) Act of 1936 introduced a similar
proviso in Section 81 (2). Under this proviso, it would be seen that the
requirement as to 21 days' notice may be dispensed with by an agreement of all
the members entitled to attend and vote and not merely of all the members
entitled to vote and present in person or proxy at the meeting. It requires
therefore an agreement of all the members of the Club in order to dispense with
the requirement of 21 days' notice. The proviso in other words indicates the
intention on the part of the Legislature that the provision in sub-section (2)
is mandatory and that it can be dispensed with only by the agreement of all the
members, It is not enough that the members present at the meeting indicated
either expressly or impliedly that they consented to or acquiesced in
shortening the period of notice. An establishment of all the members to wave
the notice has not been established in this case. Even if the members present
agreed to waive the defect in the notice the meeting would not be valid
meeting. The plaintiffs therefore are not precluded form raising the contention
that the notice contravened the provisions of sub-section (2) of Section 81.
The next objection is that the notice was
insufficient, in that it did not give full particulars of the nature of the
business. Under the articles the notice should indicate the general nature of
the business intended to be transacted at the meeting. The draft proposed
amendments to the Articles of Association did not accompany the notice and were
if fact posted only on the ,21st October, and therefore must have been received
on the 22nd., On this question there is no evidence on record, but it was
agreed before us by the learned advocates appearing for the appellants and the
respondents that the printed draft was posted on the 21st October. It is
therefore urged that the notice did not indicate the general nature of the
business. We are not prepared however to agree with this contention. It was on
the initiative of the general body that a special committee was appointed to
consider the amendments, if any, to the Articles of Association. The notice
clearly stated that a print of the proposed amended Articles of Association
will follow shortly. From the 22nd to 7th of November the members had ample
time to consider the proposed amended Articles. We do not think that the notice
was insufficient and therefore bad on this ground. No useful purpose would be
served by referring to the decisions to which our attention was drawn, as the
decision of the question would invariably rest on the fact's of each case.
In Palmer's Company
Precedents, Part I, at page 1002, it is pointed out that:
"Where a large number of alterations have to be
made, it is generally more convenient to adopt a new set of articles
altogether. Where this is course is adopted, a copy of the new regulations
should life for inspection at the office, and the notice convening the meetings
should state the fact; and in some cases it may be deemed expedient to Send
printed copies of the proposed new articles with the notices. According to the
decision of Kekewich, J., in Normandy v. Ind Coope & Co., the
notice should Call attention to any material alterations; and in Baillie v
Oriental Telephone and Electric Co., the Court
of Appeal held that a notice of a proposed resolution to alter articles
involving a large increase in the remuneration of the directors was invalid on
the ground that the proposed increase was not fully and frankly disclosed….
The notice
should state that a copy of the new articles is enclosed, or that a copy of the
proposed new articles may be seen at the company's office."
In this case
in the notice it was stated that the proposed articles would be sent shortly,
and they had been posted within six days from the date of posting of the
notice. In the light of the principles stated above we think that there is
substantial compliance with this requirement of law and that the notice was not
bad on this ground.
Nor is there
any force in the objection that the amendments moved relating to the proxies
were not within the scope and ambit of the original resolution. Notice of the
amendments was given in Exhibit P-13 by Mr. T. T. Krishnamachari and others,
and the Government later pointed out that it would be advisable in the
interests of racing that prbxies should be abolished to make the members take
active interest in racing. The amendments proposed by Mr. Eswara Aiyar cannot
be said to be outside the scope of the original resolution.
The next
objection relates to the election of 12 members of the Managing Committee. If
our view that the special resolution was not at all moved and the amendments
were not passed by a special resolution is correct, the meeting had no
authority to elect 12 members to the Managing Committee, as the old articles
continued to be in force. Apart from this, we think that the election was
illegal, as the notice was not sufficient in the circumstances of the case.
