SUPREME COURT

[1995] 5 SCL 125 (SC)

SUPREME COURT OF INDIA

B.G. Somayaji

J.S. VERMA AND S.P. BHARUCHA, JJ.

SPECIAL LEAVE TO APPEAL NO. 6358 OF 1995

MARCH 27,1995

Section 169, read with section 173, of the Companies Act, 1956 - Extraordinary general meeting - Extraordinary general meeting of appellant-bank was called for to remove four directors including two respondents herein - Alleging that material facts, i.e., allegations for removal which were contained in letter addressed to RBI by chairman of bank seeking removal of appellants were not revealed in explanatory statement annexed to notice, respondents filed suit and sought interim injunction against holding of meeting - While trial court refused injunction, High Court, holding that letter addressed to RBI was of paramount importance and constituted material fact in terms of section 173, non-disclosure of which prejudiced concerned directors, stayed proposed extraordinary general meeting - Whether on facts of case there was no ground available to High Court to set aside trial court's order refusing to grant injunction and, therefore, High Court's order was to be vacated, and appellants were to be allowed to hold extraordinary general meeting on undertaking that letter in question addressed to RBI would be circulated to shareholders -Held, yes

FACTS

The company, a banking company, by notice dated 27-1-1995 called for an extraordinary general meeting which was scheduled to be held on 2-3-1995. Four special resolutions were sought to be moved for the removal of four directors. Two of the directors filed a suit and sought for interim injunction restraining the company from holding the proposed general meeting. The allegation in the suit was that the chairman of the bank had addressed a letter on 7-1-1995 to the RBI alleging that the directors in question had indulged in certain acts which were much against the interest of the institution and that they should be removed from directorship. The plaintiffs alleged that the RBI had not yet responded to the letter, but the chairman of the bank had instigated certain persons to requisition the holding of an extraordinary general meeting for the purpose of removing them. During the hearing of the application for interim stay, the main issue centered round the legality of convening the meeting. It was contended that the explanatory statement annexed to the notice in terms of section 173 was very cryptic and the special notice which set out the four proposed resolutions for removal of the directors was silent with regard to the reasons or circumstances under which the removal was sought for and as such the notice was not in conformity with section 173. The trial judge dismissed the application for interim stay for restraining the holding of the meeting as scheduled. On appeal, the High Court held that the letter dated 7-1-1995 addressed to the RBI by the chairman of the company was of paramount importance and the shareholders should have been made aware of what exactly the allegation or the charges against the directors sought to be removed were and that these facts constituted material facts within meaning of section 173 and failure to disclose these material facts had prejudiced the plaintiffs, ie., the directors in question. In that view of the matter, the company was restrained from holding the extraordinary general meeting as scheduled or on any adjourned date, unless and until they fully and completely complied with the requirement of law. The High Court, however, permitted the respondent to adjourn the meeting and approach the appellate court.

On appeal to Supreme Court:

HELD

There was no ground available to the High Court for setting aside the trial court's order refusing to grant the injunction for holding the extraordinary general meeting of the company. The injunction granted by the High Court was, therefore, vacated, Moreover, the appellants also undertook to circulate a copy of the letter dated 7-1-1995 to the shareholders who attended the extraordinary general meeting before the commencement of the extraordinary general meeting.

Therefore, the appeal was allowed

CASES REFERRED TO

Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd [1971] 41 Comp. Cas. 377 (Bom.), Life Insurance Corpn. of India v. Escorts Ltd [1986] 59 Comp. Cas. 548 (SC), Karnataka Bank Ltd v. A.B. Datar [1994] 79 Comp. Cas. 417 (Kar.) and Purna Investments Ltd v. Southern Steelmet & Alloys Ltd [1977] 47 Comp. Cas. 752 (Kar.).

Kapil Sibal, D.D. Thakur, S.N. Bhatt, Dr. Garg and V. Lakshmi Narayan for the Appellant Salve, Ranji Thomas and N. Ganpathy for the Respondent.

ORDER OF SUPREME COURT

Leave granted.

Heard.

We are satisfied that there was no ground available to the High Court for setting aside the trial court's order refusing to grant the injunction for holding the extraordinary general meeting (EGM) of the company. We are informed that the extraordinary general meeting is scheduled to be held on 30-3-1995. The injunction granted by the High Court is, therefore, vacated. Moreover, the appellants also undertake to circulate a copy of the letter dated 7-1-1995, annexure 'B' to the shareholders who attend the extraordinary general meeting before commencement of the extraordinary general meeting.

The appeal is allowed in these terms.

No costs.

TEXT OF KARNATAKA HIGH COURT'S JUDGMENT

1. This is an appeal filed by two of the directors of the Karnataka Bank Ltd. and is directed against an order dated 28-2-1995, on IA. No. II, whereby the learned trial judge has declined to grant the application on the part of the appellants. Respondent No. 1 bank has, by a notice dated 27-1-1995, convened an extraordinary general meeting of the shareholders which is scheduled to be held on 2-3-1995 at 10.30 a.m. at Mangalore. The two appellants, who are directors of the bank had moved the trial court principally on the ground that, according to them, there are certain irregularities/illegalities with regard to the convening of the general body meeting in question. Briefly stated it is their contention, quite apart from certain mala fides which have been pleaded, that the requirements of law prescribe that the convening of such a meeting has to be accompanied by an explanatory statement which is provided for under section 173 of the Companies Act, 1956 ('the Act'). The appellants, who are the plaintiffs before the trial court, have stated that on 7-1-1995, the chairman of the bank addressed a letter to the RBI which admittedly is the supervisory authority, wherein, inter alia, he has stated that the two appellants who are directors of the bank had indulged in certain acts which were very much against the interest of the institution and for the reasons set out by him in that letter he had contended that they should be removed from the directorship of the bank. The plaintiffs' contention is that the RBI has so far not responded to that letter nor has it taken any action as asked for and that, therefore, the chairman of the bank who is not well disposed towards them because of certain conflicts that are referred to in the plaint, is alleged to have instigated certain persons to convene the general body meeting for purposes of removing the plaintiffs from the directorship of the bank. According to them, the names of approximately three thousand shareholders who have signed the requisition for holding the general body meeting have not been disclosed and there is also an allegation in the correspondence exchanged that these so-called signatures have been 'obtained'. That part of the controversy, however, is not of much consequence because the principal ground that was canvassed before the learned trial judge effectively centers round the legality or the validity involved in the convening of the meeting. The mala fides and other surrounding circumstances are larger issues which the trial court will subsequently look into. For purposes of the immediate interim order that was sought, namely, the stoppage of the holding of the extraordinary general meeting the plaintiffs essentially relied on the fact that a very cryptic explanatory statement has been annexed to the notice which states that the other directors have no interest in the item of business and only states that a requisition has been received for the convening of the meeting. A copy of the special notice has also been made part and parcel of the explanatory statement. That special notice sets out four proposed resolutions for removal of four directors which includes the two present appellants. The special notice is silent with regard to the reasons or circumstances under which the removal is sought for.

2. The learned trial judge after hearing the parties came to the conclusion that this was not a fit case in which ad interim orders for stoppage of the meeting are to the passed and, therefore, dismissed IA. No. II. The present appeal is directed against that order. In view of the fact that the meeting is scheduled for tomorrow, an urgent application was made to this Court and the appeal was virtually taken up out of turn. The respondents are represented by Mr. Holla, the learned counsel and I have heard both the learned advocates on the question of whether to grant or refuse the interim relief prayed for.

3. I shall confine this order to the material aspects of the case only, as the rest of the allegations and counter-allegations and the defence thereof are something which the trial court will look into and which I do not need to take cognizance of Mr. Raghavan, in support of his application submitted that section 173 casts a statutory duty, not merely an obligation, on the company convening a meeting of this type, to circulate to the shareholders an explanatory statement containing all material facts that are relevant as far as the agenda of the meeting is concerned as also, from the point of view of the transmission to the shareholders, factual details for purposes of their coming to a right conclusion or decision with regard to the items on the agenda. In this regard, he has sought to place reliance on a judgment of the Bombay High Court in Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377. The High Court had occasion to deal with various aspects of the law but as far as the requirements of section 173 are concerned, the High Court reiterated the position that it is a mandatory requirement of law that all material facts as also the interests or otherwise of directors must be disclosed in the explanatory statement. The reason for this is obvious insofar as there would be a class of shareholders who, on the basis of the data, would like to decide on attending the meeting or not but more importantly as far as those who attend and participate are concerned, the law takes cognizance of the fact that they must be posted with enough material from which they would be able to ascertain as to what is the nature of the controversy on which their opinion or decision is sought. It is also necessary since it is a matter of importance touching the business of the company, that the shareholders be posted with enough factual data for purposes of arriving at a judgment in matters where decisions have to be taken. Mr. Raghavan submitted that on the facts of the present case, admittedly the company had on record a letter dated 7-1-1995, concerning the very issue which is the subject matter of the extraordinary general meeting and in fact the only matter that is on the agenda for this extraordinary general meeting. He produced a copy of that letter in support of his submission that the chairman of the bank reported to the RBI, certain specific acts, which he termed as acts of grave misconduct on the part of the two appellants, and he also recommended that they should be removed from the directorship of the bank. Mr. Raghavan adverted to certain other averments in the plaint and in the correspondence and he submitted that having regard to the situation that prevails, as far as the chairman is concerned he is very much and in fact actively and personally interested in the removal of the two appellants. According to Mr. Raghavan, it was incumbent on the part of the company to have mentioned these material facts in the explanatory statement. Having regard to the importance of the matter, it would have perhaps impelled several persons who would otherwise not have attended the meeting to do so but more importantly many of the shareholders would have a desire to know as to what are the charges against the appellants and what is the reaction of a senior person like the chairman of the company to that situation. More importantly, the letter to the RBI from the chairman is an aspect of crucial importance because it is an official letter seeking the removal of the two appellants because the chairman had come to the conclusion that their continuance on the board of directors is contraindicated and not in the interest of the company. According to Mr. Raghavan, these are all very material aspects that could not and should not have been kept back from the shareholders. They were facts within the knowledge of the company and for this purpose will come within the ambit of the requirements of section 173. It was very necessary that these material facts should have been disclosed.

4. Mr. Raghavan has also advanced certain other arguments with regard to the manner in which the extraordinary general meeting ought to have been convened and it is his submission that it is not enough for one of the shareholders to have forwarded a requisition and to have annexed 381 pages of signatures (?) to it but that it is a requirement of section 169 that all the requisitionists should lodge the requisition with the company. To my mind, there is absolutely no substance in this objection for the simple reason that the law does not require duplication of a requisition. If a requisition is drafted by any one of the shareholders who is entitled to ask for the holding of the meeting and even countersigned by the prescribed number of shareholders the lodging of that requisition document with the company is deemed compliance with section 169 of the Act. As far as this objection is concerned, therefore, I do not see any reason why it should be upheld.

5. Appearing on behalf of the respondents Mr. Holla submitted that the full facts have not been placed before the court. With regard to the objection regarding the so-called disclosure of material, Mr. Holla stated that the present appellants to whom a copy of the requisition was sent and who have taken part in the board meeting wherein the decision to convene the extraordinary general meeting was taken, had themselves sent a detailed written explanation or reply setting out their side of the case. They had also requested that this should be circulated to all the shareholders and Mr. Holla stated that the bank has circulated to all the 28,000 shareholders printed copies of the reply/explanation that was sent by the present appellants. It is his case, therefore, that on the one hand the required material is now within the knowledge of the shareholders and he also advances the plea that under these circumstances the appellants are estopped from contending otherwise. As far as the plea of estoppel is concerned, there can be no such bar in situations of the present type. If the law permits a citizen to move a court for a relief, merely because he might have tried some salvage operation at an earlier point of time it would not preclude him from the enforcement of a legal right, I do not propose to deal with the aspect of estoppel.

6. Mr. Holla submitted that the ambit and scope of section 169 read with section 173 have been the subject-matter of several decisions. He drew my attention to the decision of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548. He laid particular emphasis on the headnote wherein the Supreme Court had occasion to observe that it is within the right of any shareholder to call for the convening of a special general meeting and that it is not obligatory on the part of the shareholder to set out grounds and explanations in support thereof. Mr. Holla's argument proceeds on the footing that since there is no obligation on the part of a shareholder or group of shareholders who ask for the convening of such a meeting to disclose the reasons, therefore, in such circumstances the company is relegated to the position of a post office. The learned advocate states that the only obligation on the part of the company in such circumstances is to make known to the shareholders through the explanatory statement a copy of the requisition and to mention that it is pursuant to such a requisition that the meeting is being held. In these circumstances, the learned counsel submits that the bank has more than fully complied with the requirements of law. Mr. Holla also relied on a passage from Ramaiya which is extracted at page 1094 wherein, the learned author has reproduced the ratio of the law as laid down in Life Insurance Corporation of India v. Escorts Ltd. (supra). Apart from this, Mr. Holla has drawn my attention to several other decisions and it is his contention that on the special facts of the present case the company has more than fully complied with what it was obliged to do.

7. Mr. Holla has thereafter drawn my attention to certain other parts of the record wherein he has contended that there exists more than enough justification as far as the present case is concerned for the shareholders to convene the present erson meeting. According to Mr. Holla, the company is shortly to go for a large public issue and in these circumstances any adverse statements, publicity or material that is not conducive to the reputation and good name of the company, or inter se disputes, would affect the working, welfare and prospects of the company. Mr. Holla has submitted that on the facts this is a fit case in which even as far as the merits go, this court should not intervene.

8. As regards the grant of a relief of the type that has been prayed for, Mr. Holla has relied significantly enough on an earlier decision of this Court in Karnataka Bank Ltd v. A.B. Datar [1994] 79 Comp. Cas. 417, wherein this very bank had come in an appeal in somewhat similar circumstances. Mr. Holla has placed reliance on one part of the judgment wherein this court has taken the view that it would not be open to a party to apply for an injunction for purposes of stopping a meeting of the present type. The learned judge in that decision had considered the usual plea that is advanced in such cases, namely, the aspect of irreparable damage and injury and had negatived the plea principally on the ground that a person functioning as a director of a company does so virtually on the basis of the confidence that is reposed in him by the shareholders, and at their will. If, therefore, for whatever reason, the shareholders propose to remove the person from the directorship, the learned judge observed that it would not be open to him to argue that the damage to his reputation is something irreparable. The grant of interim relief in that case was, therefore, turned down. On an analogy, Mr. Holla submits that the decision in this case applies on all fours to the present case and that consequently, this court regardless of whatever technicalities are pleaded, should refuse to stop the meeting particularly since it is to be held tomorrow.

9. The next submission canvassed by Mr. Holla is that the appellants have moved this Court virtually at the zero hour. He states that the bank has a large number of shareholders approximately 28,000, who are living all over the country and that in matters of importance such as the present one the attendance is reasonably high. He points out that even as far as similar meetings are concerned, a couple of thousand shareholders had physically attended the meeting and under these circumstances quite apart from the expenditure incurred by the bank, very serious loss, inconvenience and harassment would be caused to the shareholders if there is a last minute stoppage. He submits that in the decision referred to in Karnataka Bank Ltd.'s case (supra), this Court has held that the overriding consideration which would weigh with the court in such cases is a question as to how much of damage should be prevented by refusal of an interim relief. In this regard, he has drawn my attention to one more decision of this court in Puma Investments Ltd. v. Southern Steelmet & Alloys Ltd [1977] 47 Comp. Cas. 752. This court on that ocassion had gone into an in-depth consideration of the aspect of balance of convenience. The court took the view that in a situation of this type, where at the eleventh hour a general body meeting is sought to be stopped, the balance of convenience lies heavily on the side of the party convening the meeting and that regardless of the amount of damage that is alleged, the court should refuse to stop the meeting. On the basis of these submissions, the learned advocate contended that quite apart from the merits of the matter, even the aspect of balance of convenience lies heavily in favour of the respondents and that consequently, no relief should be granted to them.

10. In the light of the aforesaid position, the short question that requires to be considered is as to whether any breach as alleged has been committed, if so how serious is that breach, what is the effect thereof and whether, assuming such a breach has been committed, whether it is so fundamental and whether it is grave enough to warrant the stoppage of the extraordinary general meeting tomorrow. As far as this aspect of the matter is concerned, I need to take cognizance of certain features that are special to the facts of this case. One cannot go by generalised propositions nor can an issue be decided in a vacuum. On the facts of the case before me, the sole business at the meeting is the removal of the two directors of the bank. This is an aspect of seriousness because in the first instance,... it would reflect on the bank itself that two of the directors were virtually removed by the shareholders if this is.... Secondly, the law also takes serious note of the rights of the directors themselves who are the aggrieved and affected parties. In the case of removal of directors in the circumstances such as the present one, the act is on par with and tantamount to a situation of dismissal from office. The repercussions of such an action are very grave and very far reaching. In a given situation where it is warranted, such action is very necessary, but where the shareholders of a company are called upon to adjudicate on an issue whether directors should be dismissed from office or not, to my mind the shareholders must be posted with all the necessary material that concerns the issue in the present instance. It is true that the requisitionists have not set out any of the grounds on which they want the extraordinary general meeting to be convened. The matter, however, does not rest there because admittedly, the company had on record a document of importance, namely, a letter dated 7-1-1995, addressed by the chairman of the company to the RBI which is the officially designated statutory and supervisory authority wherein he has set out certain grounds in support of his application that the appellants should be removed from the directorship of the bank. If the appellants justifiably need to be removed from the directorship, this letter is of paramount importance. If, on the other hand, the shareholders desire to fairly adjudicate on the question as to whether there is justification to take the step of dismissing them from the office, it is equally necessary that they should be made known of what exactly the allegations or the charges against the appellants are. The basic principles of natural justice that will guide most of such situations or almost all of them would apply even in a situation of the present type. The company in the present instance had on record this particular document and there is no reason set out as to why there is not even a reference to it in the explanatory statement. It is a short letter. On the other hand, if the company desires to place the material before the shareholders without commenting as it is required to do, it could have easily annexed a copy of that letter to the explanatory statement or could have set out the gist thereof. An interested shareholder would have been in a position to acquaint himself with the aspect of what exactly the seriousness of the matter. To my mind, this is a requirement of law and the company has failed to comply with this requirement. It is not a mere obligation. It is not optional but it is compulsory and the courts while interpreting section 173 have unequivocally held so. Even in the headnote G of Escorts Ltd. (supra), the court has specified that this is a requirement of law and has amplified it to state that it is a requirement that is cast on the company. Under these circumstances, it was absolutely necessary that this material should have been disclosed. I have no hesitation in holding that this particular information or these facts constitute what section 173 refers to as material facts. In Firestone Tyre & Rubber Co.'s case (supra), the court has in some detail referred to this requirement and has once again reiterated the position that it is an express requirement of the law.

11. The question arises as to what is the effect of such non-disclosure. Mr. Holla has advanced the plea that it is curable insofar as since the respondents themselves have circulated an explanatory statement, the shareholders are in fact posted with the requisite facts and knowledge and that, therefore, the so-called lacuna is not existing in this case. I am unable to accept this argument because what has been circulated by the appellants is their side of the dispute or their defence to the proposed action or the charges. A shareholder who reads this explanation would get a totally lopsided view of the controversy. On the contrary, he would be left with only one side of the version and thereafter be relegated to a position wherein he would be hurriedly required to make up his mind at the meeting on the basis of whatever is stated there. That unfortunately is not the scheme of the law. The purpose of circulating an explanatory statement is in order to give the shareholders enough time to consider and reflect on the subject-matter of the agenda. There is also an additional reason for it, namely, the fact that after going through the explanatory statement it is often open to the shareholder to call for or inspect additional material prior to the holding of the meeting. The sum total of the situation can be summarised insofar as in the absence of requisite material made available, the shareholder is heavily handicapped and he is not fully equipped to take a fair decision with regard to the important issues that are the subject-matter of the meeting. In these circumstances, in my view, we are left with a situation whereby if the meeting were to be held on 2-3-1995, in the background that is disclosed to the court, it would be abundantly clear that the shareholders will be required to take a decision in the absence of a full and proper consideration of material facts. Such a decision would neither be in the interest of the company but more importantly, it could be highly damaging to the present appellants. It would be contrary to the scheme of the law which requires that such decision must be taken after a complete study of all the material that is relevant.

