[1986] 60 COMP.
CAS. 353 (DELHI)
HIGH COURT OF DELHI
v.
Apparels Exports Promotion
Council.
M. K. CHAWLA J.
SUIT NO. 759 OF 1984
FEBRUARY 13, 1985
Arun
Kumar and S. K. Kaul for the Plaintiff.
G.
L. Rawal and Sunil Aggarwal for the Defendant.
M.
K. Chawla J.—The
plaintiff, M/s. Maharaja Exports, through its sole proprietor, Ms. Sushma
Gulati, has claimed the following reliefs in her suit for declaration:
(a) A decree for declaration declaring
that the impugned notice dated April 4, 1984, issued by the defendant, M/s.
Apparels Export Pro motion Council, regarding the holding of the fourth annual
general meeting of the defendant on May 14, 1984, is illegal, invalid and
inoperative and that no annual general meeting can be held in pursuance thereof
;
(b) declaring that all the 27 members of
the existing executive committee are not entitled to hold the respective
offices in view of the judgment of Hon'ble Mr. Justice S. S. Chadha referred to
above;
(c) declaring that the 18 members of the
executive committee have retired by rotation and are not entitled to continue
in office as members of the executive committee;
(d) declaring that the 9 members of the
executive council whose names are mentioned in the impugned notice have
automatically ceased to be the members of the executive committee and are not
entitled to function as such after May 14/15, 1984 ;
(e) declaring that all the proxy forms lodged with the
council regarding the fourth annual general meeting to be invalid and illegal
particularly those on the forms other than the official forms ;
(f) declaring the fourth annual general meeting purportedly
held on May 14/16, 1984, in so far as it relates to election of 9 executive
committee members who have retired by rotation to be illegal and invalid.
In order to understand the
true scope of the plaintiff's suit, it will be relevant to keep in mind the
salient features as given in the plaint. The plaintiff is carrying on business
as manufacturers and exporters of ready-made garments of which Ms. Sushma
Gulati is the sole proprietor; that M/s. Apparel Exports Promotion Council
(hereinafter referred to as "the council") is a public limited
company registered under the provisions of the Companies Act, 1956 (hereinafter
to be referred to as "the Act"), as per the certificate of
incorporation issued by the Registrar of Companies, Delhi and Haryana; that the
defendant is also licensed under section 25 of the Act by the Central
Government; that the objects for which the defendant company has been
established are given in the memorandum of association which amongst other
things includes "to promote, advance, increase, develop export, of all
types of ready-made garments excluding woollen knitwear, garments of leather,
jute and hemp, to undertake all export promotion measures including appointment
of representatives, agents or correspondents in foreign markets to conduct
propaganda and publicity" ; that the plaintiff is a member of the
defendant council as provided under article 5(a) of the articles of association
; that the membership of the defendant is about 5,000; that as per the articles
of association of the defendant, the executive committee is to be elected to
manage the affairs of the council; that the executive committee can have
maximum 30 members besides four Government nominated members; that the
membership of the executive committee is on regional basis since the council is
an all India body ; that as per the provisions contained in the articles of association,
one-third of the elected members of the executive committee will retire by
rotation every year and the vacancy so caused shall be filled up after the
annual general meeting every year; that a member of the council is entitled to
be elected as a member of the executive committee ; that the articles of
association of the defendant authorise the defendant to frame rules and
procedure for election to the executive council; that the council framed
certain rules which were, however, challenged by certain members through a suit
filed in this court being Suit No. 873 of 1981 entitled Pramod Chopra v.
Apparels Exports Promotion Council, that the said suit was ultimately decreed
on May 19, 1983, and the impugned rules were declared to be invalid ; that the
appeal against the said single judge's judgment filed by the council also
failed ; that as far as the plaintiff understands, the council has not framed
any rules of procedure for election so far, though they were required to do so
under the amended article 48 of the articles of association.
That on April 30, 1984, the
plaintiff received a notice regarding the fourth annual general meeting of the
defendant to be held on Monday May 14, 1984, at 11 a.m. at FICCI auditorium,
New Delhi, to transact the business incorporated in the notice ; that though
the notice is purportedly dated April 4, 1984, the same is understood and
reasonably believed by the plaintiff to have been posted only on April 26,
1984. by the defendant to the various members; that this notice is totally
illegal, invalid and mala fide for the grounds mentioned in the plaint; that in
view of these grounds, it is apparent that the fourth annual general meeting
convened through the impugned notice is illegal, invalid and the defendant
cannot be permitted to hold the same. Hence, the present suit.
Along with this suit the
plaintiff also filed an application (I.A. No. 2448 of 1984) under Order 39,
rules 1 and 2, CPC, praying for the issuance of an ad interim restraint order
against the defendant from giving effect to the notice dated April 4, 1984,
which is illegal and void and from holding the annual general meeting in
pursuance thereof.
After the suit was
registered and after hearing the learned counsel for the plaintiff on the injunction
application, S.B. Wad J. passed the following order on May 11, 1984:
"I.
A. No. 2448 of 1984 :
It is stated by the counsel
for the plaintiff that no election rules laying the procedure for the election
are framed by the defendant company. The notice for the annual general meeting
purported to be issued on April 4, 1984, is actually issued on April 26, 1984.
Counsel for the plaintiff states that it was received by the plaintiff on April
30, 1984. The notice was also published in the Economic Times, Bombay, on April
29, 1984, and Delhi on April 25, 1984. Section 171 of the Companies Act
requires that at least 21 days' notice of the annual general meeting, should be
given. Prima facie there is a ground for granting ad interim order restraining
the defendant firm from holding the annual general meeting on May 14, 1984. I
order accordingly. Notice for May 16, 1984, has to be issued today."
The plaintiff preferred to
serve the defendant with the restraint order only 15 minutes before the start
of the annual general meeting. Immediately after the service of the restraint
order, the defendant rushed to the court, filed the reply to the plaintiff's
application and obtained the following order on May 15, 1985:
"Having heard the
counsel for the parties, I find that an order one way or the other will dispose
of the suit itself. The complexity of the matter is such that a full trial with
evidence of both the parties is necessary for the proper disposal of the suit.
However, considering the urgency of the matter, I order that the suit itself be
disposed of expeditiously in the month of July, 1984. Since all the
arrangements for the election are already made and a lot of expenses have
already been incurred, I direct that the election/annual general meeting shall
be held on May 16, 1984, at 2 p.m. However, the result of the election shall
not be declared till the disposal of the suit."
On the same day, the
defendants were further directed to deposit with the Deputy Registrar (0) the
ballot papers, the proxies and other relevant papers relating to the elections
within 2 days after the annual general meeting is held. The venue of the
meeting was also shifted from FICCI auditorium to Hotel Taj Palace, Sardar
Patel Marg, New Delhi. In compliance with the directions of this court, the
fourth annual general meeting has since been held. Subsequently, the defendant
approached the Division Bench in appeal (F.A.O.(OS) Nos. 59 and 60 of 1984) for
the vacation of the order restraining the defendants from declaring the result
of the election of the members of the executive committee. This appeal was
disposed of by the Division Bench on May 25, 1984, vide the following order:
"After hearing counsel
for the parties, we are of the opinion that the old arrangement should
continue, but the result of the election shall be declared. The members
declared to have been elected as directors shall not act till the decision is
given by the learned single judge. The learned single judge will hear and
decide the matter on the date fixed by him. We are not expressing any opinion
at this stage since he has not given any decision on the merits of the
controversy.
The F. A. Os. are disposed
of."
Before the defendant could
file the reply, the plaintiff was allowed to amend the plaint.
In the written statement, the defendant took up a
number of preliminary objections, inter alia, alleging that the present suit of
the plaintiff is false, frivolous and vexatious and otherwise the same is a
misuse of the process of law; that the alleged disputes fall within the purview
of the company court jurisdiction and, as such, the suit for declaration is not
maintainable; that no suit without consequential relief is maintainable; that
no suit can be brought in the name of trading name when the same is a sole
proprietorship firm; that the suit is bad for delay and laches. On merits, the
defendant admitted the correctness of the various provisions of the articles of
association under which one-third of the elected members of the executive
committee were to retire at the conclusion of each annual general meeting and
the vacancies so caused were to be filled in. The defendant also admitted the
filing of the suit by one of the members of the council and the issuance of
directions to the defendant for framing of the rules. In compliance with the
directions of the Company Law Board and also the observations made in the
judgment of this court in Suit No. 873 of 1981, necessary amendments were
carried out which ultimately resulted in the dismissal of their appeal. The
defendant also admitted the issuance of a notice for holding the fourth annual
general meeting on May 14, 1984, at FICCI auditorium but denied the fact that
the plaintiff received the notice on April 30, 1984. The notice which was
posted on April 26, 1984, was strictly in accordance with the provisions of
section 53(2) of the Act and its service must be deemed to have been effected
immediately on the expiry of 48 hours from the time of posting. In these
circumstances, in law, service on the plaintiff has been effected on April 28,
1984, which gave full 16 days' notice to the plaintiff whereas she was entitled
(only) to 14 days' notice. The defendant also denied each and every ground
mentioned in paragraph 14 of the plaint which were made the basis for the
issuance of notice and holding of the fourth annual general meeting as illegal.
The fourth annual general meeting has already been held. The defendant also
took up the objection that not only the suit is mala fide but is also bad for
delay and laches. The plaintiff has been taking an active interest in the
election of the members of the executive committee and has been a party to
signing a number of pamphlets in this behalf. Even though the notice was
allegedly served on the plaintiff on April 30, 1984, the plaintiff intentionally
filed the present suit on May 11, 1984, when May 12 and 13, 1984, were holidays
being second Saturday and Sunday. Even after ex parte injunction, the plaintiff
intentionally did not serve the notice on the defendant or on any of its
officers either on May 11, 12 or 13, 1984, even though the office of the
defendant was open for making the arrangements for the holding of the annual
general meeting on May 14, 1984. The plaintiff got the service of the notice
effected only at about 10.45 a.m. on May 14, 1984, when all the arrangements
for the holding of the meeting were complete. Under these circumstances, the
plaintiff has not come to the court with clean hands and is not entitled to the
discretionary relief on this account also. It was prayed that the suit which is
a mala fide one and has been filed with the only motive of stalling the
elections deserves dismissal with special costs.
In the replication, the
plaintiff controverted the pleas raised by the defendant in the written
statement and reiterated the facts as stated in the plaint.
On the pleadings of the
parties, the following issues were framed:
1. Whether the defendant was enjoined in law to frame fresh rules for
holding elections of the defendant council after they were struck down by a
judgment of this court?
2. Whether this court
has the jurisdiction to try this suit?
3. Whether fourteen days' notice of the proposed fourth annual general
meeting of the defendant council was not served on the plaintiff in accordance
with law?
4. Whether the defendant was bound to hold elections to all the 27
posts of executive committee members in view of the judgment of this court in
Suit No. 873 of 1981, when the articles of association and rules for election
of the defendant council were struck down? In any case, was the defendant
enjoined to hold election for at least 18 members of the execucutive committee
as the annual general meeting was being held after two years?
5. Whether the delay in the despatch of the notice shows mala fides and
oblique motives on the part of the defendant council to secure re-election of
the retiring members. If so, to what effect?
6. Whether the list of members as circulated by the defendant council
contained the names of some members from whom certain sums were still payable
to the defendant council and its effect?
7. Whether the suit of the plaintiff is bad for delay and laches and/or
otherwise the conduct of the plaintiff is such as to disentitle her to any
relief in the suit as alleged in paras 13 and 14 of the written statement?
8. Relief.
Learned counsel for the
parties agreed that the evidence in the case be allowed to be led by filing
affidavits and documents. The plaintiff filed her own affidavit while the defendants
relied upon the affidavit of Shri S. K. C. Mathur, Secretary of the defendant
council. Later on, the learned counsel for the plaintiff agreed to produce the
proprietor of the plaintiff for her cross-examination by the learned counsel
for the defendant. She was cross-examined on September 20, 1984.
I have heard the arguments
of the learned counsel for the parties and with their help gone through the
record carefully. My findings on the above issues are as follows :
Issue
No. 1 :
The onus of this issue has
rightly been placed on the plaintiff. During the course of the arguments, the
learned counsel for the plaintiff did not press this issue nor did he address
any arguments, nor refer to the various provisions of the memorandum and
articles of association of the defendant firm indicating that the defendants
were enjoined in law to frame fresh rules for holding the elections to the
defendant council after the previous rules were struck down by the judgment
dated May 19, 1983, of this court in Suit No. 873 of 1981 titled as Pramod
Chopra v. Apparels Exports Promotion Council. This issue is, therefore, decided
against the plaintiff.
Issue
No. 2 :
The objection of the
defendants is that as the disputes raised in the suit fall within the purview
of the company court jurisdiction, the present suit for declaration is not
maintainable. This objection appears to have been raised only for the sake of
raising an objection. Section 10 of the Companies Act defines the jurisdiction
of the court to entertain suits in such like matters. The definition of
"court" in clause (11) of section 2 and section 10 of the Companies
Act, 1956, dealing with jurisdiction of courts read together enables the
shareholders to decide as to which court they should approach for remedy in respect
of a particular matter. This provision does not purport to invest the company
court with the jurisdiction over every matter arising under the Act. In view of
the eloborate provisions contained in the 1956 Act in regard to management and
conduct of a company's affairs, including even important internal matters of
administration, the scope for interference by the civil court may have become
more limited, but the power has not at all been taken away. It has been rightly
observed in a case reported as R. Prakasam v. Sree Narayana Dharma Paripalana
Yogam [1980] 50 Comp Cas 611 (Ker) that except in cases where the Companies
Act, 1956, confers jurisdiction on the company court or some other authority
like the Central Government or the Company Law Board, either expressly or by
implication, all other disputes pertaining to a company are to be resolved
through the forum of civil court when the disputes are kept on being resolved
by them. Where wrong is done to an individual member, he can insist, by
recourse to a civil suit, on "strict observance of the legal rules,
statutory provisions and provisions in the memorandum and articles of
association which cannot be waived by a bare majority of shareholders".
Similar view was taken in a judgment reported as Panipat Woollen and General
Mills Company Ltd. v. P. L. Kaushik [1969] 39 Comp Cas 249 (Punj). While
interpreting the provisions of section 9 of the Code of Civil Proceduce
vis-a-vis the Companies Act, during the course of the judgment, it was observed
as under (headnote).
"Under section 9 of
the Code of Civil Procedure, 1908, civil courts have jurisdiction to try all
suits of a civil nature excepting suits of which their cognizance is expressly
or impliedly barred. Unlike some statutes, the Companies Act does not contain
any express provision barring the jurisdiction of the ordinary civil courts in
matters covered by the provisions of the Act. In certain cases like winding-up
of companies, the jurisdiction of civil courts is impliedly barred.
Where a person objects to
the election of directors and claims a decree for a declaration that he was one
of the directors, there is no provision which bars the civil court either
expressly or by implication from trying such a suit."
In the present suit also,
besides other reliefs, the plaintiff has sought a declaration that all the 27
members of the existing executive committee are not entitled to hold the
respective offices in view of the judgment of this court and further that the
18 members of the executive committee who have retired by rotation are not
entitled to continue in office as members of the executive committee. The
judgment, referred to above, fairly and squarely applies to the facts of the
present case and there is no reason to oust the jurisdiction of this court to
entertain the present suit. Under these circumstances, this issue is decided in
favour of the plaintiff and against the defendants.
Issue
No. 3 :
This
is the most material issue, the decision of which will decide the fate of the
parties. Before the relevant facts are taken into consideration as to whether
the plaintiff was duly served with a clear 14 days' notice of the proposed
fourth annual general meeting of the defendant council, the relevant provisions
of the Companies Act have to be kept in view. Section 171(1) of the 1956 Act
reads as follows :
"A
general meeting of the company may be called by giving not less than 21 days'
notice in writing..."
Admittedly,
the defendant council falls within the categories specified in clause (6) of section
25 of the Companies Act. In exercise of powers conferred by this provision, the
Central Government notified that under section, 171(1) the general body meeting
may be called by giving a notice in writing of not less than 14 days instead of
21 days.
The
next relevant provision is section 53(2); It reads as under :
"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......
(b) such
service shall be deemed to have been effected—...
(i) in the case of a notice of a meeting,
at the expiration of 48 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 ;
Section 172(3) lays down
that the accidental omission to give notice to, or the non-receipt of notice
by, any member or other person, to whom it should be given shall not invalidate
the proceedings at the meeting.
Section 173 requires the
company to annex along with the notice the explanatory statements sought to be
considered during the meeting.
It is not disputed that the
date of service of notice of the general meeting and the date of the meeting
have to be excluded while counting 14 days, the period of notice prescribed
under section 171 of the Companies Act. The expression "not less than 14
days" used in section 171 (as amended by virtue of the Central Government
Notification) normally implies notice of 14 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
date of the meeting, to form one day. Each of the 14 days must be a full or a
calendar day so that the notice can be said to be "not less than 14 days'
notice".
With this background, let
us now revert to the facts as have been brought out in the pleadings and the
documents, to determine if the plaintiffs have been served with 14 days' clear
notice of the annual general meeting of the defendant company or not. According
to the learned counsel for the plaintiff, on April 4, 1984, the meeting of the
executive committee of the defendant company was called to fix the date of the
fourth annual general meeting. Before the convening of this meeting, all the
formalities of carrying out the amendments as directed by the Company Law Board
had been complied with. The executive committee decided to hold the annual
general meeting on May 14, 1984, at 11.00 a.m. in the FICCI, Golden Jubilee
Auditorium, New Delhi. The office of the defendant company was required to send
along with the notice, the business relating to (i) the consideration of
accounts, the balance-sheets (which in this case was for a period of two years)
and the reports of the board of directors and auditors ; (ii) the declaration
of dividend ; (iii) the appointment of directors in the place of those
retiring, and (iv) the appointment of and the fixation of the remuneration of
the auditors. This requirement has admittedly been complied with by the
defendant company.
According to the plaintiff,
the impugned notice even though dated April 4, 1984, was posted to the
plaintiff and many other members on April 27, 1984. It was received by the
plaintiff on April 30, 1984, as is clear from the postal stamp affixed on the
envelope, exhibit P-8, which was an officially declared holiday in the area
where the plaintiff carried on business. It is also alleged that April 29, 1984,
was a Sunday while May 1, 1984, was again a public holiday and, therefore, it
came to the plaintiff's notice only on May 2, 1984. This notice did not allow
clear 14 days' time before the annual general meeting and, as such, is bad and invalid and
the annual general meeting cannot be held in pursuance thereof. It is also
alleged that even if 48 hours are computed from the date of the despatch of the
notice, then April 29, 1984, being a Sunday has to be excluded and the
plaintiff must be deemed to have been served with notice only on the next date.
The service of the notice, according to the learned counsel, is not a mere
formality and the notice appears to have been posted on April 27, 1984, with a
view to avoid the presence of a large number of persons and deprive them of
their right to vote and to contest the election for the membership of the
executive committee. It is also contended that when a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the court is entitled and rather bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to and full effect
must be given to the statutory fiction and it should be carried to its logical
conclusion. If the purpose of the statutory fiction, mentioned above, is kept
in view, then, according to the learned counsel, it follows, that the purpose
of that fiction would be completely defeated if the defendant company
intentionally and wilfully defaulted in sending the notices on the date which
will deprive most of its members from exercising their statutory duty.
After
giving careful consideration to each and every point urged by the learned
counsel for the plaintiff during the course of the arguments, I do not find any
substance in the same. At the outset, it may be mentioned that in the prayer
clause, the plaintiff has not raised any grievance that she was not given 14
days' clear notice of the holding of the meeting. In sub-para (a) of paragraph
20 of the prayer clause, a declaration has been sought that the impugned notice
dated April 4, 1984, issued by the defendants regarding the holding of the
fourth annual general meeting of the defendants on May 14, 1984, is illegal,
invalid and inoperative and that no annual general meeting can be called in
pursuance thereof. Exhibit P-2 is the notice of the holding of the fourth
annual general meeting on May 14, 1984, at 11 a.m. at FICCI Golden Jubilee
Auditorium, New Delhi, to transact the following ordinary business :
(1) To consider and adopt the audited
balance-sheets and the income and expenditure accounts of the council for the
years ended December 31, 1981 and December 31, 1982, along with reports of the
auditors and the executive committee of the council.
(2) To appoint auditors of the council
to hold the office from the conclusion of this meeting until the conclusion of
the next annual general meeting and to fix their remuneration.
(3) To
appoint members to the
(a) Executive committee in place of Shri........................who
retire by rotation and is eligible for reappointment....
Admittedly, this notice
complies with all the requirements of section 173 of the Companies Act. Prima
facie this notice cannot be said to be illegal.
On the second aspect, the
facts mentioned in the plaint are to be taken at its face value. In paragraph
14 of the unamended plaint, the plaintiff alleged that the impugned notice
dated April 4, 1984, was posted only on April 26, 1984, by the defendant to the
various members. However, in the amended plaint, the plaintiff advanced the
date of posting of the notice as on April 27, 1984, which was received by her
on April 30, 1984. Even assuming that the impugned notice was issued by the
defendant company on April 27, 1984, even then, in my opinion, the company has
complied with the provisions of section 171 of the Companies Act. In this case
48 hours will expire on April 29, 1984. Even if we exclude the date of the
posting of the notice and the date of the receipt of the notice as per the
provisions of clause (b) of sub-section (2) of section 53 of the Companies Act,
even then the notice must be presumed to have been served on the plaintiff 14
days prior to the holding of the meeting. In the corresponding provision in the
1913 Act, the word implied was "time" at which the would be deemed to
be delivered in the ordinary course of post.
"Ordinary course of
post" in a vast country like ours with many far-places at inaccessible
distance, where the time taken for delivery of letters varied from place to
place induced an element of uncertainty. In order to do away with this state of
affairs and to import certainty to such an important matter, as to the length
of notice of general meetings of companies, legal fiction was pressed into
service, by indicating in the 1950 Act, that the notice shall be deemed to have
been served 48 hours after posting. The words "48 hours" are meant to
make the service certain and to fix the date of service as the date on which
the said 48 hours expired. Under these circumstances, as already observed
earlier, the notice issued on April 27, 1984, will expire on April 29, 1984,
which is well within the phrase "14 days' clear notice".
This aspect can also be
looked into from another angle. Sub-section (3) of section 172 of the Companies
Act lays down that even the accidental omission to give notice to, or the
non-receipt of the notice by, any member or other person shall not invalidate
the proceedings at the meeting. The "accidental omission" means that
the omission must be not only not designed but also not deliberate. This
expression implies absence of intention or deliberate design. The word
"or" appearing in this sub-clause is of great significance. The
company has only to prove on record that they have sent the notice to its members
on the addresses furnished by them. The non-receipt of the notice, under no
circumstances, shall invalidate the holding of the meeting or the proceedings
thereof. In this case, it is the admitted case of the parties that the
defendant company did send the notice and it in fact was received by the
plaintiff. Even the non-receipt, as observed earlier, would not have made any
difference.
At this stage, it will be
relevant to mention that the learned counsel for the plaintiff is mixing up the
service of the notice of the holding of the meeting with the filing of the
nomination for the membership of the executive committee of the defendant
company. By virtue of section 257 of the Companies Act, a person who is not a
retiring director shall be eligible for appointment to the office of director
at any general meeting, if he or some other member intending to propose him
has, not less than 14 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. Mere knowledge of the holding of the meeting is sufficient. The
plaintiff has nowhere alleged in the plaint or in her affidavit that she was
not aware of the holding of the fourth annual general meeting on May 14, 1984.
It is also not alleged that the notice of the meeting was served on her on the
night of April 30, 1984, or that she made efforts in securing the signature of
a proposer and that she was not able to contact them. On the other hand, the
defendants have placed on record the numerous advertisements which have been
appearing from time to time, in the various newspapers and in different parts
of the country, intimating the members, to intimate the change in address, if
any, latest by April 12, 1984, and to clear the annual subscription so that
they may be eligible to vote at the forthcoming annual general meeting of the
council. Such notices were issued from April 5, 1984, till April 15, 1984. The
notices for the holding of the annual general meeting on May 14, 1984, were
also advertised in the various newspapers from April 14, 1984. The defendant
council also took care to publish the list of the nominations which had been
received from the members signifying their candidature for the appointment to
the office of the defendants in the fourth annual general meeting. Furthermore,
the plaintiff has been taking an active part in the affairs of the defendant
council, inasmuch as it is a party to the issuance of posters/pamphlets
opposing the candidature of Shri Mohanjit Singh and his associates as they are
alleged to have committed some malpractices, etc. All these facts go to show
that the plaintiff was fully aware of the holding of the fourth annual general
meeting on May 14, 1984, and was well within time to have filed her nomination,
if she was desirous of contesting the election. It has nothing to do with the
notice of the holding of the meeting which too has been held to have been
properly served on the plaintiff.
In view of these
circumstances, is it open to the court to extend the period of 48 hours in
order to give more time to the members enabling them to file the nominations?
The simple answer to this query raised by the learned counsel for the plaintiff
is in the negative. The Legislature in its wisdom reduced the period of 21 days
to 14 days by virtue of sub-section (6) of section 25 of the Companies Act. The
Legislature was also aware of the 14 days' notice as contemplated in section
257 of the Companies Act. It is not desirable for the courts to say that the
period of service of the notice should be reasonable. By doing this the court
will be extending the period which has purposely been limited to minimise the
scope of the mischief which used to be created in the holding of the annual
general meetings. In view of the fact that the plaintiff was fully aware of the
date of the meeting prior to the receipt of the notice, the plaintiff cannot
come forward and throw the blame on the defendant company. Taking an overall
view of the circumstances brought out on record and discussed earlier, there is
no hesitation for this court to hold that the plaintiff was duly served with 14
days' clear notice of the holding of the fourth annual general meeting of the
defendant council. This issue, therefore, is decided against the plaintiff.
Issue
No. 4 :
In order to appreciate the
scope of this issue, one has only to refer to the various dates admitted by the
parties. On October 29, 1981, the third annual general meeting was held. On
June 12, 1982, notice was issued to the members for the correction of
addresses, etc., so that the fourth annual general meeting is held within the
stipulated period. One of the members filed an application and obtained the
stay of the holding of the annual general meeting and for taking steps in this
direction, from this court on June 28, 1982. This ad interim stay dated August
25, 1982, was confirmed till the disposal of the suit. The plaintiff ultimately
succeeded in the suit and a decree was passed by S. S. Chadha J. on May 19,
1983. The respondent company preferred to file an appeal before a Division
Bench. This appeal was admitted on August 8, 1983, but they refused to vacate
the injunction. Being not satisfied with the dismissal of their miscellaneous
application, the defendant company filed a special leave petition. The order
dated May 19, 1983, was stayed by the Hon'ble Supreme Court but the court made
it clear that it would not have any effect on the Central Government (Company
Law Board) if they proposed to take any steps for the amendment of the rules.
Finally, the Company Law Board directed the defendant company to amend their
rules in order to bring them in conformity with the judgment of S.S. Chadha J.
dated May 19, 1983. On January 5, 1984, the defendant company held an
extraordinary general meeting and approved the amended rules and immediately
thereafter sought the approval of the Central Government. Within thirty days of
the Central Government's approval, the rules were submitted before the
Registrar of Companies at Kanpur and got the same approved. After having
completed the formalities, the respondent company held the executive committee
meeting on April 4, 1984, and fixed the holding of the fourth annual general
meeting for May 14, 1984. During this process, a period of two years has
expired inasmuch as the annual general meetings have not taken place for the
years 1982 to 1984.
The contention of the
learned counsel for the plaintiff is that the election be now held for all the
27 posts the holders which were to retire after the holding of the third annual
general meeting in the year 1981, in case the convening of the fourth annual
general meeting is held to be in order. It is not disputed that the defendant
council has on its board 27 elected members and four Government officials.
One-third of such directors have to retire every year by virtue of the
provisions of section 256 of the Companies Act. The plaintiff is not one of the
retiring directors. It may be that by virtue of the judgment of S. S. Chadha
J., the rules of the defendant company were held invalid and they were directed
to amend the same. At this stage, I do not propose to interpret the judgment of
S. S. Chadha J. but the fact remains that it will have prospective effect. The
defendant company cannot be held negligent or blamed for not holding the annual
general meetings. In fact, they were helpless in view of the circumstances
created by the filing of the various suits. As per the order sheet dated May
15, 1984, during the pendency of the suit, the defendant council was directed
to hold the elections of the executive committee members on May 16, 1984, at 2
p.m. but the result of the election was not to be declared. This order was
modified by the Division Bench of this court, wherein the council was directed
to declare the result of the election but the members declared elected were
required not to act till the decision of the present suit. It comes to this
that the 9 members of the executive committee have already been declared
elected. It is not denied that the fifth annual general meeting has already
been held except for the election of the executive committee members because of
the order of the Division Bench. Learned counsel for the defendant states at
the Bar that immediately after the decision of this case, they propose to hold
the election of the 9 members for the fifth annual general meeting in the month
of February, 1985, and they will hold the next annual general meeting and in
this way all the 27 members will be declared elected. For the reasons explained
above, I am not inclined to issue any directions to the defendant council for
holding the election for at least 18 members as urged by the learned counsel
for the plaintiff because this direction will not only be a harsh one, but will
also create lot of complications. The law must take its own course. Under no
circumstances, the defendant council can be blamed for not holding the annual
general meetings or electing one-third members. At this stage, I am not inclined
to grant this discretionary relief in favour of the plaintiff. Ordered
accordingly.
Issue
No. 5 :
Learned counsel for the
plaintiff in support of this issue contended that the defendant council acted
mala fide and with oblique motive to despatch the notices for the holding of
the fourth annual general meeting on a day which will deprive the members for
contesting the election for the membership of the executive committee of the
council. According to him, if the executive committee of the council had held
the meeting on April 4, 1984, and decided to hold the fourth annual general
meeting on May 15, 1984, there was no occasion for them to have despatched the
notices at such a late stage. Their intention obviously is to keep the people
in dark about the holding of the annual general meeting and deprive the
eligible members to contest the election.
Prima facie none of these
arguments has any substance. To start with, the plaintiff unfortunately has not
named the officer of the defendant company or the office bearers who could be
said to be in league for not despatching the notices within reasonable time.
Mala fides have to be alleged against some person. The defendant in this case
is the council. The particulars about the fraud or mala fides or motive are missing.
The general allegations of mala fides/motive, however strong the words in which
they are stated may be, if unaccompanied by particulars, are insufficient to
amount to an averment of the fraud or mala fides or motive of which any court
can take notice. Even otherwise, as observed earlier, section 53(2) of the
Companies Act gives the right to the defendant council to serve the members
with the notice of the meeting at the expiration of 48 hours after the letter
containing the same is posted. This legal obligation has been duly complied
with by the defendant council. Furthermore, as already discussed earlier, the
council started issuing notices by citations in the various newspapers
throughout India, intimating the date of the meeting, requiring the members to
furnish their correct addresses and to send their nominations within the
statutory period. These publications continued appearing from April 5, 1984, to
April 15, 1984. The defendant also started despatching the letters to
individual members supplying information about the holding of the fourth annual
general meeting. In compliance of the service of the individual notices as well
as the publication in the various newspapers, the defendant council was able to
correct the list of the members by April 20, 1984. By this time they also
started receiving the nominations for the post of executive committee members
the lists of which were published from time to time. While in the witness box,
even the plaintiff has not led any evidence showing the mala fides/motive on
the part of the defendant council to secure the re-election of the retiring
members by not sending notices. Unfortunately, she also did not mention the
name of any person/office-bearer or the member of the executive committee
alleging mala fide intention. The plaintiff having failed to furnish the
necessary particulars either in the plaint or in the form of evidence, this
issue has to be decided against the plaintiff.
Issue
No. 6:
Learned counsel for the
plaintiff has not pressed this issue and the same is hereby decided against the
plaintiff.
Issue
No. 7 :
It is the case of the
defendant that the plaintiff even after having been duly served with the notice
giving her clear 14 days, preferred to file the present suit on May 11, 1984,
when May 12, 13, 1984, were holidays for the courts, being Second Saturday and
Sunday. After having obtained the ad interim injunction on May 11, 1984, the
same was not got served intentionally immediately thereafter. The defendants
made all arrangements for the holding of the annual general meeting on May 14,
1984. Many members have reached Delhi from distant parts of the country to
attend the meeting. The plaintiff intentionally served the notice of the ad
interim injunction at 11 a.m. on May 14, 1984, whereas the meeting was fixed
for 11.30 a.m. According to the learned counsel, the plaintiff was fully aware
of the fact that the office of the defendant council was functioning on May 12,
13, 1984, as they were expected to receive proxies, 48 hours before the time of
commencement of the annual general meeting, as well as were also required to
give the inspection of the proxies as per the provisions of the Companies Act,
before the closing hours on May 13, 1984. This fact was known to the plaintiff
and she was also aware of the name of the counsel for the defendant. The
conduct of the plaintiff, according to the learned counsel for the defendant,
disentitled her to any relief in the suit.