Exhibit P-8 was posted on the 16th October, and it required nominations for
election to the Managing Committee to be submitted to the Secretary 14 clear
days before the date of the meeting. That means, the nominations should be
posted by a member either on the 21st October or on the 22nd to reach the
Secretary. The members were not made aware of the functions and the duties of
the Managing Committee, and in fact they did not receive the proposed
alterations earlier than the 22nd, taking the view most favourable to the
defendants. It is impossible for the members to make up their mind with no data
before them and to submit nominations. Practically they had no valid notice of
the election and the election was rushed through at the meeting of the 7th. The
election is also invalid on the further ground that Mr. Natesan presided at the
meeting. He was himself a candidate for the Managing Committee. There were 24
nominations and 19 actually contested the election. Objection was raised at the
meeting that the new rule came into existence only on that day and that
nominations were proposed 14 days before the passing of the rule. The chairman
had to give a ruling on the question, and he decided in favour of the validity
of the nominations including his
own. The chairman's ruling may be correct or may be incorrect.
Perhaps in view of the decision in Pacific Coast Coal Mines Ltd. v. Arbuthnot, a notice
for election of the members of the Managing Committee may retrospectively be
validated bypassing a special resolution, but that is not the question. Here is
an instance where the chairman was in the position of a quasi-judicial officer,
and he had to be a judge in his own cause. There was clearly a conflict between
his duty and his interest. In the normal course he should have vacated the
chair and requested another member who was not a candidate to take it, and this
was not done. That a person cannot be a judge in his own cause is an elementary
rule, and if an authority is wanted it is to be found in Rag v. Owens. In Fanagah
v. Kernan,
it is stated:—
"There is no more sacred maxim of our law than
that no man shall be a judge in his own cause, and such force has that maxim
that interest constitutes a legal incapacity to a person being a judge in every
case ... It is impossible for a Court of law to allow him to exercise the
function of presiding at that election of which he could influence the result.
No man can preside at his own election and return
himself. See The Queen v. White. These
principles are well established, and it is unnecessary to deal with them
elaborately. In fact, the respondents' advocate does not dispute the
propositions, but contends that those principles apply to meetings other than
the meetings of a company. Under the articles provision is made for the
appointment of a chairman, and he continues to preside at the meeting whether
the meeting is one for transacting ordinary, business or passing a special
resolution or for the election of members to the Board, and the mere fact that
the chairman is also a candidate for a committee or a Board of Management will
not vitiate the proceedings. So ran the argument. No authority in support of
this distinction was placed before us, and we do not see any reason for making
a distinction between meeting of company and other meetings. The principles
above referred to are elementary and are of universal application. We therefore
hold that the election of the 12 members of the Managing Committee was illegal,
even apart from the question whether the special resolution was put to the
meeting and passed or not.
We therefore hold that the special resolution
"item 2 in the agenda" was not passed, that the meeting of the 7th
November was not legal and that the members of the Managing Committee were not
duly elected. From this it follows that the proceedings of the general meeting
of 18th November, 1947, are void, and, in any event, the exclusion of proxies
at the meeting was not warranted by the articles then in force. Differing
therefore form the learned trial Judge we hold that the plaintiffs are entitled
to the reliefs asked for.
The appeal is
therefore allowed and the decree dismissing the suit is set aside. There will
be decree in favour of the plaintiffs as prayed for. The plaintiffs are
entitled to the costs of this appeal and the costs of suit, payable by the
first defendant. Having regard to the trouble involved and time taken we fix
under rule 12 of Order 6 of the High Court Fees Rules, a fee of Rs. 2500 for
the plaintiffs advocates in the appeal and Rs. 2,500 for them in the suit.
[1987] 61 COMP. CAS. 334 (KER)
HIGH COURT of KERALA
v.
State of
P. C. BALAKRISHNA MENON, J.
JANUARY 4, 1984
B. Gopakumar and Chinoy Gopakumar for the petitioner.
T.P. Kelu Nambiar and M.
Ramachandran, for the respondent.