12. The aspect of balance of convenience is one of paramount importance. I do not dispute the fact that in the majority of cases a court will refuse relief even if a case is made out if it is pointed out that heavy damage would be caused if that relief is granted. In the present case, it is demonstrated that the meeting is scheduled for tomorrow, that the company has spent a large amount of money for purposes of holding of the meeting and furthermore that serious inconvenience will be caused to the shareholders as it is too late now to intimate them that the meeting is either postponed or cancelled. The sum total of this situation represents a certain degree of financial loss. That is a consideration of consequence but on the other hand I need to take note of the fact that the appellants are gravely exposed to a situation whereby some wrong or reckless decision could be taken at the meeting only because of the fact that the shareholders were not posted with all the material. The damage to the appellants and the consequent damage to the company and the subsequent consequences thereof to my mind completely and totally outweigh whatever financial loss the postponement or revocation of the meeting may entail. In my considered view, the balance of convenience also lies very much in favour of the present appellants.

13. The present appeal is only for limited relief as far as the holding of the meeting on 2-3-1995 is concerned. To my mind, the appellants qualify for such a relief. The appeal is accordingly allowed. The respondents are accordingly restrained from holding an extraordinary general meeting of the first respondent company on 2-3-1995, or on an adjourned date unless and until they fully and completely comply with the requirement of law. At this stage, Mr. Holla points out to the court that the respondents would like to take the matter higher and since the appellants have virtually moved this court at the last minute and since he does not have a copy of even the operative part of this judgment, there is virtually no scope for him to obtain urgent orders from the Supreme Court. His first submission is that the order should be stayed for a reasonable time in order to enable him to consider his position. As far as this aspect of the matter is concerned since the meeting is to be held tomorrow, the effect of any order of stay would be that this court would be overruling its own decision. In sum and substance, the view taken by this Court is that the notice convening the meeting is bad in law as the explanatory statement communicating the notice does not set out the requisite material that the law obligates. There are also subsidiary reasons why this court has taken the view that in the present situation the holding of such a meeting is not fair. Under these circumstances, the application for stay of the order is rejected.

14. Mr. Holla has thereafter submitted that respondent No. 1 desires to take the matter higher and in the event of the appeal court either staying or setting aside this order, the company would be put to serious loss, inconvenience and time delay by having to issue a fresh notice and reconvene the meeting. Under these circumstances, he submits that since in effect this Court has taken the view that the meeting ought not to be held, the court should permit the meeting convened for tomorrow to be adjourned pending further orders to be passed by the appeal court. Mr. Raghavan has vehemently opposed this application because according to him, since this Court has held that the notice itself is bad in law, the meeting itself is virtually non est and consequently no garb of legality can be injected into it by seeking to adjourn it. I see considerable justification in the plea put forward by the learned advocate who appears for the respondent insofar as it is true that they are left with virtually no time to approach the appeal court but more importantly because the appellants in the event of the appeal court taking a view contrary to the one which this court has taken, respondent No. 1 company should in that event not be subjected to the lengthy and expensive exercise of reconvening the meeting. It shall, therefore, be permissible for them to adjourn the meeting for such period of time as they consider reasonable to approach the appeal court if the appeal court grants permission to either to hold the same meeting or to continue with it, the respondents shall be entitled to do so. On the contrary, if the appeal court were to confirm the view of this court, the question of reconvening the meeting will not arise. The second application made by Mr. Holla is accordingly granted and respondent No. 1 is permitted to adjourn the meeting convened for 2-3-1995. The appeal is allowed, the impugned order is set aside. No costs.

[1993] 76 COMP. CAS. 821 (KER)

HIGH COURT OF KERALA

Queens Kuries and Loans (P.) Ltd.

Sheena Jose

G.H. GUTTAL J.

M.C. APPLICATION NO. 37 OF 1992.

AUGUST 5, 1992

M. Ramanatha Pillai for the Applicant.

George Cherian and N. Subramonian for Respondent.

JUDGMENT

G.H. Guttal J.—The Queens' Kuries and Loans (P.) Ltd. has filed this application for a declaration that the requisition dated April 6, 1992 (exhibit P-1), made by respondents Nos. 1 to 8, and the extraordinary meeting of the company held by them on May 26, 1992, pursuant thereto and the resolutions passed therein are illegal. The respondents are members of the company. P.A. Francis, also a member, filed C.A. No. 188 of 1992 for impleading himself as a respondent. The application was allowed and P.A. Francis has been impleaded as respondent No. 9.

The facts giving rise to this application are as under:

On April 6, 1992, respondents Nos. 1 to 8 addressed the requisition (exhibit P-1) to the chairman, calling upon him to convene an extraordinary general meeting of the company. The requisition set out two resolutions proposed to be moved at the meeting. Resolution No. 1 was for immediate removal of the existing directors and resolution No. 2 was in respect of recovery from the chairman, of money lost to the company by reason of the illegal increase in the number of members. The explanatory statement attached to the resolutions is exhibit P-1(a). The requisition was deposited with the chairman on April 8, 1992. Upon the failure of the board of directors to call a meeting, respondents Nos. 1 to 8 issued notices of meeting on May 14, 1992 (exhibit R-2). The shareholders including the directors received the notices. The requisitioned meeting was held on May 26, 1992. At this meeting both the resolutions were passed.

The authorised share capital of the company is Rs. 5 lakhs divided into 50 shares of Rs. 10,000 each. Each share has paid-up value of Rs. 8,000. The total paid-up capital is (8,000 × 50) = 40,000.

Although the notices of the meeting were served on the members, the directors were not served with notices of the resolutions proposed to be moved at the meeting.

The requisition of the extraordinary general meeting and the resolutions passed therein have been challenged on various grounds. I will deal with them in the following paragraphs.

The first point is whether the eight requisitionists hold the qualifying number of shares as prescribed by sub-section (4) of section 169 of the Companies Act, 1956. In order to be entitled to requisition a meeting, the requisitionists must, on the date of the deposit of the requisition, hold "not less than one-tenth of such of the paid-up capital of the company, as at that date carries the right of voting in regard to that matter". The company's authorised share capital is Rs. 5 lakhs divided into 50 equity shares of Rs. 10,000 each. But the paid-up value of each share is only 8,000. This makes the total paid-up share capital Rs. 4 lakhs. Ten per cent. of this value is Rs. 40,000. No doubt the company had increased the number of members to 52 by allotting two additional shares. This was done without raising the share capital of the company. The issue of two more shares thereby increasing the share capital was held illegal by this court in C.A. No. 64 of 1992. Therefore, the authorised share capital of the company remains at Rs. 5 lakhs and the paid-up share capital at Rs. 4 lakhs. The eight requisitionists together held share capital worth Rs. 64,000 (8,000 x 8 = 64,000) which exceeds 10 per cent. of Rs. 4,00,000. Therefore, they were qualified to requisition the meeting.

The next submission of counsel for the appellant is this. The requisitionists proposed to pass two resolutions which they set out in the notices of the meeting. These two resolutions constitute "two ... distinct matters" within the meaning of sub-section (5) of section 169 of the Companies Act, 1956. Therefore, the provision of sub-section (4) of section 169 of the Companies Act which requires that the requisition should be backed up by shareholding of not less than one-tenth of the paid-up capital must be satisfied with reference to each of the two resolutions.

In my opinion, the argument that the requirement of sub-section (4) has not been fulfilled in regard to each of the resolutions is not sound. Sub-section (5) of section 169 incorporates sub-section (4) of that section and lays down how the validity of the requisition in respect of two or more "distinct matters" shall be judged. The substance of sub-section (5) of section 169 is that each of such distinct matters must have the support of the shareholders holding one-tenth of the paid-up share capital. If each of the distinct matters specified in the requisition commands the support of one-tenth members, the requisition in respect of each of the matters is valid. The requisition in respect of matters which do not have the support of the qualifying shareholders, is not valid. The validity of the requisition has to be determined separately in respect of each of the two matters, viz., the two resolutions. The test is whether each of the matters is supported by the qualifying shareholding. Sub-section (5) of section 169 stipulates application of the qualifying test laid down in sub-section (4) "separately" in regard to "each such matter".

In this case, the requisitionists who hold the qualifying paid-up share capital have consented to the calling of the meeting to consider each of the two matters.

The most important question, however, is whether the proceedings of the meeting and the resolution passed therein are valid. It is necessary to understand what happens when the provisions of section 169 are set into motion. If the board does not, within 21 days from the date of the deposit of a valid requisition, proceed to call a meeting for the consideration of those matters, the requisitionists themselves may call such a meeting of the company. The meeting called by the requisitionists under sub-section (6) of section 169 of the Companies Act, is a meeting of the company. The meeting shall be called in the same manner, as nearly as possible as that in which meetings are to be called by the board. The meeting held in pursuance of a valid requisition is an extraordinary general meeting of the company. At the meeting, the requisitionists may proceed to dispose of the business on the agenda. The company at such meeting is bound to follow the procedure prescribed by law for removing the directors. The manner in which the directors may be removed is laid down in section 284 of the Act. A director may be removed by ordinary resolution. But special notice shall be required of any resolution to remove a director or to appoint somebody instead of a director so removed at the meeting at which he is removed. Special notice of the resolution to remove directors required by section 284 of the Act shall be given to the company, not less than 14 days before the meeting at which it is to be moved (section 190 of the Companies Act). The notice must disclose the ground on which the director is proposed to be removed. The disclosure of the ground for removal is a matter of substance and not of form because the directors concerned are entitled to make representations in writing at the meeting. The company is bound to send a copy of the representation to every member of the company to whom the notice of the meeting has been sent. It is only after these steps are taken that the resolution can be passed.

The special notice of the resolution was not given to the company as required by law. The omission to serve the special notice is a serious error in the conduct of the proceedings. The directors have been denied their statutory right to the notices, to make representations and persuade the members to reject the resolution. The resolution removing the directors is vitiated by failure to fulfil the fundamental requirements of law. The resolution removing the directors is, therefore, invalid.

Resolution No. 2 censures the chairman for increasing the number of members, in violation of law, and resolves that the amount of expenses incurred therefor be recovered from him. The evidence does not show that the chairman was personally called upon to answer as to why he was personally liable to pay the expenses incurred for raising the number of members. It is not clear whether the decision to increase the number of shares was taken by the chairman. The basis of his liability is not discernible. What is important is that resolution No. 2 appears as if it is a part of resolution No. 1 to remove the directors. The last sentence of the explanatory note (resolution No. 2) reads "... the shareholders have lost confidence in the present director board who are trying to keep the company in their control by such illegal acts. Hence, the director board has no right to continue". (emphasis supplied)

Although resolution No. 2 bears a separate serial number, it flows from the "lack of confidence" in the board of directors. This lack of confidence is the foundation of resolution No. 1. Both the resolutions are aimed at the board of directors. Resolution No. 2 is an extension of resolution No. 1. I cannot see them as independent transactions capable of standing apart from each other. They are part of the same transaction. Their basis is the "lack of confidence" in the board of directors. They are aimed at the board of directors. They are part of the same transaction. Resolution No. 1 is invalid in every part of it. It takes with it resolution No. 2 also. Both are, therefore, invalid.

For the reasons stated in the foregoing paragraphs, I hold that the meeting was validly requisitioned. However, the resolutions passed at the meeting held on May 26, 1992, are illegal and invalid. Subject to this, the application is allowed and the judge's summons is made absolute. Respondents Nos. 1 to 8 shall pay costs of this application to the applicant.

[1993] 76 COMP. CAS. 821 (KER)

HIGH COURT OF KERALA

Queens Kuries and Loans (P.) Ltd.

Sheena Jose

G.H. GUTTAL J.

M.C. APPLICATION NO. 37 OF 1992.

AUGUST 5, 1992

M. Ramanatha Pillai for the Applicant.

George Cherian and N. Subramonian for Respondent.

JUDGMENT

The facts giving rise to this application are as under:

The authorised share capital of the company is Rs. 5 lakhs divided into 50 shares of Rs. 10,000 each. Each share has paid-up value of Rs. 8,000. The total paid-up capital is (8,000 × 50) = 40,000.

Although the notices of the meeting were served on the members, the directors were not served with notices of the resolutions proposed to be moved at the meeting.

The requisition of the extraordinary general meeting and the resolutions passed therein have been challenged on various grounds. I will deal with them in the following paragraphs.

In this case, the requisitionists who hold the qualifying paid-up share capital have consented to the calling of the meeting to consider each of the two matters.

[1992] 73 COMP. CAS. 275 (KER)

HIGH COURT of KERALA

Sree Rama Vilas Press & Publications (P.) Ltd., In re

K. JOHN MATHEW J.

Application No. 253 of 1990 in C.P. No. 28 of 1984

JULY 10, 1991

M. Ramanatha Pillai for the applicant.

N. Raghava Kurup and K. Moni for the Respondent.

A.T. James Commissioner.

JUDGMENT

K. John Mathew J.—This is an application for declaring that the election of directors and managing director of Sreerama Vilas Press and Publications (P.) Ltd. (hereinafter referred to as "the company") held on March 10, 1990, is illegal, void and inoperative. The applicant is a shareholder of the company. The company was ordered to be wound up by order dated November 4, 1976. Subsequently, by an order dated March 19,1985, this court approved a scheme for the revival of the company. As per the said order, the board of directors as on the date of the winding up petition was revived. Subsequent to that order, a general body meeting of the company was held on April 19, 1985, in which a new board of directors was elected. Subsequently, another general body meeting of the company was held on February 25, 1986, in which meeting a resolution was passed removing one of the directors, N. Madhavan Nair, who was the managing director of the company. Thereupon, he filed Application No. 63 of 1986 before this court on February 25, 1986, for a declaration that the resolution removing him was invalid. He also filed another petition for stay of operation of the said resolution, as Application No. 64 of 1986. An order of interim stay was passed on March 3, 1986.

By the time those petitions came up for hearing, the period of appointment of the managing director and board of directors of the company had expired. Therefore, this court, without going into the merits of those applications, directed a fresh election to the post of managing director and members of the board of directors. This court appointed advocate Shri V.A. Mohammed as the chairman to convene a general body meeting of the company for the purpose of conducting the elections. The court-appointed chairman convened a meeting on June 30,1986, in which the said N. Madhavan Nair was again elected as the managing director.

Meanwhile, a misfeasance application was filed as Application No. 59 of 1986 against the said N. Madhavan Nair. By order dated January 13, 1989, this court directed him to pay to the company a total amount of Rs. 44,550. Against that order, an appeal, M.F.A. No. 174 of 1989, and a cross-appeal are pending.

After the meeting convened by the court appointed chairman, Shri V.A. Mohammed, in which the said Madhavan Nair was elected for a second time as managing director, only one meeting of the board of directors was held. The last date for convening the next meeting was January 29, 1988. Two of the shareholders of the company sent a requisition to the board of directors under section 169 of the Companies Act, on December 31, 1988, requesting to convene an extraordinary general body meeting of the company. However, the managing director did not convene any meeting. Another director of the company filed a suit as O.S. No. 394 of 1989 praying for an injunction restraining the requisitionists from holding an extraordinary general body meeting. Although an interim order of injunction was passed by the Munsiff Court, that order was stayed by the district judge in C.M.A. No. 22 of 1989. That order was again challenged before this court in C.R.P. No. 861 of 1989.

The extraordinary general body meeting convened as per the requisition elected 5 directors. They authorised two of the directors to look after the day-to-day administration and management of the company. A report to that effect was filed in the company court on April 6, 1989. An application was also moved before this court to allow the newly elected board of directors to function.

When these matters came up for hearing, this court suggested that the disputes can be settled by convening a general body meeting so that further steps for revival of the company can be speeded up. One of the directors, R. Narayanan Nair, agreed that, for the time being, he will meet the expenses of the meeting. Thereafter, this court, as per order dated October 30, 1989, appointed Sri A.T. James, an advocate of this court as Chairman/Commissioner to convene a general body meeting of the company for the purpose of electing a managing director and members of the board of directors. By another order dated January 24, 1990, this court ordered that the general body meeting may be held at Hotel Shaw International at Kollam on March 10, 1990, and fixed the number of directors to be elected as four. When notices of the meeting were issued, the former managing director submitted an application as Application No. 187 of 1990 to stop the convening of the meeting. That application was dismissed by this court.

The meeting was held on March 10, 1990. Out of the shareholders of the company, six were present in person and three by proxy at the general body meeting. Those nine members together held 2,630 shares out of 4,689 shares held by the present total number of members, viz., 15. Originally, there were 17 members of whom two persons died. But those shares are not assigned to any member. In the meeting, the managing director and other directors were elected. A report to that effect was filed in court on March 22, 1990, by the court-appointed chairman. On this application, this court directed the impleadment of the newly elected directors. Another application was filed as Application No. 254 of 1990 for an order of stay of further proceedings pursuant to the election, till the disposal of Application No. 253 of 1990. That was dismissed by this court. The appeal filed against the order as M.F.A. No. 322 of 1990 was dismissed on June 18, 1990, with certain directions.

In Application No. 253 of 1990, five grounds are raised, viz., (1) the explanatory statement as contemplated under section 173(2) of the Companies Act was not annexed to the notice convening the meeting, (2) along with the notice, the names of the candidates for election were not furnished, (3) since individual notices to the members of the company regarding the candidature of a person were not sent, section 257(1A) of the Companies Act is violated, (4) this court has no jurisdiction to convene an extraordinary general body meeting, and (5) the petitioner reliably understood that the meeting was not held as notified in the notice.

Thus, the points to be decided are : (1) Whether the election of the directors is liable to be set aside since no proper explanatory statement was annexed to the notice ? (2) Whether the election is liable to be set aside on the ground that the names of the candidates were not furnished along with the notice? (3) Is the meeting liable to be held invalid since the provisions of section 2 5 7(1A) of the Companies Act were violated ? (4) Has the court jurisdiction to convene an extraordinary general body meeting of the company ? (5) Is the contention that the meeting was not held as notified true ?

Point No. 1 : According to the petitioner, the notice was not proper since no explanatory statement was annexed to the notice as required under section 173(2) of the Companies Act. It is well-settled that if an explanatory statement was liable to be annexed to the notice and it was not annexed, the meeting will be a nullity (see Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377, 435.

The chairman appointed by this court filed report No. 1 dated November 10, 1989, seeking certain directions. By order dated November 15, 1989, this court directed that the meeting was to be held at Hotel Shaw International, Quilon, on Saturday January 13, 1990, at 1 p. m. Among other directions, there was a direction to the then managing director to furnish a list of members, articles of association and other necessary records to the chairman in order that he may issue proper notices to all the shareholders. When the chairman issued notice of the meeting to be held on March 10,1990, the former managing director, N. Madhavan Nair, filed Application No. 187 of 1990 to stop the convening of the meeting on March 10, 1990. In the affidavit in support of that application, it was contended that the notice was violative of the provisions of sections 171, 173 and 257(1A) of the Companies Act. This court, by order dated March 8, 1990, held that, in view of clause 8 of the articles of the company, sections 171 and 173 will not apply in this case. The other objections were also overruled. This court also held that there was no infir mity in the notice issued by the chairman and the application was dismissed. The appeal in M.F.A. No. 333 of 1990 against the order in Application No. 187 of 1990 was dismissed by a Division Bench of this court observing that "it will be open to the appellant to urge various contentions including the contention regarding the order in Company Application No. 187 of 1990 in the course of trial of the main Application No. 253 of 1990". It may be observed that he has not, thereafter, challenged the validity of the notice. He was not impleaded as a respondent in this application (Application No. 253 of 1990).

Even so, the contention raised by the applicant in Application No. 253 of 1990 may be examined. According to the applicant, the notice was bad for not annexing a proper explanatory statement. The notice is as follows :

"Notice of general body meeting for the purpose of conducting elec tion to the board of directors and the managing director of Sree Rama Vilasam Press and Publications (P.) Ltd., with its Registered Office, Main Road, Quilon-1, issued by Advocate Commissioner, A.T. James.

The Honourable High Court of Kerala, as per its order dated October 30, 1989, in C.P. No. 28 of 1984, has directed me to hold a general body meeting for the purpose of conducting an election to the board of directors and the managing director of Sree Rama Vilasam Press and Publications P. Ltd., Quilon. I am appointed as the chairman of the said meeting. The Honourable High Court, by its order dated November 15, 1989, in commission report No. 1 in C.P. No. 28 of 1984, further directed that the meeting is to be held for the above said purpose at Hotel Shaw International, Quilon, on Saturday January 13, 1990, at 1 p.m.