Learned counsel for the
plaintiff, on the other hand, submits that May 11, 1984, was a Friday and 12th
and 13th being holidays, the plaintiff had no other option but to serve the
defendant with the ad interim order on May 14, 1984, which she did in the early
hours of the next working day.
The defendant cannot impute
motive or hold the plaintiff responsible for the delay or laches in the filing
of the present suit.
On a consideration of the
material on record, in my opinion, the defendant has something to say on this
aspect. As already observed, the plaintiff not only was served with a notice of
the holding of the annual general meeting but she was also aware of the annual
general meeting from other sources, including that of publication in the
various newspapers. In her cross-examination, she had also admitted that by
writing the letter, exhibit D-1, that Shri Mohanjit Singh had betrayed their
association (GEA), she meant to say that Mohanjit Singh had betrayed the
association by his entering into an agreement with another association of
garment exporters, other than the defendant council. She has also been
participating in the affairs of defendant No. 1 council by issuing pamphlets
and taking up the cause of the members of the council. If she had any
grievance, the cause of action had arisen immediately after the service of the
notice of the holding of the annual general meeting. There was no reason for
her to have delayed the action and disturb the annual general meeting at the
last moment thereby causing inconvenience not only to the defendant council but
also to the various members who had reached Delhi from distant parts of the
country. Even if she had been successful in obtaining the ex parte ad interim
injunction on May 11, 1984, it was her bounden duty to have served the officers
of the defendant council on that very day or at least on the next day, so that
the council may have taken steps either for the vacation of the ex parte ad
interim order or informing its members not to attend the meeting. She was also
fully aware of the fact that Shri G.L. Rawal, advocate, is the retainer of the
defendant council and even if she was under a wrong impression that the office
of the defendant council will remain closed on May 12, 13, 1984, an attempt
should have been made to serve on the advocate at his residence/office. No
explanation is forthcoming as to why she did not care to take steps in this
direction. The only inference that can be gathered is that she had the
intention to disturb the annual general meeting and, as such she can be held
responsible for the delay and laches for the filing of the present suit which
disentitles her to the relief claimed in the present suit. This issue is,
therefore, decided against the plaintiff.
Relief:
As a result of the above
discussion, I see no force in the suit and the same is hereby dismissed with
costs.
[1973] 43 Comp. Cas. 17 (Bom.)
HIGH COURT OF BOMBAY
v.
Lalji B. Desai
S.B. BHASME, J.
First Appeal No. 262 of 1971
July 26 and 27,
1971
F.S. Nariman for the appellants.
G.A. Thakkar with A.N.
Mody, D.H. Buck with G.K. Munshi for the respondent.
Bhasme, J.—This is an
appeal by defendants Nos. 2 and 3 and is directed against the judgment and
decree passed in the suit filed by respondents Nos. 1 and 2 against the
appellants and respondent No. 3. The suit was for a permanent injunction
restraining respondent No. 3 and its directors, servants and agents from
allowing the appellants to act as directors of the respondent No. 3-company. A
similar injunction was also claimed against the appellants restraining them
from acting in any manner as the directors of the respondent No. 3-company.
Respondent No. 3 is a
public limited company registered under the Indian Companies Act and carries on
business, inter alia, as manufacturer of rayon yarn and has its registered
office at Bombay. It is the plaintiffs’ case that on April 9, 1969, the board
of directors appointed the appellants as additional directors of respondent No.
3-company. The board of directors consisted at that time of 8 members excluding
those additionally appointed directors. The plaintiffs have referred to the 8
directors as functioning directors and that may be to distinguish them from the
appellants who are appointed additional directors. Thereafter notices dated
l0th April, 1969, were received by respondent No. 3-company proposing the
appellants as directors at the next annual general meeting. On June 11, 1969,
the 22nd annual general meeting of the respondent No. 3-company was convened.
At the general meeting two directors, Kasturbhai Lalbhai and Naval H. Tata,
retired by rotation and were again re-elected as directors. At the same meeting
by two separate resolutions, the appellants were appointed directors. The two
resolutions are referred to in the plaint as resolutions Nos. 5 and 6.
The plaintiffs by the suit
challenged the legality of the appointment of the appellants on certain
grounds. According to the plaintiffs the number of directors on the board can
be increased by the company under section 258 of the Indian Companies Act by
passing a resolution. No such resolution was ever duly notified, proposed and
passed. In the absence of any such resolution, respondent No. 3-company had not
the power to appoint the appellants as directors. The plaintiffs submit that
resolution Nos. 5 and 6 are, therefore, invalid, void and of no effect.
The plaintiffs also submit
that without prejudice to the aforesaid ground, the appointment of the
appellants as directors was illegal, void and of no effect as they had not
filed letters of consent under section 264(1) of the Act in respect of their
proposed appointment as directors at the annual general meeting. The
plaintiffs, as shareholders of respondent No. 3-company, have the right to
property in respondent No. 3-company. It is for this reason that they had filed
the suit restraining the appellants from acting as directors of respondent No.
3-company.
Respondent No. 3-company
filed its written statement and submitted that the appointment of the
appellants as directors was valid and legal. It has stated that a separate
resolution to increase the number of directors was not required under the
provisions of the law. The company also stated in paragraph 12(a) of the
written statement that on 9th April, 1969, the appellants had filed their
letters of consent to act as directors, if appointed. After receipt of these
letters the appellants were appointed as directors. It is mentioned in the
written statement that after their appointment as additional directors on 10th
April, 1969, two shareholders delivered to the company notices under section
257 of the Act intending to propose the appellants as candidates for the office
of the directors of respondent No. 3-company at the next annual general meeting
of the company. The appellants were not required to file any letters of consent
under section 264(1) of the Act before their election as directors at the 22nd
annual general meeting. According to the company the appellants were validly
proposed and elected as directors.
The appellants between
themselves filed one written statement and supported the validity of their
appointment on all the grounds alleged by respondent No. 3-company. In addition
the appellants stated that on their appointment as additional directors, the
strength of the board was increased to 10 directors. In paragraph 8 of the
written statement it is submitted that they were not required to file any
letters of consent under section 264(1) of the Act before their appointment as
directors at the meeting. Without prejudice to this defence it is also pleaded
that they did file the letters of consent on 9th April, 1969, with respondent
No. 3-company. They argued that, as additional directors, they were persons to
whom section 264(1) of the Act did not apply. Assuming that there was any such
requirement, it is asserted that it was a mere irregularity and that did not
disable them from acting or functioning as directors. The made it clear that it
was implicit in the two resolutions appointing them as directors that the
number of directors was, if necessary, being increased. According to them no
separate resolution under section 258 or article 169 of the articles of
association of the company was necessary for increasing the number of directors
from 8 to 10. At any rate, the absence of any separate resolution will not
affect the validity of the resolution appointing them as directors of
respondent No. 3-company. They denied that it is mandatory under section 258 of
the Companies Act or under article 169 of the articles of association of the
company that before the number of directors is increased, a resolution
increasing the number of directors ought to have been duly notified or proposed
or passed. There were other allegations made by the appellants against the
plaintiffs but for deciding the points raised in this appeal they are not at
all relevant. As the parties had not sought any issues on the basis of those
allegations, the learned judge was not called upon to consider whether they
were true or false. The substance of those allegations was that according to
the appellants the plaintiffs had filed the suit mala fide at a late stage at
the instance of one Rasiklal J. Chinai who was defeated in the contest for
election of directors at the general meeting of the shareholders of respondent
No. 3-company.
At the trial the learned
judge framed the relevant issues. Parties did not lead any oral evidence. By
consent of the parties only documents were exhibited. The defendants had also
resisted the suit on the ground that the plaintiffs being shareholders cannot
have any grievance against respondent No. 3-company as the matter in dispute
was concerning the internal management of the company and the suit by the two
shareholders was not maintainable. Perhaps it was felt by the parties that the
issues arising in the suit are purely questions of law and it was not necessary
to adduce any oral evidence.
The learned judge, on a
consideration of the evidence on record and the submissions of the parties, has
recorded his findings. He held that the present suit is maintainable. He came
to the conclusion that the letters of consent under section 264(1) of the Act
for the appointment of the appellants as directors at the annual general
meeting were not necessary. In view of this finding he held that whether or not
such letters were filed need not be considered. According to him the impugned
resolutions Nos. 5 and 6 passed at the annual general meeting of the company on
June 11, 1969, appointing the appellants as directors of the company were
illegal. Consistent with this finding the learned judge decreed the plaintiff’s
suit and granted the injunctions against respondent No. 3-company and the
appellants.
As stated above the
appellants, aggrieved by the decree, have come to this court with the present
appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody,
instructed by M/s. Haridas & Co., appears for respondents Nos. 1 and 2, the
original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi, instructed by M/s.
Bhaishankar Kanga and Girdharilal,
appears for respondent No. 3-company. It must be stated at the outset that
respondents Nos. 1 and 2 have purported to file cross-objections against the
finding recorded by the learned judge about the consent letters under section
264(1) of the Act. Mr. Thakkar conceded that the cross-objections are
misconceived but mentioned that he had the right, as an advocate appearing for
the respondents, to assail the decree under appeal on any of the grounds
decided against him. Therefore, the points for determination in this appeal
are:
(1) Whether the board of directors of
the company before and after the annual’ general meeting consisted of ten
members or whether at the annual general meeting the strength of the board of
directors was increased from 8 to 10.
(2) Whether the company can increase the
strength of the board of directors only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts.
(3) Has the board of directors
contravened the mandatory provisions of section 173 of the Act by not
furnishing any information about the proposed special business or by furnishing
information, which is hopelessly inadequate or misleading?
(4) Can the plaintiffs rely on the above
contraventions in any form without specific averments in the plaint?
(5) Has the learned judge erred in
holding that the additional directors, like the retiring directors, are not
required to file written consent duly signed before their reappointment as
directors by the company?
(6) Is the suit not competent as the alleged
irregularities arise in the course of the internal management of the company?
Before
I proceed to consider the various points urged before me, it is desirable to
refer to the relevant provisions of the Companies Act, 1956, and the articles
of association of respondent No. 3-company.
Section
2(13) of the Companies Act defines “director” as any person occupying the
position of director, by whatever name called. Section 255 provides for the
appointment of directors and the proportion of those who are to retire by
rotation. Section 256 contains provisions for ascertainment of directors
retiring by rotation and filling up of the vacancies. Under section 257 a
person who is not a retiring director shall be eligible for appointment to the
office of director 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. The other provisions of section 257 are not quite relevant and need not
be referred to here.
Under section 358 of the
Act, subject to the provisions of sections 252 255 and 259, a company in
general meeting may, by ordinary resolution, increase or reduce the number of
its directors within the limits fixed in that behalf by its articles. Section
259 in certain cases requires the sanction or approval of the Central
Government for any increase in the number of its directors. Section 260
provides that the board of directors, if permitted by the articles of
association, can appoint additional directors. The board is to exercise that
power so as not to exceed the maximum strength fixed for the board by the
articles. The first proviso to section 260 makes it clear that such additional
directors shall hold office only up to the date of the next annual general
meeting of the company. Section 262 deals with the filling of casual vacancies
amongst directors. Under section 263(1) ordinarily there will be only one
resolution for the appointment of one director at the annual general meeting of
the company. A single resolution is permitted under certain special
circumstances for appointing more than one director. Section 263(2) provides
that a resolution moved in contravention of sub-section (1) shall be void,
whether or not objection was taken at the time to its being so moved. Section
264(1) under certain circumstances requires that the candidate for directorship
should file his written consent with the company before his appointment as
director at the meeting. Section 264(2) requires that a person appointed as a
director shall not act as a director unless he has within the prescribed time
signed and filed his consent with the Registrar to act as such director.
Apart from the group of
these sections, there are two more sections, which assume importance while
deciding the points, which arise in this appeal. Section 172 requires that
every notice of a meeting of a company shall contain certain relevant
particulars. Leaving the other details, I must only mention that under section
172(1) such notice shall contain a statement of business to be transacted at
the meeting. Under section 173(1)(a) in the case of an annual general meeting, all
business to be transacted at the meeting shall be deemed special, with the
exception of the business relating to four specified items. Item No 3 deals
with the appointment of directors in the place of those retiring. Section 173
(1)(b) makes it clear that in the case of any other meeting, all business shall
be deemed special. Section 173(2) contains a direction that where any items of
business to be transacted at the meeting are deemed to be special under
sub-section (1), there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each such item of business,
including in particular the nature of the concern or interest, if any, therein
of every director, the managing agent, if any, the secretaries and treasurers,
if any, and the manager, if any. The proviso also requires further and better
particulars in specified cases. It is not necessary to refer to that proviso at
any length.
Now it remains to mention the relevant articles of
association of the company. Under article 142, the directors have power at any
time and from time to time to appoint any other qualified person to be a
director as an addition to the board so that the total number of directors at
any time shall not exceed the maximum fixed. Any person so appointed as an
addition to the board shall retain his office only up to the date of the next
annual general meeting but shall be eligible for re-election at such meeting.
Under article 164, at every annual general meeting of the company, one-third of
such of the directors for the time being as are liable to retire by rotation
or, if their number is not three or a multiple of three, the number nearest to
one-third shall retire from office. Article 166 makes it clear that a retiring
director shall be eligible for re-election. It is true that counsel on either
side did refer to other sections and articles to elucidate the various points
raised by them. I need not consider them all at this stage.
The
first point made by Mr. Nariman on behalf of the appellants is about the
strength of the board of directors of the company. He objected to the
expression “functioning directors” and “additional directors” as used by the
plaintiffs in the plaint. He said that there is no warrant for any such
distinction. Whether the directors are appointed at the meeting or by the board
of directors, they all together constitute the board. The directors in that
capacity have the same rights, privileges and obligations under the provisions
of the Act. He referred to the definition of “director” as contained in section
2(13) of the Companies Act. In all other places in the Act the board of
directors was mentioned as such and he says that the distinction sought to be
made by the plaintiffs is without any legal significance. It appears to me that
the plaintiffs have used the different expressions only for a better
understanding of their case. The appellants were, in the first instance,
appointed as additional directors and later on they were reappointed as
directors. But, apart from this fine distinction in phraseology, the point of
substance made by Mr. Nariman is that the company had not increased the number
of directors from 8 to 10 at the annual general meeting by the reappointment of
the appellants. When the board of directors in exercise of their power under
section 260 of the Act co-opted the appellants, the number of directors on the
board was increased from 8 to 10. Even at the meeting the number was not
reduced. The two directors retired by rotation and the two additional directors
ceased to hold office. There were, therefore, four clear vacancies. When the
company passed four resolutions reappointing the four persons as directors
there was no increase and the provisions of section 258 are not attracted. I
find it very difficult to accept this submission. The composition of the board
of directors with additional directors will not be the same as the board of directors appointed by the company at the general meeting.
It cannot be said that the company had at any time surrendered its inherent or
statutory power to increase the number of directors on the board when the board
appointed or co-opted additional directors. As observed by Lord Hanworth M.R.
in Worcester Corsetry Limited v. Witting, the power conferred on the directors to appoint
additional directors is a temporary power vested in them, and this is to be
reviewed and perhaps confirmed at the general meeting. Even the wording of section
260 underlines the temporary nature of this power conferred on the board of
directors. Section 260, first proviso, makes it clear that such directors shall
hold office only up to the date of the next annual general meeting. It is true
that under article 142 of the company, the board of directors can appoint any
number of additional directors at any time and from time to time so as not to
exceed the permitted maximum limit. Consistent with the first proviso to
section 260, the article also makes it clear that the person so appointed as an
addition to the board shall remain in office only up to the date of the next
annual general meeting. I am of the view that the board of directors cannot by
the appointment of additional directors increase the strength of the board so
as to affect the power of the company vested in it under section 258 of the
Act.
Then Mr. Nariman argued
that the learned judge was not justified in holding that the company can
increase the strength of the board only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts. I have not used the exact words of the learned judge but in
substance that appears to be the finding recorded by him. According to Mr.
Nariman all that section 258 requires is that the company, subject to the other
restrictions imposed on it, must resolve to increase or reduce the number of
directors in the general meeting. The section itself has not prescribed any
other formality for effecting the increase or decrease in the number of
directors. Mr. Nariman points out that under the Companies Act, wherever
separate resolutions were found necessary, provisions were made in that behalf.
He referred to section 263 of the Act. I have already mentioned above the
substance of that section. Ordinarily, there will be a separate resolution for
appointing a person as a director at the annual general meeting of the company.
Mr. Nariman says that the company can exercise the power vested in it under
section 258 by passing one or more resolutions and as no form is prescribed,
one will have to look at the substance. When there are 8 members on the board
of directors, the company can by simply appointing two members in addition
increase the number and this can be done without passing a separate resolution.
He says that it is implicit in the act of appointing. The company has exercised
the power to increase the number.
While dealing with this
power of the company to increase the number, Mr. Nariman referred to the corresponding
English law and submitted that the provisions are substantially similar. Mr.
Nariman relied on an English case, Worcester Corsetry v. Witting. The learned judges were considering the effect of two
apparently inconsistent articles of the company. But, as the case also dealt
with the power of the company to appoint directors and thereby increase the
number, it has some relevance while appreciating the point raised before me. Article
83 of Table A contained the provisions similar to section 258 of the Indian
Companies Act. At page 649, Lawrence L.J. observes as follows about the
existence of the power to increase and its exercise by the company:
“Article 83 of Table A
shows in the plainest terms that the company has power to increase or reduce
the number of its board. It is said that that does not involve the nomination
and appointment of particular gentlemen or ladies as directors, but it seems to
me that that is necessarily implied in the provision of article 83. If, for
instance, there have been four directors, within the maximum number of
directors, and the board desire that two additional directors shall be
appointed, it can convene, in my judgment, a meeting under article 83 for the
purpose of increasing the number of directors by two named persons, appointing
these two persons, and thereby increasing the number of directors”.
Slesser L.J., at page 654,
approves the above observations and says:
“The more natural view of
article 83 is that it is not redundant or merely introducing unnecessary
machinery which is already provided by article 12 in dealing with the maximum
and minimum, but, as Lawrence L.J. has indicated, is itself conferring a power
not only to increase the number but to increase that number by itself
appointing directors to the extent to which it is intended to increase the
number”.
About the power of the
company to increase the number of directors under its articles of association,
the learned author in his book Pennington’s Company Law, 2nd edition, pages
456-57, sums up the legal position as under:
“The power to appoint
subsequent directors is usually exercisable by the members of the company in
general meeting by ordinary resolution. If the articles prescribe the maximum
number of directors who may be appointed, appointments in excess of the maximum
are void. Usually, however, the members are empowered to increase or reduce the
maximum number of directors by ordinary resolution, and then an appointment of
a director in excess
of the former maximum is taken to be an exercise of the power to increase the
number of directors, and is valid”.
While
making the last-mentioned observation, the learned author in the footnote has
referred to the above-mentioned case. So Mr. Nariman argued that section 258
was an enabling section, which authorised the company to increase or decrease
the number of directors just by an ordinary resolution. As singular includes
plural, one has to look at the result and not the number of resolutions to find
out whether the company has exercised the power vested in it.
Mr.
Thakkar, with equal force, stressed the word “resolution” and said that it was
a condition precedent to the valid appointment of directors resulting in the
increase of the number of directors. Any other construction, he says, will
render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish
the said decision on certain grounds. He says that article 83 construed by the
learned judges refers to a general meeting. Section 258 of the Companies Act
provides that the company may in general meeting by ordinary resolution
increase or reduce the number of its directors. In my opinion this distinction
is not one of substance. Any such difference in the wording will not affect in
any manner the efficacy of the observations made by the learned judges in the
above-mentioned case.
Then
Mr. Thakkar was at pains to point out that no such point was ever raised and
debated in that case. The observations of the judges quoted above are merely
obiter dicta. Mr. Thakkar says that the judges were reconciling the two
apparently conflicting articles which conferred the power of appointing
directors on the board of directors and the company. He referred to several
text books on Company Law, viz., Pennington’s Company Law, 2nd edition, page
456-57, Modern Company Law by C.B. Gower, 3rd edition, page 21, Palmer’s
Company Law, page 533, Halsbury’s Laws of England, volume 6, page 279, article
574, Buckley on the Companies Act, 13th edition, page 885, and submitted
that the above-mentioned authority was quoted by the learned authors to show
that the company had not surrendered its power to appoint directors in favour
of the board of directors. But, the decision is not cited by Mr. Nariman as a
binding authority on this court. Mr. Nariman relies only on the wording of the
article considered by the judges, which resembles the wording of section 258.
Under both the provisions the company has the power to increase the number of
directors. When the company at its meeting resolves to appoint additional
directors in excess of the present strength of the board, then it is an
instance where the company is exercising its two-fold powers. The company
increases the number not by separate resolution but by appointing additional
directors. The effect is that the company has increased the number of
directors. That appears to be a sensible construction which can be adopted
while interpreting the relevant provisions contained in section 258 of the
Companies Act, 1956. In the result, in my opinion, it is not necessary for the
company to pass a separate resolution increasing the number of directors before
appointing the directors to fill the additional sanctioned posts. In law it is
possible for the company to comply with the provisions of section 258 when it
chooses to appoint within the permitted limit additional directors so as to
increase the strength of its present board. The learned judge was in error in
coming to the conclusion that in the absence of a separate resolution the
appointment of the appellants as directors of respondent No. 3-compauy was null
and void. The legality of the resolutions Nos. 5 and 6 cannot be challenged on
the ground that there was any contravention of the provisions of section 258 of
the Act.
Then
I propose to consider points Nos. 3 and 4 together as the discussion of law is
likely to be overlapping. Point No. 3 will involve the consideration of the
provisions of sections 172 and 173 of the Act and point No. 4 is about the
sufficiency or otherwise of the pleadings.
I
have already set out above the relevant provisions of section 173 of the Act.
Section 173 will have to be read with section 172(1) of the Act. Under section
172(1) every notice of a meeting of a company, among other things, must contain
a statement of the business to be transacted at the meeting. Section 173(1)
contains classification of the business and indicates when the business shall
be treated as special. Under section 173(2) any items of special business
mentioned in the notice must be accompanied by a statement setting out all
material facts concerning such items of business.
Mr.
Nariman for the appellants drew my attention to the notice of the meeting,
which is produced at exhibit D at page 90 of the paper book. It is worth while
to reproduce the material items of business:
Serial
No. 3
To
elect a director in the place of Shri Kasturbhai Lalbhai who retires by
rotation under article 164 of the articles of association of the. company, but
being eligible, offers himself for re-election.
Serial
No. 4
To
elect a director in the place of Shri Naval H. Tata, who retires by rotation
under article 164 of the articles of association of the company, but being
eligible, offers himself for re-election.
Serial
No. 7
To
appoint a director in place of Shri Laljibhai Chhaganlal Kapadia, who was
appointed an additional director of the company by the board of directors on
10th April, 1969, and who ceases to hold office under section 260 of the
Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act,
1956, has been received by the company.
Serial
No. 8
To appoint a director in
place of Shri Nimjibhai Chhanganlal Kapadia who was appointed an additional
director of the company by the board of directors on 10th April, 1969, and who
ceases to hold office under section 260 of the Companies Act, 1956, on the date
of this meeting in respect of whom a notice as required by section 257 of the
Companies Act, 1956, has been received by the company.
Items Nos. 3 and 4
constitute ordinary business and Items Nos. 7 and 8 constitute special business
within the meaning of section 173 of the Act, Being special business Items Nos.
7 and 8 are followed up by explanatory statements contained in an annexure to
the notice. Explanatory statement accompanying Item No. 7 read as under:
“Shri Laljibhai Chhaganlal
Kapadia was appointed an additional director on 10th April, 1969, by the board
of directors of the company and he retains his office as a director only up to
the date of this annual general meeting under the provisions of section 260 of
the Companies Act, 1956. As required by section 257 of the Companies Act, 1956,
a notice has been received from a member signifying his intention to propose
his appointment as a director. It is recommended that he be appointed as a
director”.
Explanatory statement
accompanying Item No. 8 is identical with the difference that it is in respect
of the other additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on
the contents of the notice in general and the explanatory notes in particular,
Mr. Nariman submits that there is compliance with the requirement of section
173 of the Act. Mr. Nariman points out that under article 164 of the articles of
association of the company, at every annual general meeting of the company,
one-third of such of the directors for the time being as are liable to retire
by rotation or if their number is not three or a multiple of three, the number
nearest to one-third are to retire from office. The strength of the board was 8
and obviously the number of directors retiring by rotation will be two. Items
Nos. 3 and 4 in the notice in unmistakable terms give an indication of this
factual and legal position. As these items of business were not special there
was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8
constituted special business. The contents of these items conveyed to the body
of shareholders sufficient information about the proposal to fill up additional
posts. The two persons had acted as additional directors and they ceased to
hold office under section 260 of the Act on the day of the meeting. It is
stated that the company had received proposals about their appointment under
section 257 of the Act. It is implicit in this statement that the board wants
the company to consider the appointment of directors for two additional posts.
The explanatory statement contains one important additional particular. The
board of directors has made a recommendation that the two persons who have
acted as additional directors be appointed directors at the meeting, According
to Mr. Nariman the board has complied with the provisions of section 173 of the
Act.
Then Mr. Nariman argued
that in the present state of pleadings, it was not open to the plaintiffs to
raise any objections about the non-compliance with the requirement of section
173 of the Act. He says that the plaint nowhere refers to section 173 of the
Act. A fair reading of the plaint would show that the main grievance of the
plaintiffs was that no resolution was proposed or passed under section 258 of
the Companies Act read with article 169 of the articles of association of the
company about increasing the strength of the board of directors. According to
the plaintiffs the two resolutions appointing the appellants as directors are
not valid as they in effect increased the number of directors from 8 to 10
without an appropriate resolution being passed as required by section 258 of
the Act. This is the only grievance of the plaintiffs about the non-compliance
with the condition in section 258 of the Act. Mr. Nariman says that in view of
this specific case made out by the plaintiffs, there was no occasion for the
defendants to meet any other case about the illegality resulting from the
non-compliance with the provisions of section 173 of the Act. Mr. Nariman in
this connection heavily leaned upon a decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti
Prasad jain. The learned
judges of the Division Bench of that
High Court had to tackle a similar point about the sufficiency or otherwise of
the pleadings. While dealing with the issue No. 4(a) in that proceeding Misra J.,
at page 202, in paragraph 17, observed as follows:
“The notice is challenged
as fraudulent and contrary to the statute. None of the grounds have been
pleaded. For the first time this contention appears to have been advanced in
course of argument before Mr. Justice Barman. In none of the affidavits the
petitioner swears that the notice was tricky, misleading or insufficient. The
question is one of mixed question of fact and law, and it is not permissible to
be taken at the stage of hearing for the first time”.
The learned judge certainly
refers later on to section 172(1) and section 173(2) of the Act. At page 214,
paragraph 58, Das J. observed as follows:
“At the outset, I must say
that the plea of invalidity of the notice was not taken either in the plaint
which was filed in the court of the subordinate judge or in the petitions and
affidavits before the honourable company judge of this court. At a fairly late
stage of the case, oral submissions were made challenging the validity of the
notice for the extraordinary general meeting of 29-3-1958. On that ground
alone, the point could have been left out of consideration”.
However, it must be stated
that the learned judges, despite the insufficiency of the pleadings, considered
the merits of the case, and held that the notice was in compliance with the
statutory requirements of section 173 of the Companies Act, as the meeting held
on the basis of such notice and the resolutions passed therein were not in any
way invalid. Mr. Nariman says that this authority has acquired additional
sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain
v. Kalinga Tubes Ltd. Wanchoo J., at page 1545, paragraph 24, has observed as
follows:
“It is, however, urged that
the notice for the general meeting of the 29th March, 1958, was not in
accordance with section 173, and so the proceedings of the meeting must be held
to be bad. This objection was, however, not taken in the petition and we have,
therefore, not permitted the appellant to raise it before us, as it is a mixed
question of fact and law. We may add that, though the objection was not taken
in the petition, it seems to have been urged before the appeal court. Das J.
has dealt with it at length and we would have agreed with him if we had
permitted the question to be raised”.
Relying on these decisions
Mr. Nariman maintained that the resolutions cannot be challenged on the ground
that the notice of the meeting and the explanatory statements accompanying the
notice were defective in any manner.
Mr. Nariman also submitted
that the provisions of section 173 were directory and not mandatory. Strict
compliance with section 173 was not necessary and there was in the present case
substantial compliance with the provisions of that section. It is for this
reason that, according to Mr. Nariman, any defect in the notice is capable of
being waived by the shareholders as the company had unanimously appointed the
appellants at the annual general meeting. If there were any averments in the
plaint setting out the various defects and irregularities in the drafting of
the notice and the explanatory statements, then it was open to the defendants
to adduce evidence and satisfy the court that the plaintiffs by their conduct
were stopped from objecting to the legality of the resolutions. As an instance
of the so-called irregularity, Mr. Nariman referred to In re Express
Engineering Works Ltd. It was a case where the legality of the company’s meeting
was challenged on the ground that it was styled a directors’ meeting and
business was transacted as if it was a general meeting. The issue of debentures
at the meeting W.I.P challenged
as not valid. Younger L.J. agreed with Lord Sterndale M.R., who held that the
shareholders must be deemed to have acted in the meeting as shareholders and
not as directors. What is stated by Younger L.J. at page 471 is to the
following effect:
“I am of the same opinion.
I am content to rest my conclusion upon what was said by Lord Davey in
Solomon’s case that a company is bound in a matter which is intra vires
by the unanimous agreement of all the corporators”.
But, this decision is not
of any assistance to us. A syndicate of five persons formed a private company.
They were all the directors and also shareholders. They all attended the
meeting and transacted business. The objection to the legality of the meeting
was rightly overruled.
Mr. Nariman then dwelt on
the case, In re Oxted Motor Company Ltd The court held that it was not open to a creditor to
impeach the validity of a resolution to wind up the company as it was competent
to 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. Even this
decision will not carry us any further as in the present case everything turns
upon the interpretation of the words of section 173 of the Companies Act.
Then Mr. Thakkar for the
respondents submitted that section 173 was in terms mandatory and not
directory. He strongly relies upon a decision of the Gujarat High Court in
Sheth Mohanlal Ganpairam v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. Mr. Thakkar pinpoints the following observations of
Bhagwati J. (as he then was), at page 338:
“The object of enacting
section 173 is to secure that all facts which have a bearing on the question on
which the shareholders have to form their judgment are brought to the notice of
the shareholders so that the shareholders can exercise an intelligent judgment.
The provision is enacted in the interests of the shareholders so that the
material facts concerning the item of business to be transacted at the meeting
are before the share holders and they also know what is the nature of the
concern or interest of the management in such item of business, the idea being
that the share holders may not be duped by the management and may not be
persuaded to act in the manner desired by the management unless they have
formed their own judgment on the question after being placed in full possession
of all material facts and apprised of the interest of the management in any
particular action being taken. Having regard to the whole purpose and scope of
the provision enacted in section 173, I am of the opinion that it is mandatory
and not directory and that any disobedience of its requirements must lead to
the nullification of the action taken”.
Mr. Thakkar reinforced his
argument by reference to a Calcutta decision in which it was held that it was incumbent on the
directors to disclose in the notice of the general meeting full facts. Before I
refer to the relevant observations of the learned judges, it is necessary to
know in brief the facts of that case. Section 294(2) of the Companies Act (as
amended by Act 65 of 1960) provides that the appointment of a sole selling
agent by the board of directors shall cease to be valid if it is not approved
by the company in the first general meeting held after the date on which the
appointment is made. The court held that the provision was not directory but
mandatory. The mere substantial compliance was not enough but there must be a
strict compliance. The impugned agreement about the appointment was referred to
in the report of the directors and the same was adopted in the subsequent
adjourned annual general meeting. But the adoption or approval of the report
was treated as ordinary business and not as a special business. In the
circumstances, the learned judges allowed the appeal and granted ad-interim
injunction against the company and the directors restraining them from getting
passed the resolution in the ensuing annual general meeting of the company. At
page 124 of the report (Shalagram Jhajharia v. National Co. Ltd.) Bose C.J. has made the
following observations after quoting section 173(2)
and (3) of the Act:
“So it appears that under
section 173(2) an explanatory note with regard to the special items of business
has to be annexed to the notice of the meeting; but this was not done with
regard to the agreement dated the 27th January, 1962. Therefore, there was no
compliance with the requirements of the statute inasmuch as it was incumbent
under the section, if any special business was to be transacted at the meeting,
to specify the nature of such business in the notice”.