As per exhibit P-1 order of
the Government of Kerala dated January 25, 1983, issued by order of the
Governor, the board of directors of the Kerala State Cashew Development
Corporation Ltd. (hereinafter referred to as "the company"), was
reconstituted under article 18 of the articles of association. There are nine
directors in the board reconstituted as per exhibit P-1 and the petitioner is
one among them. There is a subsequent order, exhibit P-2, dated September 7,
1983, as per which the fifth respondent is appointed as a director of the
company, replacing the petitioner from the post. Article 18 of the articles of
association of the company is extracted below:
"18. Appointment of
directors.—(i) The directors shall be appointed by the Governor and shall be
paid such salary and/or allowances as the Governor may from time to time
determine.
(ii) Subject
to the provisions of the Act, the directors shall hold office during the
pleasure of the Governor.
(iii) The Governor shall
have power to remove any director appointed by him from office at any time, in
his absolute discretion and fill up any vacancy in the office of a director
caused by retirement, removal, resignation, death, or otherwise."
The reconstitution of the
board of directors as per exhibit P-1 is not for any particular term. Even though
under clause (ii) of article 18, the directors hold office during the pleasure
of the Governor, the petitioner prays for a writ of certiorari quashing exhibit
P-2 order as made without jurisdiction, mala fide and arbitrary.
Article 18, extracted above,
would clearly show that the directors hold office during the pleasure of the
Governor. It is conceded by learned counsel for the petitioner that the
directors of the company are not entitled to any salary or remuneration, but
are paid sitting fees when they are required to attend the meetings of the
board.
In the decision of this
Court in A.S. Thomas v. State of Kerala [1981] KLT 278 ; ILR [1981] 2 Ker 505
the question arose as to the right of a person to continue as a member of the
Kerala State Rural Development Board constituted under section 4 of the Kerala
Act 15 of 1971, as per which the Government is authorised to constitute the
board and the members of the board would hold office during the pleasure of the
Government. The reconstitution of the board dropping the petitioner therein was
challenged in that case and this court in paragraph 7 of the judgment stated
thus at page 508 of ILR [1981] 2 Ker and on p. 279 of [1981] KLT:
"......The statute
imposes no restrictions on this power. The Government can terminate the board
at will. Being so terminable, the life of the board is strictly limited to the
duration of the Government's pleasure. When that pleasure is withheld, the
tenure of the board comes to an end. The question, however, is whether the period
specified under the notification constituting the board binds the hands of the
Government, or in other words, is the Government estopped from withholding the
pleasure, once the pleasure has been crystallised and articulated in the order
of appointment? Such contention, in my view, could succeed only if the
discretion of the Government under the statute were not unrestrained. The
statute has however conferred upon the Government relatively unrestrained
discretion to continue or withhold the pleasure at will. The only restraint on
this otherwise unrestrained discretion is the fundamental legal norm that the
pleasure must be exercised bona fide and in public interest. That being the
ambit and reach of the statute, there cannot be any estoppel against the exercise
of statutory discretion."
Unless the exercise of
pleasure is shown to be mala fide or against public interest, this court cannot
interfere with exhibit P-2 order nominating the fifth respondent as a director
of the board in the place of petitioner.
I had occasion to consider
a similar case relating to the validity of an order of Government terminating
the services of the managing director of the Kerala Health Research and Welfare
Society in O.P. No. 7308 of 1983. The order of termination in that case was
based on the Government's view expressed in the order, on the interpretation of
the Rules and Regulations of the Society that a member of the board and its
managing director shall cease to hold office on retirement from Government
service on superannuation. On a proper interpretation of the Rules and
Regulations, this court found that the view expressed by the Government was not
correct and that there was nothing in the Rules and Regulations indicating that
a member of the board or its managing director shall cease to hold office on
retirement from Government service. It was in this context that this court held
that if the Government gives a reason for the termination of the services of a
member of the board, it is open to this court to consider the legality of the
reason mentioned and if it is found that the reason stated is unsustainable in
law, it is reasonable to presume that the Government would not have withdrawn
its pleasure for the continuance in office of the member concerned but for its
wrong view of the law. Exhibit P-2 order gives no reason for the discontinuance
of the petitioner from the board of directors of the company, and, since under
article 18 of its articles of association the directors hold office during the
pleasure of the Governor and the Governor is empowered to remove a director
from office in his absolute discretion without any fetters placed on his powers
for such removal, it should be presumed that the pleasure was withheld in the
best interest of the company, unless it is shown that the exercise of power was
not bona fide.