You, as a shareholder of the company, are hereby notified that the meeting of the shareholders of the company, Sree Rama Vilasam Press and Publications P. Ltd., will be held at Hotel Shaw International, Quilon, on Sat urday January 13, 1990, at 1 p.m. for the said purpose. You are also requested to bring the necessary documents to prove your shareholding in the company for verification.

A.T. James (Advocate commissioner Chairman)

Neethi Nikethan Warriam Road

Cochin-16".

Clause 8 of the articles of association is as follows :

"Proceedings at general meetings :—

8. Fourteen days' notice at least, specifying the place, the day and the hour of the general meeting and, in case of special business, the general nature of such business, shall be given to the members in the manner herein after mentioned or in such other manner as may be prescribed by the company in general meeting, but accidental omission to give such notice to, or non-receipt of such notice by, any member shall not invalidate the proceedings of the general meeting. A general meeting may, with the consent of all the members, be called on a shorter notice and, in such manner as the members think fit".

The company is a private limited company. It is not a subsidiary of a public company. Under sub-section 1(ii) of section 170 of the Companies Act, the provisions of sections 171 to 186 shall, unless otherwise specified therein or unless the articles of the company otherwise provide, apply with respect to general meetings of a private company which is not a subsidiary of a public company. Article 8 of the articles provides for the period of notice required as well as the matters to be specified in the notice. It is also provided in article 8 that, in case of special business, "the general nature of such business shall be given to the members in the manner hereinafter mentioned, or in such other manner as may be prescribed by the company in general meeting". Therefore, there is a specific provision in that article regarding the notice of a general meeting where a special business is to be transacted. Since there is such a provision, section 173, among other sections mentioned in section 170, will not apply to this company. Moreover, the notice contains all material facts concerning the business that was to be transacted in the meeting, viz., election of managing director and other directors. The order to convene the meeting was passed after hearing all parties and the notice itself was approved by this court. The meeting was convened by the chairman appointed by this court and not by the company. Section 173 of the Companies Act is enacted for the protection of the shareholders so that the shareholders may not be duped by the management. In Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548, 636 ; AIR 1986 SC 1370, at page 1423, para 100, the Supreme Court held that the Life Insurance Corporation of India which was only a shareholder was not bound to disclose its reasons for moving the resolutions and that the duty was only on the management to disclose those facts.

The Calcutta High Court in Sitaram Jaipuria v. Banwarilal Jaipuria [1972] AIR 1972 Cal 105, held that provisions like section 173(2) should not be construed in a rigid manner and that the interpretation should not be made so as to hamper the conduct of business. It was also held that the notice must be understood in a commonsense business way and so long as that standard was satisfied, the court should not be astute to find legal and technical points to defeat the notice and the explanatory statement.

Points Nos. 2 and 3. - Names of the candidates not furnished along with the notice : No provision either in the Companies Act or in the articles of the company was brought to my notice requiring a candidate who proposes to stand for election as a director to intimate the company about it before the holding of the meeting. There is also no provision requiring the company to intimate the names of the candidates to the shareholders. In para 25 of the counter-affidavit filed by the third respondent, it is stated that all the 15 shareholders of the company belonged to the same family and are known to each other.

Learned counsel for the applicant submitted that, under section 257(1A), the company was bound to inform its members of the names of the persons who propose to stand for the election to the Board. Section 257 of the Companies Act is as follows :

"257. Right of persons other than retiring directors to stand for director ship.—(1) A person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, not less than fourteen days before the meeting, left at the office of the company a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office, as the case may be.

(1A)The company shall inform its members of the candidature of a person for the office of director or the intention of a member to propose such person as a candidate for that office, by serving individual notices on the members not less than seven days before the meeting :

Provided that it shall not be necessary for the company to serve individual notices upon the members as aforesaid if the company advertises such candidature or intention not less than seven days before the meeting in at least two newspapers circulating in the place where the registered office of the company is located, of which one is published in the English language and the other in the regional language of that place.

(2) Sub-section (1) shall not apply to a private company unless it is a subsidiary of a public company".

Sub-section (1A) refers to the "company". That can only mean the company mentioned in sub-section (1). Sub-section (1) shall not apply to a private company unless it is a subsidiary of a public company. Sub-section (1A) was incorporated in the Companies Act by Amendment Act 65 of 1960. That sub-section applies only to "the company" mentioned in sub-section (1). Thus, sub-section (1A) is really a proviso to sub-section (1) of section 257. It has no independent existence. Therefore, the provision in sub-section (2) to the effect that sub-section (1) shall not apply to a private company applies to both sub sections (1) and (1A). (See also the observation made in the Companies Act by A. Ramaiya, 11th edition, page 783 to the effect that sub-section (1A) has to be read as a continuation of sub-section (1)). Thus, there is no merit in this contention also.

Point No. 4.—According to learned counsel for the applicant, the court has no jurisdiction to convene an extraordinary general meeting of a com pany. Such a contention is raised on the basis of section 186 of the Companies Act. Section 186 as it originally stood empowered the court to order a meeting to be called. By section 14 of Act 41 of 1974, the word "court" was substituted by the words "Company Law Board" with effect from February 1, 1975. It is highly doubtful whether the power of the court to exercise control over any extraordinary general meeting of a company in respect of which a proceeding is pending in the court is taken away by this amendment. The High Court of Delhi in Dinekar Rai D. Desai v. R.P. Bhasin [1986] 60 Comp Cas 14, held that the court had such power. I am in respectful agreement with this view. In this case, the court is supervising a scheme approved by this court by order dated March 19, 1985, for the revival of the company. In any view of the case, the power of a court supervising a scheme sanctioned under section 392(1) to call a general meeting of the company is not taken away by section 186 of the Companies Act (see Indian Hardware Industries Ltd. v. S.K. Gupta [1981] 51 Comp Cas 51). Under section 392, the court has power to supervise the carrying out of the revival scheme. Therefore, in the course of implementation of the scheme, if the court is of the view that an extraordinary general meeting of the company is to be held in order to elect a new board of directors, the court has the power to do so. That power under section 392 is not in any way affected or circumscribed by section 186 of the Companies Act. In this case, on an earlier occasion, an extraordinary general meeting of the company was held on June 30, 1986, as ordered by this court under the chairmanship of an advocate-chairman appointed by this court. As stated above, in the general body meeting of the company held on February 25, 1986, a resolution was passed removing the managing director of the company, N. Madhavan Nair. He filed Application No. 63 of 1986 for a declaration that the resolution removing him was invalid. By the time that petition came up for hearing, his term had expired. Therefore, this court, without going into the merits of that application, directed a fresh election by holding a general body meeting under the chairmanship of a court-appointed chairman. It was under those circum stances that the meeting of June 30, 1986, of the company was held. There was a Misfeasance Application No. 59 of 1986 against the managing director, N. Madhavan Nair. On December 31, 1988, two of the shareholders of the company sent a requisition to the board of directors under section 169 of the Companies Act requesting it to convene an extraordinary general body meeting. The managing director did not convene any such meeting. One of the directors filed a suit, O.S. No. 394 of 1989, for an injunction to restrain the requisitionist's from holding such a meeting. Even though an order of interim injunction was granted by the trial court, that was stayed in appeal and the extraordinary general body meeting was held in which five directors were elected. An application was also moved before this court to allow the newly elected board of directors to function. When all these matters came up before this court, the court suggested that the disputes can be settled by convening another general body meeting so that further steps for revival of the company can be speeded up. It was under those circumstances that this court passed an order dated December 30,1989, appointing an advocate-chairman to convene a general body meeting of the company for the purpose of electing a managing director and members of the board of directors. From this, it is quite clear that this court was exercising its power under section 392 of the Companies Act to enforce the revival scheme. The court had jurisdiction to convene the meeting.

Point No. 5.—The contention that the meeting was not held as notified is without any merit. In fact, such a contention was not urged at the time of arguments. The records show that the meeting was actually held as notified.

It may also be observed that the newly elected board of directors have taken charge as per the directions of this court. Learned counsel for the additional third respondent has raised several other grounds also in the counter-affidavit filed in this application. I do not think that it is necessary to go into the other contentions, although they had been also urged before this court at the time of arguments.

There is no merit in this application. It is, accordingly, dismissed.

[1995] 82 COMP. CAS. 5 (BOM.)

Shailesh Harilal Shah

Matushree Textiles Ltd.

M. L. PENDSE AND A. A. CAZI, JJ.

Appeal Nos. 1001, 1002 and 1082 of 1991

APRIL 19, 20, 1993

M. L. PENDSE, J. - Matushree Textiles Limited is a public limited company incorporated under the Companies Act, 1956 (hereinafter referred to as “the Act”), and the authorised share capital of the company is Rs. 1,50,00,000 only divided into 15,00,000 equity shares of face value of Rs. 10 each. The subscribed capital is Rs. 89,00,000 divided into 8.90 lakhs shares. The shares of the company are listed on the Bombay Stock Exchange and at the relevant time, the value quoted was Rs. 40 per share. The seventh annual general meeting of the company was held on September 30, 1989, for the year ending March 31, 1989, and, consequently, the eighth annual general meeting was statutorily required to be held as per section 166 of the Act latest by December 31, 1990. The meeting was not convened by the company within the stipulated time. The eighth annual general meeting for the year ending March 31, 1990, was convened on September 30, 1991, by notice under September 2, 1991. The notice to the shareholders was sent by post on September 7, 1991, and under section 53(2)(b)(i) the Act, the notice is deemed to have been effected at the expiration of forth-eight hours after the letter is posted and accordingly, the notice is deemed to have been served on September 9, 1991.

The plaintiffs instituted Suit No. 3002 of 1991 on September 21, 1991, for a declaration that defendants Nos. 1 to 4 are not entitled to convene the eighth annual general meeting on September 30, 1991, or any other date as calling of the said meeting is ultra vires and null and void. The plaintiffs sought a declaration that notice dated September 2, 1991, convening the annual general meeting is ultra vires, invalid and illegal. The plaintiffs sought a perpetual injunction restraining the defendants from holding and/or proceeding with the annual general meeting and from in any manner giving effect or acting upon in furtherance of implementation of the resolutions to be passed at the meeting. The plaintiffs are holders of 3110 equity shares and their holding is 0.3 per cent. of the total equity subscribed. Defendant No. 1 is the company, while defendants Nos. 2 to 4 are the directors. The notice of the eighth annual general meeting sets out that the following subjects will be transacted at the meeting :

1. To receive and adopt the audited profit and loss account and the balance-sheet together with reports of directors and auditors thereon;

2. To appoint a director in place of Mr. Vimal Kumar Poddar who retires by rotation and is eligible for reappointment;

3. To appoint auditors and to authorise the board to fix their remuneration;

4. To pass an ordinary resolution appointing Mr. Santosh Kumar Poddar as a director, and

5. To pass in ordinary resolution appointing Rajnikant Mehta as director.

The plaintiffs complained that the eighth annual general meeting convened on September 30, 1991, was proposed to be held beyond the statutory period contemplated under section 166 of the Act and, therefore, the company is not entitled to call the meeting unless appropriate orders are obtained from the appropriate forum seeking extension of time. The plaintiffs further claimed that notice dated September 2, 1991, and which was deemed to have been served on September 9, 1991, for convening the meeting on September 30, 1991, does not comply with the requirement of section 171 of the Act as the duration of notice is less than 21 clear days. The plaintiffs further claimed that defendant No. 2, Santoshkumar Poddar, ceased to be a director of the company as from January 1, 1991, and his appointment as additional director pursuant to the resolution of the board of directors was bad in law. The plaintiffs claimed that on retirement of defendant No. 2, the board was not properly constituted as the minimum number of directors required is three in number. The plaintiffs further claimed that the quorum required was two and defendants Nos. 2 and 3 being real brothers and closely related, it was not open for defendant No. 3 to participate in the meeting for appointment of defendant No. 2. The plaintiffs claimed that the resolution appointing defendant No. 2 as additional director was vitiated as there was no quorum required by the Act. The plaintiffs further claimed that if the appointment of defendant No. 2 was illegal and bad, the notice convening the annual general meeting signed by defendant No. 2 is bad in law and inoperative. The plaintiffs further claimed that the company had deliberately circulated an abridged balance-sheet so as to cover up the acts of misconduct, misfeasance and malfeasance indulged in by defendants Nos. 2 to 4. The plaintiffs claimed that a perusal of the auditor’s report and notes on accounts makes it very clear that the substratum of defendant No. 1 has disappeared and defendants Nos. 2 to 4 are mismanaging the company.

The plaintiffs instituted Suit No. 3003 of 1991 in respect of the ninth annual general meeting for the year ending March 31, 1991, convened on September 30, 1991, by notice dated September 2, 1991. The notices were issued by the company to convene both the eighth and ninth annual general meetings on the same date and both the meetings were also to be held on the same date, i.e., September 30, 1991. Suit No. 3003 of 1991 challenges the right of the company to hold the ninth annual general meeting for identical reasons as set out in companion Suit No. 3002 of 1991. The notice for convening the ninth annual general meeting sets out the following agenda :

1. To receive and adopt the audited profit and loss account for the year ended March 31, 1991;

2. To declare a dividend;

3. To appoint a director in the place of Mr. Rajnikant Mehta, who retires by rotation and being eligible offers himself for reappointment;

4. To appoint auditors and authorise the board to fix their remuneration;

5. To consider whether the authorised share capital of the company be increased from Rs. 1,50,00,000 to Rs. 2,00,00,000 divided into 20,00,000 shares of Rs. 10 each;

6. To issue 8,90,000 rights shares at the face value of Rs. 10 to the existing shareholders, and

7. To authorise the board of directors to make loans to any body corporate from time to time and on such terms and conditions as the directors may deem fit, provided that the aggregate of the loans outstanding at any one time made to the company shall not exceed 30 per cent. of the aggregate of the subscribed share capital of the company.

Suit No. 3139 of 1991 was instituted on September 30, 1991, by Arunkumar Poddar and Rajkumar Bajaj and to whom the plaintiffs in other two suits are closely related and/or are friends. Arunkumar Poddar is the real brother of defendants Nos. 2 and 3, Santoshkumar and Vimalkumar Poddar, respectively. Arunkumar Poddar and Rajkumar Bajaj claimed that initially, they were directors of the company but defendants Nos. 2 to 4 illegally claimed that they had ceased to be directors by virtue of section 283(1)(g) of the Act by operation of law. It was claimed that the contention of defendants Nos. 2 to 4 that Arunkumar Poddar and Rajkumar Bajaj failed to attend the meetings and, therefore, ceased to be directors is not correct. Arunkumar Poddar and Rajkumar Bajaj, apart from seeking a declaration that they continue to be the directors of the company and all meetings of the board of directors held without their presence were illegal and invalid and resolutions non est, sought relief in respect of the eighth and ninth annual general meetings convened on September 30, 1991. The relief in respect of these two meetings was based on the same averments which were made in the two companion suits. It hardly requires to be stated that the dispute between Arunkumar Poddar and his two brothers had led to the institution of the three suits. It is required to be stated at this juncture that at one stage, the dispute between the three brothers was referred to a spiritual leader in whom the brothers had confidence but the decision of the spiritual leader was not accepted by Arunkumar Poddar and the parties decided to fight out the litigation in court.

Two notices of motion being Notice of Motion No. 2131 of 1991 and Notice of Motion No. 2132 of 1991 were taken out by the plaintiffs in Suits Nos. 3002 and 3003 of 1991, respectively, seeking interim relief restraining the company from holding and/or proceeding with the eighth and ninth annual general meetings convened on September 30, 1991. The plaintiffs also sought relief restraining the defendants from implementation of the resolution and business proposed to be transacted at the said annual general meetings. Notice of Motion No. 2158 of 1991 was taken out by Arunkumar Poddar in Suit No. 3139 of 1991 for identical reliefs. The plaintiffs applied for grant of ad interim relief pending of the disposal of the notice of motion, but the learned Trial Judge declined to grant any ad interim relief. The plaintiffs thereupon preferred appeals before the Division Bench of this court and the Division Bench granted ad interim relief only in respect of the prayer restraining the defendants from implementing the resolutions to be passed at the two annual general meetings. As the court declined to restrain the defendants from holding and proceeding with the two annual general meetings, it is not in dispute that the meetings were held on September 30, 1991. Though Arunkumar had lodged proxies prior to the date of the meetings, neither Arunkumar Poddar, nor any of the plaintiffs in the three suits attended the meetings. The resolutions proposed in the meetings were passed unanimously.

The notices of motion were taken up for hearing by the learned single judge after the date of the two meetings and the question which survived for consideration was whether the company should be restrained from implementing the resolutions which were passed. The resolutions providing for increase of share capital and issuance of rights shares and distribution of dividend could not be implemented because of grant of ad interim order. The defendants resisted the relief sought by the plaintiffs in respect of implementation of the resolutions by urging that the contentions urged by the plaintiffs in respect of the validity of the notice convening the two annual general meetings cannot be sustained. The defendants pointed out that though the statutory period contemplated by section 166 of the Companies Act for convening the annual general meeting had expired, still there is no prohibition under the Act to convene the meeting and the company at the most would be liable to a penalty for convening a meeting beyond the statutory period. The company did not seriously dispute that notice under section 171 of the Act was not of 21 clear days but of 20 days only, but urged that the provisions of section 171 of the Act are not mandatory but merely directory and the business transacted at the two meeting should not be struck down unless the plaintiffs establish any prejudice. The defendants pointed out that the plaintiffs have not even pleaded prejudice due to the shorter duration of the notice. The defendants also pointed out that the appointment of defendant No. 2 as additional director could not be invalidated and there is ample power under the Act for the existing members of the board to make the appointment. The contention of the plaintiffs that quorum was not available and, therefore, the appointment of defendant No. 2 is invalid was controverted and it was asserted that even though defendant No. 3 was related to defendant No. 2, there was no prohibition for defendant No. 3 to vote at the meting because the appointment of defendant No. 2 as additional director did not amount to contract or any other arrangement as prescribed by section 300 of the Act. The trial judge, by order dated October 15, 1991, found prima facie merit in the contentions urged to behalf of the defendants and held that the convening of the two annual general meetings did not suffer from any defect and it was not necessary to prevent the company from implementing the resolutions which were unanimously passed at the two annual general meetings. As a result of this finding, the trial judge dismissed the two motions. The third motion taken out by Arunkumar Poddar also ended in dismissal by a separate order dated October 15, 1991. It is required to be stated that in the notice of motion taking out by Arunkumar Poddar only two grounds were urged; one being that the dividend was declared in contravention of provisions of section 205 of the Act, and the second that the directors’ report does not set out the true, fair and correct picture of the company and window dressing is attempted to make a show that the company is making profits, while, in fact, the company is a sick unit. The trial judge did not find favour with the contentions of the plaintiffs.

Appeals Nos. 1001 and 1002 of 1991 are filed by the plaintiffs in Suits Nos. 3003 and 3002 of 1991, respectively, while Appeal No. 1082 of 1991 is filed by Arunkumar Poddar from order passed on Notice of Motion No. 3139 of 1991.

After the appeals were argued for some time, counsel realised that though the appeals are against orders declining to grant interim relief pending the suit, the decision would affect the result of the suit. Counsel thereupon informed that the parties do not wish to lead any evidence in Suits Nos. 3002 and 3003 of 1991 and requested that the decision in the appeals should be treated as binding on the parties as decisions in the suit and the suit should be disposed of accordingly. In Appeal No. 1082 of 1991 counsel stated that the decision in the other two appeals would be conclusive as between the parties in respect of the challenge to the holding of the eighth and ninth annual general meetings and Suit No. 3139 of 1991, will proceed in respect of the other reliefs sought by Arunkumar Poddar. We called upon the parties to file statements in writing duly signed by the parties and accordingly, the parties have filed the statements. The statements in Appeals Nos. 1001 and 1002 of 1991 are taken on record and marked as ‘X’ in the appeals, while the statement in Appeal No. 1082 of 1991 is taken on record and marked ‘X-1’. It is obvious that the parties adopted this course as the contentions raised in the plaint and on the strength of which interim relief was sought, were argued at length and the decision, one way or the other would conclude the parties at the trial and which trial is unlikely to be held within a short time. In accordance with the desire of the parties, we have heard the appeals and the decision would dispose of two suits being Suits Nos. 3002 and 3003 of 1991 while the decision would be conclusive as between the parties in the third suit, viz., Suit No. 3139 of 1991.