Mitter J., at page 134,
dilates as follows on the importance of the statutory provision:
“The provision for
inspection of the agreement at the registered office of the company in terms of
section 173(3) is not sufficient for the purposes of section 173(2)... As the legislature
has thought it fit to provide that shareholders must approve of the appointment
of selling agents the opportunity given to the shareholders must be full and
complete and there must be a full and frank disclosure of the salient features
of the agency agreement before the shareholders can be asked to give their
sanction. The provision for inspection of the agreement at the registered
office of the company
is not enough. Few shareholders have either the time or inclination to go to
the registered office to find out what the company is about to do. Moreover,
such an opportunity is illusory in the case of shareholders who do not live in
Calcutta, when the registered office is situate here”.
Coming
nearer home, Mr. Thakkar quotes a recent decision of this court in Firestone
Tyre and Rubber Co. v. Synthetics and Chemicals Ltd Madon
J. reviewed the entire case law on the subject while interpreting section
173(2) of the Act. I reproduce the headnote which neatly summarises the
conclusions of the learned judge:
“Under
section 173(2) of the Companies Act, where any items of business to be
transacted at the meeting are deemed to be special, there shall be annexed to
the notice of the meeting, a statement setting out all material facts
concerning each such item of business, including, in particular, the nature of
the concern or interest, if any, therein, of every director, the managing
agent, if any, the secretaries and treasurers, if any, and the manager, if any.
The object underlying section 173(2) is that the shareholders may have before
them all facts, which are material to enable them to form a judgment on the
business before them. Any fact which would assist them in making up their mind,
one way or the other, would be a material fact under section 173(2) and has to
be set out in the explanatory statement. This provision is mandatory and not
directory and disobedience to its requirements must lead to nullification of
the action taken”.
Then
Mr. Thakkar brought to my notice one more decision of the Calcutta High Court
in Shalagram Jhajharia v. National Company Ltd. It must be noted that the
subject-matter of the litigation in this case was an impugned selling agency
agreement which figured in the Calcutta decision cited earlier by Mr. Thakkar.
The plaintiff challenged the legality of the notice of the annual general
meeting on the ground that the explanatory statement attached to the proposed
ordinary resolution was in contravention of section 173 of the Act. On facts it
was held that the explanatory statement was misleading in relation to the facts
stated and it did not disclose certain other material facts. While concluding
that the explanatory statement in that case was bad and in violation of section
173 of the Act A.N. Ray J. indicated the correct principle of law. He says at
page 36:
“The
further question is whether the explanatory statement is in violation of provisions
contained in section 173 of the Companies Act.... It depends upon the facts of
each case as to whether an explanatory statement is tricky or misleading”.
Ray
J. in Biswanath Prasad Khailan v. Neiv Central Jute Mills, while considering the essentials
of a valid notice convening an extraordinary general
meeting, extracted two broad principles from the authorities died before him.
At page 135, he says:
“Two broad principles can
be extracted from the authorities: First, that notice must be fairly and
intelligently framed and it must not be misleading or equivocal. A benevolent
construction cannot be applied. Secondly, some matters must be brought
pointedly to the attention of the shareholders, for example, where the
directors are interested in a contract or matter which is to be submitted to a
meeting for confirmation or approval, it appears to be desirable and in certain
cases absolutely necessary to disclose the fact in the notice convening the
meeting or in some accompanying circular”.
In the wake of these
various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the
comments of the learned author of Law and Practice of Meetings by Frank
Shackleton, 5th edition. At page 27 under the caption “Special Business must be
clearly stated” the following requirements are noted:
“As to the essentials of a
notice, it must state clearly the nature of any special business to be
transacted, as no other business can be transacted in addition or otherwise,
unless the notice refers to ordinary business which it is competent for the
meeting to transact It is, however, always desirable to state clearly the
nature of any special business to be transacted, and if the regulations provide
for notice of such special business, any resolutions passed without due notice
will be invalid”.
To reiterate with emphasis
the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v.
Great Boulder Proprietary Gold Mines Ltd. Article 102 of the articles of associations of the
company provided as follows:
“If at any general meeting
at which an election of directors ought to take place the place of any director
retiring by rotation is not filled up, he shall, if willing, continue in office
until the ordinary meeting in the next year, and so on from year to year until
his place is filled up, unless it shall be determined at any such meeting on
due notice to reduce the number of directors in office”.
The question arose whether
the plaintiff, a retiring director, despite his failure to get re-elected,
continued in office. His claim was resisted on the ground that the company in
effect had at its meeting reduced the number of directors. Cohen L.J. overruled
the contention and held that the number of directors in office cannot be
reduced unless there was a specific resolution of the company to that effect
after a mention of the general nature of such a resolution has been made. The
concluding words of
article 102 require a specific notice to that effect. Lord Greene M.R., at page
30 of the report, clarifies the legal position in the following words:
“In
the present case counsel for the company argued that the company had, in effect,
determined to reduce the number of directors in office (a) by requiring to
reelect the retiring plaintiff, and (b) by not electing anybody to fill that
vacancy. I do not accept that argument. It. appears to me that the concluding
words of article 102 require a specific resolution, not merely to re-elect A,
but a specific resolution that nobody shall be elected to fill the vacancy”.
It
must be noted that the absence of due notice and a specific resolution was
linked up with certain legal consequences, for instance, continuation of the
retiring director in office. It was mostly on account of the peculiar wording
of article 102 that the court held that a proper resolution after due notice of
the proposed special business was absolutely necessary.
Then
Mr. Thakkar cited a decision in Tiessen v. Henderson . The relevant part of the
headnote of that case may be stated:
“The
notice of an extraordinary general meeting must disclose all facts necessary to
enable the shareholder receiving it to determine in his own interest whether or
not he ought to attend the meeting; and pecuniary interest of a director in the
matter of a special resolution to be proposed at the meeting is a material fact
for this purpose”.
While
restraining the company by an ad-interim injunction from acting upon or
carrying into effect certain special resolutions for reconstruction alleged to
have been passed and confirmed at its extraordinary general meetings, the learned
judge, Kekewich J., has made rather strong remarks at page 866 of the report:
“The
application of the doctrine of Foss v. Harbottle to joint stock companies involves as a necessary corollary the
proposition that the vote of the majority at a general meeting, as it binds
both dissentient and absent shareholders, must be a vote given with the utmost
fairness—that not only must the matter be fairly put before the meeting, but the
meeting itself must be conducted in the fairest possible manner”.
Then,
at pages 870-871, the learned judge makes a further observation:
“If
a meeting properly convened, and properly instructed as to the purpose for
which it is convened, chooses to assent to this, there is no reason why it
should not do so; but I think it ought to have the opportunity of considering
the point. The man I am protecting is not the dissentient, but the absent
shareholder—14 the man who is absent because, having received and with
more or less care looked at this circular, he comes to the conclusion that on
the whole he will not oppose the scheme, but leave it to the majority. I cannot
tell whether he would have left it to the majority of the meeting to decide if
he had known the real facts. He did not know the real facts; and, therefore, I
think the resolution is not binding upon him”.
Now,
I may sum up what emerges from these various authorities cited by Mr. Thakkar.
Bearing in mind the object of the legislature, I must say that section 173 is
mandatory and not directory. It is in the interest of the general body of
shareholders that the legislature has made provisions in section 173(2)
requiring the notice of a meeting to set out a statement containing all
material facts concerning each special item of business. A notice of meeting
when it contains items of special business within the meaning of section
173(1)(b) must disclose all the material facts. All the shareholders must be in
a position to make up their mind in advance whether they will attend the
meeting or leave it to the good sense of the majority at the meeting. Any
non-compliance with this requirement will nullify the action taken at the
meeting. While considering the efficacy of any such notice, a benevolent
construction will not be adopted so as to defeat the provisions of the statute.
It is also clear that whether or not a particular notice or an explanatory
statement in a given case complies with the statutory requirement is a question
of fact. There are two ways in which the mandatory provisions contained in
section 173 may be contravened. It may be a case where no explanatory statement
is at all appended to the item of a special business, or it may be a case where
the statement is incomplete, misleading or tricky. The contravention may be the
result of an act of omission or an act of commission. Whatever be the nature of
the contravention, the question always is a mixed question of fact and law.
When a challenge is made in a court of law the court will have to consider all
the facts and circumstances of the case and then decide one way or the other.
As
the contravention alleged by the plaintiffs in this case is a mixed question of
law and fact, the pleadings certainly assume importance. Mr. Nariman has made a
point, as stated above, that the pleadings give no indication that the
plaintiffs ever alleged any contravention of section 173. As the resolution is
challenged on the ground of breach of section 258 in particular and the
provisions of the Companies Act in general, there is certainly some difficulty
in permitting the plaintiffs to raise this point.
Mr.
Thakkar has not accepted the position that the plaint does not contain
sufficient averments. He has pointed out from the plaint and the written
statement that the pleadings certainly give an indication that the plaintiffs
wanted to challenge the legality of the action on the ground of either want of
or a defective resolution. Mr. Thakkar relied upon the averments in paragraph 7
of the plaint. The plaintiffs have averred that before
increasing the number of directors under section 258 of the Act and article 169
of the articles of association, a resolution ought to have been passed after
due compliance with the requirements of the provisions of the Companies Act.
Mr. Thakkar says that though the plaintiffs have alleged contravention of the
Companies Act, they have by implication referred to the requirements of an
explanatory statement under section 173 of the Act. Then Mr. Thakkar also read
out portions of the written statement of the appellants, particularly
paragraphs 9 and 10, which, according to Mr. Thakkar, show that the defendants
were aware of the challenge made by the plaintiffs to the legality of the
resolutions on the various grounds. Even apart from the pleadings, according to
Mr. Thakkar, the parties were aware of all the relevant facts and the point
about the applicability of section 173 of the Act. In this connection reliance
was also placed on the affidavits filed at the interlocutory stage in support
of the notice of motion taken out for interim relief. Plaintiffs had in their
affidavits referred to the defective explanatory statement and said that there
is non-compliance with the requirements of section 173. A reference was also
made to the appeal memo. (A.O. No. 436 of 1970) filed by the respondents in
this court against the interlocutory order. After considering all these
submissions, I am of the opinion that Mr. Thakkar can at best show in this case
that there is no explanatory note at all accompanying the item of special
business. But, the averments referred to above are certainly insufficient to
cover a plea that the explanatory statement appended to the notice of the
meeting about the special business is insufficient or misleading. Any such plea
about insufficiency of the explanatory statement is very much like the plea of
fraud. It is well-settled that the plea of fraud must be substantiated by all
relevant particulars disclosed in the pleadings.
Then I have to deal with
the points raised by Mr. Thakkar that in the present case there is no
explanatory statement and, therefore, there is a clear contravention of the
provisions of section 173 of the Act. Mr. Thakkar says that there was no
proposal in so many words about the increase of the number of directors. There
was no such item in the notice. Therefore, there was no occasion for any
explanatory statement.
I have already referred to
the contents of the items Nos. 3, 4, 7 and 8 in the notice of meeting. Items
Nos. 3 and 4 refer to ordinary business inasmuch as the directors retiring by
rotation were to be re-elected. The permanent strength of the board of
directors was 8. Under article 164 of the articles of association of the
company, the number nearest to one-third had to retire from office. Items Nos.
3 and 4 certainly indicate that the company was to fill up the two vacancies
caused by the retirement of the directors by rotation. Now, items Nos. 7 and 8
state that the board had appointed two additional directors on 10th April, 1969.
Those directors will cease to hold office under section 260 of the Act on
the date of the meeting, Notices, as required under section 257 of the Act,
have been received by the company proposing the candidature of these additional
directors at the meeting. This information about the item of business has to be
considered along with the corresponding explanatory statement. The explanatory
statement virtually restates what is contained in items Nos. 7 and 8. One
additional particular is also mentioned and that is the recommendation of the
board of directors that the named persons be appointed as directors. Items Nos.
7 and 8 along with the explanatory statement certainly convey to the
shareholders that the board of directors have made a proposal that two more
additional directors be appointed at the meeting and if possible the two named
persons be elected to fill up those additional posts. In my opinion this is
nothing short of a proposal to increase the strength of the board of directors
from 8 to 10. Mr. Thakkar tried to show that all this information has nothing
to do with the proposal to increase the number of directors. But, despite his
best efforts, he was not in a position to convince me that all this information
was in connection with some other intelligible topic, I have not been able to
place any other construction on items Nos. 7 and 8, and in my opinion the
plaintiffs have failed to make out a case that there is no information at all
about the proposed special business accompanied by the required explanatory
statement.
Then Mr. Thakkar argued
that at any rate the court must hold that the information given along with the
explanatory note is wholly misleading. Mr. Thakkar pointed out that the board
of directors has nowhere indicated in the notice or the explanatory statement
as to why it had made a proposal for increasing the number of directors.
Mr. Nariman, on the other
hand, submitted that the board can only disclose known reasons and it is not in
a position to disclose the unknown reasons. I do not find any substance in
either of these contentions. In the absence of a pleading in fact, Mr. Thakkar
cannot subsequently show that there was no reason contained in the statement
about the proposed increase. In my opinion the statement is a comprehensive and
compendious statement. The board has in a way indicated the reasons for the
increase. It has stated that it was required to appoint two men of their
confidence as additional directors. It is implicit in this action and the
statement that the company needed their services. This is followed by a
recommendation by the board that the two named persons be appointed to fill up
the additional posts. This is sufficient reason for the proposed increase. A
shareholder, after reading this information, can certainly form an intelligent
judgment and make up his mind one way or the other. He may either choose to
attend the meeting or leave it to the good sense of the majority of the voters.
As the plaint does not show in what way the explanatory statement is defective,
there is no reason to further examine the so-called defect pointed out by Mr.
Thakkar. Mr. Nariman’s distinction between known and unknown reasons is also
very far from convincing. One acts only for known reasons. Acting without
reasons is a leap in the dark and, therefore, there is never any occasion for
giving unknown reasons. But, I must make it clear that under section 173(2)
material facts will not necessarily include the reasons. It will all depend
upon the nature of the subject-matter which constitutes the special business.
Sometimes the facts stated are sufficiently eloquent and there is no need to
justify the proposed action by giving reasons. In the absence of sufficient
pleadings, the plaintiffs in the present case cannot challenge the statements
contained in the notice and the explanatory statement on the ground that the
particulars are insufficient and/or misleading. In the result I disagree with
the finding of the learned judge and hold that there is no contravention of the
provisions of section 173 of the Companies Act.
Then Mr. Thakkar argued
that the learned judge was in error in holding that the additional directors,
like the retiring directors, are not required to file any written consent duly
signed by them before their reappointment by the company. This question
involves the interpretation of section 264(1) of the Act. Section 264(1), as it
originally stood in 1956, has gone through a process of one or two amendments.
Before I consider the point and the various possible interpretations of section
264, it will be necessary to state a few more facts.
On April 9, 1969, there was
a move for appointing the appellants as additional directors. On the same day
two letters were separately addressed by the appellants to the company. The
letters purported to be consent in writing duly signed under section 264(1) of
the Act. The appellants have indicated their consent to act as a director of
the company if appointed. On April 10, 1969, the board of directors appointed
the appellants as additional directors under section 260 of the Act. On April
10, 1969, separate proposals by two members were made in favour of the
appointment of the appellants as directors at the ensuing meeting. Defendant
No. 1, the company, in its written statement, has stated that after the receipt
of the letters of consent dated April 9, 1969, the appellants were appointed as
additional directors. Mr. Thakkar referred to Form No. 29, which was submitted
on April 26, 1969, that is, long before the annual general meeting of the
company. All these facts and circumstances, according to Mr. Thakkar, show that
the letters of consent were, in fact, filed by the appellants in connection
with their appointment as additional directors. The learned judge has accepted
this position. But, Mr. Nariman for the appellants is challenging this finding.
I may not consider this controversy at this stage
As
stated above, it will be necessary to point out the legislative changes before
I consider section 264 in its present form. Section 264 as originally enacted
read as follows:
“(1) A person who
is not a retiring director shall not be capable of being appointed director of
a company unless he has, by himself or by his agent authorised in writing,
signed and filed with the Registrar, a consent in writing to act as such
director.
(2) Sub-section
(1) shall not apply to a private company unless it is a subsidiary of a public
company”.
The
provision as enacted required all persons who desired to be considered for
appointment as directors to file a written consent before their appointment.
The consent had to be given before the appointment as without such consent the
person was not capable of being appointed and he could not be considered a
qualified or a fit person for appointment as director. Only one person was
exempted from this condition and that was a retiring director. It was not
necessary for him to file any consent before his reappointment as a director.
Then as a result of the amending Act 65 of 1960, a new section 264 was
substituted with effect from December 28, 1960. The new section reads as under:
“264.(1) Every person (other than a person who has
left at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other than a director reappointed after
retirement by rotation shall not act as a director of the company unless he has
within thirty days of his appointment signed and filed with the Registrar, his
consent in writing to act as such director.
(3) This section shall not apply to a private company
unless it is a subsidiary of a public company”.
The
significant change in the wording is the deletion of the words “shall not be
capable of being appointed”. Section 264(1) dispenses with the formal consent
in the case of a person who has proposed himself as a candidate for the office
of a director under section 257 of the Act. Subsection (2) requires all persons
newly appointed as directors to file with the Registrar within 30 days of their
appointment a consent in writing to act as a director. Sub-section (2) makes it
clear that, unless such a consent is filed, the person appointed shall not act
as a director.
Thereafter,
by Act No. 31 of 1965, the section is substantially amended and I have to
consider the section so amended. The section, in the present form, is as
follows;
“264. (1) Every
person (other than a director retiring by rotation or otherwise or a person who
has left at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other
than—
(a) a director reappointed after retirement by
rotation or immediately on the expiry of his term of office, or
(b) an additional or alternate director, or a
person filling a casual vacancy in the office of a director under section 262,
appointed as a director or reappointed as an additional or alternate director,
immediately on the expiry of his term of office, or
(c) a person named as a director of the company
under its articles as first registered,
shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar his consent in writing to act as such
director.
(3) This section shall not apply to a private
company unless it is a subsidiary of a public company”.
The
first point debated before me by counsel on either side is whether section 264
is directory or mandatory. As the point is not covered by any direct authority,
the counsel had to rely upon their original submissions and they have also
referred to decisions which deal with the construction of statutes.
Mr.
Thakkar says that the section is mandatory because the condition referred to in
the section of filing a written consent is a condition precedent to the valid
appointment. The consent required under section 264 is to be in writing and
duly signed. Section 264(1) provides that the person who is a candidate for the
office of a director shall file his consent in the prescribed form to act as a
“director, if appointed. Mr. Thakkar says that the use of the expression
“shall” indicates that the section is mandatory. Mr. Thakkar invited my
attention to a number of judicial decisions about the interpretation of
statutes. He relied upon a decision of the Supreme Court in Aswini Kumar Ghose v.
Arabinda Bose for the proposition that if the specific words used by the
legislature are clear then for interpretation the courts could not rely upon
the statement of objects and reasons. Patanjali Shastri C.J., at page 378
(paragraph 32), has made the following observations:
“As
regards the propriety of the reference to the statement of objects and reasons,
it must be remembered that it seeks only to explain what reasons induced the
mover to introduce the bill in the House and what objects he sought to achieve. But, those objects and
reasons may or may not correspond to the objective which the majority of
members had in view when they passed it into law. The Bill may have undergone
radical changes during its passage through the House or Houses, and there is no
guarantee that the reasons which led to its introduction and the objects
thereby sought to be achieved have remained the same throughout till the Bill
emerges from the House as an Act of the legislature, for they do not form part
of the Bill and are not voted upon by the members. We, therefore, consider that
the statement of objects and reasons appended to the Bill should be ruled out
as an aid to the construction of a statute”.
But Mr. Thakkar admitted
that the rigour of the rule laid down in the above-mentioned case was relaxed
in a subsequent decision of the Supreme Court in Commissioner of Income-tax v. Smt. Sarda Devi , where Bhagwati J., at page 835, says:
“It is clear that unless
there is any such ambiguity it would not be open to the court to depart from
the normal rule of construction which is that the intention of the legislature
should be primarily gathered from the words which are used. It is only when the
words used are ambiguous that they would stand to be examined and construed in
the light of surrounding circumstances and constitutional principle and
practice”.
At page 839, a further rule
of construction of statute is stated:
“Though it is not
legitimate to refer to the statement of objects and reasons as an aid to the
construction or for ascertaining the meaning of any particular word used in the
Act or statute (see Aswini Kumar Ghose v. Arabinda Bose), nevertheless this court in
Stale of West Bengal v. Subodh Gopal Bose , referred to the same ‘ for the limited purpose of
ascertaining the conditions prevailing at the time which actuated the sponsor
of the Bill to introduce the same and the extent and urgency of the evil which
he sought to remedy.’ “
Mr. Thakkar says that it is
the primary rule of construction that the statute should be interpreted without
looking into any other extraneous circumstances. It is only when there is some
ambiguity that, as stated by the Supreme Court, reference may be made to the
objects and reasons for the limited purpose of finding out the particular
reason which prompted the legislature to pass that enactment.
Then Mr. Thakkar referred
to the rule which, in the judicial parlance, is recognised as the golden rule
of construction of statutes. The statement of the rule by Burton J. in
Warburton v. Lovelavd is reproduced by
the learned author in Bindra’s Interpretation of Statutes, 5th edition, at page
71, and is to the following effect:
“I apprehend it is a rule
in the construction of statutes that, in the first instance, the grammatical
sense of the words is to be adhered to. If that is contrary to, or inconsistent
with any expressed intention, or any declared purpose of the statute, or if it
would involve any absurdity, repugnance or inconsistency, the grammatical ser
se must then be modified, extended or abridged so far as to avoid such
inconvenience, but no further”.
The following passage in Chapter
XIII from Maxwell on the Interpretation of Statutes, 12th edition, page 314,
also lays down a sound principle:
“It is impossible to lay
down any general rule for determining whether a provision is imperative or
directory. ‘No universal rule’, said Lord Campbell L.C can be laid down
for the construction of statutes, as to whether mandatory enactments shall be
considered directory only or obligatory, with an implied nullification for
disobedience. It is the duty of courts of justice to try to get at the real
intention of the legislature by carefully attending to the whole scope of the
statute to be construed.’ And Lord Penzance said: ‘I believe, as far as any rule is concerned, you cannot
safely go further than that in each case you must look to the subject-matter;
consider the importance of the provision that has been disregarded, and the
relation of that provision to the general object intended to be secured by the
Act; and upon a review of the case in that aspect decide whether the matter is
what is called imperative or only directory”.
Viewed in the light of
these principles, the section, in my opinion, appears to be directory in so far
as the person who desires to be a candidate for the office of a director would
be required to file his consent. The object of the legislature is evident when
one considers the various amendments made by the legislature before the section
was enacted in the present form. Those who have once acted as directors were
only seeking reappointment. It was considered throughout that the formal
consent on their part was not necessary. It is very clear as to why such a
condition was found necessary. It may be that a person who is appointed as a
director may refuse to act on the ground that he had never consented to act as
a director. When such a flaw is discovered later on and the appointment will
have to be ignored as ineffective, the company will have to take again further
steps for filling the post of such director. Ordinarily, a person appointed as
a director is not likely to refuse to act. In a rare case, he may do so. It is
only to avoid the attending inconvenience that the legislature has prescribed
the condition. In the section as originally worded, somewhat strong language
was used. It was enacted that a person shall not be capable of being appointed
as a director unless he had filed earlier his consent in writing to act as such
director. The deletion of these words in the subsequent amended form of the
section is not without significance. Perhaps the legislature thought that the
condition was given comparatively more importance when it was introduced in the
section. If this is the only object which the legislature sought to achieve by
prescribing a prior consent in writing then there is no reason why the absence
of consent in all cases should invalidate the appointment. Even without a
consent a person appointed may accept the appointment and prefer to act as a
director. This is likely to happen in a majority of cases. Considering the
section as a whole and bearing in mind the object of the legislature and
magnitude of the mischief intended to be avoided, I hold that section 264(1) is
clearly directory and not mandatory. I am only interpreting section 264(1) of
the Act and it is not necessary to pronounce any opinion about section 264(2).
Whether it is mandatory or directory will have to be decided in a suitable
case. But, I cannot help expressing my opinion that the difference in the
language has certainly assisted me in reaching my conclusion about the
directory nature of section 264(1) of the Act. The consent under section 264(2)
which is to be filed with the Registrar is a condition precedent for acting as
a director. The sub-section provides that a person, who is being appointed for
the first time as a director, shall not act as a director of the company unless
he has filed the consent within the prescribed time. No argument is necessary
for saying that the sub-section is mandatory.
Then Mr. Thakkar submitted
that the learned judge was in error in holding that there is realty no
difference between the retiring director and the additional director while
considering the application of section 264(1) of the Act. As all the relevant
points were urged before me I had to consider them and give my decision
accordingly. In fact when I found that the section is directory it is
sufficient for the final disposal of the appeal but these are all points of law
touching the interpretation of section 264(1) as a whole and, therefore, I must
consider each point urged by the counsel separately.
That takes me to the
interpretation of the key words in section 264(1) “or otherwise”. The learned
judge while considering these words has relied on the dictionary meaning of the
expression “retire”. A person retires when he ceases to hold a particular
office. There is no difference between retiring by rotation and retiring by
ceasing to hold office. The additional directors appointed under section 260
hold office only up to the date of the next annual general meeting. In other
words, they cease to hold office before the date of the next annual general
meeting. Mr, Thakkar says that the learned judge was not right in reaching this
conclusion. According to Mr. Thakkar there is material difference between the
two sets of directors. Mr. Thakkar points out that under section 256(1) of the
Act certain proportion of directors retire by rotation. Under section 256(2) the
directors retire by rotation at every annual general meeting, whereas under
section 260, first proviso, the additional director holds office only up to the
date of the next annual general meeting of the company. In other words, the
additional director ceases to hold office earlier and thereafter the retiring
director who vacates the office at the meeting remains in office for at least a
short duration. Mr. Thakkar says that this distinction between the tenure of
the two classes of directors is recognised even under the English law. Mr.
Thakkar has relied on a decision in Eyre v. Milton Proprietary Ltd. The court in that
case was required to consider the exact connotation of two articles 85 and 90
of the articles of association of the company. The court had to decide the
meaning of the expression “of the whole number of directors” in article 85.
That was necessary to determine the number of directors who had to retire in a
particular year. There was no doubt that the expression “whole number of
directors” did not include the managing director. Article 90 provided that the
board may from time to time appoint additional directors but any director so
appointed shall hold office only until the next following ordinary general
meeting of the company, and shall then be eligible for re-election. The point
for consideration depended for its answer on the words of article 85 as
compared with the words of article 90 and, in particular, certain later words
of article 85. According to the court there must be some point of time at which
it was to be ascertained as to who are the whole number of directors to whom
must be applied the provision relating to retirement. That point of time was to
be at the ordinary general meeting. It was clear from article 90 that at the
annual general meeting the two additional directors will not be in office as
they were to hold office only until the next following ordinary general meeting
of the company. At the commencement of the ordinary general meeting they will
be no longer in office. But, the retiring directors and the other continuing
directors will act as directors throughout the meeting. In others words, they
would constitute the total number of directors for deciding the proportion of
the directors retiring. Romer L.J., at page 257, sums up the legal position in
the following words:
“I agree that in the
circumstances the number of directors to be considered is the number of
directors existing at the moment when the ordinary general meeting begins, and
inasmuch as at the particular moment that it begins the two directors elected
under article 90 cease to be directors, the number of directors then must be
taken to be five and not seven”.
Mr. Thakkar relies on this
decision for underlining a similar distinction between the directors retiring
by rotation at every annual general meeting and the additional directors
holding office only up to the date of the next annual general meeting. Mr.
Thakkar says that when the legislature has used the expressions like “retiring”
and “holding office” up to a particular point of time, the court will have to
interpret the different words in a different way. In support of this rule of
interpretation he relies on a decision of this court in East and West Insurance Co. Ltd. v. Mrs.
Kamala Jayantilal Mehta. Chief Justice, Chagla, who delivered the judgment of the Bench, says at
page 543:
“Now, the normal canon of construction
either of a statute or of articles of association is that when different
expressions are used they are intended to connote something different”
There cannot be any dispute
about this rule of interpretation. Giving full effect to the rule it only means
that a retiring director ceases to hold office later than the additional
director. The difference in the duration of their tenure is brought out by the
legislature by using appropriate expressions. But, it will not be correct to
carry this distinction too far. While interpreting the words appearing in
section 264, the expression “retiring by rotation” has to be understood in
conjunction with or along with the other key words “otherwise”. These two
expressions certainly are used for covering or for including different sets of
directors who cease to hold office. We know very well what is meant by a
director retiring by rotation. Section 256(1) provides that at the first annual
general meeting one-third of the directors for the time being as are liable to
retire by rotation, or if their number is not three or a multiple of three,
then the number nearest to one-third, shall retire from office. Then the
question arises on a literal interpretation of the words as to who are the
other directors who otherwise retire, that is, retire otherwise than by
rotation. Mr. Thakkar says that the articles of association of a company may
provide that all the directors en bloc shall retire and in that case the
company might appoint directors to fill up all the vacancies. Mr. Thakkar has
not been able to indicate any other class of directors who will be covered by
the expression “or otherwise”. He maintained that under section 256(1) a
company may by its articles provide that a certain proportion of directors will
ever remain in office and only the remaining directors will wholly retire and
it is to cover such a class of directors retiring In this manner that the
expression “or otherwise” is used by the legislature in section 264(1) of the
Act.
It is difficult to accept
this interpretation of section 256(1). Section 256(1) provides:
“....one-third of such of
the directors for the time being as are liable to retire by rotation, or if
their number is not three or a multiple of three, then, the number nearest to
one-third, shall retire from office”.
In the illustration given
by Mr. Thakkar, certain fixed number of directors will remain in office
permanently and the others will retire, so as to enable the company to fill up
those vacancies. Those who are retiring in this manner are, according to Mr.
Thakkar, not retiring by rotation. I am not prepared to accept this
interpretation of section 256(1) of the Act. When few of the directors retire
in the manner indicated in section 256(1) of the Act, then they are retiring by
rotation. If the articles so provide, all the directors may retire and that
retirement certainly will not be covered by the expression “retiring by
rotation”. On a reference to the Shorter Oxford Dictionary, volume II: N-Z, 3rd
edition, revised with addenda, I find that the adverb “otherwise” means in
another way or in other ways. Whether the expression “otherwise” would include
one or more classes is not clear. At any rate, the expression is somewhat
equivocal. In such a case I will be justified in following the dictum laid down
by the Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhanvadia . The Supreme Court in that case, while interpreting
certain articles of the Constitution, relied upon the statement of objects and
reasons. The Supreme Court had to decide whether certain provisions were
directory or mandatory. As the provisions themselves were not clear, reliance
was placed on the statement of objects and reasons for finding out the
intention of the legislature. I may reproduce the following passage from the
judgment of Mitter J. which appears at page 769, paragraph 11, of the report:
“The above cases are
sufficient to show that non-compliance with the provisions of a statute or Constitution
will not necessarily render a proceeding invalid if by considering its nature,
its design and the consequences which follow from its non-observance one is not
led to the conclusion that the legislature or the Constitution-makers intended
that there should be no departure from the strict words used”.
So, in other words, while
interpreting the words or even while departing from the strict words used, the
court may find out the intention of the legislature by referring to the
statement of objects and reasons. Mr. Nariman rightly says that relying on this
decision one can look at the notes on clauses preceding the amendment of
section 264 of the Act. (See Gazette of India, Extraordinary, Part II, sec. 2, 1964, dated
September 21, 1964). Clause 32 reads as under:
“Section 264 requires that
a person proposed as a candidate for the office of director shall file with the
company his consent to act as director, if appointed. It also requires that a
person other than a director re-appointed after retirement by rotation shall
not act as director unless he has filed with the Registrar his consent in
writing to act as such. This amendment seeks to exempt persons who have served
as directors in the immediate preceding term from these requirements. It is
felt that in the case of such persons the requirement to file their consent in
writing is a formality which could well be dispensed with”.
Clause 32 shows in
unmistakable terms as to why the exceptions were enacted to dispense with the
filing of consent in certain cases. No such consent either under section 264(1)
or sub-section (2) was necessary in the case of persons who had immediately
before the reappointment acted as directors. Considering the object of the
amendment there is no reason why the additional directors who are expressly
exempted from the requirement of filing a consent under section 264(2) should
be excluded while construing a somewhat similar exemption under section 264(1)
of the Act. In my opinion the expression “otherwise” covers all the other directors
who for one reason or the other cease to hold office and are immediately
thereafter reappointed as directors. For these reasons I hold that the learned
judge was right when he recorded a finding that additional directors are not
required to file any written consent under section 264 of the Act, as a
condition precedent for the validity of their re-appointment.