A member of the board of
directors of a company is not holding an office of profit. Nor has he a right
to the office except on the continued pleasure of the Governor. Exhibit P-1
order as per which the board is constituted is not for any particular term and
each member of the board continues in office during the pleasure of the
Governor, who is empowered to terminate the services of any member of the board
at his absolute discretion.
The petitioner alleges that
the order, exhibit P-2, is mala fide on account of the serious allegations
against the fourth respondent, the Minister for Labour, as contained in exhibit
P-1(a). In the counter-affidavit filed by the Deputy Secretary to the
Government, Industries Department, on behalf of the first respondent, the State
of Kerala, it is stated that the company concerned is under the control of the
Industries Department and is being dealt with by the Minister for Industries.
The allegation of mala fides is denied. It is also stated that there is nothing
on record to show that the Industries Minister was in any way influenced by the
fourth respondent. The files relating to the case were placed before me by the
learned Advocate-General for my perusal. There is nothing in the files to show
that the fourth respondent, the Minister for Labour, had done anything in the
matter. It is true the fourth respondent has not filed a counter affidavit
denying the allegations against him. But being a matter not within his
portfolio, he is not obliged to file a counter denying the averments made
against him.
Learned counsel for the
petitioner relies on the decision of the Supreme Court in S. Partap Singh v.
State of Punjab, AIR 1964 SC 72, wherein it is stated at page 85 :
"Before proceeding further
it is necessary to state that allegations of a personal character having been
made against the Chief Minister, there could only be two ways in which they
could be repelled. First, if the allegations were wholly irrelevant, and even
if true, would not afford a basis upon which the appellant would be entitled to
any relief, they need not have been answered and the appellant would derive no
benefit from the respondent not answering them. We have already dealt with this
matter and have made it clear that if they were true and made out by acceptable
evidence, they could not be ignored as irrelevant. (2) If they were relevant,
in the absence of their intrinsic improbability, the allegations could be
countered by documentary or affidavit evidence which would show their falsity.
In the absence of such evidence, they could be disproved only by the party
against whom the allegations were made denying the same on oath."
The company concerned is
under the control of the Industries Department and the fourth respondent, the
Minister for Labour, had nothing to do with the same. Under the circumstances,
the allegations made against the fourth respondent should be held to be wholly
irrelevant in considering the question as to whether exhibit P-2 is vitiated by
mala fides. Except for the fact that the fourth respondent has not chosen to
deny the allegations contained in the original petition against him, there is
no other material in the case to hold that exhibit P-2 order is not one passed
in the bona fide exercise of power vested in the Governor under article 18 of
the articles of association of the company.
Learned counsel for the
petitioner submits that the order, exhibit P-2 is not one issued by the
Governor who alone is invested with power to withhold his pleasure as provided
for in article 18 and hence the order is invalid. Exhibit P-2 order itself
shows that it was issued "by order of the Governor" and was signed by
the Secretary, Industries Department. There is therefore no substance in the
contention that exhibit P-2 order is not one issued by the Governor withholding
his pleasure for the continuance of the petitioner as a member of the board of
directors of the company. The writ petition fails and is dismissed. In the
circumstances, there will be no order as to costs.
[1941]
11 COMP. CAS. 78 (MAD.)
HIGH COURT OF
v.
Canara Banking Corporation, Ltd.
GENTLE, J.