Shri Kapadia, learned counsel for the plaintiffs in the two suits and Shri Thakkar, learned counsel appearing for the plaintiffs in the suit instituted by Arunkumar Poddar and Rajkumar Bajaj, raised four or five contentions to urge that the eighth and ninth annual general meetings held by the company were illegal and contrary to law. The first contention urged by learned counsel is that the notice signed by defendant No. 2 as chairman and convening the meeting was illegal as the appointment of defendant No. 2, Santoshkumar, was illegal and consequently, the notice convening the meeting was not valid. It was contended that defendant No. 2 had vacated the office as director on December 31, 1990, in accordance with section 255 of the Act. The section, inter alia, provides that the directors shall retire by rotation unless the articles provide for the retirement of all directors at every annual general meeting. The meeting of the board of directors was held on January 1, 1991, and the minutes of the meetings disclose that defendants Nos. 2 to 4 were present. The fact that Santoshkumar retires on December 31, 1990, by rotation was noticed and the minutes establish that defendant No. 3 who is the real brother of Santoshkumar requested the board that Santoshkumar be appointed as an additional director for reasons set out in the minutes. The resolution appointing Santoshkumar Poddar, defendant No. 2, as additional director was passed unanimously by the two remaining directors being defendants Nos. 3 and 4. Shri Kapadia submitted that defendant No. 2 could not have been appointed as additional director at a meeting in which defendant No. 3 was present and voted because defendant No. 3 was interested in the resolution for appointment of defendant No. 2 and, therefore, was not entitled to participate in accordance with the provisions of section 300 of the Act. It was also contended that if defendant No. 3 is excluded from the meeting in respect of the resolution of appointment of defendant No. 2 as additional director, then the meeting could not have been held for want of quorum. Shri Kapadia further submitted that once defendant No. 2 retired by rotation, then the remaining two directors could not be considered as constituting a valid board of directors, the minimum number to constitute the board being three in accordance with section 252(1) of the Act. It was urged that the meeting held was invalid and the balance-sheets and notices signed by defendant No. 2 were contrary to law and, consequently, the two annual general meetings were not properly convened. Shri Cooper, learned counsel appearing on behalf of the defendants, controverted the submissions by claiming that the challenge to the appointment of defendant No. 2 as additional director is without any merit because the participation of defendant No. 3 was not in contravention of the provisions of section 300 of the Act. It was urged that the appointment of defendant No. 2 as additional director is neither a contract nor an arrangement entered into by or on behalf of the company. Shri Cooper further submitted that the contention that the board was not properly constituted is not correct but even otherwise, it amounts only to an irregularity and the notice convening the annual general meetings or the resolutions passed in those meetings cannot be invalidated in view of the provisions of section 290 of the Act and regulation 85 of Table ‘A’ of Schedule I to the Act. Shri Cooper further submitted that the challenge to the appointment of defendant No. 2 as additional director cannot be entertained at the behest of the plaintiffs and it is only the company who may be able to challenge it in an action instituted by the shareholders on behalf of the company. The suits instituted by individual shareholders cannot nullify the resolutions passed at annual general meetings and the plaintiffs cannot be permitted to defeat the rights of the shareholders for their own grievances against the board of directors.

Section 252 of the Act, inter alia, provides that every public company shall have at least three directors and section 287(2) of the Act sets out that the quorum for a meeting of the board of directors shall be one-third of the total strength or two directors, whichever is higher. Section 300(1) prescribes that no director of a company shall as a director take any part in the discussion of, or vote on, any contract or arrangement entered into by and on behalf of the company if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement. Sub-section (4) of section 300 provides that every director who knowingly contravenes the provisions of sub-section shall be punishable with fine which may extend to five thousand rupees. Shri Kapadia submitted that a director of the company is an agent and consequently, the appointment of the director amounts to a contract, the contract being between the principal and the agent. In support of the submission, reliance is placed on the decision in R. K. Dalmia v. Delhi Administration [1962] 32 Comp. Cas. 699/AIR 1962 SC 1821. In the case before the Supreme Court, Dalmia and another were prosecuted for an offence under section 409 of the Indian Penal Code and it was contended on behalf of the accused that they were not entrusted with dominion over the funds. While examining the contention, the Supreme Court referred to passages from Palmer’s Company Law and observed that directors are not only agents but they are in some sense and to some extent trustees and consequently, the accused were entrusted with dominion over the funds. Reference was also made to the decision of this court in Firestone Tyre and Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom) where it was held, while examining the provisions of section 300(1) of the Act, that it is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity and actual conflict is also not necessary and the possibility of conflict is enough. It was further held that the interest or concern need not be direct, but may be indirect as the object intended to be attained by the enactment is to prevent the conflict between interest and duty which might otherwise inevitably arise. Shri Kapadia submitted that even assuming that the appointment of an additional director does not amount to a contract, still there is no escape from the conclusion that it amounts to an arrangement and referred to the decision of the Madras High Court in Hari Kishon Somani [1985] 1 Comp LJ 195. The learned single judge of the Madras High Court referred to the decision in Foster v. Foster [1916] 1 Ch 532 and held that mere appointment as the director on the board does not amount to a contract between the company and the person to be appointed. It was held that the additional director is appointed in exercise of the powers reserved with the board in that behalf in the company’s articles and consequently, the appointment would not make it a contract. The learned single judge then proceeded to examine as to whether the appointment to an arrangement and explained the earlier decision of the Madras High Court in Public Prosecutor v. T. P. Khaitan [1957] 27 Comp. Cas. 77, where Justice Rajagopala Ayyangar, as he then was, held that any interest in an arrangement within the meaning of the section, although elastic in expression, must, in the context, receive the interpretation that it must be of such a nature as to involve a conflict between interest and duty of the same type as would arise in the case of a personal pecuniary interest in the contracts of the company. The learned single judge felt that the arrangement cannot be equated with the contract and the arrangement denotes all kinds of legal relationship which are not covered by a contractual relationship and all kinds of concern or interest arising out of such an arrangement. Shri Kapadia relying upon the observations of the learned judge submitted that the appointment of additional director should be treated as an arrangement falling under section 300 of the Act and, consequently, defendant No. 3, who is the real brother of defendant No. 2, had interest in the appointment of defendant No. 2 and was, therefore, not entitled to discuss or vote on the resolution. It is not possible to accede to the submission of learned counsel. It is undoubtedly true as held by the Supreme Court that the director is an agent of the company but the assumption of the plaintiffs that the relationship of principal and agent can be created only by contract is not accurate. The relationship can be created by operation of law and in such cases, the relationship cannot to be treated as a contract. The director is treated as an agent or a trustee by operation of law and not because the company or shareholders have entered into contractual relationship with the person purposed to be appointed as a director. We are in agreement with the view expressed by the learned single judge of the Madras High Court that the appointment of additional director does not amount to a contract as contemplated by section 300(1) of the Act. It is also not possible to accede to the submission of Shri Kapadia that in any event the appointment of a director amounts to an arrangement under section 300(1). The observation of Justice Rajagopala Ayyangar that the arrangement within the meaning of section must receive the inter-relation that it must be of such a nature as would arise in the case of personal pecuniary nature in the context of the company is accurate and the expression ‘arrangement’ must bear the meaning of it as in sections 209 and 301 of other Act. Section 301 demands that every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements and the particulars to be entered are the date of the contract or arrangement, the names of the parties thereto, the principal terms and conditions thereof, etc. It is impossible to accept that the appointment of the director amounts to an arrangement and it is required to be entered in the register maintained by the company under section 301 of the Act. Shri Cooper pointed out that none of the companies have entered such appointments in the register maintained under section 301 of the Act because the arrangement contemplated under section 300 though directly not a contract must take the colour from the context of contractual relationship contemplated under the section. The arrangement is something skin to a contract though not strictly a contract as contemplated by the Contract Act. There is one more aspect, which cannot be overlooked. What section 300(1) prescribes is a contractual arrangement entered into “by or on behalf of the company” and it is impossible to suggest that appointment of an additional director is by and on behalf of the company. The section postulates that the contract or arrangement is by the company or on behalf of the company and that means that the company is one of the contracting parties or parties to the arrangement. The company is not a party for making an appointment of a person as director; nor is the appointment on behalf of the company. To accept the submission that the appointment of an additional director amounts to a contract or arrangement, it would be necessary to conclude that such a contract or arrangement is by or on behalf of the company, and it is not possible to do so. In our judgment, the contention that defendant No. 3 could not have participated in the discussion or vote on the resolution to appoint defendant No. 2 as additional director in view of the prohibition of section 300(1), therefore, cannot be accepted.

Shri Cooper, in this connection, submitted that in spite of the fact that defendant No. 3 was a relation of defendant No. 2 and even assuming that the appointment of defendant No. 2 as an additional director amounts to a contract or arrangement, still the participation of defendant No. 3 in the appointment can at the most be treated as an irregularity. It was urged that such an irregularity cannot be questioned by an individual shareholder but it is permissible only for the company to challenge the action or acts done in pursuance of such an irregularity. In support of the submission, reliance was placed on the decision in Narayandas Shreeram Somani v. Sangli Bank Ltd. [1965] 35 Comp. Cas. 596/AIR 1966 SC 170. The Supreme Court was examining the scope and object of section 91B of the Indian Companies Act, 1913, which, inter alia, provided that a director shall not vote on any contract or arrangement in which he is directly or indirectly interested, unless authorised by the company’s articles. The Supreme Court held that in case such a director casts his vote, the same should not be counted and his presence would not count towards the quorum. It was further held that if an interested director votes and without his vote being counted, there is not quorum, the meeting would be irregular, and the contract sanctioned at such meeting would be voidable by the company against the director and any other contracting party who has notice of the irregularity, The Supreme Court held that the company may, however, waive the irregularity and affirm the transaction. The Supreme Court then observed (headnote of AIR 1966 SC 170) :

“The contract becomes liable to be avoided by the company against the directors and any other contracting party having notice of the irregularity. The object of section 91B is to protect the company; and the company may, it is chooses, waive the irregularity an affirm the contract.”

Shri Cooper submits and in our judgment, with considerable merit, that the participation of defendant No. 3 and casting of the vote to elect defendant No. 2 as an additional director at the most was an irregularity and that cannot vitiate the appointment of defendant No. 2 or his acting as director and signing the balance sheet and notice convening the annual general meeting. The irregularity cannot to be questioned by an individual shareholder as long as the company does not question the appointment of defendant No. 2.

Shri Cooper then submitted that the acts done by defendant No. 2 as a director in signing the balance-sheet and convening the two annual general meetings are valid in spite of the alleged defect in the appointment of defendant No. 2 and relied upon the provisions of section 290 of the Act and regulation 80. Section 290 of the Act, inter alia, provides that acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification by virtue of any provision contained in the Act or in the articles. Regulation 80, inter alia, prescribes that all acts done by any meeting of the board or by any person acting as a director, shall, notwithstanding that it may afterwards by discovered that there was some defect in the appointment be valid as if such director had been duly appointed. Shri Cooper submits that in view of then provisions of section 290 and regulation 80, even assuming that the contention of the plaintiffs in respect of appointment of defendant No. 2 is correct, still the acts done by defendant No. 2 in convening the two annual general meetings are required to be treated as valid. Reliance was placed on the decision in Boschock Proprietary Co. Ltd. v. Fuke [1906] 1 Ch 148. Article 84 of the company in that case was almost in identical terms with regulation 80. There was a challenge to the resolutions passed convening the annual general meeting on the ground that the meeting was convened by de facto directors. The contention was that there was no duly constituted board which could validly convene the annual general meeting of the company, as the meeting was called by persons who were merely de facto directors. It was held that the resolution for calling the meeting was passed at the board meeting; notice of it was duly sent to every shareholder, and one of the objects of the meeting was to confirm the acts therefore done by persons purporting to act as directors, and in these circumstances, any informality in convening the meeting should be treated as a mere irregularity, and not sufficient to invalidate any resolution passed at the annual general meeting. The decision refers to several earlier decisions In Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543/AIR 1968 SC 772, the scope of regulation 94 of Table ‘A’ to the First Schedule to the Indian Companies Act, 1913, and which is similar to regulation 80 of Table ‘A’ of Schedule I to the Companies Act, 1956, came up for consideration and it was decided that in the absence of evidence that the directors were aware of the disqualification that would be incurred by entering into contracts of sale or purchase or supply of goods with the company, the resolution passed by the directors in respect of such contracts cannot be invalidated. In our judgment, even assuming that the resolution appointing defendant No. 2 as additional director amounts to a contract or an arrangement as covered by section 300 of the Act, still the appointment of defendant No. 2, the most, would be irregular due to the participation of defendant No. 3, but the acts done by defendant No. 2 and especially in convening the annual general meeting cannot the struck down at the behest of some shareholders.

Shri Kapadia contended that the meeting held on June 1, 1991, by the directors of the company and at which matting, defendant No. 2, Santoshkumar, was appointed as an additional director was illegal and invalid as the board was not properly constituted. It was urged that section 252 of the Act demands that every public company shall have at least three director and on retirement of defendant No. 2 on December 31, 1990, there was no existing board as defendants Nos. 3 and 4 were the only directors left. In the absence of at least three directors, claims Shri Kapadia, there was no validly constituted board and consequently, the meeting held on January 1, 1991, was invalid and so also the resolution passed by the two directors, i.e., defendants Nos. 3 and 4, to appoint defendant No. 2 as an additional director. Shri Kapadia submitted that the trial judge was in error in referring to the provision of regulation 75 of Table ‘A’ of the First Schedule to the Act. Regulation 755 reads as under :

“The continuing directors may act notwithstanding any vacancy in the board; but, if and so long as their numbers are reduced below the quorum fixed by the Act for a meeting of the board, the continuing directors or director may act for other purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company, but for no other purpose.”

It was contended that regulation 75 comes into the picture when the number of continuing directors are reduced below the quorum and the continuing directors can act for the purpose of increasing the number of directors to that fixed for a quorum or of summoning a general meeting Shri Kapadia submitted that on retirement of defendant No. 2, the continuing director were only defendants Nos. 3 and 4 and to constitute a quorum in accordance with section 252(2), there must be at least two directors, but defendants Nos. 3 and 4 could not constitute a quorum because defendant No. 3 was interested in the appointment of defendant No. 2 as additional director and, therefore, not entitled to participate. It was further submitted that regulation 75 can be attracted provided the continuing directors act for the purpose of increasing the number of directors to constitute a quorum or for summoning an annual general meeting and neither of those purposes was in existence on January 1, 1991, and consequently, the meeting held and at which defendant No. 2 was nominated as additional director was illegal. Shri Cooper controverted the submission by urging that notwithstanding the fact that the strength of the continuing directors has fallen to less than the minimum number prescribed by section 252(1) of the Act, it is open to the continuing directors to co-opt more directors. In support of submission, reliance was placed on the case of Sly, Spink and Co., In re [1911] 2 Ch 430. The provisions of article 88 of the articles of association of the company, in that case, enabled the continuing directors to act notwithstanding any vacancy in their body of the purpose of increasing the number of directors for constituting a quorum or of summoning a general meeting of the company but for no other purpose. The question as to whether article 88 was attracted arose for determination. The article of the company provided that the number of directors should not be less than four. The learned judge found that there were never more than three directors and the three directors carried on the business of the company from its inception. Reliance was placed on article 88 to claim that the three continuing directors could summon the meeting. The contention was not accepted by reliance on two earlier decisions where a clear distinction has been made between cases where directors too few in number could and could not act as continuing directors. It was observed (at page 437) :

“In one case you have a board insufficient in number from the first, and notwithstanding the continuing clause it was held that the board could not transact business. In the other case you have a board which was originally competent to transact business but was diminished by retirement to a number less than that provided for by the articles. The continuing clause was held to apply and those directors were held to be competent to transact the business of the company.”

The decision undoubtedly supports the contention of the defendants that the continuing directors, i.e., defendants Nos. 3 and 4, were entitled to nominate defendant No. 2 as additional director and the board was properly constituted. Reference can be usefully made to the decision in (A.) Ananthalakshmi Ammal v. Indian Trades & Investments Ltd. [1952] 22 Comp. Cas. 324/AIR 1953 Mad 467, where Mr. Justice Venkatarama Aiyar, as he then was, held that the power to co-opt a director might be exercised notwithstanding that the strength of the directorate has fallen below the minimum required and below the quorum prescribed by the articles of association. In that case, the contention was that there was only one director, there was no board of directors as required by article 75 and that, therefore, there could be no valid co-option as the power to co-opt could only be exercised by the board. In answer to the contention, reliance was placed on article 81 which provided that the continuing directors may act notwithstanding any vacancy in their body but only to ensure that number does not fall below the minimum an except in emergencies. The learned judge, after considering a large number of English decisions, referred to the decision in Sly, Spink and Co., In re [1911] 2 Ch 430 with approval. We are in respectful agreement with the view taken by the Division Bench of the Madras High Court. An identical view was taken in Fatech Chand Kad v. Hindsons (Patiala) Ltd. [1957] 27 Comp. Cas. 340 (Pepsu). It is, therefore, not possible to accede to the submission of Shri Kapadia that the board of directors was not properly constituted at the meeting held on January 1, 1991, and the continuing directors could not have nominated defendant No. 2 as an additional director.

Shri Kapadia referred to an unreported decision, delivered by a single judge of this court in Ketan Champaklal Bakshi v. Mrs. Sheela Sidhdharth Bakshi (AFO No. 929 of 1990-15-1-1991). The decision has no application because in that case, the board was never validly constituted at any stage. The learned judge held that the principle that acts done by any person acting as director are valid when the appointment was afterwards found to be defective has no application to a case where there has been total absence of appointment or fraudulent usurpation of authority and referred to the decision in Morris v. Kanssen [1946] 1 All ER 586 (HL). The decision of the House of Lords in Morris v. Kanssen [1946] 1 All ER 536 (HL) has no application to the facts of the present case, as it is not the claim of the plaintiffs that the board of directors was not properly constituted prior to January 1, 1991, In our judgment, the meeting held on January 1, 1991, was legal and valid and the action of defendants Nos. 3 and 4 as continuing directors in nominating defendant No. 2 as additional director does not suffer from any infirmity. The contention of the plaintiffs that the signing of the balance sheet and the notices convening the eighth and ninth annual general meetings of the company by defendant No. 2 was vitiated and, therefore, the resolutions passed at the meetings should be struck down cannot be accepted.

The second contention urged by Shri Kapadia is that the notices dated September 2, 1991, issued under section 171 of the Act of convening the eighth and ninth annual general meetings on September 30, 1991, were not of sufficient duration and, therefore, the resolutions passed at the meetings are illegal and inoperative. It is not in dispute that section 171(1) of the Act provides that the general meeting of the company may be called by not less than 21 day’s notice in writing. Sub-section (2) of section 171 provides that the general meeting may be called after giving shorter notice if consent is accorded thereto by all the members entitled to vote thereat. Sub-section (3) of section 171 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it may be given shall not invalidate the proceedings at the meeting. The two notices convening the two meetings are dated September 2, 1991, but were posted on September 7, 1991, and were received by the plaintiffs on September 12, 1991. In view of the deeming provision under section 52(b)(i) of the Act, the notice is deemed to have been served on the shareholders on September 9, 1991. Shri Kapadia submitted that the notice did not provide for clear 21 days’ period before convening of the annual general meetings on September 30, 1991. Learned counsel urged that although none of the plaintiffs attended the annual general meetings and the resolutions were passed unanimously, the provisions of sub-section (2) enabling the company to give shorter notice is not attracted because consent is not given by all the shareholders entitled to vote and that cannot be construed as only those shareholders who were present at the meeting. Shri Kapadia submitting that the provisions of sub-section (1) of section 171 of the Act are mandatory and non-compliance automatically vitiates the meetings as well meetings as well as the resolutions passed therein. Shri Cooper, on the other hand, submitted that the provisions of section 171(1) of the Act are merely directory in nature an unless and until it is established that the shorter duration of the notice has caused prejudice to substantial number of shareholders, it is not permissible to declare the meeting illegal and strike down the resolutions passed therein. The rule as to whether a particular provision can be regarded as mandatory or directory is set out in a celebrated passage from Maxwell on the Interpretation of Statutes in the following terms (at p. 364 of 11th edition of Maxwell) :

“It has been said that no rule can be laid down for determining whether the command (of his statute) has to be considered as a mere direction or instruction involving no invalidating consequence in its disregard or as imperative with an implied nullification for disobedience, beyond the fundamental one that it depends on the scope and object of the enactment. It may, perhaps, be found generally correct to say that nullification is the natural and usual consequence of disobedience, but the question is in the main governed by consideration of convenience and justices in R. v. Ingall [1876] 2 QB 199 at page 208, per Lush J, and, when that result would involve general inconvenience or injustice to innocent persons or advantage to those guilty of the neglect, without promoting the real aim and object of the enactment, such an intention is not to be attributed to the Legislature. The whole scope and purpose of the statute under consideration must be regarded. The general rule is, that an absolute enactment must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled substantially.”