Then Mr. Nariman submitted
that no such consent under section 264(1) is required for appointment of any
person as an additional director under section 260 of the Act. He relies on the
wording of section 264(1), viz.:
“Every
person.......proposed as a candidate for the office of a director shall sign
and file with the company, his consent in writing to act as a director, if
appointed”.
These words, according to
Mr. Nariman, indicate that the consent contemplated is referable to the
candidature of the person for the office of director. That can only be at the
meeting of the company in which directors are appointed by unanimous or
majority vote of the shareholders. Mr. Nariman says that section 260 confers
power on the board of directors’ to appoint additional directors when so
permitted by the articles of association of the company. Neither in section 260
nor anywhere in the articles of the company are there provisions requiring the
person to file his consent before his appointment as additional director. A
closer reading of section 264(1) furnishes one more reason in support of the
interpretation suggested by Mr. Nariman. One of the persons, who is exempted
from the condition of filing such a consent, is one who has left at the office
of the company a notice under section 257 signifying his candidature for the
office of a director. This clearly shows that the provision about consent is in
connection with the appointment of directors at the meeting of the company.
Even the consent that is prescribed is to be in writing to act as a director,
if appointed. There are no such words to show that the consent is given to act
as a director or an additional director. These various expressions used by the
legislature certainly indicate that section 264(1) does not in any manner
regulate the appointment of additional directors under section 260 of the Act.
It is not disputed before
me nor was there any dispute before the learned judge about the fact that there
is one set of written consent filed in this case on behalf of the appellants.
It is not necessary to resolve the controversy whether it was with reference to
the appointment as an additional director or with reference to the
reappointment as a director. If no consent was required for any appointment
under section 260 that consent, if filed, will be redundant. It is true that
the company by its written statement has taken up a contention that after
receipt of these consents the appellants were appointed is additional
directors. Mr. Thakkar also submitted that that may be accepted or a fact in view of the various facts
and circumstances mentioned above. But, the appellants in their written
statement have pleaded that these written consents certainly validated their
appointment in the general meeting. Once it is found as a fact that no consent
was required for the appellants’ appointment as additional directors, then
there is no reason why the appellants should not be allowed to rely upon the
letters of consent, when the validity of their appointment is challenged by the
plaintiffs. Letters of consent were to be filed duly signed by the persons
concerned with the company. They are so signed and filed with the company.
There are no words used in the letters to indicate that they had given the
consent only to act as additional directors, if appointed. In the absence of
any such restrictive words, it can be fairly assumed that they gave their
consent in writing not only to act as additional directors, if appointed, but
also to act as directors, if appointed. In my opinion even for this additional
reason the appointment of the appellants cannot be challenged.
The last point raised in
the present appeal is about the maintainability of the suit. Mr. Nariman,
consistent with the appellants’ stand in the lower court, submits that the
plaintiffs have come to the court with certain grievances about the
irregularities committed by the company while appointing the appellants as directors.
Mr. Nariman relied upon a decision of this court in V.N. Bhajekar v. K.M.
Shinkar. It was a suit by the shareholders challenging
irregularities committed by the directors. It was held that such a suit was not
competent. The headnote indicates that there are certain recognised exceptions to the rule that
mere irregularities committed during the course of the management of the
internal affairs of the company do not furnish any cause of action to the
shareholders. The relevant headnote is to the following effect:
“The
supremacy of the majority of shareholders is subject to certain exceptions,
viz.:
(1) Where
the act complained of is ultra vires the company;
(2) where
the act complained of is a fraud on the minority; and
(3) where there is an absolute necessity to
waive the rule in order that there may not be a denial of justice”.
Mr.
Nariman submits that the present case is not covered by any one of these three
exceptions. The appellants were appointed directors by an unanimous resolution
passed by at the meeting of the company. The plaintiffs after a long lapse of
time had no reason to rush to the court for any relief. It is not an act which
is patently illegal or ultra vires the company. But, I find it difficult to
accept this contention of Mr. Nariman. I have already held that section 173 is
mandatory and not directory. Any non-compliance with the provisions of section
173 will result in the nullification of the Act. The plaintiffs have alleged
that there was contravention of section 258 of the Indian Companies Act, as
there was no valid resolution proposing the increase in the number of
directors. It may be that the plaintiffs have not eventually succeeded in the
suit. In view of the findings recorded by me, it cannot be said that the suit
as framed is not competent. In my opinion the plaintiffs’ case will be covered
by the first of the three exceptions mentioned above. The learned judge was,
therefore, right when he held that the suit as framed was maintainable.
Mr.
Buch with Mr. Munshi, who appeared for respondent No. 3-company, submits to the
orders of this court.
In
the result the appeal is allowed, the judgment and decree of the lower court is
set aside and the plaintiffs’ suit is dismissed with costs throughout.
Respondents Nos. 1 and 2 will not be liable to pay the costs of respondent No.
3 throughout.
[1993]
77 COMP. CAS. 324 (MAD)
HIGH COURT OF MADRAS
v.
New Theatres Carnatic Talkies Pvt. Ltd.
LAKSHMANAN
J.
C.P. NO. 10 OF 1981.
DECEMBER 12, 1991
T.
Raghavan for the Petitioner.
T.R.
Rajagopalan for the Respondent.
Lakshmanan
J.—The first
respondent company is a private limited company incorporated under the provisions
of the Indian Companies Act, 1913. Respondents Nos. 2 to 6 are brothers and son
of one Balaswamy Naidu. The petitioners are the sons of late Guruviah Naidu.
Guruviah Naidu and Balaswamy Naidu are brothers. The capital of the company is
Rs. 1 lakh divided into 100 shares of Rs. 1,000 each. The amount of capital
paid up or credited as paid up is Rs. 50,000 made up of 50 shares of Rs. 1,000
each.
The
petitioners, who are the sons of Guruviah Naidu, have filed this petition under
sections 397 and 398 of the Companies Act, 1956. The petitioners herein are the shareholders of the first
respondent company holding between themselves 25 fully paid-up shares of Rs.
1,000 each out of the total issued and subscribed and paid-up capital of 50
shares of Rs. 50,000 each. They have been holding these shares ever since 1967.
The petitioners thus held 50 per cent, of the issued capital of the company and
as such they are entitled to invoke section 399 of the Companies Act, 1956, for
relief under sections 397 and 398 of the Act. The company constructed a theatre
known as Carnatic Talkies situated in Big Bazaar Street, Coimbatore, which is
the subject-matter of the present proceedings. The company has been carrying on
only the business of exhibiting motion pictures in the said theatre. As stated
above, the petitioners' father, V. Guru-viah Naidu, became the holder of 25
shares on and from April 27, 1951, and the remaining shares came to be held by
his brother, V. Baluswamy Naidu. The late V. Guruviah Naidu was functioning as
the managing director of the company from April 27, 1951, till June, 1962,
while the late V. Baluswamy Naidu was the only other director of the company
throughout the said period and he was acting as the managing director till his
death. Subsequent to the death of Baluswamy Naidu, Guruviah Naidu was acting as
the managing director of the company till his death on January 10, 1970. The 25
shares which were held by Baluswamy Naidu which were held in the name of a
firm, V. Baluswamy Naidu and Sons, and registered as such in the share register
of the company transmitted into the following names of his six sons in or about
1967 :
|
SI. No. |
Names |
No. of shares |
|
1. |
V.B. Gopalakrishnan
|
4 |
|
2. |
V.B.
Jagadeesan |
4 |
|
3. |
V.B.
Devaraj |
4 |
|
4. |
V.B.
Padmanabhan |
5 |
|
5. |
V.B.
Rangaraj |
4 |
|
6. |
V.B.
Selvaraj |
4 |
Likewise
Guruviah Naidu transferred his shares to his three sons in equal proportion of
six shares each and he retained seven shares in his own name. The transfer of 18
shares made in favour of the petitioners were duly registered in the books of
the company.
According
to the petitioners, certain oppressive tactics were practised on them by
respondents Nos. 2 to 5 even as early as 1972, and that the third respondent, V.B.
Gopalakrishnan, at the instigation of his brothers refused to co-operate with
the first petitioner herein in running the theatre for the full time of lease
granted to the first petitioner and the third respondent was running the
theatre on lease as per the said arrangement. At the time of the death of V.
Guruviah Naidu, the other director of the company was the second respondent,
V.B. Padmanabhan, as he was appointed as a director of the company after the
demise of his father, V. Baluswamy Naidu. By a resolution of the board dated
February 21, 1970, the first petitioner was appointed as a director and also
managing director of the company till December 5, 1971. On that date, the first
petitioner resigned his managing directorship and, therefore, in his place the
second respondent, V.B. Padmanabhan, was appointed to that office, while the
first respondent continued as a director of the company. According to the
petitioners, respondents Nos. 2 to 5 herein were scheming to have complete
control of the company and the theatre exclusively for themselves and to
prevent the petitioners from exercising any right as members of the said
company. It is stated that the second respondent taking advantage of the fact
that he was the managing director of the company removed all the records to his
residence and kept them for himself. The respondents, particularly the second
respondent was preventing the first petitioner from continuing the lease of the
theatre by making his brother, the third respondent, who was the co-lessee, to
refrain from co-operating with the first petitioner to obtain the licence for
running the theatre, although the first petitioner was put in possession of the
theatre. The second respondent was interfering with the running of the theatre
of the first petitioner from May, 1972, onwards with the result that the first
petitioner was forced to institute O.S. No. 43 of 1972 on the file of the
Sub-Court, Coimbatore, for restraining his co-lessee, V.B. Gopalakrishnan, from
interfering with the theatre by him. The licence granted could not be renewed
after its expiry because of the non-co-operating attitude of the respondents,
with the result that the theatre had to be closed down and consequently, the
company had incurred heavy loss, there was no income from the theatre and the
delicate machinery got rusted and deteriorated in value. By preventing the
third respondent from co-operating with the first petitioner for renewing the
licence, the second respondent was responsible for such an oppressive
management and he was also responsible for such oppressive management and
oppressive conduct of the affairs of the company. The theatre was closed for
want of a licence right from September 10, 1972, onwards. The second
respondent, who was the then managing director had deliberately flouted the
decision of the board contained in its resolution dated February 4, 1972, for
transmission of the seven shares standing in the name of the petitioners'
father, the late Guruviah Naidu, in the names of his legal representatives, viz.,
the petitioners herein by refusing to effect the transfer and register the
names of the petitioners in the registers of the company. He had also set up
one Rukmini Ammal to file a suit against the company, which was then
represented by the second respondent as the managing director, claiming falsely
that the shares then standing in the name of late Guruviah Naidu in the
registers of the company belonged to her.
The
suit was dismissed and even thereafter the transmission of the shares was not
effected by the second respondent.
The
petitioners also purchased the four shares standing in the name of Rangaraj,
the sixth respondent, on February 25, 1972, and lodged the transfer application
and the shares with the company for registration in March, 1972. The second
respondent deliberately omitted to register the transfer on false and untenable
grounds and instigated a collusive suit to be instituted by his brothers
against the said Rangaraj and the petitioners herein for a declaration that the
sale by the sixth respondent was void, not valid and binding upon the third,
fourth and fifth respondents and the petitioners herein should transfer the
shares to them and the second respondent for a sum of Rs. 8,000 and for an
injunction restraining the petitioners herein from applying for the
registration of the shares of their names with the first respondent company and
from acting adversely to their interest and that of the second respondent on
the basis of the transfer of the four shares. In the suit, the respondents set
up an oral agreement between the brothers and also between the parties to the
suit and also between late Guruviah Naidu and his brothers, Baluswamy Naidu,
that each of the families should maintain the same number of shares, viz.,
twenty five shares, to each branch and that if any member of the two branches
wished to sell their shares, the first option to purchase the same should be
given to the members of the other branch and if the offer so made to the
members of the other branch is also not accepted, then the sale should be
effected to third parties. When the trial court decreed the suit, appeals were
preferred by the petitioner and the sixth respondent to the District Court at
Coimbatore in A. S. Nos. 57 of 1977 and A. S. No. 112 of 1977, which were dismissed.
Second Appeals Nos. 1994 of 1978 and 2163 of 1978 filed by the petitioners and
the sixth respondent respectively to this court were disposed of by a common
judgment. While dismissing the second appeals this court directed a
modification of the decree of the trial court by substituting the names of
respondents Nos. 3 to 5 herein in the place of the petitioners. In other
respects, it was held that all other terms of the decree of the trial court
would stand. Aggrieved by the judgment and decree passed in the said two
appeals, both the petitioners herein and the sixth respondent preferred special
leave petitions to the Supreme Court and the Supreme Court granted leave to the
petitioners as well as to the sixth respondent to prefer appeals. The said civil
appeals were numbered as Civil Appeals Nos. 1946-47 of 1980. When the company
petition was filed, the said two appeals were pending. Even at the time of
reserving orders in his company petition, the said two appeals were pending. In
the meanwhile, the appeals were taken up and disposed of by the Supreme Court
on November 28, 1991. Allowing
the appeals preferred by the petitioners and the sixth respondent, the Supreme Court
held as under :
"Hence,
the private agreement which is relied upon by the plaintiffs whereunder there
is a restriction on a living member to transfer his shareholding only to the
branch of family to which he belongs in terms imposes two restrictions which
are not stipulated in the article. Firstly, it imposes a restriction on a
living member to transfer the shares only to the existing members and,
secondly, the transfer has to be only to a member belonging to the same branch
of family. The agreement obviously, therefore, imposes additional restrictions
on the member's right to transfer his shares which are contrary to the
provisions of article 13. They are, therefore, not binding either on the
shareholders or on the company. In view of this legal position, the finding
recorded by the courts below that the sale by the first defendant of his shares
to defendants Nos. 4 to 6 is invalid as it is in breach of the agreement, is
erroneous in law. In view of our above finding, it is unnecessary to go into
the question whether the High Court was justified in directing the transfer of
shares by defendants Nos. 4 to 6 to the plaintiffs even if its finding that the
sale was invalid was correct.
In
the circumstances, the appeals are allowed, the decree of the High Court is set
aside, and the plaintiffs' suit is dismissed with costs".
It
is seen that as a result of the several deliberate acts of commission and
omission on the part of the respondents, the first and third petitioners herein
filed Company Petition No. 88 of 1973 on the file of this court against the
first and second respondents herein for various reliefs including those for
superseding the board of directors of the first respondent company and
appointing one or more administrators to carry on the business of the company.
The said company petition was ordered on October 4, 1974, by this court in
terms of the joint memorandum of compromise filed by the parties to the said
company petition, pursuant to which the company was managed by the board
constituted, viz., the second petitioner and the second respondent as the only
two directors of the company in accordance with the articles of association of
the company. As per the said orders, the term of office of the board of
directors of the company was to come to an end on December 27, 1980. The second
respondent, who was acting as the managing director of the first respondent
company, failed to convene either the meeting of the board of directors or the
general body meeting of the company and the first and third petitioners were,
therefore, obliged to file Company Application No. 2048 of 1980 in the said
Company Petition No. 88 of 1973 against respondents Nos. 1 and 2, praying for
directions to the board of directors for convening a general body meeting of
the company for the purpose of electing directors and also for appointment of a
chairman for the purpose of conducting the proceedings of the general body
meeting and also for necessary directions for electing the directors in the
general body meeting for constituting a board consisting of at least three
directors. The second petitioner filed his counter-affidavit, supporting the
application while the second respondent filed a counter affidavit, resisting
the said application. However, during the hearing of the said application, the
second respondent herein offered to file a supplemental affidavit undertaking
to convene a meeting of the board of directors on December 1, 1980, for
considering and approving of the draft profit and loss account for the year
June 30, 1978, and for convening the annual general body meeting. Thereafter,
the said company petition was closed in view of the undertaking given by the
second respondent that he would hold the general body meeting after convening a
meeting of the board of directors on December 1, 1980.
A
board of directors meeting was held on December 1, 1980, and in that meeting
the second petitioner herein insisted that the second respondent convene the
general body meeting of the company at least on December 27, 1980, since the terms
of office of the second respondent as managing director as per the orders
passed in Company Petition No. 88 of 1973 would come to an end. But the second
respondent refused to do so stating that he would hold the general body meeting
only on January 5, 1981, and that he would hold another meeting of the board of
directors on December 8, 1980, for setting the agenda for the general body
meeting. On that day, the second petitioner noticed some writing dated October
8, 1980, in the minutes book under the caption PROCEEDINGS OF THE MANAGING
DIRECTOR. Thereafter, the second
petitioner addressed a letter on the same day to the second respondent stating
that the minutes book should contain only the proceedings of the meeting of the
board of directors and not any proceedings of the managing director alleged to
have taken place on October 8, 1980. The second petitioner also asked for a
copy of the writing dated October 8, 1980, and also the circumstances under
which the same found a place in the minutes book. The second respondent has
neither furnished a copy of the writing dated October 8, 1980, nor sent any
reply. According to the petitioners, the second respondent had unauthorisedly
and illegally introduced the said writing in the minutes book of the first respondent
company with the full knowledge that the appeals filed by the petitioners and
the sixth respondent herein were pending in the Supreme Court.
The
petitioner has also filed Company Petition No. 1 of 1981, for rectification of
the register of members since it became necessary to have the register of
members rectified since the second respondent removed from the register of
members of the company the name of the sixth respondent without any reasonable
cause. It is, therefore, stated that the second respondent taking advantage of
his position as managing director of the company at the relevant time pursuant
to the order passed in Company Petition No. 88 of 1973 by compromise had
interpolated the alleged proceedings dated October 8, 1980, in the minutes book
of the company without even bringing it to the notice of the second respondent,
who was during the relevant time, the only other director of the company. This
act on the part of the second respondent is harsh, oppressive burdensome,
wrongful and prejudicial to the interest of the petitioners herein and the
object of the second respondent in meddling with the records of the company is
only to gain complete control of the company for himself and his brother by
excluding the petitioners from having any control or participation in the
administration of the company.
The
second respondent did not take any steps to convene the meeting of the board of
directors as per the order of the court in Company Petition No. 88 of 1973 and also
to convene a general body meeting for passing accounts. The arrangement
pursuant to the compromise order had come to an end as early as on December 27,
1980, and that the second respondent as the managing director had taken
advantage of continuing to remain the managing director of the company with the
active assistance and collusion of his brothers, viz., the respondents in this
case. As a matter of fact even in the general body meeting held on January 5,
1981, the second respondent and his brothers who were having an upper hand
refused to consider the objections raised by the second petitioner herein. The
second respondent, who presided over the meeting declared that the general body
meeting was adjourned. Since the second respondent declared that the meeting
was adjourned, the petitioner left the meeting as they were under the
impression that the general body meeting would be held again on some other date
to be fixed. During the general body meeting and before it was adjourned by the
second respondent, the petitioners handed over to the second respondent some
proposals to be considered and passed in the general body. It was only after
these proposals were submitted the second respondent thought it fit to adjourn
the meeting and immediately thereafter the petitioners herein sent a telegram
to the second respondent. The second respondent sent a reply telegram falsely
alleging that the petitioners herein participated in the election of the
chairman and that the adjournment motion was lost and at that stage, the
petitioner walked out of the meeting though the second respondent told them
that the meeting would go on with its business, etc. The petitioners submitted
that the meeting was adjourned by the second respondent in collusion and in
conspiracy with his brothers, viz., respondents Nos. 3 to 5, and prepared some
resolutions as if they were passed in the general body meeting and as if three
directors were elected in the meeting, viz., the second respondent, the second
petitioner and the third respondent. According to the petitioners, the general
body meeting was adjourned and as such no business could have been transacted
thereafter and in any event the resolutions said to have been passed in the
general body meeting after the petitioners left the meeting, are mere
make-believe affairs prepared by the second respondent in collusion and
conspiracy with his brothers. It is pertinent to point out that more than two
directors cannot be elected inasmuch as in the articles of the company, there
is provision for electing only two directors. The petitioners stated that no
business was transacted at the meeting convened and held on January 5, 1981,
and that in any event the third respondent has not been elected as a director
of the first respondent company and is not a director of the company. The
petitioners submitted that the articles of association of the first respondent
company provide only for two directors and that there is no provision for a
third director and that, therefore, the allegation of the third respondent as a
director cannot be taken up without amending the articles of association of the
first respondent company, by increasing the strength of the board as required
by the provisions of the Companies Act.
The
petitioners filed Company Petition No. 1 of 1981 under section 155 of the
Companies Act for rectification of the register of members deleting the names
of respondents Nos. 2 to 5 in respect of the shares bearing Nos. 23 to 26, and
originally standing in the name of the sixth respondent. It is seen from the
typed set of documents filed by the first and second respondents, that the
articles of association included therein did not correspond with the articles
of association of the first respondent company. Hence the petitioners submit
that the respondents have created documents to suit their purpose. The records
of the Registrar of Companies relating to the first respondent company was
inspected and the inspection of the records has revealed that the second
respondent had filed Form No. 23 under section 192 of the Companies Act, on
June 21, 1973, in his capacity as the managing director of the first respondent
company. The said Form would disclose that at the general body meeting said to
have been held on June 11, 1973, certain resolutions amending the articles of
the first respondent company were passed. The resolution said to have been
passed at the general meeting on June 11, 1973, are to the effect that the
number of directors of the company shall be not less than 2 and not more than 4
and that the said resolution was substituted in the place as article 31.
Likewise Sri V.B. Padmanabhan shall hold office for life or until they
voluntarily resign. Subject No. 3 relates to the articles of association 35 and
substitution of the resolution that the business of the company shall be
carried on by the board of directors, subject to the direction, control and
superintendance of the board of directors at all time. Subject No. 4 relates to
the deletion of article 36 and substitution of article 35 in its place to the
effect that Sri V.B. Padmanabhan shall be the managing director of the company
entrusted with substantial power of the management of the company and shall
hold office as managing director for the period up to June 30, 1975.
Thereafter, Sri V.G. Balasundaram shall be the managing director of the company
for a period of two years from July 1, 1975, until June 30,1977. Thereafter Sri
V.B. Padmanabhan and Sri V.G. Balasundaram shall hold office as managing
director of the company in turn and in the alternative for a period of two
years each commencing from July 1, 1977. The said return further disclosed that
a notice of the meeting was said to have been despatched on May 31, 1973, and
resolutions were said to have been passed on June 11, 1973. The petitioners
submit that no notice of the meeting purported to have been held on June 11,
1973, was ever sent to the petitioners or their group or any meeting was really
held on June 11, 1973. When the petitioners instituted proceedings under
sections 397 and 398 of the Companies Act on the file of this court in Company
Petition No. 88 of 1973, no whisper has been made about the amendment of the
articles of the company. The petitioners filed the articles of association in
the said proceedings and no objection was ever taken that the articles of
association filed by the petitioner did not represent the correct position. For
the first time the present articles of association in the alleged form came to
light when the second respondent filed a typed set of documents in C.P. No. 1
of 1981. The petitioners had till then no knowledge of the return filed by the
second respondent with the Registrar of Companies and there was no occasion for
the petitioners to be apprised of the said amendment and they came to know of
the same only on inspection of the relevant records with the Registrar of
Companies and in view of the compromise entered into in C.P. No. 86 of 1973.
The petitioners, therefore, submit that the meeting purported to have been held
on June 11, 1973, was not really held and the resolution purported to be passed
in the said meeting is illegal and void. Therefore, the articles of association
of the first respondent will be one that stood prior to the alleged meeting
dated June 11, 1973. It is, therefore, submitted by the petitioners that they
are entitled to a declaration that the purported meeting held on June 11, 1973,
was illegal, void and that any resolutions passed thereat are not valid and
binding on the first respondent company. Hence, the third respondent, who is purported
to have been appointed at the meeting held on January 5, 1981, cannot function
as such a director of the first respondent company. The petitioners further
submit that even alternatively and assuming but not conceding that proceedings
of the meeting purported to have been convened on January 5, 1981, were to be
correct and that the articles were amended on June 11, 1973, even then the
third respondent cannot be said to be legally appointed as a director of the
company, the said purported amendment of the articles of association would
contemplate that any director other than the one mentioned in the alleged
amended articles under article 32 of the association should be appointed in the
general meeting by a special resolution. If that be the case the appointment of
the third respondent should be considered as a special business and the
provisions of section 173 of the Companies Act shall apply to the first
respondent company. The notice issued for holding the meeting on January 5,
1981, should disclose the intention to move the election of the third
respondent as a director as and by way of a special resolution by setting out
the special resolution as such. The notice did not disclose any such resolution
as required under section 189 of the Companies Act and there is no explanatory
statement attached to the notice as required under section 173 of the Companies
Act. The provisions of sections 173 and 189 are mandatory and in the absence of
compliance with the said provisions the purported resolutions are illegal and
void.
According
to the petitioners, they are entitled to have the affairs of the company
managed properly and for that purpose have a general body meeting convened and
the company being managed properly by a duly appointed board of directors in accordance
with the provisions of the Companies Act. It is also essential in the interest
of the company and its shareholders that the board of directors of the company
should be superseded and the affairs of the company administered by one or more
administrators to be appointed by this court for such period as may be decided
by this court. As the action of the second respondent has resulted in serious
loss to the company and its shareholders, it is necessary to give directions
for appropriate proceedings being instituted against the second respondent
pursuant to section 406 read with sections 539 to 544 of the Companies Act so
that the second respondent may be surcharged and the company compensated for
the loss sustained by the acts and omissions of the second respondent.
With
these averments, the petitioners have filed the above company petition praying
:
(1) to supersede the board of directors
of the first respondent company and appoint one or more administrators to carry
on the business of the company ;
(2) to assess the damages sustained by
the company by reason of the wrongful acts of the second respondent and to make
an order surcharging the second respondent and directing payment of
compensation of the first respondent company ;
(3) to direct the administrators to
convene one or more general meetings of the company after complying with such
directions as this court may deem fit, for appointment of a new board of
directors to take charge of the affairs of the company and to vest the
management with such board ;
(4) for declaring that the extraordinary
general meeting of the first respondent company held on June 11, 1973, as
illegal and void and that the resolutions said to have been passed thereat are
not binding on the company ;
(5) for declaring that the proceedings
of the annual general body meeting held on January 5, 1981, and as recorded by
the second respondent in the minutes book of the first respondent company are
illegal and void and not binding on the first respondent company ;
(6) for declaring that the third respondent is not a director of the first respondent company ;
(7) for ad interim injunction restraining
the third respondent from acting or functioning as a director of the first
respondent company pending disposal of the company petition and for other
reliefs.
The
company petition was resisted by the respondents. The second respondent filed a
counter-affidavit for himself and on behalf of the respondent company. He also
filed an additional counter-affidavit to the amended petition under sections
397 and 398 of the Act on July 20, 1983. The petitioners filed a reply
affidavit to the additional counter filed by the second respondent. They denied
the allegations as baseless and unsustainable and devoid of any merits.
According to them, there are no facts to justify the making of a winding up
order and the requirement of section 397 of the Act is also not satisfied.
There are absolutely no grounds for invoking section 298 of the Act. The
allegations are very vague and baseless in regard to the mismanagement. It is
also denied that they set up Rukmani Ammal to institute any suit. According to
the respondents, after the second respondent became the managing director of
the company on December 28, 1978, the meetings of the board of directors of the
company were held on December 28, 1978, January 20, 1979, February 10, 1979,
March 10, 1979, April 21, 1979, May 5, 1979, June 9, 1979, December 1, 1980,
December 8, 1980, and January 12, 1981, and the meeting of the general body was
held on January 5, 1981. At the general body meeting accounts of the company
for the year ended June 30, 1978, were laid and adopted. However, because of
the absolute lack of co-operation and the obstructive attitude of the second
petitioner as co-director, meetings of the board of directors could not be held
more frequently and further general meetings could not be held to bring the
accounts up to date. It is also stated in paragraph 8 of the counter-affidavit
as to what transpired at the annual general meeting of the company held on
January 5, 1981. They also denied the allegations made in the company petition
concerning the proceedings of the general body meeting held on January 5, 1981.
The contentions now advanced against the proceedings of the said meeting are an
afterthought and obviously invented only for the purpose of this company
petition. The respondents have also denied the allegations in paragraphs 18-A
and 18-B of the company petition. According to them, article 31 of the articles
of association of the company provides that the number of directors of the
company shall be not less than two and not more than four. In the circumstances
the election of the third respondent at the general meeting on January 5, 1981,
was well within the number of directors provided in the said article. According
to the respondents, there was no necessity to amend the articles of association
to increase the strength of the board of directors of the company at the
general meeting on January 5, 1981. A valid general meeting was properly held on
June 11, 1973, after due notice to all the shareholders including the
petitioner. The petitioners had deliberately stayed away from that meeting with
ulterior motives, the special resolutions were validly passed at that meeting
amending the articles of association in certain respects and thereafter return
in Form No. 23 under section 192 of the Act was filed with the Registrar of
Companies regarding the amendments to the articles of association and other
subsequent proceedings to the knowledge of the petitioners. The proceedings of
the meetings of the board of directors of the company subsequent to the
election at the general meeting held on January 5,1981, would show that the
second respondent has always adopted an obstructive attitude in all the meetings
that he attended. Therefore, from any point of view, this company petition has
no merits.
The
petitioners filed a reply affidavit to the additional counter-affidavit
reiterating the contentions raised earlier and contended that the prayers
enumerated in the company petition are absolutely tenable and justifiable and
that the petitioners are entitled to the reliefs as prayed for.
I
have heard the lengthy and elaborate submissions of Mr. T. Raghavan, learned
senior counsel appearing on behalf of the petitioners and Mr. T.R. Rajagopalan,
learned counsel appearing on behalf of the respondents.
Exhibits
P-1 to P-47 were marked by consent on behalf of the petitioners and exhibits
C-1 to C-6 were marked . No oral evidence was let in by either parties and
arguments were advanced on the basis of the pleadings and on the basis of the
documents filed in these proceedings.
In
this company petition, the following reliefs are sought for :
(a) for superseding the board of
directors of the company and appoint-ment of administrator.
(b) to convene the general meeting for
appointment of a new board of directors to take charge of the affairs of the
company and to vest the management with such board. These reliefs are sought
for on the basis that the meetings held on June 11, 1973, and January 5, 1981,
are illegal and void and not binding on the company apart from the factum of
the meetings being disputed.
For
appointment of administrator the contention of the petitioners-is that (a)
earlier pursuant to the order of this court in C.P. No. 88 of 1973 there would
be two directors one being Mr. V.G. Sundar Raj (second petitioner) and the
other Mr. V.B. Padmanabhan (second respondent) representing the two groups. Mr.
V.G. Sunder Raj would be the managing director for the first three years from
the date of his appointment and Mr. V.B. Padmanabhan would be the managing
director for a period of two years immediately following the expiry of three
years of the tenure of Mr. V.G. Sunder Raj. The total tenure contemplated is
five years. The order does not contemplate the continuance of the two directors
appointed by the court.
A
meeting dated January 5, 1981, was purported to have been convened. Whether the
said meeting is valid is a question raised. The notice dated December 12, 1980,
issued in the name of the board by Mr. V.B. Padmanabhan (R-2) as managing
director of the company. The agenda referred to three items of business, viz.,
(1) consideration of accounts, (2) appointment of auditors, and (3) appointment
of directors. The petitioner challenges the meeting on two counts, (a) That the
purported meeting did not take place. For that reliance is placed on the
telegram dated January 5, 1981, sent by the second and third petitioners and
another. A reply to the same was issued by Mr. V.B. Padmanabhan, the second
respondent. The minutes dated January 5, 1981, are alleged to be the minutes
produced. The transactions purported to have been taken place would show that
apart from the appointment of auditors there were election of directors. It is
stated in the alleged meeting that three of them are elected, viz., (1) V.B.
Padmanabhan (R-2), (2) V.B. Gopalakrishnan (R-3) and (3) V.G. Sunder Raj
(second petitioner). Assuming that the meeting had taken place on January 5,
1981, the election of the three directors is not in accordance with the
articles of association of the company as there could be only two directors
under the articles. So there is no place for the third director. The respondent
relies on an alleged amendment to the articles purported to have been made at
an extraordinary general meeting said to have been held on June 11, 1973. The
petitioners challenge the holding of such meeting. The petitioner has detailed
in paragraphs 18(c), 18(d) of the petition as to how there would never have been
a meeting on June 11,1973, and the resolutions purported to have been passed on
June 11, 1973, are illegal and void. The purported proceedings held on January
5, 1981, depend upon the factum and validity of the alleged meeting of June 11,
1973.