JULY 26, 1940
K. Srinivasa Rao, for
the Petitioner.
K.P. Sarvothma Rao, for the
Respondent.
This is a petition by a
shareholder of the Canara Banking Corporation, Ltd., under Section 38(1) of the
Companies Act. This section, so far as it is material, provides that if the
name of any person is without sufficient cause entered in or omitted from the
register of members of a Company, the person aggrieved may apply to the Court
for rectification of the register. The petitioner is the holder of one share
only and the Company at a general meeting purported to act under Art. 173 of
the Articles of Association and expelled him from membership. This Article
provides to that effect that if any shareholder unjustly or unlawfully has
recourse to law in any matter whatever connected with the Corporation, he shall
render himself liable to expulsion and on such expulsion he shall never again
be admitted into the Corporation.
The petitioner preferred a
complaint to the District Magistrate of South Canara seeking sanction under
Section 196-A of the Code of Criminal Procedure to prosecute some directors and
ex-directors of the Company for conspiracy in the preparation of a balance
sheet or balance sheets of the Company. The learned Magistrate refused to grant
the process sought and in the course of his order he gave the following reasons
for his decison. The respondents (directors) were all highly respectable
gentlemen; the balance sheet had been accorded sanction at a general body
meeting of the shareholders; petitions to the Registrar of Joint Stock
Companies and to Government to initiate an enquiry into the affairs of the
Company had been rejected, and he had been forced to think that the petitioner
was working against the Bank out of sheer malice. He added that from the
attitude of the Registrar and the Government it was apparent that there was no
reason to think that the respondents in the proceedings before the Magistrate
had any reason whatever to conspire to cheat the shareholders. It is said and
not disputed that a copy of the order of the Magistrate was circulated to all
the shareholders of the Company. A meeting was called on the 20th July, 1939.
The petitioner attended and objected to the meeting continuing, nevertheless a
resolution was passed that, in view of his conduct in filing an application
before the District Magistrate of South Canara seeking sanction to prosecute
some of the directors and ex-directors, thereby acting contrary to Art. 173 as
seen from the order of the District Magistrate, he be expelled from the
membership of the Corporation. On the date when this resolution was passed the
petitioner was undoubtedly a member of the Company. There was no power for the
Company to deal with the share or shares which were held by a person whom the
company at a general meeting purported to expel from membership. The Articles
provide for forfeiture of shares by members in certain contingencies but these
contingencies do not include purported expulsion of a member under Art. 173.
Ordinarily, a company is unable to sell its own shares but when shares are
forfeited it can resell or dispose of them as provided in the Articles.
Subsequent to the passing
of the resolution of expulsion the Company has altered its Articles by making
an addition to Art. 173. Notice of the meeting at which these Articles were
changed was not given to the petitioner. Under the additional Articles
provision is made by which the Company can, in effect, force an expelled member
to sell his shares to any person at a price which is fixed under the provisions
of the Articles and the Company is enabled to authorise a director to sign the
necessary transfer instrument on behalf of such transferor if he fails to do
so. Sec. 34(3) of the Companies Act provides that it shall not be lawful to
register a transfer of shares unless a proper instrument of transfer duly
stamped and executed by the transferor and the transferee has been delivered to
the Company. There are of course occasions when the transferor does not or
cannot sign, such as when a Court sale has been held. In that event Order 21,
Rule 80, of the Code of Civil Procedure provides for the Judge or an Officer of
Court directed by him signing the transfer instrument. Art. 52 (3) of the
Company's Articles, it would seem, purports to confer upon the directors of the
Company power to transfer shares in spite of the absence of an instrument of
transfer. It Says: "Unless sanctioned by the Board of Directors, it shall
not be lawful for the Corporation to register a transfer of shares unless a
proper instrument of transfer duly stamped and executed by the transferor and
the transferee has been delivered to the Corporation." If this Article
does purport to confer power on the directors to transfer shares in the absence
of an instrument of transfer, it is clearly ultra vires of Section 34 of the
Companies Act.