The rule has been applied in several cases in India by the Supreme Court and it is necessary to bear in mind the object, purpose and scope of the provision to determine whether it is mandatory or merely directory. Even if a penalty is prescribed for non-compliance, that itself is not sufficient to treat the provision as mandatory. The Supreme Court in Hari Vishnu Kamath v. Ahmad Ishaque, AIR 1955 SC 233, observed (at page 245) :

“It is well-established that an enactment in from mandatory might in substance be directory, and that the use of the word ‘shall’ does not conclude the matter. This question was examined at length in Julius v. Bishop of Oxford [1880] 5 AC 214, and various rules were laid down for determining when a statute might be construed as mandatory and when as directory. They are well-known and there is no need to repeat them. But they are, all of them, only aids for ascertaining the true intention of the Legislature which is the determining factor, and that must ultimately depend on the context.”

It is, therefore, necessary to examine the object, purpose and scope of section 171 of the Act to determine whether the requirement is mandatory or directory. The recommendations of the Company Law Committee in paragraphs 75(i) and 78 of the report indicates that the period of 21 days was provided instead of 14 days as earlier fixed to enable the shareholders to campaign and canvass the proxies if they so desired. The shareholders required reasonable time to canvass opinion in favour or against the particular resolution proposed to be considered at the meeting of the company. The object, therefore, is obviously to give proper and reasonable opportunity to the shareholders for participating effectively in the meetings. The length of notice, the contents and the manner of service of notice have all been prescribed with this end in view. The fact that sub-section (2) of section 171 of the Act enables the shareholders to consent to a shorter duration of notice is an indication that the Legislature never thought the length of notice sacrosanct. Sub-section (2) of section 171 of the Act indicates that it is for the shareholders to consider and decide whether they have got necessary opportunity of properly participating in a meeting. Sub-section (3) of section 172 of the Act is and indicator that the Legislature never desired that the proceedings of the meeting should be invalidated merely because notice as prescribed under sub-section (1) of section 171 is of insufficient duration. Sub-section (3) of section 172 of the Act provides that the accidental omission to give notice to, or the non-receipt of notice by, any member not invalidate the proceedings and that clearly indicates the anxiety of the Legislature not to invalidate the proceedings, even though no prejudice whatsoever is caused to the interest of the shareholders. To hold that the provisions of section 171(1) of the Act are mandatory would lead to very unusual results making it difficult for large public companies to effectively function. A couple of shareholders cannot be permitted to defeat the interest of a large body of shareholders by raising the contention that the duration of notice was not sufficient and even though such complaints do not indicate any prejudice by service of notice of shorter duration. In our judgment, looking to the object, purpose and scope of provisions of section 171(1) of the Act, the conclusion is inescapable that the provision is merely directory and not mandatory.

Shri Kapadia relied upon some decisions in support of the submission that the provision is mandatory and absolute compliance is necessary and it is wholly irrelevant that any prejudice is caused by non-compliance. The first decision relied upon in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185/AIR 1977 SC 536, the Supreme Court examined the question whether the provisions of section 108 of the Act are mandatory or directory. Section 108 deals with transfer of shares or debentures and provides that the company shall not register the transfer unless a proper instrument of transfer duly stamped and executed by the transferor and by the transferee has been delivered to the company along with the certificate relating to the shares or debentures or along with the letter of allotment of the share certificate. The Supreme Court observed that negative, prohibitory and exclusive words are indicative of the legislative intend when the statute is mandatory. The words “shall not register” are mandatory in character and that is strengthened by the negative from of the language. The Supreme Court held that the merely because the non-compliance is not declared as an offence cannot lead to the conclusion that the section is directory. We are unable to appreciate how the decision will advance the case of the plaintiffs in claiming that section 171(1) of the Act is mandatory. The object, scope and intent of the two sections are totally different and distinct. The shares or debentures constitute property and the Legislature was particular that the transfers should not be effected unless the requirements of the section are strictly complied with. The reason is obvious that such holder of the share or debenture certificate should not be deprived of the properly right without the company being satisfied that the transfer is genuine. The decision of the Supreme Court has no application while examining the provisions of section 171(1) of the Act. Shri Kapadia then referred to a decision of a single judge of this court in Balwant Singh Sethi v. Sardar Zorawarsingh Hushnak Singh Anand [1988] 63 Comp. Cas. 310, but the reliance on this decision is not appropriate. In the case before the learned single judge the issue was whether the notice was of sufficient duration and the learned judge, after holding that the notice was not of sufficient duration, proceeded to pass the order. Neither the question as to whether the provision of section 171 of the Act was mandatory or directory nor whether the party complaining has suffered prejudice was either argued or considered and consequently, the decision has no application to the submission that the provisions of section 171 of the Act are mandatory. Such is the case with the decision in Homi Cawasji Bharucha v. Arjun Prasad [1957] 27 Comp. Cas. 6 (Pat.) on which reliance was placed. In the absence of consideration as to whether the provisions are mandatory or directory, the mere fact that the decision proceeded to invalidate the meeting on the ground of duration of notice is not sufficient to infer that the provision was held to be mandatory.

Shri Kapadia also submitted that the trial judge was in error in concluding that the provision was directory by reference to sub-section (3) of section 172 of the Act. It was urged that the sub-section refers only to accidental omission or non-receipt of notice by any member and reference was made to English decisions to urge that the omission should be accidental and not intentional. Reliance was also placed on the decision in Pearce, Duff and Co. Ltd., In re [1960] 3 All ER 222 (Ch D) to urge that all shareholders must consent to the shorter duration of notice. It is not necessary to examine this line of cases as it is not the claim of the defendants that there is an accidental omission in giving notice of shorter duration or that all the shareholders and consented to the notice being of shorter duration.

Shri Kapadia heavily relied upon the decision in N. V. R. Nagappa Chettiar v. Madras Race Club [1949] 19 Comp. Cas. 175; ILR 1949 Mad. 808 and this judgment requirement closer scrutiny. The Madras Race Club is a body corporate registered under the Companies Act of 1913 and the business and the object of the club is to carry on business of the race club and to provide amenities to the members. There were 260 club members of whom 23 were living outside British India. On October 16, 1947, notice was issued to the club members of the extraordinary general meeting convened on November 7, 1947. The Notice was posted at Guindy on October 16, 1947. The meeting held on November 7, 1947, and the resolutions passed therein were challenged by two members of the club by filing a suit for themselves and on behalf of other members of the club after obtaining permission under Order I, rule 8 of the Code of Civil Procedure. A declaration was sought that the meeting was invalid and void and all business transacted thereat was invalid, null and void and one of the contentions in support of the declaration was that the notice of the meeting contravened the provisions of section 81(2) of the Companies Act, 1913, at 21 days were not allowed between the date of the meeting and the receipt of the notice. The Trial Judge concluded that though there was some irregularity at the meeting. there was no illegality in the proceedings of the meeting and the resolutions were validly passed. The plaintiffs carried an appeal and the Division Bench held that the provision was mandatory and the meeting was not legally convened. The contention that the plaintiffs had not remained present at the meeting and, therefore, must be deemed to have waived the objection was turned down on the ground that such a plea was not specifically raised in the written statement, nor was any issue framed. While examining the contention that the shareholders by agreement can dispense with the duration of the notice, it was observed that the agreement must be of all the members of the club and it was not enough that the members present at the meeting either expressly or impliedly consented to or acquiesced in the shortening of the period of notice. According to the Division Bench of the Madras High Court, express consent of all the members to waive the notice must be established and even if the members present at the meeting agreed to waive the defect, that would not cure the defect and the meeting would not be invalid. Shri Kapadia that the decision of the Madras High Court, entirely supports the submission and it should be concluded that the two annual general meetings convened were not valid meetings and the resolutions passed therein are ineffective. With respect. We are unable to share the view of the Madras High Court.

A contrary view has been taken by two Calcutta decisions and to which we will immediately refer. The first decision is in Surajmull Nagarmull v. Shew Bhagwan Jalan [1973] ILR Cal. 207, Mr. Justice A. N. Sen, as he then was, by a detailed judgment examined the ambit and scope of sections 171 and 172 of the Act. The learned judge held that sections 171 to 186 of the Companies Act apply to meetings of the company and have been enacted for the proper holding of the meetings, the object being to ensure that the members of the company get the necessary and proper opportunity of attending and presenting their views effectively at the meetings. Examining the ambit of section 171(2) of the Act, the learned judge held that notice of a short duration in breach of provisions of sub-section (1) of section 171 of the Act does not necessarily lead to the voiding of the meeting and rendering the proceedings illegal, ineffective and void. The learned judge disagreed with the observations of the Madras High Court and held that prior consent of the members would completely render sub-section (2) of section 171 nugatory and seeking such prior consent may make waste of valuable time. The learned judge held that the consent referred to need not necessarily be obtained before calling any meeting and the consent may be obtained before or after the calling of the meeting and also at the meeting. The consent need not be express or in writing and may be implied and inferred from the conduct of the members. The learned judge then examined the provisions of section 171 and held that the provision is clearly directory and not mandatory. It was observed that the provision is not so imperative that the requirement thereof cannot be waived at all and is not mandatory in the sense that any breach thereof will necessarily and invariably invalidate the meetings and the proceedings thereat. The learned judge observed that non-compliance with the statutory requirement of section 171(1) of the Act may render the proceedings voidable an in appropriate cases any such breach may have the effect of invalidating the meeting and the proceedings thereat. We are in entire agreement with the reasoning and the conclusion reached by the learned judge in regard to the ambit of sections 171, 172 and 173(2) of the Act. The decision of the learned judge was considered and followed by the Division Bench of the Calcutta High Court in the case of Calcutta Chemical Co. Ltd. v. Dhiresh Chandra Roy [1985] 58 Comp. Cas. 275. An identical view was also taken by the Delhi High Court in the decision in Maharaja Exports v. Apparels Exports Promotion Council [1986] 60 Comp. Cas. 353. In our judgment, the Calcutta decision lays down the correct law and the view of the Madras High Court is very technical and would lead to very drastic problems in running the affairs or public limited companies. It hardly requires to be stated that public limited companies have large number of shareholders and if a couple of shareholders are permitted to challenge the legality of the proceedings of meetings on the ground of insufficiency of notice, and that too without indicating any prejudice, then it would be impossible to efficiently run the administration of public limited companies. The view taken by the Madras High Court while considering the case of members of the race club, who were few in number, did not consider the serious repercussions which would follow in the case of public limited companies having a large number of shareholders.

Shri Kapadia sounded an apprehension that in case the provisions of section 171(1) of the Act are held to be directory, then every company would hold the annual general meetings by service of notice of any duration and this would defeat the object of service of notice. The submission is not accurate because even if the provision is held to be directory, that does not confer a charter on the company to serve notice of any duration according to their choice. Even if the provision is directory, it does not permit the company to bypass the statutory requirement and in every case where a breach is complained of, the court will have to examine whether the proceedings should be invalidated or otherwise. Learned counsel felt that a company may give notice of four or five days and will try to sustain the validity of the proceedings. It is impossible to assume that the court will close its eyes to the reality and accept the claim that notice of even one day is enough. The court will not proceed to invalidate the proceedings on the ground of insufficient duration of notice only when it is established that defect is not intentional or deliberate and no prejudice whatsoever is caused too a particular case by shorter duration of notice. It would be necessary for a party complaining of insufficient duration of notice to plead prejudice caused and in case such prejudice is established, then even though the provision is directory, the court would grant the relief.

Shri Kapadia then submitted that in the present case, the notice was short by one day it has caused prejudice to the plaintiffs because the plaintiffs did not have sufficient time to canvass. In support of the submission, reference was made to a letter dated September 18, 1991, addressed to the company by attorneys of the plaintiffs. The letter demands supply of balance-sheets and profit and loss accounts. The letter sets out that Santoshkumar was appointed as additional director improperly and copies of the minutes of the meetings were sought for. On September 20, 1991, the company informed the attorneys that in view of ongoing litigation between Arunkumar Poddar and defendants Nos. 2 and 3, the attorneys should forward letters of authority of the clients authorising the attorneys to represent them. On September 25, the demand was reiterated on behalf of the plaintiffs and on September 27, 1991, the company informed the plaintiffs to come and take inspection of all the documents. From this correspondence, it was contended by Shri Kapadia that the company deliberately suppressed the relevant documents from the plaintiffs and that has caused prejudice to the plaintiffs as the plaintiffs did not have sufficient time to canvass against the proposed resolutions to be moved at the annual general meetings. Shri Cooper controverted the submission by pointing out that apart from the fact that none of the plaintiffs remained present at the annual general meetings and raised any objection to the resolutions which were unanimously passed, no complaint of prejudice whatsoever is made in the plaints. The only averment in paragraph 11 of the plaint in Suit No. 3002 of 1991 is that the defendants have deliberately circulated an abridged balance-sheet so as to prevent acts of misconduct, misfeasance of the defendants coming to light. It is further averred that revenue a glance at the auditor’s report and notes on accounts makes it clear that the substratum of the company has disappeared and defendants Nos. 2 to 4 are mismanaging the company and treating the company as their private assets. It is obvious that the plaintiffs never complained of any prejudice suffered because of shorter duration of notice and the contention urged by Shri Kapadia with reference to the correspondence is imaginary. In Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd., AIR 1928 PC 180, it was held that the shareholders knowing the work to be transacted at the meeting and remaining absent cannot subsequently complain about insufficiency of notice for convening the meeting. In our judgment, the plaintiffs have not suffered any prejudice whatsoever by the notice being of only 20 clear days instead of 21 clear days and it is obvious that the plaintiffs are set up by Arunkumar Poddar who has personal quarrels with defendants Nos. 2 and 3 who are his real brothers. The shareholding of the plaintiff is extremely negligible being 0.3 per cent. and it would be entirely unreasonable to invalidate the business transacted at the annual general meeting at the behest of these few shareholders and to the detriment of a large body of shareholders who had unanimously approved the resolutions moved at the meetings. We enquired from learned counsel as to which resolution passed at the meeting affects the interest of the plaintiffs and the grievance seems to be only about the issuance of right shares after increasing the authorised share capital and conferring power on the board of directors to make loans to any body corporate. The issuance of the right shares to all the existing shareholders can by no stretch of imagination affect the interest of the shareholders, nor would it change the controlling pattern of shareholding of the company. The grievance about conferring power upon the board of directors to make loans to bodies corporate is the apprehension that the directors may give loans to firms and companies in which they have interest. More about it at a later stage, but the prejudice complained of seems to be only of Arunkumar Poddar who has personal complaints against defendants Nos. 2 and 3 and we are not at all impressed by the claim made by learned counsel that service of notice of 20 clear days has caused prejudice.

Shri Kapadia then submitted that the proceedings held at the two annual general meetings should be invalidated because there was no strict compliance with the provisions of sub-section (3) of section 217 of the Act. The sub-section, inter alia, provides that there shall be attached to every balance-sheet laid before a company in general meeting, a report by its board of directors, with respect to the state of the company’s affairs. Sub-section (3) demands that the board shall give the fullest information and explanation in its report on every reservation, qualification or adverse remark contained in the auditor’s report. Referring to the eighth annual report, learned counsel urged that the auditors had made certain remarks and the information supplied by the company was not sufficient and, therefore, it was not possible to pass the accounts at the annual general meeting. We are unable to find any merit in the contention. The directors’ report clearly recites that information as per section 217 of the Act is supplied and notes Nos. 5 to 8 on which counsel laid stress refer to estimated gratuity and liability, sundry debts, and interest on overdue bills and, in our judgment, the information supplied cannot be said to be insufficient so as to make it impossible for the shareholders to pass the accounts.

Shri Kapadia then submitted that section 173 of the Act demands that in the case of an annual general meeting, a statement setting out all material facts connected with each item of the business should be annexed to the notice of the meeting. It was contended that the provisions that the explanatory statement should be annexed to the notice is mandatory as held by the single judge of this court in Laljibhai C. Kapadia v. Lalji B. Desai [1973] 45 Comp. Cas. 17 (Bom.) and the decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777 (Guj.)/AIR 1965 Guj. 96. Learned counsel urged that item 8 of the ninth annual report sets out a resolution conferring power upon the board of directors to make any loan to any body corporate from time to time on such terms and conditions as the directors may deem fit provided that the aggregate of the loans outstanding at any one time made to the company shall not exceed 30 per cent. of the aggregate of the subscribed share capital. The explanatory note to item No. 8 sets out that in the course of business, the company may have to make loans or deposits, etc., to bodies corporate in excess of the limits and section 370 of the Act provides that no company shall make any loan or loans to any body corporate in excess of the limits fixed by the Central Government unless making of such loans has been previously authorised by a special resolution of the lending company. The explanatory note recites that the company may have surplus funds during off season which the board of directors may utilise for giving loans and it is, therefore, advisable in the interest of the company to obtain the consent of the members by special resolution. Shri Kapadia complains that the explanation is a tricky one because the claim that the company may have surplus funds is totally false. Reference was made to the minutes of the meeting held on January 1, 1991, at which meeting Santoshkumar was appointed as additional director. One of the reasons set out for appointing Santoshkumar was that the business of the company of manufacturing cotton printed sarees and texturised/twisted yarn and P.O.Y. was undergoing recession and the company under the circumstances of the crisis has trying times ahead and Santoshkumar can help the company to come out of the crisis. Shri Kapadia submits that this reason is indicative of the fact that the financial state of the company was not healthy and if that is so, it is impossible to imagine that the company may have surplus funds as set out in the explanatory statement. It was urged that the power was sought by the board of directors only with a view to siphon away the funds of the company to the concerns in which defendants Nos. 2 and 3 have control and interest. Learned counsel urged that the fact that the company did not give a truthful explanation is sufficient to invalidate the resolutions passed at the meetings. It is not possible to find any merit in the contention for more than one reason. In the first instance, the claim that the financial health of the company was not sound cannot be accepted merely because in the meeting held on January 1, 1991, one of the reasons given for nominating Santoshkumar was to overcome the recession in the market and which was due to the Gulf War and money conditions being tight. It is not correct that the financial condition of the company was not sound because one of the resolutions at the ninth annual general meeting was to declare a divided. Shri Kapadia submitted that the company wants to disburse the dividend not out of the profits but out of the assets of the company and declaration of dividend was a ruse to mislead the shareholders. It is not possible to accept the claim made on behalf of the plaintiffs because nothing prevented the plaintiffs from remaining present at the annual general meeting and raising objections or to impress upon other shareholders the claim of mismanagement. Secondly, the assumption of the plaintiffs that the board of directors would siphon off the funds to the concerns of defendants Nos. 2 and 3 is without any foundation. There is not a whisper of complaint in the plaints that defendants Nos. 2 and 3 have previously siphoned away the funds of the company or had given loans to bodies corporate in which these defendants have any interest. Save and except the averment made in paragraph 11 to which reference is made hereinabove, the plaintiffs have not pointed out any act of defendants Nos. 2 and 3 to create suspicion that resolution No. 8 at the ninth annual general meeting was for the purpose of enabling the board of director to grant loans to the own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during the off season and the conferring of a power cannot necessarily lead to the inference that the power was to be misused by the board of directors. Again, it is not permissible for the plaintiffs who were fully conscious of the business to be transacted at the annual general meeting to remain absent and thereafter complain of insufficiency of information or tricky explanation. In our judgment, the challenge to the business conducted in the meetings is without any substance and there is no reason to nullify the resolutions passed at the annual general meetings.

It is required to be mentioned that though the plaintiffs had claimed before the trial court that the company had no authority to convene the eighth annual general meeting after December, 1990, the said contention was not pressed by Shri Kapadia the during the arguments. The trial judge negatived the contention by holding that there is no prohibition on holding annual general meeting after the statutory period and the only consequence is of penalty payable by the company. In the absence of any arguments on this aspect, it is not necessary to examine the finding. In our judgment, the plaintiffs have not made out any case for grant of relied and accordingly, the appeals as well as Suits Nos. 3002 and 3003 of 1991 must fail in accordance with the consent statements field by the parties.