The
following are the circumstances that would be relevant to be noticed to show
that no meeting would have been held on June 11, 1973. These circumstances have
been relied on by the petitioners.
(a) The suit, O.S. No. 1246 of 1972,
filed by V.G. Balasundaram on the file of the District Munisiff Court,
Coimbatore, for declaration and for permanent injunction for delivery of the
books and papers of the plaintiff company in the hands of the plaintiff was
dismissed by the said court on May 11, 1973.
(b) A requisition meeting was convened
by petitioners Nos. 2 and 3 for removal of the second respondent. A reference
to the letter dated May 30, 1973, will show that petitioners Nos. 2 and 3 have
requested respondents Nos. 2 and 3 and the company to convene an extraordinary
general meeting of the company for the purpose of passing a special resolution
as required under section 284 of the Act. The resolutions were for the removal
of the second respondent from the post of director of the company and to
appoint the second petitioner to be the director of the company in the place of
the second respondent.
(c) The letter dated June 6,1973, sent
by the company to petitioners Nos. 2 and 3 from the second respondent herein
expressing their inability to convene the general body meeting for the removal
of the second respondent in view of the pendency of the proceedings in O.S. No.
870 of 1972 on the file of the District Munsiff Court, Coimbatore, and O.S. No.
463 of 1972 on the file of the Sub-court, Coimbatore.
(d) Notice dated June 7, 1973, sent by
registered post with acknowledgment due from the first petitioner to the second
respondent and also to the Registrar of Companies and to the chartered
accountants. It is stated therein that the business of the company could not be
transacted in view of the extraordinary circumstances mentioned in the said
letter. The said communication was sent to place on record that no business was
trans acted in the board meeting of the company on June 7, 1973.
(e) Notice of the board meeting for June
16, 1973, was sent on June 8, 1973. Item No. 3 of the agenda is to consider the
requisition dated May 30,1973, received by the company on June 4, 1973, from
petitioners Nos. 2 and 3.
(f) Another letter dated June 8,1973,
was sent to the first petitioner herein in connection with the board meeting
held on June 7, 1973, enclos ing the agenda for the meeting held on June 16,
1973, and requesting the first petitioner to attend the said meeting.
(g) O.S. No. 416 of 1973 is the suit
filed by the company by its managing director, the second respondent herein
against the second, third and first petitioners respectively on the file of the
Sub-Court, Coimbatore, to declare that the resolutions proposed and contained
in the requisition for general meeting dated May 30,1973, and the notice of the
extraordinary general meeting of the first respondent company issued by
petitioners Nos. 2 and 3 on July 5, 1973, are illegal and opposed to the
articles of association and invalid and without any legal effect and for a
consequential injunction restraining the petitioners herein from making any
claim or asserting any rights on the basis of the said resolution or seeking to
enforce the same in any manner and for costs. This suit was filed on July 9,
1973.
(h) The written statement filed by the
petitioners in O.S. No. 416 of 1973 is another document marked as exhibit P-13
in the present proceedings to show that no meeting would have been held on June
11, 1973. It is mentioned in paragraph 11 of the written statement that no
special resolution is required under the article for removal of a director.
Article 27 has been misinterpreted by the respondents herein and V.B.
Padmanabhan was not appointed as director for any specific term and is
removable at the will of the general body. Only article 31, section 284 of the
Act would apply and in either event, only an ordinary resolution is required.
The allegation that the proposed resolution was also opposed to articles 31,
32, 35 and 36 are meaningless and none of these articles apply to the proposed
resolution. It is also stated in paragraph 12 of the written statement that no
special resolution is required for appointment of a director unless the
strength of directors is thereby increased.
(i) The written statement filed by V.G.
Balasundaram, the first petitioner herein and the third defendant in O.S. No.
416 of 1973, and marked as exhibit P-14 in these proceedings is also relevant
to be noticed in this context. It is also stated that no resolution is required
under the articles for removal of a director.
(j) Company Petition No. 88 of 1973 was
filed on October 16, 1973, on the file of this court by petitioners Nos. 1 to 3
impleading the first respondent company and V.B. Padmanabhan as respondents
Nos. 1 and 2. The said petition was filed under sections 397 and 398 of the
Companies Act. Several acts of misconduct have been alleged against the
respondents therein. It is stated in paragraph 22 of Company Petition No. 88 of
1973 that the petitioners and the other members of the company are entitled to
have the affairs of the company managed properly by a duly appointed board of
directors in accordance with the provisions of the Companies Act. The articles
of the company which were drawn up in the year 1935 are totally inadequate to
ensure proper management of the company. The articles, particularly the
provisions relating to the appointment of directors, their powers and duties
require a revision so as to bring them in line with the provisions of the
Companies Act. It is also essential in the interests of the company and the
shareholders that the board of directors of the company should be superseded
and the affairs of the company administered by one or more administrators to be
appointed by this court for such period as may be decided by this court. As the
action of the second respondent has resulted in serious loss to the company, it
is also necessary that this court may be pleased to give directions for
appropriate action being instituted against the second respondent, V.B.
Padmanabhan.
(k) In the said company petition, a
memorandum of compromise was entered into and signed by the petitioners and the
respondents and their respective counsel. This memorandum of compromise dated
October 14, 1974, is marked as exhibit P-4 in the present proceedings. Under
the said memorandum of compromise, parties have agreed to withdraw the
following legal proceedings, which were then pending and allow them to be
dismissed as settled out of court :
1. C.P.
No. 35 of 1974, High Court, Madras.
2. O.S.
Nos. 416 of 1973 and 265 of 1974, Sub-Court, Coimbatore.
(l) It is mentioned in paragraph 22 of
the compromise that the respective contentions of parties in the suit in O.S.
No. 416 of 1973, Sub-court, Coimbatore, are left open and the parties shall be
at liberty to proceed with the said suit. It is also a matter of record that
the two appeals in A. S. Nos. 57 and 112 of 1977 preferred on the file of the
District Court, Coimbatore, and the two second appeals in S. A. Nos. 1994 of
1978 and 2163 of 1979, respectively, preferred against the said judgments of
the District Court on the file of this court were dismissed.
The
respondents claim that the amended articles of association were filed in O.S.
No. 416 of 1973. According to the petitioners, the said amended articles were
never marked as exhibit and that the suit was not tried at all. There is no
occasion for the petitioners to know that the articles of association were
filed by the respondents in O.S. No. 416 of 1973 were different from the
articles filed in C.P. No. 88 of 1973.
In
Company Petition No. 88 of 1973, in Company Petition No. 1(A) of 1981 and
Company Petition No. 10 of 1981 (the present proceedings), the petitioners
filed the original articles of association, which are marked as exhibit P-1. In
this connection it is useful to refer to rule 22 in the Ramaiya's Companies
Act, Eleventh edition, Appendix V, page 1786. Rule 22 provides that every
petition and application mentioned in Appendix II shall be accompanied by the
documents set opposite thereto in column (4) of the said Appendix. The
petitioners' case is that it is only in the course of the hearing in C.P. No.
1(A) of 1981 that the purported meeting said to have been held on June 11,
1973, came to be known. The written statement filed by the petitioners in O.S.
No. 416 of 1973 would clearly show that the pleadings were on the basis of the
existing articles of association without reference to the purported amendment.
The minutes book of the proceedings is also not produced.
There
were at all times only two directors of the company. In para 22 of Company
Petition No. 88 of 1973, specific reference is made that the articles were
drawn up in 1935 and that the articles relating to the appointment of directors
require revision so as to bring them in line with the provisions of the
Companies Act, 1956. In the counter-affidavit filed by the second respondent,
there is no reference to the amendment of the articles at the meeting purported
to be held on June 11, 1973.
That
no meeting was held on June 11, 1973, was further made clear in the counter
filed by Mr. V.B. Padmanabhan, the second respondent herein in Company
Application No. 715 of 1978 in C.P. No. 88 of. 1973 (available at pages 209 and
210 of typed set No. 3). It is alleged by Mr. V.B. Padmanabhan that the
articles of the first respondent company provided and provides only for two
directors. This would clearly show that the respondents wanted to keep in dark
the manipulation of the minutes to be utilised at an appropriate time which
came to them at the meeting held on January 5, 1981. The contention of the
respondents that no meeting was held would be evident from their additional
counter-affidavit. A reference to paragraph 6 of the additional
counter-affidavit will amply prove this. It shows there from that according to
them it was a requisitioned general meeting and notice was sent to all
shareholders under certificate of posting.
Section
169 is the relevant provision with regard to the requisition meeting. Section
169 provides that an extraordinary general meeting may be called on requisition
of members holding at least one tenth of the paid-up capital carrying voting
rights in respect of that matter. A notice should be sent by the
requisitionists to the company. The company should forthwith convene a board
meeting and the board will convene a requisition meeting within 21 days of the
receipt of the notice. If the board does not convene the meeting, then the
requisitionists would convene the meeting. There is no reference as to when the
requisition notice was received by the company, when the board meeting of the
company was convened for consideration and how the company should have issued a
notice.
From
a perusal of the notice, it is seen that the notice is said to have been issued
by the said company. But from the dates given earlier, it would show that there
was no board meeting which considered any requisition for holding the meeting
and decided to convene a meeting. No presumption of the minutes would arise
with reference to the minutes of the requisitioned meeting. Sections 193 and
195 of the Companies Act will not be applicable to the minutes of the
requisitioned meeting and the minutes have to be proved as a matter of fact. As
rightly contended by Mr. T. Ragavari the minutes book is not produced before
this court.
According
to the petitioners, no meeting was ever held on January 5, 1981, and even
assuming that such a meeting was held, and the articles duly amended the
proceedings of the said meeting were challenged with reference to the election
of directors on two grounds :
(a) Appointment
of a third director should be done by a special resolution ;
(b) Even in the so called amended
articles the appointment of directors is contemplated by a special resolution.
Section
189 of the Companies Act stipulates that the notice must specify the resolution
as special resolution and to be passed. Article 27 of the articles of
association of the company contemplates increase in the number of directors by
special resolution in general meeting. If such an increase is contemplated with
reference to the meeting held on January 5, 1981, a special resolution should
have been passed for appointment of directors. The purported amended article 32
contemplates the appointment of directors in general meeting by special
resolution. In my view, section 189 of the Companies Act is mandatory and has
not been complied with in this case. Section 189(2) of the Act says as follows
:
"A
resolution shall be a special resolution when —
(a) the intention to propose the resolution as a
special resolution has been duly specified in the notice calling the general
meeting or other intimation given to the members of the resolution :
(b) the notice required under this Act has been
duly given of the general meeting".
In
two decisions of our High Court and the Patna High Court respectively Self Help
Private Industrial Estate Private Ltd., In re [1972] 42 Comp Cas 605 (Mad) and
Parikh Engineering and Body Building Co. Ltd., In re [1975] 45 Comp Cas 157, it
has been held by two learned judges that for want of proper or sufficient
notice or other defect in procedure a special resolution is not effective.
Section
173 of the Companies Act is equally mandatory. The said section applies to the
company as the articles of association has not expressly excluded the
application of section 173. Section 173(1) of the Act contemplates the
appointment of directors in the place of directors retiring as ordinary
directors. There are only two directors appointed by virtue of compromise. The
appointment of a third director is not a director appointed in the place of
directors retiring. The explanatory statement is mandatory, as could be seen
from the following two decisions in :
1. Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee
Cotton and Jute Mills Ltd. [1964] 34 Comp Cas 777 (Guj) ;
2. Firestone Tyre and Rubber Co. v. Synthetics and
Chemicals Ltd. [1971] 41 Comp Cas 377 (Bom).
The
notice dated December 12, 1980, for the meeting to be held on January 5, 1991,
is in my view thus defective. The notice dated December 12, 1980, has been
marked as exhibit P-5 in these proceedings. Subject No. 3 in the agenda relates
to the appointment of directors. In my view, the appointment of directors can
only be by a resolution with required majority. I am also of the view that
every single requirement of section 189 of the Act is absent in the instant
case. If these appointments are bad since they are not by a special resolution,
then it can be construed that there is no valid board at all. Every single requirement
of the Act prescribed for the protection of the shareholders is violated.
Section 166 of the Act speaks about the condition of the annual general
meeting. It is contended that no general body meetings were held in regard to
the company in question. Section 210 of the Act provides that : "At every
annual general meeting of a company held in pursuance of section 166, the board
of directors of the company shall lay before the company —
(a) a balance-sheet as at the end of the
period specified in sub section (3), and
(b) a
profit and loss account for that period".
It
is contended that the material provisions mentioned above have not been
complied with by the respondents. Section 285 of the Act relates to the
meetings of the board of directors, which contemplates that a meeting of the
board of directors of the company shall be held at least once in every three
months and at least four such meetings shall be held in every year. It is also
seen that the petitioners sent a telegram on January 5, 1981, itself. There is
also a dispute as to what happened on January 5, 1981, in the said meeting. It
is seen from the proceedings of the first respondent company under subject No.
3 that according to the members as soon as this subject was taken up Shri V.G.
Sundar Raj moved a resolution that subject No. 1 of the agenda to be deferred
to another date and that the same may be considered by the general body at the
adjourned meeting. The abovesaid resolution was seconded by Sri V.G. Muniraj.
The chairman of the meeting Sri V.B. Padmanabhan, the second respondent herein
stated that the accounts have already been passed by the board of directors,
that this meeting has been called pursuant to an undertaking given in the High
Court and the proceedings before the High Court and that it is not proper to
defer the subject and that, therefore, the chairman has stated that he was
putting the resolution for adjournment to vote. It is also stated in the
minutes that the resolution for adjournment was lost by only two members voting
for the resolution and four members voting against the resolution and
accordingly, the chairman declared the resolution as lost. At this stage, Sri
V.G. Sundar Raj, Sri V.G. Muniraj and Sri V.G. Krishnaswamy Naidu (proxy for
Sri V.G. Balasundaram) staged a walk out from the meeting and thereupon it was
resolved that the profit and loss account for the year ended June 30, 1979, and
the balance-sheet as on that date and the reports of the board of directors and
the auditors be and they are thereby received, adopted and approved. Shri V.B.
Jagadeesan seconded the above resolution and the resolution was then put to
vote and declared carried by the chairman on show of hands unanimously.
Likewise, subject No. 3 which relates to appointment of directors resolved that
Shri V.B. Padmanabhan, the second respondent, was appointed as director of the
company. The said resolution was proposed by Mr. V.B. Jagadeesan and seconded
by V.B. Devarajan. It is stated in the minutes that at that stage Sri V.B.
Padmanabhan intervened and stated that it would not be proper for him to be the
chairman while considering the resolution concerning his appointment as
director and, therefore, he stepped down from the chair. Again, Shri V.B.
Padmanabhan proposed and Shri V.B. Jagadeesan seconded that V.B.
Gopala-krishnan be voted to the chair unanimously. After Sri V.B.
Gopalakrishnan assumed the chair, the resolution relating to the appointment of
Sri V.B. Padmanabhan as director was put to vote and declared carried by the
chairman on show of hands unanimously. At this stage, Sri V.B. Gopalakrishnan
stepped down from the chair and Sri V.B. Padmanabhan assumed the chair, having
already been elected to the chair and he moved the following resolution :
(a) That
Shri V.G. Sundara Raj be appointed as director of the company.
(b) The said resolution was seconded by
Sri V.B. Jagadeesan and the resolution was then put to vote and declared and
carried by the chairman on show of hands by three members voting for the resolution
and Sri V.B. Gopalakrishnan voting against the resolution.
(c) Sri V.B. Jagadeesan proposed another
resolution, proposing to appoint Sri V.B. Gopalakrishnan as director of the
company.
(d) The said resolution was seconded by
Shri V.B. Devarajan and then the said resolution was put to vote and declared
and carried by show of hands unanimously.
(e) The meeting terminated with a vote
of thanks to the chair. The minutes of the meeting was signed by the chairman
of the meeting.
In
my opinion, the notice itself is not in consonance with section 189(2)(a) of
the Act for the reasons mentioned above. Exhibit P-1 is the memorandum and
articles of association of the first respondent company. Paragraph 27 deals
with the appointment of directors by a special resolution. Paragraphs 29 and
30(a) have to be noticed in this connection. Paragraph 29 of exhibit P-l deals
with show of hands only. It further deals with decision at the meeting on the
question submitted and the procedure to be followed. It says that every
question submitted to a meeting shall be decided in the first instance by show
of hands by the members present in person and by the duly constituted
representative of any company or corporation and the chairman shall have in
case of equality of votes a casting vote and unless a poll is demanded by any
member, a declaration by the chairman that a resolution has been carried or
lost and an entry to that effect in the minutes book shall be conclusive
evidence without proof of the number or proportion of votes recorded in favour
of or against, such resolution. Article 30(a) provides that if a poll is
demanded by any member, every member present shall have a vote for each share
and the result of the poll shall be deemed to be resolution of the meeting. A
reference to the minutes of the meeting which is marked as exhibit P-39 of the
proceedings will show that Sri V.B. Padmanabhan, the chairman elected by show
of hands proposed that Sri V.B. Gopalakrishnan be elected to the chairman and
that a poll was taken on the said resolution with 25 votes being cast in favour
and 25 votes being cast against the said motion and that at that stage Sri V.B.
Padmanabhan as chairman gave his casting vote in favour of the election of Sri
V.B. Gopalakrishnan and Sri V.B. Gopalakrishnan was elected to the chair and
after the election he conducted the further proceedings.
As
stated above, article 30(a) does not provide a casting vote, which apart from
oppression in my view is a good ground for winding up. As far as poll is
concerned, there is no casting vote. If that is so, V.B. Gopalakrishnan cannot
conduct the proceedings, if he is not properly elected. It is seen from the
minutes that Mr. V.B. Gopalakrishnan conducted the further proceedings. As seen
from the proceedings mentioned earlier it will be seen that the meeting held on
January 5,1981, is not a valid meeting and that the meeting was objected to by
telegrams sent by the petitioners. Therefore, there is a serious dispute as to
the validity of the meeting. That apart it is also seen that the notice sent is
also defective in regard to the appointment of directors.
Section
173 of the Act deals with the explanatory statement to be annexed to the
notice. The appointment of directors can be under two circumstances ; (a)
directors retiring by rotation or being reappointed. In that case, no
explanatory statement is required. The object of enacting section 173 is to
secure that all facts which have a bearing on the question on which the
shareholders have to form their judgment are brought to the notice of the
shareholders so that the shareholders can exercise an intelligent judgment. The
provision is enacted in the interests of the shareholders so that the material
facts concerning the item of business to be transacted at the meeting are before
the shareholders and they also know what is the concern or interest of the
management in any item of business, the idea being that the shareholders may
not be duped by the management and may not be persuaded to act in the manner
desired by the management unless they have formed their own judgment on the
question after being placed in full possession of all the material facts and
apprised of the interest of the management in any particular action being
taken.
Having
regard to the whole purpose and scope of the provision enacted in section 173,
I am of the opinion that it is mandatory and not directory and that any
disobedience to its requirements must lead to the nullification of the action
taken. In the instant case, there is no article excluding section 170(2) of the
Act. In the case of private companies, these provisions will apply. Therefore,
in my opinion, under section 173 of the Act with regard to appointment of
directors, there should have been an explanatory statement which is mandatory.
In the instant case, no explanatory statement has been appended to the notice
which is mandatory. Hence failure to append an explanatory statement is not
only defective but also fatal and an incurable defect. Hence, on this point
also I hold that the entire meeting held on January 5, 1981, and the resolution
stated to have been adopted after the petitioners withdrew from the meeting are
bad in law. This point has been specifically raised by the petitioners in their
pleadings. I have already held that section 173 is mandatory and not directory.
Hence, respondents Nos. 2 and 3 cannot consider themselves as duly elected
directors since, in my view, the notice is defective and once the notice is
held to be defective, no business can be transacted. It was virtually an ex
parte meeting. In this context, support can be derived from the decision in
Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Ltd.
[1964] 34 Comp Cas 777, of the Gujarat High Court. It was held that section 173
of the Act enacts a provision which is mandatory and not directory and that the
object of enacting section 173 is to secure that all facts which have a bearing
on the question on which the shareholders have to form their judgment are
brought to the notice of the shareholders so that the shareholders can exercise
an intelligent judgment.
Section
195 of the Act also does not save the situation. In my view, the statutory
presumption is something which is rebuttable.
Let
me now deal with the validity of the meeting said to have been held on June 11,
1973.
Section
169 of the Act provides that an extraordinary general meeting may be called on
the requisition of members holding at least one-tenth of the paid-up share
capital of the company as at that date carrying the right of voting in regard
to that matter. The requisition is not placed before this court. The board is
expected to call for a meeting if there is a valid requisition. If there was
no, requisition, it is the duty of the parties to place that requisition before
the meeting. According to the petitioners, no notice was served on them for the
meeting held on June 11, 1973, That none of the petitioners attended the
meeting is a common ground. The minutes are stated to be recorded for June 11, 1973,
meeting. The minutes are stated to be recorded in some book which is not at all
the minutes book. That is also not placed before this court. Hence, in my view,
the statutory presumption under section 195 of the Act does not arise. The
minutes of the general meeting should contain a fair summary of the proceedings
of such meeting and in particular of all material questions asked or comments
made. Section 193 of the Act provides that every company shall cause minutes of
all proceedings of every general meeting of its board of directors or of every
committee of the board to be kept by making within thirty days of the
conclusion of every such meeting concerned, entries thereof in books kept for
that purpose with their pages consecutively numbered. If the presumption is not
under section 193, presumption under section 195 is not at all available. The
factum with regard to the June 11, 1973, meeting is not placed before this
court. This court is also not in a position to know what was the requisition,
who could lead it, was it a valid requisition and if so, why the company has
not acted on that. I may say that there is practically no material on these
aspects. The judgment of the apex court in Shanti Prasad Jain v. Kalinga Tubes
Ltd. [1965] 35 Comp Cas 351 (SC), is also a judgment under section 397 of the
Act. The Supreme Court said that the circumstances must be such as to warrant
the inference that there has been, at least, an unfair abuse of powers and an
impairment of confidence in the probity with which the company's affairs are
being conducted as distinguished from mere resentment on the part of a minority
at being outvoted on some issue of domestic policy. The Supreme Court said that
the conduct must be continuous act on the part of the majority shareholders,
continuing up to the date of petition, showing that the affairs of the company
were being conducted in a manner oppressive to some part of the members. The
conduct 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 for oppression of a minority by a
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.
The
observations made by the Supreme Court are directly applicable to the facts of
this case. In this case, the loss of confidence against the respondents is
justifiable. Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351
(SC) has been followed in (sic) which relates to a case of small companies. The
relevant passage in Rajahmundry Electric Supply Corporation v. A. Nageswara Rao
[1956] 26 Comp Cas 91 (SC) is extracted hereunder (at page 97) :
"Loch
v. John Blachwood Ltd. [1924] AC 783 (PC) was itself a case in which the order
for winding up was asked for on the ground of mismanagement by the directors,
and the law was thus stated at page 788 :
'It
is undoubtedly true that at the foundation of applications for winding up, on
the just and equitable rule, there must lie a justifiable lack of confidence in
the conduct and management of the company's affairs. But this lack of
confidence must be grounded on conduct of the directors, not in regard to their
private life or affairs, but in regard to the company's business. Furthermore
the lack of confidence must spring not from dissatisfaction at being outvoted
on the business affairs or on what is called the domestic policy of the
company. On the other hand, whenever the lack of confidence is rested on a lack
of probity in the conduct of the company's affairs, then the former is
justified by the latter, and it is under the statute just and equitable that
the company be wound up'."
In
Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd,
[1981] 51 Comp Cas 743 at 779, the Supreme Court had extracted a passage from
Lindley on Partnership (14th Edition, pages 194-95) which cites Blisset v.
Daniel [1853] 10 Hare 493 ; 68 ER 1022 as an authority for the proposition that
:
"The
utmost good faith is due from every member of a partnership towards every other
member; and if any dispute arise between partners touching any transaction by
which one seeks to benefit himself at the expense of the firm, he will be
required to show not only that he has the law on his side, but that his conduct
will bear to be tried by the highest standard of honour".
Mr.
T.R. Rajagopalan, learned counsel appearing for the respondents, argued that a
single act does not constitute oppression. Needle Industries (India) Ltd,'s
case [1981] 51 Comp Cas 743 was referred to by learned counsel. The said case
was considered by the Delhi High Court after Needle Industries (India) Ltd.'s
case [1981] 51 Comp Cas 743 (sic). I have also been taken through the pleadings
and also the relevant documents filed in this case. According to learned
counsel, the documents filed in this case show that the petitioners had
knowledge about the management. According to Mr. Rajagopalan, learned counsel
for the respondents, there was a change in the management and that from 1975
the petitioners' group were in management for a period of three years and then
for two years, the respondents' side were in management and in view of the
compromise reached between the parties, the June 11, 1973, meeting cannot be
relied upon for oppression. Learned counsel has also relied on certain passages
in some judgments in support of his contention. However, I am of the view that the
very fact that the respondents suppressed the alleged meeting stated to have
been held on June 11, 1973, and used the alleged amendment of the articles at
the meeting held on January 5, i981, for the purpose of electing a majority of
board is not a single act. What is dormant till 1981, by suppression and given
up at the time C.P. No. 88 of 1973 was sought to be reactivated at the meeting
convened for January 5, 1981. In my view, the contention of the respondents is
baseless. I am also of the view that in view of the decisions in :
1. Ramashanhar
Prosad v. Sindri Iron Foundry, AIR 1966 Cal 512.
2. AIR
1982 (2) LLJ 216 (Delhi) (sic).
The
contention that a single act does not constitute oppression is not at all
acceptable. But the said single act again has a long standing effect. While
reiterating his arguments, Mr. T.R. Rajagopalan contended that isolated
instances cannot be a ground for a petition under section 397 and that in the
nature of the case, it cannot be said that there is oppression. He cited the
decision in Maharani Lalita Rajya Lahshmi v. Indian Motor Co. (Hazaribagh) Ltd.
[1962] 32 Comp Cas 207 ; AIR 1962 Cal 127, which in turn refers to a case of
single and solitary instances and a case under section 397.
Mr.
T. Raghavan, learned counsel for the petitioners has also cited the following
decision : Seethiah v. Venhatasubbiah [1949] 19 Comp Cas 107 ; AIR 1949 Mad
675, and submitted that subsequent events after the filing of the petition can
also be taken into account and that no pleading is necessary for the said
purpose. It is a fact that no meeting was held after 1982 and no accounts have
also been submitted and the company's position is not disclosed by the
respondents and no particulars as to the position obtained in the company were
made available to the court. No accounts whether audited or not were filed in
this court. While arguing on this point, Mr. T. Raghavan, learned senior
counsel for the petitioners drew my attention to the decision in Gopal
Krishnaji Kethar v. Mohd. Haji Latif, AIR 1968 SC 1413 at page 1416. In the
instant case, as mentioned above, the respondents have not placed before this
court any documents and if they fail to do so, this court is always entitled to
draw an adverse inference.
Before
I conclude I must also advert to the impact of the judgment of the Hon'ble
Supreme Court dated November 28, 1991, in V.B. Rangaraj v. V.B. Gopaahishnan
[1992] 73 Comp Cas 201 (SC).
Company
Petition No. 1A of 1981 proceeded on the basis that the judgment of Ramanujam
J. in the second appeal is binding on the parties, subject to final decision of
the Supreme Court. Parties proceeded on the basis that each group holds 25
shares. There would be a deadlock. The judgment of the Supreme Court resolved
the said deadlock. If one group holds majority, then there will be no deadlock
and it is now possible for the company to run. The court under section 402 of
the Act has power to require the other members also to sell their shares. It is
to be noticed that the powers of this court under section 402 are very wide.
For
the foregoing reasons, I have no hesitation to hold that the several acts on
the part of the respondents mentioned above are harsh, oppressive, burdensome
and prejudicial to the interest of the petitioners herein. The second
respondent also did not take any steps to convene the meeting of the board of
directors and also finalise accounts and place them before the board and also
convene a general body meeting for passing the accounts. In view of this obstructive
attitude on the part of the respondents, the second petitioner who is the only
other director in the company during the relevant time was kept completely in
the dark in regard to the administration of the company. The petitioners who
are holding 25 shares and are entitled to participate in the affairs of the
company are prevented from participating in the affairs of the company because
of the prejudicial and oppressive conduct of the respondents. Because of the
prejudicial conduct of the members of the respondent group, the company has
incurred heavy loss. The licence of the company also was not renewed in time
and the second respondent was responsible for such oppressive management. The
theatre was closed for want of a licence. I also hold that the meeting
purported to have been held on June 11, 1973, was not really held and that the
resolution purported to have been passed in the said meeting is illegal and
void. Therefore, I hold that the articles of association of the first
respondent company will be as they stood prior to the alleged meeting dated
June 11, 1973, and hence the petitioners are entitled to a declaration that the
extraordinary general meeting of the first respondent company held on June 11,
1973, is illegal and void and that the resolutions passed thereat are not
binding on the first respondent company. Likewise the third respondent, who is
purported to have been appointed at the meeting held on January 5, 1981, cannot
function as such director of the first respondent company. The appointment of
the third respondent was not considered as a special business under the
provisions of section 173 of the Act. The notice issued for holding the meeting
for January 5, 1981, has not disclosed the intention to move the election of
the third respondent as a director as and by way of special resolution. There
is also no explanatory statement attached to the notice as required under
section 173 of the Act, which is mandatory and in the absence of compliance
with the said provisions, I hold that the purported resolutions are illegal and
void.
For
the aforesaid reasons :
(a) the petition filed by the
petitioners has to be allowed in toto and in the interest of the company and
its shareholders, the board of directors of the company is superseded ;
(b) the affairs of the company are directed to be administered by petitioners Nos. 1 to 3 ;
(c) since it is proved that the action
of the second respondent has resulted in serious loss to the company and its
shareholders, the petitioners, as administrators are directed to take
appropriate proceedings being instituted against the second respondent pursuant
to section 406 read with sections 539 to 544 of the Act, so that the second
respondent may be surcharged and the company compensated for the loss sustained
by the acts and omissions of the second respondent ;
(d) the petitioners will engage a
chartered accountant to go into the accounts and affairs of the company, during
the management of the respondents to assess the damages sustained by the
company, by reason of the wrongful acts of the second respondent and the
petitioners are permitted to take appropriate proceedings against the second
respondent by way of surcharge proceedings as mentioned above ; and also move
this court for any directions ;
(e) the petitioners as administrators
shall convene one or more general meetings of the company, after complying with
the above directions for appointment of a new board of directors to take charge
of the affairs of the company and to vest with the management of such board,
(f) this
company petition is allowed with costs of the petitioners.
[1992]
73 COMP. CAS. 285 (KER)
HIGH COURT of KERALA
v.
Sreerama Vilas Press & Publications (P.) Ltd.
VARGIIESE KALLIATH AND G.H. GUTTAL JJ.
M.F.A. No. 722 of 1991
SEPTEMBER
20, 1991
M. Ramanatha Pillai for the appellant.
Varghese Kalliath J.—This is an appeal against the order of a learned single
judge of this court in Application No. 253 of 1990 in C.P. No. 28 of 1984. The
said application was filed under rule 9 of the Companies (Court) Rules, 1959,
by a shareholder of the company for an order declaring the election of
directors and managing director of the company (Sreerama Vilas Press and
Publications (P.) Ltd., Quilon) held on March 10, 1990, as illegal, void and
inoperative.
These are the facts : The
applicant is a shareholder of the company. There was a winding up order by the
company on November 4, 1976. Subsequently, the company court approved a scheme
for revival of the company. As a consequence of that order, the board of
directors as on the date of the winding up petition was revived. A general body
meeting of the company was held on April 19, 1985, and a new board of directors
was elected. On February 25, 1986, another general body meeting was held
wherein a resolution was passed removing one of the directors, N. Madhavan
Nair, who was the managing director of the company. Madhavan Nair filed
Application No. 63 of 1986 before the company 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. The company court passed
an order of interim stay on March 3, 1986.
When the petitions came up
for hearing, the period of appointment of the managing director and the board
of directors of the company had expired. The company court did not consider the
question on merits, but directed a fresh election to the board of directors and
managing director. In order to enable a proper election, the company 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
meeting held under the directions of the company court elected the board of
directors and N. Madhavan Nair was also elected as the managing director.
A misfeasance application
was filed against N. Madhavan Nair. The company court directed N. Madhavan Nair
to pay to the company a total amount of Rs. 44,550. Madhavan Nair has filed M.F.A.
No. 174 of 1989. A cross-appeal also was filed. Both are now pending.