The position at the time
when the purported expulsion of the petitioner took place is this. He was a
shareholder and learned Counsel on behalf of the Company has conceded that so
long as a person remains a shareholder he must remain a member of the Company.
The Company purported to expel him, according to the terms of the resolution,
from the membership of the Company. There was no power by which it could
obtain, seize or deprive him of his share. No doubt he was a holder of one
share only, but the same principle would apply with a holder of a large number
of shares of considerable value. The Articles did not enable the company to
forfeit shares or sell them to any other person as they are now empowered to do
by the. alteration. The alteration in the Articles effected after the date of
the resolution under Art. 173 cannot in any way be binding upon the petitioner.
Notice was withheld from him of the meeting at which the alteration was made.
The provisions of the Articles form part of the contract between a member or a
shareholder and the company, and one party to a contract cannot add terms to
the contract without the knowledge or consent of the other party. It is quite
clear that after the position in regard to the Company and the petitioner was
realised, the Company took steps to provide by an addition to the Articles, the
necessary means to carry out what they wished to effect in regard to an
expelled member. As the powers of the Company at the date when the petitioner
was purported to be expelled did not empower them to deprive him of his share
and while he remained a shareholder he must also remain a member, it must
follow that the resolution of expulsion has no effect. His purported expulsion
by the resolution having no effect, the sale in law could not be carried out.
Further, he could not be compelled under any provision of the Articles to
transfer his share to any other person. He was entitled to keep it, the Company
could not authorise any one to sign an instrument of transfer on his behalf, he
never signed any instrument and no valid instrument was sent to the company, as
the Companies Act requires. In my view, the petitioner never ceased to remain a
member of the Company inasmuch as he always remained a shareholder.
Learned Counsel on behalf
of the Company raised an objection that proceedings under Sec. 38(1) of the
Companies Act are not open to the petitioner as this section provides a remedy
only when the name of any person is without sufficient cause entered in or
omitted from the register of members. The name of the petitioner was included
in the register of members and was struck out when his expulsion took place or
when the Company purported to force him to sell his share to some other person.
Same two months after the resolution expelling him, the Company wrote to the
petitioner on the 23rd October, 1939, that his share had that day been
transferred to Mr. V. Achutha Srinivas Kamath, and a cheque for Rs. 70 was sent
to him as the price for such share. The petitioner wrote objecting to the
action of the Company and said that he did not propose to cash the cheque and
he has not done so. This action by the Company took place after the addition to
the Articles had been made to which have referredearlier. The striking out of
the name of the petitioner from the register containing the names of the members
apparently would have taken place on or about the date when the Company wrote
to the petitioner that his share had been sold to the transferee. Learned
Counsel on behalf of the Company contended that the word 'omitted' in Section
38(1)(a) does not include the striking out of the name of a member which had
been previously in the register. When the name of a person, who is a member of
the Company, has been struck out, the effect is the same as if his name had
never been entered. The striking out of his name in the register thus causes
his name to be omitted from it and I hold that, when a person's name has been
struck out or expunged, then it is an omission of his name within the meaning
of the section.
A further point was taken
on behalf of the Company by learned Counsel that the present petition is
abortive inasmuch as the name of the transferee has not been added as a party.
In my view there has been no valid or legal transfer of the share which the
petitioner held in the Company to any transferee and he is still the holder of
the share ; therefore his name must be included in the list of members. The
petitioner still holds the certificate recording that he is the holder of one
share in the Company and I direct that there be a rectification of the register
and the Company will add to the names of members that of the petitioner. The
relief which I am granting in this petition is to place the petitioner in the
position in which he has always been—a shareholder of the Company. The
petitioner is entitled to his cost against the Company.
Learned counsel for the
petitioner has asked me to fix the amount of costs. He has spent Rs. 40 as out
of pocket. I fix the total costs including the cut of pocket expenses at Rs.
150.