Accordingly, Appeals Nos. 1001 1002 and 1082 are dismissed with costs. In view of the consent statement filed by the parties in Suits Nos. 3002 and 3003 of 1991 both the suits are dismissed with costs. The findings recorded by this judgment are binding upon the plaintiffs in Suit No. 3139 of 1991 in view of the consent statement filed by the parties to this suit.

At this stage, Shri Kapadia orally applies for leave to appeal to the Supreme Court. Prayer refused. Shri Kapaida applies for continuation of interim relief on the ground that the interim relief has continued from September, 1991. We are not inclined to continue the interim relief because the complaint about enforcement of the resolutions passed at the two annual general meetings is principally in respect of only two items, viz., (a) issuance of rights shares, and (b) conferring power upon the board of directors to give loans. We do not find that even if these two resolutions are enforced, any prejudice whatsoever will be caused to the plaintiffs. The rights shares are issued to the existing shareholders at par and issuance of such shares is not likely to affect the controlling pattern of the company. The apprehension that the shareholders may transfer the shares and interests of third parties may come in is without any merit. The conferring of power on the board of directors to grant loans to bodies corporate also is not going to affect the interests of the plaintiffs as there are several restrictions prescribed under the Act on the granting of loans. Accordingly, the prayer for continuation of interim relief is rejected.

[1988] 64 COMP. CAS. 19 (P&H)

HIGH COURT OF PUNJAB AND HARYANA

Col. Kuldip Singh Dhillon

Paragaon Utility Financiers P. Ltd.

RAJENDRA NATH MITTAL, J.

COMPANY PETITION NO. 79 OF 1982

MAY 15, 1986

Arun Jain for the Petitioners.

N.K. Sodhi, H.S. Bajwa, N.C. Sahni and Rajiv Narain Raina for the Respondents.

JUDGMENT

Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the Companies Act, 1956.

Briefly, the facts are that the respondent is a private limited company having authorised capital of Rs. 10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the provisions of the Companies Act (hereinafter referred to as "the Act"). The petitioners hold 150 shares as detailed below:

Col. Kuldip Singh, petitioner	No. 1	20
Hardev Singh Minhas,"	No. 2	30
Maj. K. Gurdev Singh,"	No. 3	20
Smt. Nasib Kaur,"	No. 4	20
Iqbaljit Singh,"	No. 5	20
Smt. Kirpal Kaur,"	No. 6	20
Smt. Chanan Kaur,"	No. 7	20

It is alleged that the affairs of the company are being conducted prejudicially to public interest and in a manner oppressive to the petitioners, who are in minority, as detailed below:

(i) The company had been allotted 490 equity shares of Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as "PISCO"). The paid-up amount in respect of the above shares was Rs. 3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife, Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares). These were transferred in a clandestine manner and without having been offered to any other shareholder including the petitioners, for a consideration of Rs. 3.90 lakhs in a meeting of the board of directors of the company held on December 30, 1978. No money in cash was paid by the purchasers to the company as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited with the company was adjusted towards the purchase price and the balance amount of Rs. 1,90,000 was given by the company as loan to the purchasers with interest at the rate of 15 per cent, per annum. The meeting in which the shares were transferred was illegal and void for want of quorum. Some other irregularities were also committed by the board of directors in calling and holding the meeting. Thus, the transfer of shares is not binding on the company.

(ii)Shri Ramesh Inder Singh was the managing director of the company in the year 1976 and he had been operating the bank account of the company maintained in the Central Bank of India, Civil Lines, Jalandhar City, without any authority. He issued cheques in fictitious names with the result that amounts to the tune of lakhs of rupees were misappropriated.

(iii)Mohinder Singh had been appointed as manager-cum-cashier of the company during the regime of Pavittar Singh, father of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh. As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by him in the year 1976. The board of directors decided to take action against him. The matter was taken in various meetings of the board of directors but no action was taken against him. Thus, the interest of the shareholders was not protected by the management.

(iv)The minutes book of the company relating to the meetings of the board of directors and shareholders was not kept properly from November, 1978, to September, 1979. Some of the proceedings have not been signed by the chairman. There are various violations of the provisions of section 193 of the Act. Therefore, the business transacted in the meetings during that period is illegal and void ab initio.

(v)The company had been advancing loans to some persons without any documents. It is alleged that it advanced loan without interest and without getting executed any document to PISCO. An amount of Rs. 14,309.57 stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder Singh as on December 31, 1978, but no action has been taken to recover the amounts from them.

The aforesaid allegations, it is pleaded, go to prove the mismanagement on the part of the management which is prejudicial to public interest and oppressive to the minority members of the compauy. Thus, the circumstances are such in which it would be just and equitable that the company can be ordered to be wound up. Consequently, it is prayed that action be taken under the aforesaid section. The respondents in the petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No. 2, late Pavittar Singh, was ordered to be deleted.

The petition has been contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two written statements have been filed, one on behalf of respondent No. 1 and the other on behalf of the latter respondents. Respondent No. 1 alleged that the affairs of the company were meticulously looked after during the period when Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application for rectification of the register of shareholders of PISCO under section 155. The application was decided against him but an appeal is pending in this court against that order.

In the written statement on behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the allegations in the petition do not make out a case of oppression and mismanagement of the affairs of the company and its winding up on just and equitable grounds. The petition is mala fide and had been filed at the behest of Col. P. S. Dhillon who had been the managing director till April 20, 1982, when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in the petition, it is stated, related to the transfer of 490 shares held by the company in PISCO. The matter had been decided in company petition filed by Col. P. S. Dhillon which had since been dismissed. It is further pleaded that rectification of the transfer of shares cannot be the subject-matter of a petition under sections 397 and 398. The allotment cannot also be declared invalid in the absence of PISCO. The other allegations in the petition have been controverted by the said respondents.

On the pleadings of the parties, the following issues were framed:

1. Whether the petition is maintainable in view of the preliminary objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and paragraph No. 6 of the written statement of respondent No. 1? [Opp].

2. Whether the affairs of the company are being conducted in a manner prejudicial to the interest of the company and public? [Opp].

3. Whether the acts of the majority are oppressive to the interest of the minority? [Opp].

A. Relief.

Issue No. 1: The first preliminary objection raised by Mr. Sodhi is that the petitioners have no right to maintain the present petition as they did not own 10 per cent, shareholding on the date of filing the petition. On the other hand, Mr. Jain, counsel for the petitioners, has argued that the petitioners had 150 shares out of 1,000 shares on the date of filing the petition as given in the petition. Thus, they had the right to file the petition.

I have duly considered the arguments of learned counsel and find force in the contention of Mr. Jain. The petitioners, as given in the list of members, exhibit P-88, filed with the Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June 30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the time of filing the petition, the petitioners were shareholders of the company. From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that the petitioners had more than 10 per cent, shareholding in the company.

At this, Mr. Sodhi sought to urge that the position reflected in exhibit P-88 relates to the month of June, 1982, whereas the petition was filed in October, 1982. He argues that it was incumbent on the petitioners to show the total number of shareholding held by them on the date of filing the petition which they failed to do. He made reference to Rajahmundry Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of the board of directors dated October 29,1978, wherein 20 shares held by Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh and Amarjit Singh Bajwa, son of Rattan Singh.

I do not find any substance in this submission of learned counsel as well. The petitioners have shown that according to the latest list of members filed with the Registrar of Companies, they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement that all the petitioners were shareholders of the company on the date of filing the petition. The proceedings of the board of directors dated October 29, 1978, however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner. It cannot be ruled out that 20 shares might have been again transferred in the name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not been transferred to her subsequently, the remaining petitioners still had more than 10% shareholding on the date of petition and thus they were entitled to file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case. [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant after obtaining the consent of more than one-tenth in number of the members presented the petition under section 153C of the Indian Companies Act, 1913 (section 397 of the Companies Act, 1956). Subsequent to the presentation of the petition, some of the members withdrew their consent. It was held that subsequent withdrawal of the consent could not affect the right of the petitioner to proceed with the petition or the jurisdiction of the court to dispose of it on merits. In my view, the observations in the above case are of no assistance to Mr. Sodhi. Consequently, I overrule this preliminary objection.

The second objection of Mr. Sodhi is that the allegations made in the petition should be such that a prima facie case for winding up of the company has been made out under section 433(f), but from the allegations in the petition, no such case stands established. In support of his contention, he places reliance on Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976 SC 565.

There is no dispute about the proposition that an action under section 397 can be taken only if a prima facie case for winding up has been made out on the allegations in the petition. In the above observations, I find support from Rajahmundry Electric Supply Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows (at page 95):

".before taking action under section 153C, the court must be satisfied that circumstances exist on which an order for winding up could be made under section 162".

Sections 153C and 162 of the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956 Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC). It was further observed therein that the conduct of the majority shareholders must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression by the majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

It is now to be determined whether the allegations in the petition make out a prima facie case for the winding up of the company under section 433(f). The section says that a company may be wound up by the court if it is of opinion that it is just and equitable to do so. The question arises what the words "just and equitable" mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that the principle of "just and equitable" baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula. Clause (f) is not to be read as being ejusdem generis with the preceding five clauses. Whether the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words "just and equitable" themselves. In view of sections 397, 398 and 443(2), relief under section 433(f) based on the just and equitable clause is in the nature of a last resort, when other remedies are not efficacious enough to protect the general interest of the company. There must be materials to show when the just and equitable clause is invoked that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. It is further observed that the court will have to keep in mind the position of the company as a whole and the interest of the shareholders and to see that they do not suffer in a fight for power that may ensue between the two groups. Similar observations were made in Seth Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that 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 shall consider the interest of the shareholders as well as of the creditors. It is not necessary to dilate further on this matter. It is sufficient to observe that if the allegations in the petition are taken to be established, the petitioners are entitled to obtain an order of winding up under section 433(f).

The third preliminary objection of Mr. Sodhi is that the oppression should continue up to the date of the petition. He contends that the petition in this case does not show that the oppression is continuous and, therefore, it is liable to be dismissed. To fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand, Mr. Jain has argued that if the effect of a single act is continuously oppressive, the court is entitled to pass an order under sections 397 and 398. He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).

I have duly considered the argument. The matter does not require any elaborate discussion as it has been settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 that in order to file an application under section 397, if must be shown that the conduct of the majority shareholders was oppressive to the minority members and this requires that events have to be considered not in isolation but as part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. Same view was expressed by P. N. Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777 (Guj). It was observed therein that sections 397 and 398 postulate that there must be at the date of the application a continuing course of conduct of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company. I am in respectful agreement with the above observations. It is true that in Sindhri Iron Foundry's case [1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta High Court that if the court is satisfied that a single wrongful act is such that its effect will be a continuous course of oppression and there is no prospect of remedying the situation by the voluntary act of the party responsible for the wrongful act, the court is entitled to interfere by an appropriate order under section 397 of the Act. However, the above observations are not in consonance with those of the Supreme Court in Shanti Prasad Jain's [1965] 35 Comp Cas 351. Consequently, it is not possible for me to rely upon the view expressed by the Calcutta High Court.

It is clear from the facts that the petitioners have alleged oppression relating to the year 1978-79. Thereafter, Col. P. S. Dhillon was appointed as the managing director who remained as such for many years, but during that period, the petitioners remained quiet and took no action. Thus, it cannot be said that there are continuous acts of the majority shareholders which have been oppressive to the petitioners. Consequently, the petition is liable to be dismissed on this short ground.

Issues Nos. 2 and 3.—Though, in view of the above finding, it is not necessary to deal with the arguments of Mr. Jain on these issues, in order to avoid the possibility of remand in appeal, I consider it proper to deal with them.

In the first instance, counsel for the petitioners has challenged the resolutions passed in the meetings of the company held on November 30, 1978, December 30, 1978, January 15, 1979, and February 28, 1970. It was highlighted by him that several directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt. Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt. Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh. Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother of Smt. Nasib Kaur. He submits that the matter is to be examined in this background. He has challenged the legality of the resolution dated November 30, 1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in which the resolution was passed was incomplete; secondly, no notice of the meeting was given to the directors and, thirdly, that, in fact, no meeting was held on that date.

The first question that arises for determination is as to whether the quorum for the meeting in which resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that there were 32 directors of the company on November 30, 1978, and, therefore, the quorum for the meeting was 11. However, only 8 directors were present. Out of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on September 27, 1977, and January 30, 1978, respectively, as they failed to attend three consecutive meetings and thus they would be deemed to be not present in the meeting. In this way, only six directors would be deemed to be present.

On the other hand, Mr. Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of directors on that date was 24. The number for determining the quorum will be deemed to be 24 and not 32. Therefore, the quorum would have been complete if eight directors were present. He further contends that Shri Pavittar Singh had been re-elected as director on June 30, 1978, and, therefore, he did not suffer from any disability on November 30, 1978.

I have duly considered the arguments of learned counsel. It has been admitted by Mr. Jain that out of the 32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh had ceased to be directors prior to November 30, 1978. Subsection (2) of section 287 provides that the quorum for a meeting of the board of directors of the company shall be one-third of its total strength or two directors, whichever is higher. In clause (a) of sub-section (2) of section 287, the total strength of the board of directors of a company has been denned as the total strength of the board of directors as determined in pursuance of the Act, after deducting there from the number of directors, if any, whose places may be vacant at the time. It is thus evident that for constituting quorum, l/3rd of the total number of directors who do not suffer from any disability are to be taken into consideration. The effective number of directors who admittedly ceased to be so is 8. Thus, the number of effective directors was 24 and out of them 8 directors could constitute the quorum. The directors present in the meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt. Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt. Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a dispute as to whether Shri Pavittar Singh was re-elected as a director or not. Even if it may be assumed that Shri Pavittar Singh had been re-elected as director, the quorum was incomplete as only six directors were present.

The second question to be determined is whether notice of the meeting was given to the directors and if not with what effect. Mr. Jain has argued that the copy of the despatch register of the company from October 16, 1978, to February 19, 1979, exhibit P-74, does not show that any notice was issued for the said meeting. On the other hand, Mr. Sodhi, has argued that the only requirement under section 286 is that the notice of the meeting should be in writing. It does not prescribe the manner in which it is to be served on the directors. The notice under article 82 of the articles of association can be served personally. He submits that notices were not sent by post but through a messenger.

It is not disputed by Mr. Sodhi that the notices were not entered in the despatch register. There is no reliable evidence on record to prove that notices were sent through messenger and, therefore, it cannot be held that notices were given to the directors. It is essential that the notices of the meetings have to be sent to all the directors, otherwise, the resolutions passed in such meetings are invalid. In this view, I am fortified by the observations of the Supreme Court in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC 2389, wherein it was observed that notice to all the directors of a meeting of the board of directors is essential for the validity of any resolution passed at the meeting and where no notice was even given to one of the directors, the resolution passed at the meeting of the board of directors is invalid. Consequently, I am of the opinion that the resolution dated November 30, 1978, is invalid on this ground.

The third question to be determined is whether the meeting was held on November 30, 1978, or the minutes were recorded without holding the meeting. Mr. Jain has argued that no meeting was held but the minutes were recorded subsequently by the eight directors in collusion with each other. In support of his contention, he brought to my notice the fact that the signatures of the chairman at the end of the minutes bear the date November 30, 1979, instead of November 30, 1978. The arguments have been considered by me but I do not agree with them. The proceedings book is page-marked and consists of several resolutions even after this resolution. This resolution cannot be said to have been incorporated therein subsequently merely because under the resolution, Shri Pavittar Singh purported to have signed on November 30, 1979. The year and the date might have been mentioned through an oversight.

Now, I advert to the resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr. Jain has challenged the said resolution on four grounds, out of which three grounds are the same on which resolution, exhibit P-1, was challenged. The fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur, Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri Swaran Singh, took part in the meeting without disclosing their interest in the proposed transaction and, therefore, they ceassed to be directors on that date. The first question to be seen is whether the quorum for the meeting was complete or not. This meeting was attended by the following ten directors:

1.	Smt. Nasib Kaur.
2.	Smt. Mohinder Kaur,
3.	Smt. Rajinder Singh Johal,
4.	Smt. Gurbax Kaur,
5.	Shri Pavittar Singh,
6.	Shri Ravinder Singh,
7.	Shri Swaran Singh,
8.	Smt. Inderjit Kaur,
9.	Shri Rameshinder Singh, and
10.	Shri Amar Singh.

The resolution was passed for transferring 490 shares of PISCO held by the company in favour of the following persons for full consideration:

	Shares
1. Shri Pavittar Singh and his wife, Smt. Nasib Kaur	122
2. Shri Ravinder Singh and his wife, Smt. Santosh	124
3. Shri Rameshinder Singh	122
4. Shri Swaran Singh	122
	490

N.B. Out of 6 transferees, all except Smt. Santosh were directors of the company.

Mr. Jain has contended that out of the ten directors present in the meeting, five directors were transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to be a director. If the presence of the five transferee-directors and that of Smt. Inderjit Kaur is not taken into consideration, then the quorum is incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh, after he had ceased to be a director, was re-elected on June 30, 1978. However, he admits that Smt. Inderjit Kaur ceased to be a director. He further submits that the transferees did not cease to be directors at the time of passing the resolution and at the most they ceased to be so after the resolution had been passed.

First, it is to be seen whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the shareholders dated June 30, 1978, from which it is clear that he was re-elected as director on June 30, 1978. Thereafter, it is not shown that he ceased to be so. Consequently, I am of the opinon that he was a director on December 30, 1978.

It is next to be seen whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder,Singh and Shri Rameshinder Singh had ceased to be directors on that date because they took part in the meeting at the time of passing the resolution, exhibit P-2. Relevant parts of sections 283(1)(i) and 299 read as follows:

"Section 283. Vacation of office by directors.—(1) The office of a director shall become vacant if—.

(i) he acts in contravention of section 299.

Section 299. Disclosure of interests by director.—(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors.".

From a reading of section 283, it is clear that the office of the director becomes vacant when a director acts in contravention of section 299. It is enjoined by section 299 that a director, who is interested in a contract entered into by or on behalf of the company, should disclose the nature of his interest at a meeting of the board of directors. If he fails to do so, he ceases to be a director. In view of the aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of the company.

Now, the question arises, whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1) of section 300 provides that no director of a company shall, as a director, take any part in the discussion or vote on any contract by or on behalf of the company, if he is in any way, whether directly or indirectly interested in the contract, nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void. Sub-section (2)(a), which is in the nature of a proviso to sub-section (1), says that sub-section (1) shall not apply to a private company which is neither a subsidiary nor a holding company of a public company. A reading of the above provisions makes it clear that sub-section (1) applies to a public limited company and not to a private company which is not a subsidiary or a holding company of a public company. Therefore, it is in the case of a public company and a private company which is a subsidiary or a holding company of a public company, that if a director takes part in the proceedings of the board of directors and votes regarding any contract in which he is interested, his presence for the purposes of forming a quorum shall not be counted and his vote shall be void. However, it will not be so if the company is a private company. In the present case, the company is a private company. Therefore, the presence of the aforesaid five directors for the purposes of quorum and their vote for the purpose of passing the resolution cannot be excluded. They shall, however, cease to be directors after the passing of the said resolution. Consequently, the resolution, exhibit P-2, cannot be held to be invalid on this ground. However, it may be reiterated that the shares were transferred in the names of some of the directors. Thus, the action of the directors in passing the resolution amounts to oppression of the minority shareholders in spite of the fact that it is not an invalid resolution. In the above observation, I find support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it was held that a resolution may be passed by the directors which is perfectly legal in the sense that it did not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interest of the company. Such a resolution can certainly be struck down by the court under section 397 or 398.

Now, it is to be seen whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt. Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978, and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter she ceased to be so. Consequently, she was a director on the date of the meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be directors. If the presence of two directors, namely, Ravinder Singh and Smt. Inderjit Kaur, is not taken into consideration, eight directors were still present in the meeting. The total number of directors, as already mentioned, was 24. Thus, the quorum was complete.

Mr. Jain next submits that no notice of the meeting was sent to the directors and, consequently, the meeting was illegal. There is force in this submission. The copies of the despatch register from October 16, 1978, to February 19, 1979, exhibit P-74, show that no notice was sent regarding the meeting. A similar argument was raised earlier and was dealt with while determining the validity of the resolution dated November 30, 1978. For similar reasons, the resolution dated December 30, 1978, is also invalid.