Two
of the shareholders of the company made a requisition to the board of
directors, under section 169 of the Companies Act on December 31, 1988,
requesting it to convene an extraordinary general body meeting of the company.
The managing director did not convene any meeting. Another director of the
company filed a suit, O.S. No. 34 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's
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 five
directors. Before the company court, a report was filed. Another application
was also moved before the company court to allow the newly elected board of
directors to function. When the matter came up before the company court, it
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 agreed that for the time being he will meet the expenses of the
meeting. The company court, as per order dated October 30, 1989, appointed Shri
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. 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 the company court.
The
meeting was held on March 10, 1990. Out of the shareholders of the company, six
were present and three by proxy attended the general body meeting. Those nine
members together held 2,630 shares out of 4,689 shares held by the total number
of members, viz., 15. Ordinarily, there were 17 members of whom two persons had
died. The present strength of members is 15. In the meeting held under the
directions of the company court, a board of directors and managing director
were elected. The Commissioner filed a report on March 22, 1990. The present
Application No. 253 of 1990 was filed challenging the election and its
proceedings. 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 the present application (Application No. 253 of 1990). The company
court dismissed the application for stay. An appeal was filed as M.F.A. No. 322
of 1990, which was dismissed on June 18, 1990, with certain directions.
The
company court has now dismissed Application No. 253 of 1990. The applicant is
aggrieved and she has filed this appeal.
Counsel
for the appellant raised certain points before us which he has raised in the
petition and before the company court. He submitted that the notice convening
the meeting by the chairman appointed by the company court is defective, since
an explanation as contemplated under section 173(2) of the Companies Act was
not annexed to the notice. Further, it was submitted that the notice is
defective since, along with the notice, the names of candidates for elections
were not furnished. It was also contended that individual notices to the
members of the company regarding the candidature of a person were not sent and
that it is a violation of section 257(1A) of the Companies Act. Counsel
submitted that the appointment of Commissioner and direction to convene an
extraordinary general body meeting of the company itself are without
jurisdiction. The above contentions were raised before the company court also.
The company court found no merit in those contentions and negatived those
contentions. Counsel argued the case elaborately. We are obliged to consider
the points raised by counsel, since he pressed all the points with equal
emphasis.
The
first question we have to consider is whether the notice is defective on
account of lack of explanatory statement under section 173(2) of the Companies
Act. Section 173(2) of the Companies Act provides thus :—
"173.
Explanatory statement to be annexed to notice.— ... (2) Where any items of
business to be transacted at the meeting are deemed to be special as aforesaid,
there shall be annexed to the notice of the meeting a statement setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein, of every director, and
the manager, if any".
It
has to be remembered that the chairman appointed by the company court was
seeking directions in the matter of conducting the meeting. The company court
gave certain directions for the proper conduct of the meeting. The former
managing director, Sri N. Madhavan Nair, filed Application No. 187 of 1990 to
stop the convening of the meeting on the ground that the notice is not in
conformity with sections 171, 173 and 257(1A) of the Companies Act. The company
court overruled the objections, found the notice in order and dismissed the
application of the former managing director. He filed an appeal, M.F.A. No. 333
of 1990. The appeal 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. So even though the company court has found that
the notice sent by the chairman appointed by the company court was not
defective, that matter was left open to be considered by the company court at
the final stage of the main application, viz., Application No. 253 of 1990. But
it has to be noted that the meeting was held as early as on March 10, 1990, and
the period of appointment of the board of directors and managing director of
the company has expired by efflux of time and an election to a new board of
directors and managing director became necessary.
Nevertheless,
we feel that we are bound to consider the correctness of the judgment
challenged in this appeal. The company court, in its order, has extracted in
full the notice issued by the chairman appointed by the company court and we do
not want to repeat it in this judgment. The purpose for which the meeting is
held is clearly stated in the notice. The purpose is for conducting an election
to the board of directors and managing director of the company. There is no
difficulty to hold that the notice was issued following the provisions
contained in the articles of association and no argument was advanced by
counsel for the appellant stating that the notice is defective on account of
the fact that it has not complied with the provisions contained in the articles
of association.
The
gravamen of the charge against the notice is that it has not complied with the
provisions contained in section 173 of the Companies Act. The articles of
association provide for the nature of the notice to be sent to the effect that
what has to be done is to inform the members of the company of the general
nature of the business to be transacted at the meeting. The learned single
judge observed that since there is a specific provision in the articles of
association regarding the notice of a general meeting where special business is
to be transacted, section 173 of the Companies Act may not apply to the present
case. Further, the company court said that the notice issued contains all
material facts concerning the business that was to be transacted in the
meeting, viz., election of managing director and directors and that the order
to convene the meeting was passed after hearing all parties and the notice
itself was approved by the company court. It was also pointed out that the
meeting was convened by the chairman appointed by the company court and not
exactly by the company. The intent and purpose of section 173 of the Companies
Act is to give directions to the shareholders in the matter of holding a meeting
by the management.
In Sitaram Jaipuria v.
Banwarilal Jaipuria, AIR 1972 Cal 105, the Calcutta High Court has held that the
provisions like section 173(2) of the Companies Act should not be construed in
a rigid manner and an interpretation should not be made so as to hamper the
conduct of business. The notice has to be construed in a realistic and businesslike manner and if it
satisfied the essence of section 173 of the Companies Act, the meeting should
not be invalidated on the technical ground that the notice has not complied
with the provisions of section 173(2) of the Companies Act. The intention
behind the provisions contained in section 173 of the Companies Act has to be
understood in a meaningful manner. Of course, if a transaction of business has not
been sufficiently notified or which is substantially different from the
notification, it would be invalid. Beyond that on technicalities the meeting
should not be invalidated. It is clear from the notice that the transaction of
business to be carried out in the meeting is the election of the board of
directors and managing director. That was the only transaction scheduled in the
meeting and for which alone the meeting was called.
The
notice was found to be valid by the company court. All proceedings for the
conduct of the election were supervised by the company court and the parties
had opportunities before the company court to raise points against the validity
of the notice. Even before the holding of the meeting, the company court has
considered it and found it to be valid. It is also necessary to note that
neither the notice nor the explanatory note omits to disclose material facts
pertaining to the transaction to be carried out in the meeting. The decision
taken in respect of that transaction would be invalid and ineffective (sic).
But if a shareholder is aware of the facts, he cannot reasonably complain of
insufficiency of the notice or any irregularity. If he is present at the meeting,
he must point out to the chairman about the irregularity before the meeting
proceeds with the agenda. There is no case for the petitioner, who is the
appellant herein that she has raised any objection in the meeting itself.
The
provisions contained in section 173 of the Companies Act making some
requirements for a valid notice is to enable the members to understand and
appreciate the nature of the business or items of business proposed to be
considered at the meeting and make up their mind whether to go to and attend
and vote at the meeting or abstain from voting (see Pearce, Duff and Co. Ltd.,
In re [1960] 3 All ER 222 (Ch D)). We feel that the requirement of section 173
of the Companies Act is that the members of the company should be informed
truly of the nature of business to be transacted at the general meeting. Too
rigid an interpretation would not advance the object of the provision which
will only hamper the conduct of business.
In
this case, it has to be noted that the meeting was called by the chairman
appointed by the company court and all proceedings were subjected to scrutiny
and directions of the company court. No one can attribute any mala fide motive
on the part of the chairman to cover up or to mislead the members as to the
object and purpose of the meeting. In our view, the learned single judge has rightly rejected the
contention of the appellant based on section 173(2) of the Companies Act.
Counsel
for the appellant submitted before us that the provision contained in section
257(1A) of the Companies Act has not been complied with. It is contended that
section 257(1A) of the Companies Act mandates the company to inform its members
of the names of the persons who proposed to stand for election to the board of
directors. In order to understand this submission of counsel for the appellant,
we feel that it is apposite to quote section 257 of the Companies Act.
"257. Right of persons
other than retiring directors to stand for directorship.—(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, along
with a deposit of five hundred rupees which shall be refunded to such person
or, as the case be, to such member, if the person succeeds in getting elected
as a director.
(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".
His
Lordship Justice John Mathew considered this question very elaborately and
found that sub-section (1A) of section 257 of the Companies Act has no
application in regard to a private company and the company in this case is a
private company. Sub-section (1A) of section 257 is really interlinked with
sub-section (1) of section 257 of the Companies Act. It has to be noted that in
sub-section (1) of section 257 of the Companies Act the statute provides that
"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". It is significant to note that it is a provision intended for
controlling the procedure for the election of a director at the general
meeting. It was found that sub-section (1) of section 257 of the Companies Act
was not complete and so sub-section (1A) of section 257 was introduced by an
amendment. The integrant of sub-section (1) of section 257 of the Companies Act
if analysed, can be read as follows : (1) a person who is not a retiring
director shall, subject to the provisions of the Companies Act, be eligible for
appointment to the office of director, (2) it can be done in a general meeting,
(3) for appointment as a director that person or some member intending to
propose him should have 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 not less
than 14 days before the meeting, and (4) the notice should accompany a deposit
of Rs. 500 which shall be refunded to such person or, as the case may be, to
such member, if the person succeeds in getting elected as a director. What has
to be done with the notice under sub-section (1) has been provided for in the
provisions contained in sub-section (1A) of section 257 of the Companies Act.
So as an adjunct or part of sub-section (1), an amendment was introduced as
sub-section (1A) of section 257 of the Companies Act wherein it is mandated
that when such a notice is received, the company is bound to 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 the office of a director by
serving individual notices on the members not less than seven days before the
meeting. So, in effect, both sub-section (1) and sub-section (1A) of section
257 of the Companies Act together postulate a procedure with regard to the
election to the office of director of a company. It is significant to note that
the company shall inform its members about the candidature of a person for the
office of director or the intention of a member to propose a person as a
candidate. Both these are referred to only in subsection (1A) of section 257 of
the Companies Act. Only in sub-section (1) the procedure is prescribed by which
14 days' notice has to be given signifying by a member his intention to stand
as a candidate for the office of director or any other member who wants to
propose a member as a candidate for the office of director. Sub-section (1A)
can have any meaning only if we read subsection (1A) along with sub-section (1)
of section 257 of. the Companies Act. Otherwise, sub-section (1A) will be
incomprehensible. Sub-section (1A) cannot be separated from sub-section (1) of section 257 of the
Companies Act. It is on account of this intimate relationship with sub-section
(1) that the provisions contained in sub-section (1A) of section 257 of the
Companies Act have been termed as section (1A).
Sub-section
(2) of section 257 of the Companies Act makes it clear that sub-section (1)
shall not apply to a private company unless it is a subsidiary of a public
company. There is no point in saying that sub-section (1) is not applicable by
virtue of the provisions contained in sub-section (2) of section 257 of the
Companies Act as far as this company is concerned, but nevertheless,
sub-section (1A) of section 257 of the Companies Act is applicable to this
private company. If such a construction is adopted, it will lead to manifest
absurdity. The learned judge also found so. We see no error in this
interpretation of the provision. In view of this, we see no merit in the second
ground urged by counsel for the appellant.
Counsel
for the appellant next contended that the court has no jurisdiction to convene
an extraordinary general meeting of the company. This contention was raised on
the basis of section 186 of the Companies Act. 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. We also share with the opinion expressed by
the learned single judge that 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 not taken away by the said amendment. In Dineker Rai
D. Desai v. R.P. Bhasin [1986] 60 Comp. Cas. 14 (Delhi), the Delhi High Court
held that the court has such power. We also respectfully agree with this view.
In
this case, yet another important fact has to be taken into account. The meeting
itself was convened at the behest of the court, since the company was in the
process of implementing a scheme sanctioned under section 392(1) of the
Companies Act under the direct supervision of the court. In Indian Hardware
Industries Ltd. v. S.K. Gupta [1981] 51 Comp. Cas. 51 (Delhi), it has been held
that under section 392 of the Companies Act, the court has the power to
supervise the carrying out of the revival scheme and also 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 of
the Companies Act is not in any way affected or circumscribed by section 186 of
the Companies Act. We are of the view that the point raised on the basis of
section 186 of the Companies Act has no merit in the circumstances of the case.
The learned judge has also found so.
We cannot forget the fact
that the meeting was convened overruling the objection, which was subject to an
appeal and that appeal was also dismissed and now, as it is, the period of the
board of directors has expired by efflux of time. Section 392 of the Companies
Act empowers the court sanctioning a scheme to supervise the implementation of
that scheme and to give such direction in regard to any matter or to make such
modifications, compromises or arrangements as it may consider necessary for the
proper working of the revival scheme. It is difficult to read any limitation in
that power so as to exclude the power to call a meeting of the company for the
purpose of electing the directors if the court feels that it is necessary for
the proper working of the scheme to appoint a board of directors of the
company. The width and scope of the power under section 392 of the Companies
Act is no longer in doubt. Section 392(1) of the Companies Act confers power of
the widest amplitude on the High Court to give directions and if necessary to
modify the scheme and that power implies in itself all incidental powers like
convening a meeting of the members to elect directors. In S.K. Gupta v. K.P.
Jain [1979] 49 Comp. Cas. 342, the Supreme Court has observed thus (at page 35)
:
"The purpose underlying
section 392 is to provide for effective working of the compromise and/or
arrangement once sanctioned and over which the court must exercise continuous
supervision (see section 392(1)), and if over a period there may arise
obstacles, difficulties or impediments, to remove them, again, not for any
other purpose but for the proper working of the compromise and/or arrangement.
This power either to give directions to overcome the difficulties or if the
provisions of the scheme themselves create an impediment, to modify the
provision to the extent necessary, can only be exercised so as to provide for
smooth working of the compromise and/or arrangement... But the Legislature,
foreseeing that a complex or complicated scheme of compromise or arrangement spread
over a long period may face unforeseen and unanticipated obstacles, has
conferred power of the widest amplitude on the court to give directions and, if
necessary, to modify the scheme for the proper working of the compromise or
arrangement. The only limitation on the power of the court, as already
mentioned, is that all such directions that the court may consider appropriate
to give or make such modifications in the scheme, must be for the proper
working of the compromise and/or arrangement".
This vast power cannot be
whittled down by the 1974 amendment. The history of the amendment also
fortifies the view we have taken. The amendments were brought on the
recommendation of the Administrative Reforms Commission. It recommended that
the functions which are discharged by the courts under the Companies Act may be reviewed and those
which are essentially of an administrative nature may be transferred to the
executive. It also recommended that there was a case for relieving the courts
of items of merely administrative nature. These can be transferred to the
Company Law Board and as a result of that, a new section, section 186 of the
Companies Act was introduced. It is true that if, after the 1974 amendment, any
person wishes to call an extraordinary annual general meeting, he will have to
apply to the Company Law Board. But the present is not a case where a meeting
is being called in the normal course by a member. The learned company judge who
directed the calling of the meeting did so because he felt that the only way in
which the court can supervise the carrying out of the scheme was to order that
a general meeting of the company be held in order to appoint the directors of
the company. It would be quite anomalous to hold that if the court felt the
necessity of calling such a meeting, it would have to request the Company Law
Board to call such a meeting.
The
court cannot ignore this vital aspect and adopt a course which might be
inconsistent with the provisions of the section. We cannot think that the
Legislature intended such a result because it is well-settled law that if an
interpretation leads to absurdity and anomaly, the same must be avoided. There
is nothing in section 186 which ousts the jurisdiction of the court by
expressly or impliedly saying that the company court which is supervising the
scheme under section 392 of the Companies Act cannot call a meeting of the
company, if it feels that such a course is necessary to do justice in the
matter and to make the scheme effective. We cannot accept an interpretation
which puts the court in the position of a supplicant before the Company Law
Board. It will be against the widest amplitude given to the power under section
392(1) of the Companies Act as interpreted by the Supreme Court.
In
the result, we see no merit in this appeal and the appeal is only to be
dismissed. We do so.
Delhi High Court
Companies
act
[2002] 37 scl 25 (delhi)
HIGH
COURT OF DELHI
v.
Quality
Assurance Institute (India) Ltd.
CYRIAC JOSEPH, J.
Company
Appeal (B) No. 4 of 2000
Section 41 of the Companies Act, 1956 - Members - Shareholders of
respondent-company, in its AGM held on 30-9-1999, had issued mandate to Board
of directors to allot bonus shares - Board of Directors, in its meeting, held on
14-1-2000, passed a resolution deciding to allot bonus shares to shareholders
holding equity shares as on 1-2-2000 - Appellant was an equity shareholder and
had sold his shares and executed transfer deeds on 30-10-1999 - Whether it
could be said that right of appellant to get bonus shares crystallised as on
30-9-1999 and, thus, he was entitled to get any bonus shares - Held, no
Section 173 of the Companies Act, 1956 - Meetings - Explanatory note
to be annexed to notice - Whether it is correct to say that explanatory
statement is not to be read in isolation and it has to be read along with
special resolution included in agenda - Held, yes
The appellant was a shareholder in the respondent-company. He held certain equity shares of the respondent-company. In the sixth AGM of the shareholders of the company held on 30-9-1999 to transact business as mentioned in the notice, item No. 8 was regarding passing of a resolution to issue bonus shares to the shareholders holding equity shares of the company. The aforesaid item No. 8 was passed at the AGM by which a mandate was issued to the board of directors to allot bonus shares. The board of directors, in its meeting, held on 14-1-2000, passed a resolution deciding to allot bonus shares to shareholders holding equity share as on 1-2-2000. As the appellant did not receive the bonus shares, he filed a petition under section 113(3). The CLB dismissed the petition.
The only contention urged by the appellant was that as per the explanatory statement annexed to the notice for the A.G.M., the proposal was “to reward the existing shareholders by way of issue of bonus shares in such ratio as the board of directors may deem fit”, that the said proposal was accepted by the AGM on 30-9-1999 and, hence, the members who held equity shares of the company as on 30-9-1999, were entitled to bonus shares. But there was no merit in the said contention of the appellant.
The explanatory statement is not to be read in isolation. It has to be read along with the special resolution included in the agenda. It was specifically stated in the said resolution that the proposal was to issue bonus shares “to such members holding equity shares as per the register of equity shareholders at date determined by the board of directors of the company who are the holders, as on the aforesaid date, of the existing equity shares of the company fully paid up”. It was absolutely clear from the wording of the resolution that the entitlement for bonus shares was available only to those who held equity shares of the company on a particular date to be determined by the board of directors of the company after the resolution was passed by the AGM. The date so determined by the board of directors was 1-2-2000. When the resolution clearly stated that bonus shares would be allotted to the shareholders holding equity shares as per the register of equity shareholders as on a date determined by the board of directors, the reference in the explanatory statement to “existing shareholders” could be understood only as shareholders existing as on the date determined by the board of directors. Admittedly, the appellant was not holding any shares of the respondent-company as on 1-2-2000. Therefore, the appellant was not entitled to allotment of bonus shares on the basis of the resolution of the AGM held on 30-9-1999.
If the explanatory statement was read along with the resolution, there was neither ambiguity nor confusion nor contradiction nor inconsistency with regard to the members entitled to bonus shares.
Therefore, the finding of the CLB that the appellant was not entitled to allotment and distribution of bonus shares in his favour on the basis of the special resolution passed at the AGM of the respondent-company held on 30-9-1999, was to be upheld.
S.K. Gupta and Ms. Sheetal Sharma for the Applicant.
Judgment
1. The appellant challenges the order dated 20-9-2000, passed by the Company Law Board, Northern Region Bench, New Delhi, in C.P. No. 4/113/2000/CLB, dismissing the appellant’s petition filed under section 113(3) of the Companies Act, 1956 (‘the Act’).
2. The appellant was a shareholder in the respondent-company, Quality Assurance Institute (India) Ltd. He held 5,000 equity shares of the respondent-company. In the notice for the sixth annual general meeting (AGM) of the shareholders of the company held on 30-9-1999, the following was included as item No. 8 of the agenda:
“To consider and, if thought fit, to pass, with or without modification, the following resolution as a special resolution :
Resolved that pursuant to the recommendation of the board of directors and article 133 of the articles of association of the company, and part of the sums standing to the credit of the company’s general reserve be capitalised and such be applied in terms of articles 133 and 134 of the articles of association of the company, for paying up in full at par equity shares of Rs. 10 each in the capital of the company to be allotted and distributed as fully paid bonus shares to such members holding equity shares as per the register of equity shareholders at date determined by the board of directors of the company, who are the holders as on the aforesaid date of the existing equity shares of the company fully paid-up in proportion to such number as the board of directors may decide for one existing fully paid equity share held by such member as on the aforesaid date upon the footing that they become entitled to such new equity shares as capital and not as income.”
3. In accordance with the provisions of section 173(2) of the Companies Act, 1956 (‘the Act’) an explanatory statement was annexed to the above mentioned notice. Item No. 8 of the said explanatory statement was as follows :
“The equity share capital of the company presently stands at Rs. 33,69,860 and the reserves as at March 31, 1999, were Rs. 1,02,92,378.
In view of the excellent working of the company, it is planned to reward the existing shareholders by way of issue of bonus shares in such ratio as the board of directors may deem fit. None of the directors are concerned or interested in the resolution except to the extent of their shareholding.”
The above mentioned resolution was passed at the annual general meeting on 30-9-1999, without any modification. Subsequently, based on the resolution passed at the annual general meeting, the board of directors of the company at its meeting held on 14-1-2000, passed the following resolution :
“Resolved that equity shares be allotted and distributed as fully paid-up bonus shares to the members holding equity shares as per the register of members as on February 1, 2000, who are the holders as on February 1, 2000 of the existing fully paid equity shares of the company, in the ratio of two bonus shares for one existing fully paid-up equity share held by the members as on February 1, 2000, upon the footing that they become entitled to such new equity shares as capital and not as income.”
In the meanwhile, the appellant had sold all his shares in the respondent-company to one Rajesh Naik and his wife, Sapna Kishore, on 25-10-1999, and the transfer deeds were executed on 30-10-1999. When the appellant did not receive any bonus share certificate pursuant to the special resolution passed at the AGM on 30-9-1999, he sent a notice dated 21-3-2000, requesting the respondent-company to deliver the bonus share certificates within ten days. But the company did not deliver them. Thereupon, the appellant filed the petition under section 113(3) of the Companies Act before the CLB praying for a direction to the respondent-company to deliver 10,000 bonus shares to the appellant.
4. The respondent-company filed a reply to the petition and opposed the prayer of the appellant. According to the respondent-company, the AGM of the company held on 30-9-1999, resolved to allot and distribute bonus shares to such members holding equity shares as per the register of equity shareholders at a date determined by the board of directors of the company, who are the holders, as on the aforesaid date of the existing equity shares of the company fully paid-up. The AGM issued the mandate to the board of directors to allot bonus shares in such ratio and on a date they may think fit and appropriate. In terms of the said mandate, the board of directors in its meeting held on 14-1-2000, passed the resolution deciding to allot bonus shares in the ratio of two bonus shares for one equity share held as on 1-2-2000. The appellant had admittedly sold all his shares for a valuable consideration on 25-10-1999, and executed transfer deeds on 30-10-1999. On the request of the transferees, the board of directors registered the said shares in the name of the transferees. Therefore, the appellant’s name was not appearing in the register of members on 1-2-2000, which was the cut-off date. The resolution passed by the AGM on 30-9-1999, did not state that the shareholders whose names appeared in the register of equity shareholders as on the date of AGM were entitled to bonus shares. Hence, the appellant had no right to get the bonus shares and no right of the appellant to get bonus shares had crystallised on 30-9-1999. It was contended by the respondent that the appellant’s petition under section 113(3) of the Companies Act was not maintainable.
5. After considering in detail the various contentions of the parties, the CLB upheld the stand of the respondent and dismissed the appellant’s petition. The CLB also found force in the contention of the learned counsel for the respondent that the petition was liable to be dismissed for non-joinder of necessary parties as the appellant had not impleaded the transferees of the shares even though the bonus shares claimed by the appellant had already been issued to the said transferees.
6. The appellant does not dispute the facts stated above. The only contention urged by the learned counsel for the appellant is that as per the explanatory statement annexed to the notice for the AGM the proposal was “to reward the existing shareholders by way of issue of bonus shares in such ratio as the board of directors may deem fit”, that the said proposal was accepted by the AGM on 30-9-1999, and hence that the members who held equity shares of the company as on 30-9-1999, were entitled to bonus shares. But there is no merit in the said contention of the learned counsel for the appellant. The explanatory statement is not to be read in isolation. It has to be read along with the special resolution included in the agenda. It was specifically stated in the said resolution that the proposal was to issue bonus shares “to such members holding equity shares as per the register of equity shareholders at date determined by the board of directors of the company who are the holders, as on the aforesaid date, of the existing equity shares of the company fully paid-up.” It is absolutely clear from the wording of the resolution that the entitlement for bonus shares was available only to those who held equity shares of the company on a particular date to be determined by the board of directors of the company after the resolution was passed by the AGM. The date so determined by the board of directors was 1-2-2000. When the resolution and the explanatory statement are read together, there is no scope for any ambiguity or confusion. When the resolution clearly stated that bonus shares would be allotted to the shareholders holding equity shares as per the register of equity shareholders as on a date determined by the board of directors, the reference in the explanatory statement to ‘existing shareholders’ could be understood only as shareholders existing as on the date determined by the board of directors. The AGM of the respondent-company was competent to take a decision to allot and distribute bonus shares to shareholders and to authorise the board of directors to determine the date from which and the manner in which such decision is to be implemented. Significantly, the appellant did not challenge the notice issued for the annual general meeting or the special resolution passed at the AGM. In fact the case of the appellant was based on the said resolution and he was relying on the said resolution. Admittedly, the appellant was not holding any shares of the respondent-company as on 1-2-2000. Therefore, the appellant was not entitled to allotment of bonus shares on the basis of the resolution of the AGM held on 30-9-1999.
7. The learned counsel for the appellant also, though feebly, contended that the explanatory statement was inconsistent with the resolution included as item No. 8 in the notice for the AGM. So long as the explanatory statement did not say that the company planned to reward the existing shareholders as on the date of the AGM, I do not find any inconsistency or contradiction between the resolution and the explanatory statement. No date for giving effect to the decision to allot bonus shares was mentioned in the explanatory statement. At the same time, it was specifically stated in the resolution that the bonus shares would be allotted and distributed to such members who would be holding equity shares as on a date determined by the board of directors of the company. If the explanatory statement is read along with the resolution, there is neither ambiguity nor confusion nor contradiction nor inconsistency with regard to the members entitled to bonus shares. It cannot be said that the explanatory statement was tricky or misleading or lacking in material particulars. In this context, it has to be noted that, as pointed in the impugned order by the CLB, neither in the petition filed before the CLB nor in the oral submissions, the appellant had raised any plea that the notice for the annual general meeting was tricky or misleading or lacking in material particulars or that the appellant was misled by the explanatory statement. On the other hand, the appellant’s case before the CLB was that the notice for the AGM was deliberately not sent to him to keep him in the dark about the special resolution and consequently he was not aware of the annual general meeting to be held. As pointed out by the CLB, the appellant was relying upon the special resolution adopted at the AGM for claiming 10,000 bonus shares.
8. Therefore, I am in complete agreement with the finding of the CLB that the appellant was not entitled to allotment and distribution of bonus shares in his favour on the basis of the special resolution passed at the AGM of the respondent-company held on 30-9-1999. Hence, the appeal is dismissed in limine.
[1992]
73 COMP. CAS. 285 (KER)
HIGH COURT of KERALA
v.
Sreerama Vilas Press & Publications (P.) Ltd.
VARGIIESE
KALLIATH AND G.H. GUTTAL JJ.
M.F.A. No. 722 of 1991
SEPTEMBER 20, 1991
M. Ramanatha Pillai for the
appellant.
Varghese Kalliath J.—This is an appeal against the order of a learned single
judge of this court in Application No. 253 of 1990 in C.P. No. 28 of 1984. The
said application was filed under rule 9 of the Companies (Court) Rules, 1959,
by a shareholder of the company for an order declaring the election of
directors and managing director of the company (Sreerama Vilas Press and
Publications (P.) Ltd., Quilon) held on March 10, 1990, as illegal, void and
inoperative.
These are the facts : The
applicant is a shareholder of the company. There was a winding up order by the
company on November 4, 1976. Subsequently, the company court approved a scheme
for revival of the company. As a consequence of that order, the board of
directors as on the date of the winding up petition was revived. A general body
meeting of the company was held on April 19, 1985, and a new board of directors
was elected. On February 25, 1986, another general body meeting was held
wherein a resolution was passed removing one of the directors, N. Madhavan
Nair, who was the managing director of the company. Madhavan Nair filed
Application No. 63 of 1986 before the company 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. The company court passed
an order of interim stay on March 3, 1986.
When the petitions came up
for hearing, the period of appointment of the managing director and the board
of directors of the company had expired. The company court did not consider the
question on merits, but directed a fresh election to the board of directors and
managing director. In order to enable a proper election, the company 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
meeting held under the directions of the company court elected the board of directors
and N. Madhavan Nair was also elected as the managing director.
A misfeasance application
was filed against N. Madhavan Nair. The company court directed N. Madhavan Nair
to pay to the company a total amount of Rs. 44,550. Madhavan Nair has filed M.F.A.
No. 174 of 1989. A cross-appeal also was filed. Both are now pending.
Two
of the shareholders of the company made a requisition to the board of
directors, under section 169 of the Companies Act on December 31, 1988, requesting
it to convene an extraordinary general body meeting of the company. The
managing director did not convene any meeting. Another director of the company
filed a suit, O.S. No. 34 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's 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 five
directors. Before the company court, a report was filed. Another application
was also moved before the company court to allow the newly elected board of directors
to function. When the matter came up before the company court, it 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 agreed that for the time being he will meet the expenses of the
meeting. The company court, as per order dated October 30, 1989, appointed Shri
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. 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 the company court.
The
meeting was held on March 10, 1990. Out of the shareholders of the company, six
were present and three by proxy attended the general body meeting. Those nine
members together held 2,630 shares out of 4,689 shares held by the total number
of members, viz., 15. Ordinarily, there were 17 members of whom two persons had
died. The present strength of members is 15. In the meeting held under the
directions of the company court, a board of directors and managing director were
elected. The Commissioner filed a report on March 22, 1990. The present
Application No. 253 of 1990 was filed challenging the election and its
proceedings. 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 the present application (Application No. 253 of 1990). The company
court dismissed the application for stay. An appeal was filed as M.F.A. No. 322
of 1990, which was dismissed on June 18, 1990, with certain directions.
The
company court has now dismissed Application No. 253 of 1990. The applicant is
aggrieved and she has filed this appeal.
Counsel
for the appellant raised certain points before us which he has raised in the
petition and before the company court. He submitted that the notice convening
the meeting by the chairman appointed by the company court is defective, since
an explanation as contemplated under section 173(2) of the Companies Act was
not annexed to the notice. Further, it was submitted that the notice is
defective since, along with the notice, the names of candidates for elections
were not furnished. It was also contended that individual notices to the
members of the company regarding the candidature of a person were not sent and
that it is a violation of section 257(1A) of the Companies Act. Counsel
submitted that the appointment of Commissioner and direction to convene an
extraordinary general body meeting of the company itself are without
jurisdiction. The above contentions were raised before the company court also.
The company court found no merit in those contentions and negatived those
contentions. Counsel argued the case elaborately. We are obliged to consider
the points raised by counsel, since he pressed all the points with equal emphasis.
The
first question we have to consider is whether the notice is defective on
account of lack of explanatory statement under section 173(2) of the Companies
Act. Section 173(2) of the Companies Act provides thus :—
"173.
Explanatory statement to be annexed to notice.— ... (2) Where any items of
business to be transacted at the meeting are deemed to be special as aforesaid,
there shall be annexed to the notice of the meeting a statement setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein, of every director, and
the manager, if any".
It
has to be remembered that the chairman appointed by the company court was
seeking directions in the matter of conducting the meeting. The company court
gave certain directions for the proper conduct of the meeting. The former
managing director, Sri N. Madhavan Nair, filed Application No. 187 of 1990 to
stop the convening of the meeting on the ground that the notice is not in conformity
with sections 171, 173 and 257(1A) of the Companies Act. The company court
overruled the objections, found the notice in order and dismissed the
application of the former managing director. He filed an appeal, M.F.A. No. 333
of 1990. The appeal 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. So even though the company court has found that
the notice sent by the chairman appointed by the company court was not
defective, that matter was left open to be considered by the company court at
the final stage of the main application, viz., Application No. 253 of 1990. But
it has to be noted that the meeting was held as early as on March 10, 1990, and
the period of appointment of the board of directors and managing director of
the company has expired by efflux of time and an election to a new board of
directors and managing director became necessary.