Mr. Jain has then argued that in the resolution dated November 30, 1978, it was decided that the shares be offered to the existing shareholders. Shri R. S. Johal was authorised to do so. However, he did not offer the shares to the other shareholders and, therefore, the transfer of shares to Pavittar Singh, etc., amounts to oppression on the minority shareholders.

I find substance in this submission. Before deciding to whom the shares should be sold, it was the duty of Shri Johal to make an offer of sale to all the shareholders. Those should have been transferred to one who made the highest offer. However, it was not done. It is true that Shri Johal says that he told orally all the shareholders in this regard. This part of the statement, however, cannot be accepted. Consequently, transfer of the shares to the transferees without offering the shares to the other shareholders in terms of the resolution dated November 30, 1978, exhibit P-1, is oppressive to the other shareholders.

Mr. Jain has further argued that the consideration for the 490 shares purchased by Shri Pavittar Singh, etc., was not paid in cash by them. The purchase price of the shares was Rs. 4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them from the company for interest at the rate of 15% per annum and that amount has not been repaid till today.

I have duly considered the argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some amount was shown payable to the transferees in the account books of the company. In case that amount was got adjusted by them towards the payment of consideration of the shares, no fault can be found therein. However, the act of advancing a loan by the company to the transferee-directors at the juncture when the company was not in sound financial condition was an oppressive act on the minority shareholders. It is also relevant to point out that they have not repaid the amount of loan or interest thereon up-to-date.

The third resolution of the company, which has been challenged by the petitioners, is dated January 15, 1979, exhibit P-17. By this resolution, the minutes of the meeting dated December 30, 1978, were confirmed and the loans given to the directors for purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took part in the meeting dated December 30, 1978, without disclosing their interest in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and Shri Avtar Singh admittedly ceased to be directors. The total number of directors present was eleven and in case the aforementioned seven directors are excluded, the number of directors present remained four. The quorum of the meeting should have been eight and thus the resolution is invalid. I agree with the submission of learned counsel. It is not necessary to dilate (further) on the paint as the matter has already been discussed above.

Mr. Jain has further challenged the validity of the resolution on the ground that the notices of the meeting were not despatched to the directors. He, in support of his contention, referred to the despatch register, exhibit P-74. I agree with this submission as well. The matter has already been discussed above. For similar reasons, this resolution is also invalid.

Mr. Jain has next challenged on similar grounds the resolution passed in the meeting held on February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to whether the quorum of the meeting was complete. Eleven directors were present in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As already held, they ceased to be directors on December 30, 1978. Out of the remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt. Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six directors are to be excluded for the purposes of quorum. Consequently, five directors would be deemed to be present in the meeting. The quorum for the meeting was eight. I am, therefore, of the opinion that the resolution dated February 28, 1979, is also invalid.

The second question is whether the resolution is invalid as the notices of the meeting were not sent to all the directors. In the despatch register, exhibit P-74, admittedly, the despatch of the notices of the meeting to the directors is entered. Therefore, I am of the view that this formality had been fulfilled by the company and the resolution cannot be held to be invalid on this ground.

Mr. Jain has further argued that the resolution was invalid as Shri R. S. Johal and ten other directors protested against the resolution and walked out of the meeting. He made reference to the letter dated February 28, 1969, exhibit P-76. There is force in this submission also. It is stated in the letter, exhibit P-76, that in the meeting of the board of directors held on February 28, 1979, the directors who signed the letter did not agree to the proposal for transfer of the 490 shares held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh, Ravinder Singh and Swaran Singh and voted against the resolution. The resolution, therefore, stood defeated. The directors who signed the letter walked out of the meeting in protest against the overbearing, arbitrary, unconstitutional and illegal action, arrogant attitude and threatening behaviour of the directors interested in the transferees. The latter prevailed upon the managing director and, therefore, he refused to record their disapproval and vote of dissent. It was requested by them that the minutes be not recorded, contrary to the will and verdict of the majority of the directors. The letter is signed by 11 directors and addressed to the managing director. From the above letter, it is evident that eleven other directors were present in the meeting but neither their presence nor their vote of dissent against the resolution was recorded. Shri R. S. Johal appeared in the witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76. He stated that in the meeting held on February 28, 1979, there was a dispute regarding the sale of shares in favour of Rameshinder Singh and his partymen and that some of the directors, namely, Shri N. S. Domeli, Shri Puran Chand, Smt. Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri Puran Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of the meeting. There is no mention about the dispute in the minutes. Shri Domeli also admits his signature on the letter. I am, therefore, of the opinion that the resolution dated February 28, 1979, exhibit P-18, is invalid.

The petitioners have also challenged the resolutions passed in the annual general meeting held on June 30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and loss account for the year ending December 31, 1978, were passed. It is contended by Mr. Jain that 21 days' clear notice for holding the meeting was required to be iven to the shareholders under section 171, but that was not done. The notices were despatched on June 13, 1979, and thus 21 days' clear notice was not given to them. He also contends that the copies of the balance-sheet should have been sent with the notices but the same were not sent.

Mr. Sodhi has not disputed that the notices given to the shareholders were of less than 21 days. Section 171 reads as follows:

"171.Length of notice for calling meeting.—(1) A general meeting of a company may be called by giving not less than twenty-one days' notice in writing.

(2) A general meeting may be called after giving shorter notice than that specified in sub-section (1), if consent is accorded thereto—

(i) in the case of an annual general meeting, by all the members entitled to vote thereat; and

(ii) in the case of any other meeting, by members of the company (a) holding, if the company has a share capital, not less than 95 per cent, of such part of the paid-up share capital of the company as gives a right to vote at the meeting, or (b) having, if the company has no share capital, not less than 95 per cent, of the total voting power exercisable at that meeting:

Provided that where any members of a company are entitled to vote only on some resolution or resolutions to be moved at a meeting and not on the others, those members shall be taken into account for the purposes of this sub-section in respect of the former resolution or resolutions and not in respect of the latter".

A reading of the section shows that 21 days' notice is necessary for convening the annual general meeting. However, a shorter notice for such a meeting can be given, if all the members who are entitled to vote in the meeting accord their consent for doing so. Previously, fourteen days' notice was provided but later the period of notice was extended to 21 days on the report of the Company Law Committee. The reasons for extension of period have been given in the report, the relevant portion of which reads as follows:

"We further recommend that twenty-one day's notice should be given of all resolutions to be passed at a general meeting—ordinary or special. The extension of the period of notice from fourteen to twenty-one days is necessary to enable shareholders to combine and canvass for proxies if they so desire. The present period of fourteen days is too short for all the processes that are involved before the shareholders canvass their opinion in favour of or against a particular resolution proposed to be considered at any meeting of the company".

After taking into consideration the provisions of the section and the reasons for incorporating the same, I am of the view that the period of notice cannot be curtailed except on the ground mentioned in the section itself. The provisions of the section are mandatory and if they are not complied with, the resolutions passed in such a meeting cannot be held to be valid. The members in this case admittedly did not agree for curtailing the period of notice. Therefore, the resolutions passed in the meeting dated June 30, 1979, are invalid.

The petitioners have further challenged the validity of the resolution of the board of directors dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and loss account for the year ending December 31, 1978. Mr. Jain submits that the quorum in the meeting was not complete and, therefore, the resolution was invalid. I do not find any substance in the argument. In the meeting, eight directors were present. As already mentioned, there were only twenty-four directors of the company. Consequently, eight directors constituted the quorum. I am, therefore, of the view that the resolution cannot be said to be invalid.

The next contention of Mr. Jain is that the shares which were transferred to Shri Pavittar Singh, etc., had more value than that for which they were sold. In support of his contention, he places reliance on the balance-sheet ending December 31, 1976, exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance in this submission. The shares were not quoted on the stock exchange. No reliable data has been provided by the petitioners showing that the value of the shares was more. In the first two balance-sheets, the company is shown to have suffered losses to the tune of several lakhs of rupees. In the balance-sheet ending December 31, 1978, some profit is shown to have been earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs odd. The aforesaid figure shows that PISCO was not faring well.

The respondents produced Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the shareholders during the aforesaid period. The face value of each share was Rs. 1,000. He further deposed that, according to the assets of the company, the value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs. 625 in the year 1978.

After taking into consideration the circumstances, it cannot be accepted that the value of the shares was more than Rs. 1,000 per share when they were transferred to the respondents.

Mr. Jain then contends that the accounts of the company were not even operated by duly authorised persons. To fortify his argument, he made reference to the copy of the resolution of the board of directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of directors.

I have duly considered the matter. In the copy of the resolution, exhibit P-3, it is stated that Shri Pavittar Singh, managing director, would remain out of station for two months with effect from April 10, 1976. The accounts of the company with the Central Bank of India, Civil Lines, Jullundur, and Indian Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh Domeli, chairman of the company, and Shri Rameshinder Singh, director of the company in place of Shri Pavittar Singh, managing director. It was further stated that in future any two of the three persons, namely, Shri Naranjan Singh Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate the accounts. It has been certified to be a true copy by Shri Mohinder Singh as the managing director. The original resolution purports to bear the signatures of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing director of the company nor was Bir Singh Johal its chairman. The resolution does not find a place in the original minutes book of the board of directors. Some resolutions dated April 11, 1976, are entered in the minutes book (copy exhibit P. 3-A). These resolutions are different from the resolution, exhibit P-3. Mr. Sodhi has not been able to show any other resolution in the minutes book, copy of which is exhibit P-3. In the circumstances, it is evident that the affairs of the company were mismanaged by the respondents.

Mr. Jain has further argued that Shri Rameshinder Singh operated the accounts on the basis of that resolution and advanced loans to the persons in the names of some fictitious persons and thus misappropriated the amounts. He submits that the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there was no such person. On the other hand, Mr. Sodhi has placed reliance on the statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a payee's account cheque and the payment of the cheque was made to the Punjab and Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it cannot be held that Jagtar Singh was a fictitious person.

The next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a manager by the respondent had embezzled a huge amount of the company but no effective step was taken to recover the amount from him. In order to prove the aforesaid facts, Mr. Jain placed reliance on the resolutions of the board of directors, exhibit P-87, dated December 30, 1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977, exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda. However, Shri Mohinder Singh reconstructed the record and showed an amount of Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was given to the company. It is further stated that Shri Mohinder Singh had introduced false credits in the account books in favour of Sarabha Land and Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said company. These entries were got fictitiously made by him. In the resolution, exhibit P-67, it was said that certain irregularities were committed by Shri Mohinder Singh and, therefore, his services had been terminated. It was resolved that a sub-committee consisting of the chairman and the managing director be appointed to go into the accounts and submit a report for taking appropriate action against him.

In the resolutions, exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the report of the sub-committee had not been received. In exhibit P-71, it was said that Mohinder Singh had not rendered accounts and had handed over the cash. Consequently, it was decided to approach him for that purpose. In the resolution, exhibit P-72, dated December 13, 1977, the matter again came up before the board of directors and it was resolved that action against Shri Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that taking of appropriate action against Shri Mohinder Singh was being deferred without any reason even though it stood established that he had misappropriated the funds of the company. It is true that Shri Naranjan Singh Domeli made a statement that a FIR was lodged against Shri Mohinder Singh but the particulars of the FIR have not been brought on the record. It has not been shown that any further action was taken by the directors to recover the amount. It appears that the FIR was lodged to complete the formalities and the directors were not serious in taking any action against him. Thus, the allegation of the petitioners that the company was mismanaged stands established.

Mr. Jain has also argued that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri Paramjit Singh. Even no document was got executed from them in token of having received the amounts. The act amounts to mismanagement. I find substance in this submission. The argument regarding the payment of loans to the aforesaid persons and PISCO stands established from the copies of the ledger of the respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30, 1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on January 1, 1977. No amount of interest was debited to their account. No document was got executed from the said debtors. The aforesaid amounts have not been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh, Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors. It appears that the amounts were advanced to PISCO without interest because the said directors wanted to help their concern. After taking into consideration all the circumstances, I am of the view that the affairs of the company were conducted by the respondents in a manner oppressive to the petitioners.

Before parting with the judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the directors, they could not be challenged in view of section 290 of the Act. In support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).

I do not agree with the argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner, five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at the meetings was incomplete and no proper notice of the meeting was given to the directors, exhibit P-2 on the ground that no proper notice was given to the directors and exhibit R. 2/6 on the ground that no notice of requisite period was given. Exhibit P-18 was declared invalid also on the ground that the resolution was opposed by the majority of the directors and, therefore, it could not be deemed to have been passed. Section 290 of the Companies Act provides that the acts done by a person as a director shall be valid notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. It is evident from the language of the section that it gives protection to the acts of the directors if their appointments were invalid on account of any defect or disqualification or the same had come to an end. It does not give protection to their acts which are otherwise illegal. Thus, the resolutions passed in a meeting which had not been properly convened are not valid resolutions. Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot be held valid under the said section.

It is true that the resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground that the quorum for the meeting was incomplete as some of the directors present there ceased to be so. But, in the facts and circumstances of this case, the section does not give protection to the resolutions passed in such meetings. The reason is that the resolutions in the present case have not been passed bona fide by the directors, as out of the six beneficiaries, five were directors of the company and the sixth was the wife of one of them. The sole object of the directors in passing the resolution was to promote their self-interest. Moreover, the benefit of the said section can normally be taken by a third person and not by the directors or their close relations. It is further noteworthy that some of the resolutions were oppressive to the minority shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it was observed by me that even if a director ceased to be so in view of section 283, the resolution of the board of directors could not be held illegal in view of section 290 which provided that the acts done by a person would be valid notwithstanding that it might afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. The facts of that case were that a boiler was sold by the company after a decision had been taken in a meeting of the board of directors. The purchaser had no concern with the company. He took a plea that he was a bona fide purchaser for valuable consideration. The case is clearly distinguishable and, therefore, the observations therein are of no help in deciding the petition.

Consequently, in view of the finding that there were no continuous acts of the majority shareholders which had been oppressive to the petitioners, I dismiss the petition. However, the parties are left to bear their own costs.

[1937] 7 COMP. CAS. 22 (CD)

IN THE CHANCERY DIVISION

Hector Whaling, Ltd., In re.

BENNETT, J.

DECEMBER 2, 1935

Lionel Cohen, K. C, and T. D. D. Divine, for the company.

JUGEMENT

Bennett, J.—stated the facts and continued: The first point to be decided is what is meant by the phrase "not less than twenty-one days' notice" contained in sub-section 2 of section 117 of the Companies Act, 1929. In the interests of everybody it is of importance that there should be no doubt as to the meaning of a phrase in a section of almost daily use. I do not think there is any doubt about its meaning, and I propose to found my decision on R. v. Turner and Chambers v. Smith, and to decide that the phrase means twenty-one clear days, exclusive of the day of service, and exclusive of the day on which the meeting is to be held.

The question then arises whether the effect of sub-section 6 of section 117 is to enable the company to say that the statutory requirement of sub-section 2 that there was to be twenty-one clear days' notice has been cut down by the provisions of article 139. [His Lordship read sub-section 6 and continued:] Article 139, in my judgment, has nothing to do with the service of the notice, and nothing to do with the manner in which the notice is given. It is concerned entirely with the way in which time is to be measured, and I can see no ground on which I can properly decide that a company can, by its articles of association, curtail the length of time which Parliament has said must elapse between the date on which the notice is served and the date on which the meeting is held. Sub-section 6 is concerned solely with the method of giving notice. Therefore, I come to the conclusion that article 139 is irrelevant for the purpose of the question which I have to decide.

In my view, the petitioning company has failed to prove that the special resolution was properly passed. I will therefore, adjourn the further hearing of the petition to enable the company to call a fresh meeting.

[1957] 27 COMP. CAS. 6 (SC)

Homi Cawasji Bharucha

Arjun Prasad

RAMASWAMI AND IMAM, JJ.

JANUARY 11, 1956

RAMASWAMI, J. - This appeal is presented on behalf of Homi Cawasji Bharucha and 43 other appellants against the order of Mr. Justice JAMUAR dated the 4th January, 1956, in Company Act Case No. 3 of 1951.

The history of the case is important. On the 22nd of July, 1952, respondent No. 1, Arjun Prasad, who was a shareholder of the company made an application under section 153 of the Indian Companies Act, 1913, proposing a scheme for reconstruction of the company in liquidation. On the 6th of October, 1953, respondent No. 1 was directed by the court to arrange for holding separate meetings of (1) the debenture-holders and other secured creditors, (2) the unsecured creditors, (3) the preference shareholders, and (4) the ordinary shareholders. The meetings were fixed to be held on the 9th and 10th of November, 1953.

The first three meetings were held on the 9th and 10th of November, 1953. But on the 10th of November, 1953, respondent No. 1 made an application to the court that the meeting of the ordinary shareholders be postponed because there was a dispute between him and the Central Bank of India with regard to the title to about Rs. 8 lakhs worth of shares and also as to which party had the right of exercising his vote. The meeting was adjourned by the court to the 12th of December, 1953, and later on there was another order of the court dated the 12th of January, 1954, adjourning the meeting sine die.

The dispute between the respondent NO. 1 and the Central Bank of India as regards the transfer of rupees eight lakhs worth of shares was decided by the Company Judge on the 22nd of January, 1954, and that decision was confirmed by a Bench of this Court on Letters Patent Appeal on the 8th of November, 1954. On the 6th of May, 1955, respondent No. 1 prayed that the postponed meeting of the shareholders may be held. The court directed that the meeting should be held on the 26th of June, 1955, and on that date the meeting of ordinary shareholders was duly held.

On the 14th of October, 1955, respondent No. 1 made another application seeking the direction of the court for holding fresh meetings of preference shareholders and of ordinary shareholders for consideration of a modified scheme of reconstruction. On the 18th of October, 1955, the court directed that the meetings of the ordinary shareholders and of preference shareholders should be held on the 27th November, 1955. There was a direction by the court that notices should be sent under certificate of posting and that there should also be publication of the notice in two newspapers, namely, the Indian Nation and the Aryavarta.

But the important point is that in this order of the 18th October, 1955, the learned Company Judge gave no direction as to the length of the notice. It appears that notices of the meetings were posted at Calcutta on the 10th of November, 1955. It also appears that these notices were received by a number of shareholders at Bombay on the 16th of November, 1955, and onwards. On the 23rd of November, 1955' an application was filed by Hariyesh Daulatjada, one of the shareholders, challenging the validity of the meetings which were proposed to be held on the 27th of November, 1955.

It was contended on his behalf that at least 21 days' notice was essential and in the absence of such notice, the meetings of the shareholders could not be validly held. There is also a letter sent to the court purporting to be signed by twenty-five shareholders containing objection to the same effect. The matter was heard by JAMUAR J. or the 25th of November, 1955, and he made the following order :

"On an application filed on behalf of Arjun Prasad, the 27th of November, 1955, was fixed by order No. 173, dated the 18th of October, 1955, for the meeting of the preference shareholders and of the ordinary shareholders. Two applications have been placed before me, one by Hariyesh, son of Lallubhai Daulatjada of Bombay, praying that the court may be pleased to adjourn the meeting for at least one month and the other by quite a number of shareholders of the Gaya Sugar Mills Ltd. making the same prayer.

Mr. Untwalia states that this court need not extend the date of the meetings which has already been fixed as the 27th November, 1955, but he says that, at the meeting, adjournment of the meetings will be taken for a period of not less than one month in order to enable the petitioners, who have filed petitions for an adjournment of the meetings to attend the adjourned meetings.

Mr. Untwalia further undertakes to send intimation under certificate of posting to the shareholders informing them of the adjourned dated of the meeting."

The meetings of the preference shareholders and of ordinary shareholders were accordingly held on the 27th of November, 1955, but no business was transacted on that date and the meetings were adjourned to the 8th of January, 1956. On the 23rd of December, 1955, two applications were again filed before JAMUAR J., one of behalf of appellants Nos. 1 and 2, and the other on behalf of appellants No.s 3 to 44 along with seven other persons challenging the validity of the meetings held on the 27th of November, 1955.

It was contended on their behalf that the meetings held on the 27th of November, 1955, were illegal because there was an omission to serve notice of the meetings at least twenty-two days before the date fixed for the meetings. It was pointed out that section 81(2) of the Indian Companies Act, 1913, required that at least 21 days' notice should be given if a special resolution was to be passed at a meeting of the shareholders. It was complained on behalf of the appellants that in the present case only ten or eleven days' notice was given and there was a breach of the statutory requirement.