Nevertheless,
we feel that we are bound to consider the correctness of the judgment
challenged in this appeal. The company court, in its order, has extracted in
full the notice issued by the chairman appointed by the company court and we do
not want to repeat it in this judgment. The purpose for which the meeting is
held is clearly stated in the notice. The purpose is for conducting an election
to the board of directors and managing director of the company. There is no
difficulty to hold that the notice was issued following the provisions
contained in the articles of association and no argument was advanced by
counsel for the appellant stating that the notice is defective on account of
the fact that it has not complied with the provisions contained in the articles
of association.
The
gravamen of the charge against the notice is that it has not complied with the
provisions contained in section 173 of the Companies Act. The articles of
association provide for the nature of the notice to be sent to the effect that
what has to be done is to inform the members of the company of the general
nature of the business to be transacted at the meeting. The learned single
judge observed that since there is a specific provision in the articles of
association regarding the notice of a general meeting where special business is
to be transacted, section 173 of the Companies Act may not apply to the present
case. Further, the company court said that the notice issued contains all
material facts concerning the business that was to be transacted in the
meeting, viz., election of managing director and directors and that the order
to convene the meeting was passed after hearing all parties and the notice
itself was approved by the company court. It was also pointed out that the
meeting was convened by the chairman appointed by the company court and not
exactly by the company. The intent and purpose of section 173 of the Companies
Act is to give directions to the shareholders in the matter of holding a
meeting by the management.
In Sitaram Jaipuria v.
Banwarilal Jaipuria, AIR 1972 Cal 105, the Calcutta High Court has held that the
provisions like section 173(2) of the Companies Act should not be construed in a
rigid manner and an interpretation should not be made so as to hamper the
conduct of business. The notice has to be construed in a realistic and businesslike manner and if it
satisfied the essence of section 173 of the Companies Act, the meeting should not
be invalidated on the technical ground that the notice has not complied with
the provisions of section 173(2) of the Companies Act. The intention behind the
provisions contained in section 173 of the Companies Act has to be understood
in a meaningful manner. Of course, if a transaction of business has not been
sufficiently notified or which is substantially different from the
notification, it would be invalid. Beyond that on technicalities the meeting
should not be invalidated. It is clear from the notice that the transaction of
business to be carried out in the meeting is the election of the board of
directors and managing director. That was the only transaction scheduled in the
meeting and for which alone the meeting was called.
The
notice was found to be valid by the company court. All proceedings for the
conduct of the election were supervised by the company court and the parties
had opportunities before the company court to raise points against the validity
of the notice. Even before the holding of the meeting, the company court has
considered it and found it to be valid. It is also necessary to note that
neither the notice nor the explanatory note omits to disclose material facts
pertaining to the transaction to be carried out in the meeting. The decision
taken in respect of that transaction would be invalid and ineffective (sic).
But if a shareholder is aware of the facts, he cannot reasonably complain of
insufficiency of the notice or any irregularity. If he is present at the
meeting, he must point out to the chairman about the irregularity before the
meeting proceeds with the agenda. There is no case for the petitioner, who is
the appellant herein that she has raised any objection in the meeting itself.
The
provisions contained in section 173 of the Companies Act making some
requirements for a valid notice is to enable the members to understand and
appreciate the nature of the business or items of business proposed to be
considered at the meeting and make up their mind whether to go to and attend and
vote at the meeting or abstain from voting (see Pearce, Duff and Co. Ltd., In
re [1960] 3 All ER 222 (Ch D)). We feel that the requirement of section 173 of
the Companies Act is that the members of the company should be informed truly
of the nature of business to be transacted at the general meeting. Too rigid an
interpretation would not advance the object of the provision which will only
hamper the conduct of business.
In
this case, it has to be noted that the meeting was called by the chairman
appointed by the company court and all proceedings were subjected to scrutiny
and directions of the company court. No one can attribute any mala fide motive
on the part of the chairman to cover up or to mislead the members as to the
object and purpose of the meeting. In our view, the learned single judge has rightly rejected the
contention of the appellant based on section 173(2) of the Companies Act.
Counsel
for the appellant submitted before us that the provision contained in section
257(1A) of the Companies Act has not been complied with. It is contended that
section 257(1A) of the Companies Act mandates the company to inform its members
of the names of the persons who proposed to stand for election to the board of
directors. In order to understand this submission of counsel for the appellant,
we feel that it is apposite to quote section 257 of the Companies Act.
"257. Right of persons
other than retiring directors to stand for directorship.—(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, along
with a deposit of five hundred rupees which shall be refunded to such person
or, as the case be, to such member, if the person succeeds in getting elected
as a director.
(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".
His
Lordship Justice John Mathew considered this question very elaborately and
found that sub-section (1A) of section 257 of the Companies Act has no
application in regard to a private company and the company in this case is a
private company. Sub-section (1A) of section 257 is really interlinked with
sub-section (1) of section 257 of the Companies Act. It has to be noted that in
sub-section (1) of section 257 of the Companies Act the statute provides that
"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". It is significant to note that it is a provision intended for
controlling the procedure for the election of a director at the general
meeting. It was found that sub-section (1) of section 257 of the Companies Act
was not complete and so sub-section (1A) of section 257 was introduced by an
amendment. The integrant of sub-section (1) of section 257 of the Companies Act
if analysed, can be read as follows : (1) a person who is not a retiring
director shall, subject to the provisions of the Companies Act, be eligible for
appointment to the office of director, (2) it can be done in a general meeting,
(3) for appointment as a director that person or some member intending to
propose him should have 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 not less
than 14 days before the meeting, and (4) the notice should accompany a deposit
of Rs. 500 which shall be refunded to such person or, as the case may be, to
such member, if the person succeeds in getting elected as a director. What has
to be done with the notice under sub-section (1) has been provided for in the
provisions contained in sub-section (1A) of section 257 of the Companies Act.
So as an adjunct or part of sub-section (1), an amendment was introduced as
sub-section (1A) of section 257 of the Companies Act wherein it is mandated
that when such a notice is received, the company is bound to 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 the office of a director by
serving individual notices on the members not less than seven days before the
meeting. So, in effect, both sub-section (1) and sub-section (1A) of section
257 of the Companies Act together postulate a procedure with regard to the
election to the office of director of a company. It is significant to note that
the company shall inform its members about the candidature of a person for the
office of director or the intention of a member to propose a person as a
candidate. Both these are referred to only in subsection (1A) of section 257 of
the Companies Act. Only in sub-section (1) the procedure is prescribed by which
14 days' notice has to be given signifying by a member his intention to stand
as a candidate for the office of director or any other member who wants to
propose a member as a candidate for the office of director. Sub-section (1A)
can have any meaning only if we read subsection (1A) along with sub-section (1)
of section 257 of. the Companies Act. Otherwise, sub-section (1A) will be
incomprehensible. Sub-section (1A) cannot be separated from sub-section (1) of section 257 of the
Companies Act. It is on account of this intimate relationship with sub-section
(1) that the provisions contained in sub-section (1A) of section 257 of the
Companies Act have been termed as section (1A).
Sub-section
(2) of section 257 of the Companies Act makes it clear that sub-section (1)
shall not apply to a private company unless it is a subsidiary of a public
company. There is no point in saying that sub-section (1) is not applicable by
virtue of the provisions contained in sub-section (2) of section 257 of the
Companies Act as far as this company is concerned, but nevertheless,
sub-section (1A) of section 257 of the Companies Act is applicable to this
private company. If such a construction is adopted, it will lead to manifest
absurdity. The learned judge also found so. We see no error in this
interpretation of the provision. In view of this, we see no merit in the second
ground urged by counsel for the appellant.
Counsel
for the appellant next contended that the court has no jurisdiction to convene
an extraordinary general meeting of the company. This contention was raised on
the basis of section 186 of the Companies Act. 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. We also share with the opinion expressed by
the learned single judge that 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 not taken away by the said amendment. In Dineker Rai
D. Desai v. R.P. Bhasin [1986] 60 Comp. Cas. 14 (Delhi), the Delhi High Court
held that the court has such power. We also respectfully agree with this view.
In
this case, yet another important fact has to be taken into account. The meeting
itself was convened at the behest of the court, since the company was in the
process of implementing a scheme sanctioned under section 392(1) of the
Companies Act under the direct supervision of the court. In Indian Hardware Industries
Ltd. v. S.K. Gupta [1981] 51 Comp. Cas. 51 (Delhi), it has been held that under
section 392 of the Companies Act, the court has the power to supervise the
carrying out of the revival scheme and also 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 of the Companies Act
is not in any way affected or circumscribed by section 186 of the Companies
Act. We are of the view that the point raised on the basis of section 186 of
the Companies Act has no merit in the circumstances of the case. The learned
judge has also found so.
We cannot forget the fact
that the meeting was convened overruling the objection, which was subject to an
appeal and that appeal was also dismissed and now, as it is, the period of the
board of directors has expired by efflux of time. Section 392 of the Companies
Act empowers the court sanctioning a scheme to supervise the implementation of
that scheme and to give such direction in regard to any matter or to make such
modifications, compromises or arrangements as it may consider necessary for the
proper working of the revival scheme. It is difficult to read any limitation in
that power so as to exclude the power to call a meeting of the company for the
purpose of electing the directors if the court feels that it is necessary for
the proper working of the scheme to appoint a board of directors of the
company. The width and scope of the power under section 392 of the Companies
Act is no longer in doubt. Section 392(1) of the Companies Act confers power of
the widest amplitude on the High Court to give directions and if necessary to
modify the scheme and that power implies in itself all incidental powers like
convening a meeting of the members to elect directors. In S.K. Gupta v. K.P.
Jain [1979] 49 Comp. Cas. 342, the Supreme Court has observed thus (at page 35)
:
"The purpose
underlying section 392 is to provide for effective working of the compromise
and/or arrangement once sanctioned and over which the court must exercise
continuous supervision (see section 392(1)), and if over a period there may
arise obstacles, difficulties or impediments, to remove them, again, not for
any other purpose but for the proper working of the compromise and/or
arrangement. This power either to give directions to overcome the difficulties
or if the provisions of the scheme themselves create an impediment, to modify the
provision to the extent necessary, can only be exercised so as to provide for
smooth working of the compromise and/or arrangement... But the Legislature,
foreseeing that a complex or complicated scheme of compromise or arrangement
spread over a long period may face unforeseen and unanticipated obstacles, has
conferred power of the widest amplitude on the court to give directions and, if
necessary, to modify the scheme for the proper working of the compromise or
arrangement. The only limitation on the power of the court, as already
mentioned, is that all such directions that the court may consider appropriate
to give or make such modifications in the scheme, must be for the proper
working of the compromise and/or arrangement".
This vast power cannot be
whittled down by the 1974 amendment. The history of the amendment also
fortifies the view we have taken. The amendments were brought on the
recommendation of the Administrative Reforms Commission. It recommended that
the functions which are discharged by the courts under the Companies Act may be reviewed and those
which are essentially of an administrative nature may be transferred to the
executive. It also recommended that there was a case for relieving the courts
of items of merely administrative nature. These can be transferred to the
Company Law Board and as a result of that, a new section, section 186 of the
Companies Act was introduced. It is true that if, after the 1974 amendment, any
person wishes to call an extraordinary annual general meeting, he will have to
apply to the Company Law Board. But the present is not a case where a meeting
is being called in the normal course by a member. The learned company judge who
directed the calling of the meeting did so because he felt that the only way in
which the court can supervise the carrying out of the scheme was to order that
a general meeting of the company be held in order to appoint the directors of
the company. It would be quite anomalous to hold that if the court felt the
necessity of calling such a meeting, it would have to request the Company Law
Board to call such a meeting.
The
court cannot ignore this vital aspect and adopt a course which might be
inconsistent with the provisions of the section. We cannot think that the
Legislature intended such a result because it is well-settled law that if an
interpretation leads to absurdity and anomaly, the same must be avoided. There
is nothing in section 186 which ousts the jurisdiction of the court by
expressly or impliedly saying that the company court which is supervising the
scheme under section 392 of the Companies Act cannot call a meeting of the
company, if it feels that such a course is necessary to do justice in the
matter and to make the scheme effective. We cannot accept an interpretation
which puts the court in the position of a supplicant before the Company Law
Board. It will be against the widest amplitude given to the power under section
392(1) of the Companies Act as interpreted by the Supreme Court.
In
the result, we see no merit in this appeal and the appeal is only to be
dismissed. We do so.
[1992]
73 COMP. CAS. 285 (KER)
HIGH COURT of KERALA
v.
Sreerama Vilas Press & Publications (P.) Ltd.
VARGIIESE KALLIATH AND G.H. GUTTAL JJ.
M.F.A. No. 722 of 1991
SEPTEMBER
20, 1991
M. Ramanatha Pillai for the appellant.
Varghese Kalliath J.—This is an appeal against the order of a learned single
judge of this court in Application No. 253 of 1990 in C.P. No. 28 of 1984. The
said application was filed under rule 9 of the Companies (Court) Rules, 1959,
by a shareholder of the company for an order declaring the election of
directors and managing director of the company (Sreerama Vilas Press and
Publications (P.) Ltd., Quilon) held on March 10, 1990, as illegal, void and
inoperative.
These are the facts : The
applicant is a shareholder of the company. There was a winding up order by the
company on November 4, 1976. Subsequently, the company court approved a scheme
for revival of the company. As a consequence of that order, the board of
directors as on the date of the winding up petition was revived. A general body
meeting of the company was held on April 19, 1985, and a new board of directors
was elected. On February 25, 1986, another general body meeting was held
wherein a resolution was passed removing one of the directors, N. Madhavan
Nair, who was the managing director of the company. Madhavan Nair filed
Application No. 63 of 1986 before the company 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. The company court passed
an order of interim stay on March 3, 1986.
When the petitions came up
for hearing, the period of appointment of the managing director and the board
of directors of the company had expired. The company court did not consider the
question on merits, but directed a fresh election to the board of directors and
managing director. In order to enable a proper election, the company 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
meeting held under the directions of the company court elected the board of
directors and N. Madhavan Nair was also elected as the managing director.
A misfeasance application
was filed against N. Madhavan Nair. The company court directed N. Madhavan Nair
to pay to the company a total amount of Rs. 44,550. Madhavan Nair has filed
M.F.A. No. 174 of 1989. A cross-appeal also was filed. Both are now pending.
Two
of the shareholders of the company made a requisition to the board of
directors, under section 169 of the Companies Act on December 31, 1988,
requesting it to convene an extraordinary general body meeting of the company.
The managing director did not convene any meeting. Another director of the
company filed a suit, O.S. No. 34 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's
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 five
directors. Before the company court, a report was filed. Another application
was also moved before the company court to allow the newly elected board of
directors to function. When the matter came up before the company court, it
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 agreed that for the time being he will meet the expenses of the
meeting. The company court, as per order dated October 30, 1989, appointed Shri
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. 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 the company court.
The
meeting was held on March 10, 1990. Out of the shareholders of the company, six
were present and three by proxy attended the general body meeting. Those nine
members together held 2,630 shares out of 4,689 shares held by the total number
of members, viz., 15. Ordinarily, there were 17 members of whom two persons had
died. The present strength of members is 15. In the meeting held under the
directions of the company court, a board of directors and managing director
were elected. The Commissioner filed a report on March 22, 1990. The present
Application No. 253 of 1990 was filed challenging the election and its
proceedings. 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 the present application (Application No. 253 of 1990). The company
court dismissed the application for stay. An appeal was filed as M.F.A. No. 322
of 1990, which was dismissed on June 18, 1990, with certain directions.
The
company court has now dismissed Application No. 253 of 1990. The applicant is
aggrieved and she has filed this appeal.
Counsel
for the appellant raised certain points before us which he has raised in the
petition and before the company court. He submitted that the notice convening
the meeting by the chairman appointed by the company court is defective, since
an explanation as contemplated under section 173(2) of the Companies Act was
not annexed to the notice. Further, it was submitted that the notice is defective
since, along with the notice, the names of candidates for elections were not
furnished. It was also contended that individual notices to the members of the
company regarding the candidature of a person were not sent and that it is a
violation of section 257(1A) of the Companies Act. Counsel submitted that the
appointment of Commissioner and direction to convene an extraordinary general
body meeting of the company itself are without jurisdiction. The above
contentions were raised before the company court also. The company court found
no merit in those contentions and negatived those contentions. Counsel argued
the case elaborately. We are obliged to consider the points raised by counsel,
since he pressed all the points with equal emphasis.
The
first question we have to consider is whether the notice is defective on
account of lack of explanatory statement under section 173(2) of the Companies
Act. Section 173(2) of the Companies Act provides thus :—
"173.
Explanatory statement to be annexed to notice.— ... (2) Where any items of
business to be transacted at the meeting are deemed to be special as aforesaid,
there shall be annexed to the notice of the meeting a statement setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein, of every director, and
the manager, if any".
It
has to be remembered that the chairman appointed by the company court was
seeking directions in the matter of conducting the meeting. The company court
gave certain directions for the proper conduct of the meeting. The former
managing director, Sri N. Madhavan Nair, filed Application No. 187 of 1990 to
stop the convening of the meeting on the ground that the notice is not in
conformity with sections 171, 173 and 257(1A) of the Companies Act. The company
court overruled the objections, found the notice in order and dismissed the
application of the former managing director. He filed an appeal, M.F.A. No. 333
of 1990. The appeal 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. So even though the company court has found that
the notice sent by the chairman appointed by the company court was not
defective, that matter was left open to be considered by the company court at
the final stage of the main application, viz., Application No. 253 of 1990. But
it has to be noted that the meeting was held as early as on March 10, 1990, and
the period of appointment of the board of directors and managing director of
the company has expired by efflux of time and an election to a new board of directors
and managing director became necessary.
Nevertheless,
we feel that we are bound to consider the correctness of the judgment
challenged in this appeal. The company court, in its order, has extracted in
full the notice issued by the chairman appointed by the company court and we do
not want to repeat it in this judgment. The purpose for which the meeting is
held is clearly stated in the notice. The purpose is for conducting an election
to the board of directors and managing director of the company. There is no
difficulty to hold that the notice was issued following the provisions
contained in the articles of association and no argument was advanced by
counsel for the appellant stating that the notice is defective on account of
the fact that it has not complied with the provisions contained in the articles
of association.
The
gravamen of the charge against the notice is that it has not complied with the
provisions contained in section 173 of the Companies Act. The articles of
association provide for the nature of the notice to be sent to the effect that
what has to be done is to inform the members of the company of the general
nature of the business to be transacted at the meeting. The learned single
judge observed that since there is a specific provision in the articles of
association regarding the notice of a general meeting where special business is
to be transacted, section 173 of the Companies Act may not apply to the present
case. Further, the company court said that the notice issued contains all material
facts concerning the business that was to be transacted in the meeting, viz.,
election of managing director and directors and that the order to convene the
meeting was passed after hearing all parties and the notice itself was approved
by the company court. It was also pointed out that the meeting was convened by
the chairman appointed by the company court and not exactly by the company. The
intent and purpose of section 173 of the Companies Act is to give directions to
the shareholders in the matter of holding a meeting by the management.
In Sitaram Jaipuria v.
Banwarilal Jaipuria, AIR 1972 Cal 105, the Calcutta High Court has held that the
provisions like section 173(2) of the Companies Act should not be construed in
a rigid manner and an interpretation should not be made so as to hamper the
conduct of business. The notice has to be construed in a realistic and businesslike manner and if it
satisfied the essence of section 173 of the Companies Act, the meeting should
not be invalidated on the technical ground that the notice has not complied
with the provisions of section 173(2) of the Companies Act. The intention
behind the provisions contained in section 173 of the Companies Act has to be
understood in a meaningful manner. Of course, if a transaction of business has
not been sufficiently notified or which is substantially different from the
notification, it would be invalid. Beyond that on technicalities the meeting
should not be invalidated. It is clear from the notice that the transaction of
business to be carried out in the meeting is the election of the board of
directors and managing director. That was the only transaction scheduled in the
meeting and for which alone the meeting was called.
The
notice was found to be valid by the company court. All proceedings for the
conduct of the election were supervised by the company court and the parties
had opportunities before the company court to raise points against the validity
of the notice. Even before the holding of the meeting, the company court has
considered it and found it to be valid. It is also necessary to note that
neither the notice nor the explanatory note omits to disclose material facts
pertaining to the transaction to be carried out in the meeting. The decision
taken in respect of that transaction would be invalid and ineffective (sic).
But if a shareholder is aware of the facts, he cannot reasonably complain of
insufficiency of the notice or any irregularity. If he is present at the
meeting, he must point out to the chairman about the irregularity before the
meeting proceeds with the agenda. There is no case for the petitioner, who is
the appellant herein that she has raised any objection in the meeting itself.
The
provisions contained in section 173 of the Companies Act making some requirements
for a valid notice is to enable the members to understand and appreciate the
nature of the business or items of business proposed to be considered at the
meeting and make up their mind whether to go to and attend and vote at the
meeting or abstain from voting (see Pearce, Duff and Co. Ltd., In re [1960] 3
All ER 222 (Ch D)). We feel that the requirement of section 173 of the
Companies Act is that the members of the company should be informed truly of
the nature of business to be transacted at the general meeting. Too rigid an
interpretation would not advance the object of the provision which will only
hamper the conduct of business.
In
this case, it has to be noted that the meeting was called by the chairman
appointed by the company court and all proceedings were subjected to scrutiny
and directions of the company court. No one can attribute any mala fide motive
on the part of the chairman to cover up or to mislead the members as to the
object and purpose of the meeting. In our view, the learned single judge has rightly rejected the
contention of the appellant based on section 173(2) of the Companies Act.
Counsel
for the appellant submitted before us that the provision contained in section
257(1A) of the Companies Act has not been complied with. It is contended that
section 257(1A) of the Companies Act mandates the company to inform its members
of the names of the persons who proposed to stand for election to the board of
directors. In order to understand this submission of counsel for the appellant,
we feel that it is apposite to quote section 257 of the Companies Act.
"257. Right of persons
other than retiring directors to stand for directorship.—(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, along
with a deposit of five hundred rupees which shall be refunded to such person
or, as the case be, to such member, if the person succeeds in getting elected
as a director.
(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".
His
Lordship Justice John Mathew considered this question very elaborately and
found that sub-section (1A) of section 257 of the Companies Act has no application
in regard to a private company and the company in this case is a private
company. Sub-section (1A) of section 257 is really interlinked with sub-section
(1) of section 257 of the Companies Act. It has to be noted that in sub-section
(1) of section 257 of the Companies Act the statute provides that "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". It is significant to note that it is a provision intended for
controlling the procedure for the election of a director at the general
meeting. It was found that sub-section (1) of section 257 of the Companies Act
was not complete and so sub-section (1A) of section 257 was introduced by an
amendment. The integrant of sub-section (1) of section 257 of the Companies Act
if analysed, can be read as follows : (1) a person who is not a retiring
director shall, subject to the provisions of the Companies Act, be eligible for
appointment to the office of director, (2) it can be done in a general meeting,
(3) for appointment as a director that person or some member intending to
propose him should have 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 not less
than 14 days before the meeting, and (4) the notice should accompany a deposit
of Rs. 500 which shall be refunded to such person or, as the case may be, to
such member, if the person succeeds in getting elected as a director. What has
to be done with the notice under sub-section (1) has been provided for in the
provisions contained in sub-section (1A) of section 257 of the Companies Act.
So as an adjunct or part of sub-section (1), an amendment was introduced as
sub-section (1A) of section 257 of the Companies Act wherein it is mandated
that when such a notice is received, the company is bound to 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 the office of a director by
serving individual notices on the members not less than seven days before the
meeting. So, in effect, both sub-section (1) and sub-section (1A) of section
257 of the Companies Act together postulate a procedure with regard to the
election to the office of director of a company. It is significant to note that
the company shall inform its members about the candidature of a person for the
office of director or the intention of a member to propose a person as a
candidate. Both these are referred to only in subsection (1A) of section 257 of
the Companies Act. Only in sub-section (1) the procedure is prescribed by which
14 days' notice has to be given signifying by a member his intention to stand
as a candidate for the office of director or any other member who wants to
propose a member as a candidate for the office of director. Sub-section (1A)
can have any meaning only if we read subsection (1A) along with sub-section (1)
of section 257 of. the Companies Act. Otherwise, sub-section (1A) will be
incomprehensible. Sub-section (1A) cannot be separated from sub-section (1) of section 257 of the
Companies Act. It is on account of this intimate relationship with sub-section
(1) that the provisions contained in sub-section (1A) of section 257 of the
Companies Act have been termed as section (1A).
Sub-section
(2) of section 257 of the Companies Act makes it clear that sub-section (1)
shall not apply to a private company unless it is a subsidiary of a public
company. There is no point in saying that sub-section (1) is not applicable by
virtue of the provisions contained in sub-section (2) of section 257 of the
Companies Act as far as this company is concerned, but nevertheless,
sub-section (1A) of section 257 of the Companies Act is applicable to this
private company. If such a construction is adopted, it will lead to manifest
absurdity. The learned judge also found so. We see no error in this
interpretation of the provision. In view of this, we see no merit in the second
ground urged by counsel for the appellant.
Counsel
for the appellant next contended that the court has no jurisdiction to convene
an extraordinary general meeting of the company. This contention was raised on
the basis of section 186 of the Companies Act. 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. We also share with the opinion
expressed by the learned single judge that 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 not taken away by the said amendment.
In Dineker Rai D. Desai v. R.P. Bhasin [1986] 60 Comp. Cas. 14 (Delhi), the
Delhi High Court held that the court has such power. We also respectfully agree
with this view.
In
this case, yet another important fact has to be taken into account. The meeting
itself was convened at the behest of the court, since the company was in the
process of implementing a scheme sanctioned under section 392(1) of the
Companies Act under the direct supervision of the court. In Indian Hardware
Industries Ltd. v. S.K. Gupta [1981] 51 Comp. Cas. 51 (Delhi), it has been held
that under section 392 of the Companies Act, the court has the power to
supervise the carrying out of the revival scheme and also 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 of
the Companies Act is not in any way affected or circumscribed by section 186 of
the Companies Act. We are of the view that the point raised on the basis of
section 186 of the Companies Act has no merit in the circumstances of the case.
The learned judge has also found so.
We cannot forget the fact
that the meeting was convened overruling the objection, which was subject to an
appeal and that appeal was also dismissed and now, as it is, the period of the
board of directors has expired by efflux of time. Section 392 of the Companies
Act empowers the court sanctioning a scheme to supervise the implementation of
that scheme and to give such direction in regard to any matter or to make such
modifications, compromises or arrangements as it may consider necessary for the
proper working of the revival scheme. It is difficult to read any limitation in
that power so as to exclude the power to call a meeting of the company for the
purpose of electing the directors if the court feels that it is necessary for
the proper working of the scheme to appoint a board of directors of the company.
The width and scope of the power under section 392 of the Companies Act is no
longer in doubt. Section 392(1) of the Companies Act confers power of the
widest amplitude on the High Court to give directions and if necessary to
modify the scheme and that power implies in itself all incidental powers like
convening a meeting of the members to elect directors. In S.K. Gupta v. K.P.
Jain [1979] 49 Comp. Cas. 342, the Supreme Court has observed thus (at page 35)
:
"The purpose
underlying section 392 is to provide for effective working of the compromise
and/or arrangement once sanctioned and over which the court must exercise
continuous supervision (see section 392(1)), and if over a period there may
arise obstacles, difficulties or impediments, to remove them, again, not for
any other purpose but for the proper working of the compromise and/or
arrangement. This power either to give directions to overcome the difficulties
or if the provisions of the scheme themselves create an impediment, to modify
the provision to the extent necessary, can only be exercised so as to provide
for smooth working of the compromise and/or arrangement... But the Legislature,
foreseeing that a complex or complicated scheme of compromise or arrangement
spread over a long period may face unforeseen and unanticipated obstacles, has
conferred power of the widest amplitude on the court to give directions and, if
necessary, to modify the scheme for the proper working of the compromise or
arrangement. The only limitation on the power of the court, as already
mentioned, is that all such directions that the court may consider appropriate
to give or make such modifications in the scheme, must be for the proper
working of the compromise and/or arrangement".
This vast power cannot be
whittled down by the 1974 amendment. The history of the amendment also
fortifies the view we have taken. The amendments were brought on the
recommendation of the Administrative Reforms Commission. It recommended that
the functions which are discharged by the courts under the Companies Act may be reviewed and those
which are essentially of an administrative nature may be transferred to the
executive. It also recommended that there was a case for relieving the courts
of items of merely administrative nature. These can be transferred to the
Company Law Board and as a result of that, a new section, section 186 of the
Companies Act was introduced. It is true that if, after the 1974 amendment, any
person wishes to call an extraordinary annual general meeting, he will have to apply
to the Company Law Board. But the present is not a case where a meeting is
being called in the normal course by a member. The learned company judge who
directed the calling of the meeting did so because he felt that the only way in
which the court can supervise the carrying out of the scheme was to order that
a general meeting of the company be held in order to appoint the directors of
the company. It would be quite anomalous to hold that if the court felt the
necessity of calling such a meeting, it would have to request the Company Law
Board to call such a meeting.
The
court cannot ignore this vital aspect and adopt a course which might be
inconsistent with the provisions of the section. We cannot think that the
Legislature intended such a result because it is well-settled law that if an
interpretation leads to absurdity and anomaly, the same must be avoided. There
is nothing in section 186 which ousts the jurisdiction of the court by
expressly or impliedly saying that the company court which is supervising the
scheme under section 392 of the Companies Act cannot call a meeting of the
company, if it feels that such a course is necessary to do justice in the
matter and to make the scheme effective. We cannot accept an interpretation
which puts the court in the position of a supplicant before the Company Law
Board. It will be against the widest amplitude given to the power under section
392(1) of the Companies Act as interpreted by the Supreme Court.
In
the result, we see no merit in this appeal and the appeal is only to be
dismissed. We do so.
[1992]
73 COMP. CAS. 285 (KER)
HIGH COURT of KERALA
v.
Sreerama Vilas Press & Publications (P.) Ltd.
VARGIIESE
KALLIATH AND G.H. GUTTAL JJ.
M.F.A. No. 722 of 1991
SEPTEMBER
20, 1991
M. Ramanatha Pillai for the appellant.
Varghese Kalliath J.—This is an appeal against the order of a learned single
judge of this court in Application No. 253 of 1990 in C.P. No. 28 of 1984. The said
application was filed under rule 9 of the Companies (Court) Rules, 1959, by a
shareholder of the company for an order declaring the election of directors and
managing director of the company (Sreerama Vilas Press and Publications (P.)
Ltd., Quilon) held on March 10, 1990, as illegal, void and inoperative.
These are the facts : The
applicant is a shareholder of the company. There was a winding up order by the
company on November 4, 1976. Subsequently, the company court approved a scheme
for revival of the company. As a consequence of that order, the board of
directors as on the date of the winding up petition was revived. A general body
meeting of the company was held on April 19, 1985, and a new board of directors
was elected. On February 25, 1986, another general body meeting was held
wherein a resolution was passed removing one of the directors, N. Madhavan
Nair, who was the managing director of the company. Madhavan Nair filed
Application No. 63 of 1986 before the company 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. The company court passed
an order of interim stay on March 3, 1986.
When the petitions came up
for hearing, the period of appointment of the managing director and the board
of directors of the company had expired. The company court did not consider the
question on merits, but directed a fresh election to the board of directors and
managing director. In order to enable a proper election, the company 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
meeting held under the directions of the company court elected the board of
directors and N. Madhavan Nair was also elected as the managing director.
A misfeasance application
was filed against N. Madhavan Nair. The company court directed N. Madhavan Nair
to pay to the company a total amount of Rs. 44,550. Madhavan Nair has filed
M.F.A. No. 174 of 1989. A cross-appeal also was filed. Both are now pending.
Two
of the shareholders of the company made a requisition to the board of
directors, under section 169 of the Companies Act on December 31, 1988,
requesting it to convene an extraordinary general body meeting of the company.
The managing director did not convene any meeting. Another director of the
company filed a suit, O.S. No. 34 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's
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 five
directors. Before the company court, a report was filed. Another application
was also moved before the company court to allow the newly elected board of
directors to function. When the matter came up before the company court, it
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 agreed that for the time being he will meet the expenses of the
meeting. The company court, as per order dated October 30, 1989, appointed Shri
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. 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 the company court.
The
meeting was held on March 10, 1990. Out of the shareholders of the company, six
were present and three by proxy attended the general body meeting. Those nine
members together held 2,630 shares out of 4,689 shares held by the total number
of members, viz., 15. Ordinarily, there were 17 members of whom two persons had
died. The present strength of members is 15. In the meeting held under the
directions of the company court, a board of directors and managing director
were elected. The Commissioner filed a report on March 22, 1990. The present
Application No. 253 of 1990 was filed challenging the election and its
proceedings. 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 the present application (Application No. 253 of 1990). The company
court dismissed the application for stay. An appeal was filed as M.F.A. No. 322
of 1990, which was dismissed on June 18, 1990, with certain directions.