On behalf of respondent No. 1 Mr. Untwalia submitted that section 81(2) of the Indian Companies Act was not applicable and that, on the contrary, the matter was governed by the rules framed by the High Court under section 246, and rule 127 required only seven days' notice to be given.

JAMUAR J. did not decided the question of law but ordered that the adjourned meetings fixed for the 8th of January, 1956, should be held and "if the validity of these meetings be challenged, appropriate order will then be passed." This order was passed by JAMUAR J. on the 4th of January, 1956, and the propriety of that order is the sole question at issue in the present appeal.

In support of this appeal Mr. Dutt put forward the submission that the proposed resolution for consideration at the meeting of the shareholders held on the 27th of November, 1955, was not purely a scheme for compromise falling under section 153 of the Indian Companies Act, but the question of reduction of share capital was involved and so the special formalities prescribed by section 81 of the Indian Companies Act should have been followed.

The opposite view point was put forward by Mr. Lalnarain Sinha appearing on behalf of respondent No. 1. It was contended by Mr. Lalnarain Sinha that the provision of section 153 of the Indian Companies Act was self-contained and that it was open to the Company Judge to give directions not only with regard to the place and time of the meeting but also with regard to the length of notice to be given to the shareholders.

It was submitted that the jurisdiction conferred by section 153 was of a special character and the orders of the court in exercise of its special jurisdiction would override the provisions of section 55 of the Companies Act. I do not think that this argument is right.

On the contrary, I am satisfied that the special formalities required for a resolution with respect to reduction of share capital under section 55 of the Companies Act cannot be overriden by any direction of the court given under section 153 of the Indian Companies Act. It is manifest that section 153 of the Indian Companies Act and section 55 of the said Act deal with two separate classes of special matters, and as a matter of construction I hold both these special provisions are equally important and neither of the special provision can be nullified or over ridden by each other.

It follows, therefore, that if there is a scheme or a proposed compromise which involves a dealing with reduction of share capital, the formalities prescribed not only by section 153 but also by section 55 have got to be complied with. That is the view expressed by YOUNGER J. in In re White Pass and Yukon Rly. Co. Ltd. 1. This case has been cited with express approval in Buckley on the Companies Act, 12th Edition, page 414, where the following passage occurs :

"The words at the end of this sub-section are taken from section 45 of the Act of 1908, repealed by the Act of 1928, which prescribed a separate and different procedure for effecting reorganizations of share capital of the two classes mentioned. Such reorganization can now, even if they could not whilst section 45 was in force, be effected as arrangements with members under this section, as can also all other modes of reorganizing the share capital, even when involving an interference with preferences or special rights attached to shares by the memorandum, although when the arrangement involves a reduction of capital the requirements of the Act with regard to such reduction of capital must also be complied with. If it be desired to covert issued shares into reedemable preference shares, the scheme should provide for a reduction of capital by cancelling the issued shares and a reincrease by the creation of redeemable preference shares of an equivalent amount."

It is, therefore, clear that it is open to the parties to propose any mode of reorganising the share capital as a part of a scheme for arrangement or compromise under section 153 of the Indian Companies Act, but if the arrangement or compromise involves a dealing with reduction of share capital for which other provisions of the Act prescribe special formalities, such special formalities must also be complied with.

The admitted position in this case is that twenty-two days' notice was not given to the ordinary or preference shareholders of the proposed meetings. It is said that ten to eleven days' notice was given. Admittedly, therefore, the requirements of sections 55 and 81 have not been complied with. Section 55 states :

"55. Reduction of share capital. (1) Subject to confirmation by the court, a company limited by shares, if so authorised by its articles, may by special resolution reduce its share capital in any way, and in particular (without prejudice to the generality of the foregoing power) may-

(a) extinguish or reduce the liability on an any of its shares in respect of share capital not paid up ; or

(b) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost or unrepresented by available assets ; or

(c) either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the wants of the company, and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

(2) A special resolution under this section is in this Act called a resolution for reducing share capital."

Section 8I(2) is to the following effect :

"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."

Reading section 8I(2) and 55 together, it is manifest that a resolution which involves a reduction of share capital can only be considered at a meeting of which not less than 21 days' notice has been duly given. Since there has been a violation of section 8I with regard to the period of notice, I think that the meetings held on the 27th of November, 1955, for considering the modification of the scheme must be held to be illegal and invalid. In support of my view, I would refer to the decision of the Privy Council in Garden Gully United Quartz Mining Co. v. McLister.

A point was taken by Mr. Lalnarain Sinha that the modified scheme which was to be considered at the meetings held on the 27th of November, 1955, did not involve a reduction of share capital and the statutory provisions of sections 55 and 8I of the Indian Companies Act were not attracted. I do not think that there is any substance in this argument. The draft resolution which was to be placed at the meetings on the 27th of November, 1955, was to the following effect :

"That clause 6(b) of the proposed scheme of arrangements be substituted as follows :

The preference shares will be redeemed fully by payment in cash of 40% of the face value of the shares out of the money deposited in the bank by the preference trustees and sale proceeds of land at Gaya and Chakand, and with regard to the remaining 60% of the face value, the company will allot redeemable preference shares of the face value of Rs. 100 each to the holders of existing preference shares pro rata. The said redeemable preference shares shall be redeemed as to one- half of their face value on or before 31st December, 1962, and the other half on or before the 31st December, 1972, and shall confer on the holders thereof the right to a fixed non-cumulative preferential dividend at the rate 4% taxable per annum. In case the money in the hands of the trustees are not sufficient to pay 40% of the face value as aforesaid, the company will meet the deficit and in case of excess, the trustees will pay the same to the company. the preference shareholders will forgo all claim for arrears of dividend. A sub- committee be appointed consisting of the following of the following persons to supervise the carrying out of the scheme on behalf of the preference shareholders : I. Sri Jagannath Prasad Gupta, 2. Sri Sohanlal Jajodia, 3. Sri Kishan Chand Puri. After reconstruction is effected, the preference shareholders will be entitled to nominate two persons to the board of directors. Provided further that the directors of the company shall not be entitled to create a charge on the assets of the company exceeding rupees 7 lakhs without the consent of the directors nominated by the preference shareholders. It is further resolved that subject to full payment to the debenture holders and other secured creditors and 33% to the unsecured creditors the 40% payment to the preference shareholders in cash must be made within 12 months from the date of the sanctioning of the scheme of reconstruction.

The proposal, therefore, was that the preference shares would be redeemed fully by payment in cash of 40% of the face value of the shares out of Rs. 10,25,000 received from the preference trustees and with regard to the remaining 60% of the face value, the company would agree to allot redeemable preference shares of the face value of Rs. 100 each to the holders of the existing preference shares pro rata.

It is clear that by payment in cash of 40% of the face value of the preference shares there is a corresponding reduction of the share capital of the company. Section 55 of the Indian Companies Act also contemplates that the share capital of a company can be reduced in any way. There may be such a reduction of share capital if the company returns part of the capital money to the preference shareholders in cash. There is an authoritative statement of law on this point at page 155 of Buckley on the Companies Act, twelfth edition :

"A reduction therefore by which capital moneys are to be returned to some or one only and not to all of the shareholders may be resolved upon and confirmed if it be fair and equitable. To call such a transaction a purchase by the company of its own shares within Trevor v. Whitworth which the court cannot sanction (a view which the Court of Appeal in In re Denver Hotel Co., negatived in the particular facts of that case, but regarded as a possible and fatal objection if the facts had been different) is to misunderstand that decision. Every return of capital, whether to all shareholders or to one, is pro tanto a purchase of the shareholder's rights. It is illegal as a reduction of capital, unless it be made under the statutory authority, but in the latter case is perfectly valid."

There is also authority for the proposition that the conversion of issued preference shares into redeemable preference shares is equivalent to a reduction of share capital and simultaneous increase of share capital. That was the view expressed by SIMONDS J. in In re St. James Court Estate Ltd. It was held in that case that conversion of issued preference shares into redeemable preference shares could take place only if the steps appropriate to a reduction and simultaneous increase of capital had been taken.

I, therefore, consider that the argument of Mr. Lalnarain Sinha on this point is not correct and the draft resolution which was to be placed at the meetings of the shareholders on the 27th of November, 1955, involved a question of reduction of share capital and so the special formalities prescribed in sections 55 and 8I of the Act should have been adopted and complied with.

For the reasons expressed, I hold that the proceedings of the meetings of the preference shareholders and of the ordinary shareholders held on the 27th of November, 1955, are illegal because of failure to comply with the statutory provisions required under section 8I of the Indian Companies Act. I would accordingly set aside the order of JAMAUR J. dated the 4th January, 1956, and allow this appeal. I would not make any order as to costs in the special circumstances of this case.

IMAM J. - I agree.

Appeal allowed.

[1949] 19 COMP. CAS. 175 (MAD.)

HIGH COURT OF MADRAS

N.V.R. Nagappa Chettiar

The Madras Race Club

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.

JUDGMENT

This appeal arises out of an action by the members of the Madras Race Club. The action was tried on the original side by Bell, J., and by his judgment he dismissed the suit of the plaintiffs. Hence this appeal by the plaintiffs.

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.

[1973] 43 COMP. CAS. 197 (DELHI)

HIGH COURT OF DELHI

Bharat Kumar Dilwali

Bharat Carbon & Ribbon Mfg. Co. Ltd.

P.N. KHANNA AND PRAKASH NARAIN, JJ.

Suit No. 306 of 1971

DECEMBER 9, 1971

Ved Vyas and D.K. Kapur, for the Plaintiff.

S.N. Chopra and Madan Bhatia, for the Defendants.

JUDGMENT

“Whether the day on which the notice of the general meeting of the company is served and the day on which the meeting is held are to be excluded, when calculating 21 days, the period of notice, prescribed under section 171 of the Companies Act, 1956, herein referred to as ‘ the 1956 Act’?”

Section 171(1) of the 1956 Act reads as follows:

“171. (1) A general meeting of a company may be called by giving not less than 21 days’ notice in writing”.

Mr. S.N. Chopra, the learned counsel for the defendant, contended that the phrase “ not less than 21 days’ notice” has to be construed with reference to section 53(2) of the 1956 Act, which prescribes the time when the service of the notice of a meeting shall be deemed to have been effected. The relevant portion of section 53(2) of the Act reads as follows:

“53. (2) Where a document is sent by post,—

(a) service thereof shall be deemed to be effected by properly addressing, pre-paying and posting a letter containing the document......; and

(b) such service shall be deemed to have been effected—

(i) in the case of a notice of a meeting, at the expiration of forty-eight hours after the letter containing the same is posted, and

(ii) in any other case, at the time at which the letter would be delivered in the ordinary course of post”.

According to Mr. Chopra, 21 days of the notice, required under section 171, start running when the service of the notice of the meeting is effected. Under the Indian Companies Act, 1913, herein called “the 1913 Act”, the service was deemed to be effected, according to regulation 112(2) of Table A in the First Schedule to the said Act, at the time at which the letter would be delivered in the ordinary course of post. Section 53 of the new 1956 Act has introduced a change, which, according to him, lays emphasis on the exact hour at and not only the day on which the service is deemed to be effected. This emphasis on the hour, Mr. Chopra urged, was to fix the point of time from which the twenty-one days of the notice are to run. Each day of the notice is to be taken as a unit of twenty-four hours, starting from the expiry of the forty-eight hours after the time it was posted. And the meeting held on the expiry of the last hour of such a twenty-first day of twenty-four hours was a validly held meeting. Neither the day on which the notice is deemed to be served, nor the day on which the meeting is to be held, submitted Mr. Chopra, would, therefore, be excluded. In support of his argument, Mr. Chopra relied on an English decision of the Court of Appeal in Cornfoot v. Royal Exchange Assurance Corporation . That was a case on a policy of marine insurance on a ship. The insurance was expressed to be upon the ship “ at and from Portland, Oregon, by any route to Algoa Bay and for 30 days in port after arrival, however employed”. The expression “30 days” in the policy was held to mean thirty consecutive periods of 24 hours, the first of which began to run at 11-30 a.m. on August 2, when the ship came into Bay and anchored. The insurance was held to have come to an end before the loss occurred at 4-30 p.m. on September 1.

The contention of Mr. Chopra cannot be accepted. His reference to the words “forty-eight hours” after the notice is posted, occuring in section 53 of the 1956 Act, as if indicating an emphasis on the word “ hour “ has no justification. In the corresponding provision in the 1913 Act, the word employed was “time”, at which the notice would be deemed to be delivered in the ordinary course of post. The use of the word “ hour” in the new 1956 Act does not, therefore, introduce a change of any significance”. The ordinary course of post”, in a vast country like ours, with many far-flung and at places inaccessible distances, where the time taken for delivery of letters varied from place to place, introduced an element of uncertainty. In order to do away with this state of affairs and to import certainty to such an important matter, as the length of notice of general meetings of companies legal fiction was pressed into service, by enacting in the 1956 Act, that the notice is deemed to be served forty-eight hours after posting. The words “ forty-eight hours “ are thus meant to make the service certain, and to fix the day of service as the day on which the said forty-eight hours expire.

The judgment of the Court of Appeal in Cornfoot v. Royal Exchange Assurance Corporation renders no help to Mr. Chopra. The wordings in the policy, under consideration in that case, clearly indicated that the risk was covered for 30 days after arrival of the ship (and not 30 days after the day of arrival). The risk could not be said to commence on the next day after the day on which the ship arrived because the period of time from 11-30 a.m. on August 2, when the ship arrived, up to the beginning of August 3, could not be said to be uncovered. The risk was continuing during the voyage and continued after arrival. The said case, therefore, is of no help to Mr. Chopra’s argument.

The language used in section 171 of the 1956 Act is entirely different. It does not speak of 21 days after the service is effected. On the other hand, it requires 21 days’ notice. The expression “not less than 21 days’ notice” used in section 171 normally implies a notice of 21 whole or clear days. Part of the day, after the hour at which the notice is deemed to have been served, cannot be combined with the part of the day before the time of the meeting on the day of the meeting, to form one day. Each of the 21 days must be a full or a calendar day, so that the notice can be said to be “not less than 21 days’ notice”.

The words “not being less than one month”, occurring in the proviso to section 78 of the Travancore District Municipalities Act, came up for consideration before the Supreme Court in Pioneer Motors (P.) Ltd. v. Municipal Council, Nagercoil . The Supreme Court held that the said words implied that clear one month’s notice was necessary to be given, that is, both the first day and the last day of the month had to be excluded. The Supreme Court noticed with approval the observation of Lord Parker C.J. in Thompson v. Stimpson , in which case no notice to quit any premises was valid under the statute unless it was given “ not less than four weeks “ before the date on which it was to take effect. It was held that the length of notice required was four clear weeks, i.e., a period of four weeks excluding the day from which it ran and the day on which the notice expired. The reasoning on which the judgment was based was that the person for whose benefit the delay was prescribed must be given the benefit of the entire period.

Mr. Ved Vyas, the learned counsel for the plaintiff, cited several decisions, both English and Indian, to support his contention that the words “not less than” so many days have always been interpreted to mean the whole days. It is not really necessary to go into these authorities in view of the judgment of the Supreme Court in Pioneer Motor’s case , which is binding on us. But, in order to notice the consistency in the interpretation of the aforesaid relevant words in a long catena of decisions, we may here refer to them in brief.

In Chambers v. Smith , every writ was to be made returnable on some day “not being less than 15 days” after the service thereof. It was held that the date of the issue of the writ as well as that of the service thereof were to be excluded providing an interval of clear 15 days. In In re Railway Sleepers Supply Company , an interval of “not less than fourteen days”, which under section 51 of the English Companies Act, 1862, was required to elapse between the meetings passing and confirming a special resolution of a company was held to mean an interval of 14 clear days, exclusive of the respective days of the meeting. Chitty J. cited in that case with approval Lord Tenterden’s test in Webb v. Fairmaner and Young v. Higgon , which was to reduce the time to one day. Using the words of the learned judge, supposing the statute in our case had said, a notice of “not less than one day”; if the notice was served, say on the 1st of January, the meeting could not properly be held on the 2nd of January, for one day must intervene, therefore, the 3rd of January would be the earliest day and adding twenty more days to make up the twenty one, the meeting could not be held before the 23rd. Chitty J. had also observed that the general rule of law in the computation of time was that fractions of a day were not reckoned, in other words, to render the day a sort of indivisible point. In McQueen v. Jackson, less time than fourteen days from the day on which the summons were not to be made returnable, was held to mean that 14 clear days must elapse between the date of service and that of return. In In re Rector Whaling Ltd. the words “not less than 21 days’ notice”, in section 117(2) of the English Companies Act, 1929, were construed to mean, not less than twenty-one clear days, exclusive of the day of service of the notice and exclusive of the day on which the meeting is held.

Taking up the Indian case law, the expression “not less than 30 days”, in section 22(2) of the Income-tax Act, 1922, was interpreted in Commissioner of Income-tax v. Ekbal & Co. , to mean outside two points of time, one at which the period begins and the other at which it expires. This meant 30 clear days and was to be distinguished from the expression within 30 days, which was within two points of time. In N.V.R. Nagappa Chettiar v. Madras Race Club , the words “not less than 21 days” in section 81 of the 1913 Act, were held to mean an interval of 21 clear days in computing which the date of the meeting and the date of the service of the notice were to be excluded. In Anokhmal Bhurelal v. Chief Panchayat Officer, Rajaslhan, Jaipur , the expression “at least seven days before the date of election” were construed to mean seven clear days. In Smt. Haradevi v. State of Andhra , the words “not being earlier than three days” from the date of the service of the order in section 6(c) of the Requisition of Buildings (Andhra Area) Ordinance, 1953, were interpreted to mean that three whole days must elapse between the date of the service of the order and the date fixed for delivering possession. Three periods of 24 hours calculated from the hour of the day on which the order was served, were held to be not sufficient compliance with the terms of the relevant provision. In I M. Lall v. Gopal Singh , rule 4 of the All India Bar Council (First Constitution) Rules, 1961, came up for consideration. The words in the said rule, relevant for our present purpose, were “not less than 10 days “and” not more than 21 days “ before the date of the election. These words, it was held, referred to clear, complete or entire days, intervening between the two terminal days. It was observed: “It is not correct to take into account in computing days, fraction of a day. A day is a unit of time and has been treated as a standard of measurement. A day is not an aggregation of hours, minutes or seconds when it is construed as a unit of time. When law refers to days, it does not take into reckoning a further sub-division of day in hours or minutes. By a day is understood a ‘ calendar day ‘ or an entire day. A ‘day’ is a space of time between two successive midnights and in computing day as a period of time, law does not take into consideration fractions of two days in order to make up one complete day”.

The contention of Mr. Chopra, that a change has been introduced in the law relating to length of notice, is not correct. We, on the other hand, find that the legislature has avoided a change. Under section 81(2) of the 1913 Act, a general meeting for passing special resolution could be called by a notice of “not less than 21 days”. Regulation 49 of Table A in the First Schedule to the 1913 Act, however, provided that, subject to the said provisions of sub-section (2) of section 81 of the 1913 Act. 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 could be given. The legislature was, thus, well aware of the previous provisions as well as the interpretation thereof. While enacting the Companies Act, 1956, the provisions contained in Regulation 49 about the inclusion or the exclusion of any particular day were completely done away with. The language about the notice of “not less than 21 days’, wiich the courts had been interpreting to mean full complete days, used in section 81(2) was retained in the new section 171 of the 1956 Act, without incorporating the further explanatory words inclusive or exclusive of any particular days. The adoption of this language in section 171 is significant and shows the intention of the legislature to exclude the day on which the service was deemed to be effected and the day of the meeting. Reference to section 53(2) while interpreting section 171 as urged by Mr. Chopra, has, therefore, no justification. Length of notice of general meeting of companies is an important subject and the courts have been interpreting the relevant words in the provisions dealing with it, with a remarkable unanimity, and, now when as we have held above, the 1956 Act has not introduced any change, we would better adhere to the settled rules, which we must say with respect have been properly settled.

The question posed accordingly must be answered in the affirmative. The day of service of the notice of the general meeting and the day of the meeting have to be excluded, while counting twenty one days the period of notice prescribed under section 171 of the 1956 Act.

Costs shall abide the event.

[1949] 19 COMP. CAS. 175 (MAD.)

HIGH COURT OF MADRAS