The
company court has now dismissed Application No. 253 of 1990. The applicant is
aggrieved and she has filed this appeal.
Counsel
for the appellant raised certain points before us which he has raised in the
petition and before the company court. He submitted that the notice convening
the meeting by the chairman appointed by the company court is defective, since
an explanation as contemplated under section 173(2) of the Companies Act was
not annexed to the notice. Further, it was submitted that the notice is defective
since, along with the notice, the names of candidates for elections were not
furnished. It was also contended that individual notices to the members of the
company regarding the candidature of a person were not sent and that it is a
violation of section 257(1A) of the Companies Act. Counsel submitted that the
appointment of Commissioner and direction to convene an extraordinary general
body meeting of the company itself are without jurisdiction. The above
contentions were raised before the company court also. The company court found
no merit in those contentions and negatived those contentions. Counsel argued
the case elaborately. We are obliged to consider the points raised by counsel,
since he pressed all the points with equal emphasis.
The
first question we have to consider is whether the notice is defective on
account of lack of explanatory statement under section 173(2) of the Companies
Act. Section 173(2) of the Companies Act provides thus :—
"173.
Explanatory statement to be annexed to notice.— ... (2) Where any items of
business to be transacted at the meeting are deemed to be special as aforesaid,
there shall be annexed to the notice of the meeting a statement setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein, of every director, and
the manager, if any".
It
has to be remembered that the chairman appointed by the company court was
seeking directions in the matter of conducting the meeting. The company court
gave certain directions for the proper conduct of the meeting. The former
managing director, Sri N. Madhavan Nair, filed Application No. 187 of 1990 to
stop the convening of the meeting on the ground that the notice is not in
conformity with sections 171, 173 and 257(1A) of the Companies Act. The company
court overruled the objections, found the notice in order and dismissed the
application of the former managing director. He filed an appeal, M.F.A. No. 333
of 1990. The appeal 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. So even though the company court has found that
the notice sent by the chairman appointed by the company court was not
defective, that matter was left open to be considered by the company court at
the final stage of the main application, viz., Application No. 253 of 1990. But
it has to be noted that the meeting was held as early as on March 10, 1990, and
the period of appointment of the board of directors and managing director of
the company has expired by efflux of time and an election to a new board of
directors and managing director became necessary.
Nevertheless,
we feel that we are bound to consider the correctness of the judgment
challenged in this appeal. The company court, in its order, has extracted in
full the notice issued by the chairman appointed by the company court and we do
not want to repeat it in this judgment. The purpose for which the meeting is
held is clearly stated in the notice. The purpose is for conducting an election
to the board of directors and managing director of the company. There is no
difficulty to hold that the notice was issued following the provisions
contained in the articles of association and no argument was advanced by
counsel for the appellant stating that the notice is defective on account of
the fact that it has not complied with the provisions contained in the articles
of association.
The
gravamen of the charge against the notice is that it has not complied with the
provisions contained in section 173 of the Companies Act. The articles of
association provide for the nature of the notice to be sent to the effect that
what has to be done is to inform the members of the company of the general
nature of the business to be transacted at the meeting. The learned single
judge observed that since there is a specific provision in the articles of
association regarding the notice of a general meeting where special business is
to be transacted, section 173 of the Companies Act may not apply to the present
case. Further, the company court said that the notice issued contains all
material facts concerning the business that was to be transacted in the
meeting, viz., election of managing director and directors and that the order
to convene the meeting was passed after hearing all parties and the notice
itself was approved by the company court. It was also pointed out that the
meeting was convened by the chairman appointed by the company court and not
exactly by the company. The intent and purpose of section 173 of the Companies
Act is to give directions to the shareholders in the matter of holding a
meeting by the management.
In Sitaram Jaipuria v.
Banwarilal Jaipuria, AIR 1972 Cal 105, the Calcutta High Court has held that the
provisions like section 173(2) of the Companies Act should not be construed in
a rigid manner and an interpretation should not be made so as to hamper the
conduct of business. The notice has to be construed in a realistic and businesslike manner and if it
satisfied the essence of section 173 of the Companies Act, the meeting should
not be invalidated on the technical ground that the notice has not complied
with the provisions of section 173(2) of the Companies Act. The intention
behind the provisions contained in section 173 of the Companies Act has to be
understood in a meaningful manner. Of course, if a transaction of business has
not been sufficiently notified or which is substantially different from the
notification, it would be invalid. Beyond that on technicalities the meeting
should not be invalidated. It is clear from the notice that the transaction of
business to be carried out in the meeting is the election of the board of
directors and managing director. That was the only transaction scheduled in the
meeting and for which alone the meeting was called.
The
notice was found to be valid by the company court. All proceedings for the
conduct of the election were supervised by the company court and the parties
had opportunities before the company court to raise points against the validity
of the notice. Even before the holding of the meeting, the company court has
considered it and found it to be valid. It is also necessary to note that
neither the notice nor the explanatory note omits to disclose material facts
pertaining to the transaction to be carried out in the meeting. The decision
taken in respect of that transaction would be invalid and ineffective (sic).
But if a shareholder is aware of the facts, he cannot reasonably complain of
insufficiency of the notice or any irregularity. If he is present at the
meeting, he must point out to the chairman about the irregularity before the
meeting proceeds with the agenda. There is no case for the petitioner, who is
the appellant herein that she has raised any objection in the meeting itself.
The
provisions contained in section 173 of the Companies Act making some
requirements for a valid notice is to enable the members to understand and
appreciate the nature of the business or items of business proposed to be
considered at the meeting and make up their mind whether to go to and attend
and vote at the meeting or abstain from voting (see Pearce, Duff and Co. Ltd.,
In re [1960] 3 All ER 222 (Ch D)). We feel that the requirement of section 173
of the Companies Act is that the members of the company should be informed
truly of the nature of business to be transacted at the general meeting. Too
rigid an interpretation would not advance the object of the provision which
will only hamper the conduct of business.
In
this case, it has to be noted that the meeting was called by the chairman
appointed by the company court and all proceedings were subjected to scrutiny
and directions of the company court. No one can attribute any mala fide motive
on the part of the chairman to cover up or to mislead the members as to the
object and purpose of the meeting. In our view, the learned single judge has rightly rejected the
contention of the appellant based on section 173(2) of the Companies Act.
Counsel
for the appellant submitted before us that the provision contained in section
257(1A) of the Companies Act has not been complied with. It is contended that
section 257(1A) of the Companies Act mandates the company to inform its members
of the names of the persons who proposed to stand for election to the board of
directors. In order to understand this submission of counsel for the appellant,
we feel that it is apposite to quote section 257 of the Companies Act.
"257. Right of persons
other than retiring directors to stand for directorship.—(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, along
with a deposit of five hundred rupees which shall be refunded to such person
or, as the case be, to such member, if the person succeeds in getting elected
as a director.
(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".
His
Lordship Justice John Mathew considered this question very elaborately and
found that sub-section (1A) of section 257 of the Companies Act has no application
in regard to a private company and the company in this case is a private
company. Sub-section (1A) of section 257 is really interlinked with sub-section
(1) of section 257 of the Companies Act. It has to be noted that in sub-section
(1) of section 257 of the Companies Act the statute provides that "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". It is significant to note that it is a provision intended for
controlling the procedure for the election of a director at the general
meeting. It was found that sub-section (1) of section 257 of the Companies Act
was not complete and so sub-section (1A) of section 257 was introduced by an
amendment. The integrant of sub-section (1) of section 257 of the Companies Act
if analysed, can be read as follows : (1) a person who is not a retiring
director shall, subject to the provisions of the Companies Act, be eligible for
appointment to the office of director, (2) it can be done in a general meeting,
(3) for appointment as a director that person or some member intending to
propose him should have 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 not less
than 14 days before the meeting, and (4) the notice should accompany a deposit
of Rs. 500 which shall be refunded to such person or, as the case may be, to
such member, if the person succeeds in getting elected as a director. What has
to be done with the notice under sub-section (1) has been provided for in the
provisions contained in sub-section (1A) of section 257 of the Companies Act.
So as an adjunct or part of sub-section (1), an amendment was introduced as
sub-section (1A) of section 257 of the Companies Act wherein it is mandated
that when such a notice is received, the company is bound to 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 the office of a director by
serving individual notices on the members not less than seven days before the
meeting. So, in effect, both sub-section (1) and sub-section (1A) of section
257 of the Companies Act together postulate a procedure with regard to the
election to the office of director of a company. It is significant to note that
the company shall inform its members about the candidature of a person for the
office of director or the intention of a member to propose a person as a
candidate. Both these are referred to only in subsection (1A) of section 257 of
the Companies Act. Only in sub-section (1) the procedure is prescribed by which
14 days' notice has to be given signifying by a member his intention to stand
as a candidate for the office of director or any other member who wants to
propose a member as a candidate for the office of director. Sub-section (1A)
can have any meaning only if we read subsection (1A) along with sub-section (1)
of section 257 of. the Companies Act. Otherwise, sub-section (1A) will be
incomprehensible. Sub-section (1A) cannot be separated from sub-section (1) of section 257 of the
Companies Act. It is on account of this intimate relationship with sub-section
(1) that the provisions contained in sub-section (1A) of section 257 of the
Companies Act have been termed as section (1A).
Sub-section
(2) of section 257 of the Companies Act makes it clear that sub-section (1)
shall not apply to a private company unless it is a subsidiary of a public
company. There is no point in saying that sub-section (1) is not applicable by
virtue of the provisions contained in sub-section (2) of section 257 of the
Companies Act as far as this company is concerned, but nevertheless,
sub-section (1A) of section 257 of the Companies Act is applicable to this
private company. If such a construction is adopted, it will lead to manifest
absurdity. The learned judge also found so. We see no error in this
interpretation of the provision. In view of this, we see no merit in the second
ground urged by counsel for the appellant.
Counsel
for the appellant next contended that the court has no jurisdiction to convene
an extraordinary general meeting of the company. This contention was raised on
the basis of section 186 of the Companies Act. 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. We also share with the opinion
expressed by the learned single judge that 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 not taken away by the said amendment.
In Dineker Rai D. Desai v. R.P. Bhasin [1986] 60 Comp. Cas. 14 (Delhi), the
Delhi High Court held that the court has such power. We also respectfully agree
with this view.
In
this case, yet another important fact has to be taken into account. The meeting
itself was convened at the behest of the court, since the company was in the
process of implementing a scheme sanctioned under section 392(1) of the
Companies Act under the direct supervision of the court. In Indian Hardware
Industries Ltd. v. S.K. Gupta [1981] 51 Comp. Cas. 51 (Delhi), it has been held
that under section 392 of the Companies Act, the court has the power to
supervise the carrying out of the revival scheme and also 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 of
the Companies Act is not in any way affected or circumscribed by section 186 of
the Companies Act. We are of the view that the point raised on the basis of
section 186 of the Companies Act has no merit in the circumstances of the case.
The learned judge has also found so.
We cannot forget the fact
that the meeting was convened overruling the objection, which was subject to an
appeal and that appeal was also dismissed and now, as it is, the period of the
board of directors has expired by efflux of time. Section 392 of the Companies
Act empowers the court sanctioning a scheme to supervise the implementation of
that scheme and to give such direction in regard to any matter or to make such
modifications, compromises or arrangements as it may consider necessary for the
proper working of the revival scheme. It is difficult to read any limitation in
that power so as to exclude the power to call a meeting of the company for the
purpose of electing the directors if the court feels that it is necessary for
the proper working of the scheme to appoint a board of directors of the company.
The width and scope of the power under section 392 of the Companies Act is no
longer in doubt. Section 392(1) of the Companies Act confers power of the
widest amplitude on the High Court to give directions and if necessary to
modify the scheme and that power implies in itself all incidental powers like
convening a meeting of the members to elect directors. In S.K. Gupta v. K.P.
Jain [1979] 49 Comp. Cas. 342, the Supreme Court has observed thus (at page 35)
:
"The purpose
underlying section 392 is to provide for effective working of the compromise
and/or arrangement once sanctioned and over which the court must exercise
continuous supervision (see section 392(1)), and if over a period there may
arise obstacles, difficulties or impediments, to remove them, again, not for
any other purpose but for the proper working of the compromise and/or
arrangement. This power either to give directions to overcome the difficulties
or if the provisions of the scheme themselves create an impediment, to modify
the provision to the extent necessary, can only be exercised so as to provide
for smooth working of the compromise and/or arrangement... But the Legislature,
foreseeing that a complex or complicated scheme of compromise or arrangement
spread over a long period may face unforeseen and unanticipated obstacles, has
conferred power of the widest amplitude on the court to give directions and, if
necessary, to modify the scheme for the proper working of the compromise or
arrangement. The only limitation on the power of the court, as already
mentioned, is that all such directions that the court may consider appropriate
to give or make such modifications in the scheme, must be for the proper
working of the compromise and/or arrangement".
This vast power cannot be
whittled down by the 1974 amendment. The history of the amendment also
fortifies the view we have taken. The amendments were brought on the
recommendation of the Administrative Reforms Commission. It recommended that
the functions which are discharged by the courts under the Companies Act may be reviewed and those
which are essentially of an administrative nature may be transferred to the
executive. It also recommended that there was a case for relieving the courts
of items of merely administrative nature. These can be transferred to the
Company Law Board and as a result of that, a new section, section 186 of the
Companies Act was introduced. It is true that if, after the 1974 amendment, any
person wishes to call an extraordinary annual general meeting, he will have to apply
to the Company Law Board. But the present is not a case where a meeting is
being called in the normal course by a member. The learned company judge who
directed the calling of the meeting did so because he felt that the only way in
which the court can supervise the carrying out of the scheme was to order that
a general meeting of the company be held in order to appoint the directors of
the company. It would be quite anomalous to hold that if the court felt the
necessity of calling such a meeting, it would have to request the Company Law
Board to call such a meeting.
The
court cannot ignore this vital aspect and adopt a course which might be
inconsistent with the provisions of the section. We cannot think that the
Legislature intended such a result because it is well-settled law that if an
interpretation leads to absurdity and anomaly, the same must be avoided. There
is nothing in section 186 which ousts the jurisdiction of the court by
expressly or impliedly saying that the company court which is supervising the
scheme under section 392 of the Companies Act cannot call a meeting of the
company, if it feels that such a course is necessary to do justice in the
matter and to make the scheme effective. We cannot accept an interpretation
which puts the court in the position of a supplicant before the Company Law
Board. It will be against the widest amplitude given to the power under section
392(1) of the Companies Act as interpreted by the Supreme Court.
In
the result, we see no merit in this appeal and the appeal is only to be
dismissed. We do so.
[1986] 59 COMP. CAS. 898
(KER.)
v.
Travancore Rubber & Tea Co.
Ltd.
K. BHASKARAN, ACTG., C.J.
AND M. FATHIMA BIVI, J.
MFA
NOS. 466 OF 1982 AND 38 TO 47, 50 TO 56, 66, 67 AND 75 TO 77 OF 1983.
DECEMBER 22, 1983
Mani J. Meenattoor for the
Appellants.
M. Pathrose Mathai for the
Respondents.
Bhaskaran, Actg, C.J.—These are appeals under sub-section (4) of section 155 of
the Companies Act, 1956 ("the Act"), directed against the decision by
our learned brother, M.P. Menon J., in C.P. Nos. 8 to 30 of 1980, which were
petitions under section 155 of the Act and rule 9 of the Companies (Court)
Rules, 1959 ("the Rules"), for rectification of the register of members
of the first respondent company (the Travancore Rubber and Tea Co. Ltd.) by
removing the name of the second respondent in the respective petitions from the
register of members in respect of equity shares alleged to have been purchased
by the respective petitioner from the second respondent in the respective
petitions at the prevailing market rate through brokers and in respect of
which, share transfer deeds duly executed by the transferors and the
transferees, together with the share certificate relating to the said shares,
were forwarded to the registered office of the company for registering the
transfers and duly entering the names of the respective petitioners in the
register of members of the company as the holders of those shares. It has been
averred that the company instead of registering the said transfers of shares
and entering the names of the respective petitioners as the owners of the said
shares, by its letter dated January 29, 1980, informed the respective
petitioners that the transfer applications were considered by the board of
directors of the company at its meeting; and that the board has declined to
register the transfer of shares in exercise of the powers conferred on the
board under article 24 of the articles of association of the first respondent
company read with section 111 of the Act; in consequence, the first respondent
company returned the share certificates relating to the said shares to the
petitioners.
Issues Nos. 1 and 2
formulated for trial by the learned judge (issues Nos. 3 to 6 not being
relevant for our present purpose) read as follows:
"(1) Are the petitioners competent to challenge the
validity of article 24 (as amended in 1965) of the first respondent-company's
articles of association in these proceedings? and
(2) If so, is article
24 (as amended in 1965) invalid as alleged? "
The first
respondent-company was incorporated under the Travancore Companies Act (IX of
1114 ME). Exhibit A-l contains the articles of association of the company as it
stood prior to 1965; and regulation 20 thereof was in the following terms:
"20. The directors may
refuse to register any transfer of a partly paid share (a) where the company
has a lien on the share; or (b) where it is not proved to their satisfaction
that the proposed transferee is a responsible person; or (c) where the
directors are of opinion that the proposed transferee (not being already a
member) is not a desirable person to admit to membership, but the directors
shall not be bound to state their reason for refusing to register any transfer.
Notice of refusal to transfer shall be given to both parties to the deed or
application for transfer within two months after the decision of the board of
directors is made".
M/s. Aspinwall & Co.
(Travancore) Ltd. were originally the managing agents of the company; and it
appears that some time prior to 1965, that arrangement was terminated. This
change in regard to the managing agency and the far reaching changes brought
about in the company law by the Companies Act, 1956, made the directors think
that the articles of association as a whole had to be recast and replaced by a
new set of articles. Accordingly, they gave notice of the following special
resolution for the 21st annual general meeting of the company held on June 24,
1965:
"Resolved that the
regulations contained in the printed document submitted to this meeting and for
purposes of identification signed by the chairman of the meeting, be and are
hereby approved and that such regulations be and are hereby adopted as the
articles of association of the company for and to the exclusion of all existing
articles".
The notice also stated:
"An explanatory
statement under section 173 of the Companies Act in respect of the above items
of business and a copy of the proposed new set of articles are attached hereto.
Copies of the existing memorandum and articles of association of the company
are available for inspection at the company's registered office during business
hours".
The explanatory note itself
was in the following terms:
"As you know, this is
a company registered under the Travancore Companies Act (IX of 1114 ME), which
has been superseded by the Companies Act, 1956, which has brought into force
far reaching changes in the law relating to companies. Further, the
existing articles of the company were framed with a view to have the company
managed only by managing agents. There are no managing agents at present, and
it is desirable to take power in the articles for the management of the company
by any type of management permitted under the Companies Act. It has, therefore,
been considered necessary and desirable that the existing articles of
association of the company framed under the old Travancore Companies Act (IX of
1114 M E) should be amended to make suitable provisions for the aforesaid purposes.
In
view of the large number of amendments required, it has been considered more
convenient to frame a completely new set of articles and to adopt the same in
substitution for and to the exclusion of the existing articles. Under the
Companies Act, 1956, articles can be altered by special resolution. The special
resolution notified is for the purpose of approving and adopting the new
articles".
The
annual general meeting passed the resolution and adopted the new set of
articles with some modifications; and exhibit A-4 contains these articles.
Regulation 24 in exhibit A-4 reads as follows:
"The
board may, in their absolute discretion and without assigning any reason,
decline to register:
(a) the
transfer of a share to a person of whom they do not approve; or
(b) any
transfer of shares on which the company has a lien".
The
substantial difference between old regulation 20 and new regulation 24 is that
whereas under the former, the directors could have refused transfers only in respect
of partly paid shares, under the new regulation 24 they could refuse transfers
of fully paid shares also. The petitioners are transferees of fully paid shares
and, therefore, if the amendments made in 1965 were to be held invalid and
inoperative, the refusal on the part of directors to register the transfer of
shares in these cases could not obviously be justified. The only ground raised
in the petitions against the validity of the amendments is that the explanatory
statement under section 173(2) to the notice of the special resolution for the
21st annual general meeting of the company held on June 24, 1965, at which the
new regulations are stated to have been considered and adopted, fell short of
the statutory requirements. Our learned brother, M.P. Menon J., dealt with the
explanatory statement under section 173(2) at some length without, however,
deciding issue No. 2 touching the validity of article 24 in exhibit A-4. In the
light of the decision on issue No. 1, that the petitioners were not competent
to challenge the validity of article 24 in exhibit A-4 articles of association
in the proceedings before the company court, the company petitions were
dismissed by a combined order challenged in these appeals.
Section
31 of the Act permits a company, by special resolution, to alter its articles
of association subject to the provisions of the Act and the conditions
contained in the memorandum. Section 36 provides:
"36.
Effect of memorandum and articles.—(1) Subject to the provisions of this Act,
the memorandum and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by
the company and by each member, and contained covenants on its and his part, to
observe all the provisions of the memorandum and of the articles."
Sub-section
(2) of section 189 of the Act is to the following effect:
"(2)
A resolution shall be a special resolution when—
(a) the intention to propose the resolution as a
special resolution has been duly specified in the notice calling the general
meeting or other intimation given to the members of the resolution;
(b) the notice required under this Act has been
duly given of the general meeting; and
(c) the votes cast in favour of the resolution
(whether on a show of hands, or on a poll, as the case may be) by members who,
being entitled so to do, vote in person, or where proxies are allowed, by
proxy, are not less than three times the number of the votes, if any, cast
against the resolution by members so entitled and voting".
In
our view, the dismissal of the company petitions, which has given rise to these
appeals, on the basis of the decision on Issue No. 1 that the petitioners
(appellants) were not competent to question the validity of regulation 24 of
the new regulations (A-4 articles of association) could not be assailed on the
ground that regulation 24 is null and void".
Gore-Browne
in his Handbook on Joint Stock Companies, 41st edition, at page 51, has stated as follows:
"Even when articles
have not been formally altered, the court may have regard to a long course of
practice, and recognise as valid articles which have been used for many years,
although not regularly adopted, and may also act upon a distribution of assets
not in strict accordance with articles if there has been a general adoption of
the method of distributing. Moreover, where an article is one which the company
has power to adopt, the fact that there has been a defect in the procedure of
its adoption will not prevent a person dealing with the company on the faith of
the article from insisting that it shall be treated as binding on the company,
and the company can equally insist upon such article where it has been made the
basis of a contract with a stranger.
The court will not at the
instance of the company rectify mistakes in the articles. Even where
rectification is sought by one or more of the signatories of the articles, and
it is proved that the articles do not give effect to the agreement between
them, the court has no jurisdiction to order rectification".
It is true, as held by the
Gujarat High Court in Sheth Mohanlal Ganpat. ram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [
1964] 34 Comp Cas 777, section 173 enacts a
provision which is mandatory, not directory. Subsection (2) of section 173 of
the Act reads as follows:
"Where any items of
business to be transacted at the meeting are deemed to be special as aforesaid,
there shall be annexed to the notice of the meeting a statement setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein, of every director, the
managing agent, if any, the secretaries and treasurers, if any, and the
manager, if any".
Whether the statement
annexed to the notice of the meeting contains full and frank disclosure of the
material facts concerning each item of business must essentially depend upon
the facts of each case. The learned judge, though it might not have been
strictly necessary in view of the decision taken under issue No. 1, pointed out
some of the defects noticed in the explanatory statement under section 173(2)
of the Act, which might lead to a conclusion that it could not be said that
there was a full and fair disclosure of all the full material facts concerning
various items of business to be transacted in the annual general meeting. Apart
from the fact that if, as correctly pointed out by the learned judge, the
petitioner was not entitled to question the validity of regulation 24 of the
articles of association (as amended in 1965), there was no purpose in
conducting a postmortem on the process of amendment which took place in 1965.
The learned judge has guardedly refrained from entering a definite finding on
issue No. 2. We are not also persuaded to hold that the articles of association
registered with the Registrar of Companies in 1965, substituting the earlier
articles of association are ex facie void. A very minor defect arising out of
strict non-confirmity with the provisions contained in section 173(2) might not
render the amendment null and void. In any event, in our opinion, there is no
scope for an elaborate enquiry by us, at this distance of time, as to whether
the articles of association are void or voidable in' a proceeding under section
155, however much enlarged the scope of the enquiry under the said section is
now after the amendment of the Act in 1960. We have no doubt that in collateral
proceedings under section 155, it would not be expedient for the court to enter
a finding on such a basic question as to whether the amended or substituted
articles are void or voidable, much more so when it has to be borne in mind
that the transferor himself not having been entitled to do so in a suit, which
would have been clearly barred by limitation, to circumvent the provisions of
the Limitation Act through the backdoor by the transferee approaching the
company court under section 155, when he is told that the articles by which the
transferor was bound, authorised the board of directors to decline to register
the transfer. Section 155 of the Act, provides as follows:
"155.
Power of court to rectify register of members.—(1) If—
(a) the
name of any person—
(i) is without sufficient cause, entered in
the register of members of a company, or
(ii) after having been entered in the
register, is, without sufficient cause, omitted therefrom; or
(iii) default is made, or unnecessary delay
takes place, in entering on the register the fact that any person having become,
or ceased to be a member the person aggrieved, or any member of the company or
the company, may apply to the court for rectification of the register.
(2) the court may
either reject the application or order rectification of the register; and in the
latter case, may direct the company to pay the damages, if any, sustained by
any party aggrieved.
In
either case, the court in its discretion may make such order as to costs as it
thinks fit.
(3)
On an application under this section, the court—
(a) may decide any question relating to the
title of any person who is a party to the application to have his name entered
in or omitted from the register, whether the question arises between members,
or alleged members, or between members or alleged members on the one hand and
the company on the other hand; and
(b) generally, may decide any question which it
is necessary or ex- pedient to decide in connection with the application for
rectification."
We
do not think it expedient or necessary for the company court on an application
made by a person, who is said to have purchased shares in 1979, to decide
whether an amendment to the articles of association made as early as in the
year 1965 was void or voidable, particularly in the light of the fact that the
amended provisions were binding on the shareholders from whom he purchased the
shares. Be that as it may, regulation 24 is one of the regulations in the
articles of association registered with the Registrar of Companies, which is
binding on the company and the shareholders; and it authorises the directors to
decline to register the transfer of shares without assigning any reason
whatsoever. The scope of the question to be decided in an enquiry under section
155 of the Act at the instance of a transferee of shares, in our opinion, would
not extend to the scrutiny of matters which could not have been agitated by the
transferor of the shares in a suit on account of limitation. The scope of the
enquiry under section 155 has to be understood from the nature of the relief that
the applicant could expect from the various
clauses in sub-section (1) of section 155.
It is not disputed before
us that the owners of the shares, from whom the petitioners purchased the shares,
had they continued to be the owners of the shares, without the transfer taking
effect, would not have had the right to challenge the validity of the new
regulations (exhibit A-4, articles of association) in a suit, as it would have
became hopelessly barred by limitation on the date of the filing of the company
petitions. If that be the position with respect to the right of the transferor
of the shares, it would not be reasonable to hold that the transferee of the
shares from such a shareholder would have had a better right to challenge the
validity of the amendment when that right was not available to the transferor
by the operation of law, namely, the law of limitation.
If a person in whose name
the shares stood in 1965, at the time of the amendment to the articles of
association, comes to court, it is quite possible that he would have been
confronted with such questions as to whether he had not participated in the
deliberations at the annual general meeting which adopted the amendment to the
concerned regulation, and whether he had then raised any objection to the
proceedings on account of the failure to comply with the provisions of section
173(2) of the Act, in so far as it related to the explanatory statement to be
annexed to the notice. It might have been also possible for the company to
contend for the position that, even if there was no full and fair disclosure of
the impact of the amendment proposed on the company and the shareholders, the
shareholder had participated at the deliberations of the annual general meeting
and he having raised no objection to the resolution being carried, he had
waived his right with respect to the strict formalities under section 173(2) of
the Act.
Strong reliance was placed
by the counsel for the appellant-petitioners on the decision of the Bombay High
Court in Maneckji's case, AIR 1931 Bom 354. Having gone through the facts of
the case, we do not think the observations contained in that decision could be
applied to the facts of the present case. That was a case in which a company
was incorporated in 1876 and its articles of association which were then
registered having become out of date, the directors desired to substitute them
with a new set of up-to-date articles. At the same time, the managing agents of
the company, who had acted as such for 50 years without any agreement, desired
to have an agreement with the company, fixing the duration of the agency and
denning their powers. The directors convened an extraordinary general meeting
of the shareholders to pass the necessary resolutions for carrying out the said
purpose. The notice convening the meeting set out necessary resolutions and was
accompanied by a circular, but sufficient particulars regarding important
changes to be effected were not set out. The resolutions were passed and
confirmed. In a suit by a shareholder suing on behalf of himself and other
shareholders for a declaration that the resolutions were inoperative on the
ground of insufficiency of notice and for injunction, the court held that the
notice should have given sufficiently fully and frank disclosures of the facts
and the effect of the resolutions and agreement, and consequently, the
resolutions were inoperative and not binding upon the company.
Reliance was also placed on
the decision of the Calcutta High Court in Bimal Singh v. Muir Mills Co. [1952]
32 Comp Cas 248 Cal. That was a case in which there was no disclosure of
particulars of the proposed changes in the articles of association. Inasmuch as
a notice of a proposed meeting of a company at Kanpur for adopting certain new
"articles of association in substitution for and to the exclusion of all
existing articles", and for the appointment of managing agents were merely
accompanied by a circular stating that copies of the proposed new articles and
of the managing agency agreement were available for inspection at the office,
certain shareholders who received the notice at Calcutta applied to the High
Court at Calcutta, to set aside the resolutions made pursuant to the notice
alleging that they did not attend the meeting being misled by the notice that
no radical change would be made. On the facts and circumstances stated above,
the High Court held that the notice did not disclose fully and frankly the
facts upon which the shareholders were asked to vote and deliberately withheld
material facts from the knowledge of the shareholders. It was really a tricky
notice of concealing the real object and amplitude of the amendments for
adopting new articles of association in substitution and to the exclusion of
the existing articles. This decision also is not applicable to the facts of the
case. Further, it has to be noticed that, as in the case of the ManeckjVs case,
AIR 1931 Bom 354, in this case also, the decision was rendered in a suit, not
in proceedings before the company court in a proceeding under section 155 of
the Act.
Another decision cited on
behalf of the appellants-petitioners was the one in Bajaj Auto Ltd. v.N K.
Firodia [1971] 41 Comp Cas 1 (SC). This decision too, in our view, does not
advance the case of the appellant-petitioners. That decision was rendered in an
appeal against the order of the Company Law Board. In the last paragraph, at
page 6 of the report, it is stated as follows:
"If the articles
permit the directors to decline to register transfer of shares without stating
the reasons, the court would not draw unfavourable inferences against the
directors because they did not give reasons. In other words, the court will
assume that the directors acted reasonably and bona fide and those who allege
to the contrary would have to prove and establish the same by evidence."
In this case, it is not the
case of the appellants-petitioners that the directors while declining to
register the transfer of shares had given any reasons which they were able to
establish by evidence as being made without reasonableness and bona fides.
The
decision in Shaligram Jhajhariav. National Co. Ltd. [1965] 35 Comp Cas 706,
Mahuraj Singhv. Vulcan Insurance Co. Ltd. [1973] 43 Comp Cas 177 and Gulabrai
KalidasNaik v. Laxmidas Lallubhai Patel [1978] 48 Comp Cas 438 also have been cited, in support of the contentions put
forward by the appellant-petitioners. It is true that all these decisions
reiterated the principles laid down by the Bombay High Court in Maneckji's case,
AIR 1931 Bom 354. However, it has to be remembered that the question as to
whether there was a full, fair, complete and frank disclosure in the
explanatory statement annexed to the notice or whether the notice is a tricky
notice would depend upon the facts and circumstances disclosed in each case.
The facts of the present case could not be compared to those in the cases
referred to above. The decision of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas
Lallubhai Patel [1978] 48 Comp Cas 438, has been cited to contend for the
position that the jurisdiction of the company court under section 155 of the
Act is analogous to that of a civil court in a suit. The learned judge has
taken note of the expanded scope of the enquiry under section 155 of the Act
before the company court. Even then, the finding by the learned judge was that
in the present case, it was not necessary or expedient to enter a finding on
Issue No. 2 for reasons already stated.
These
appeals have been filed under sub-section (4) of section 155 of the Act. That
sub-section provides as follows:
"From
any order passed by the court on the application, or on any issue raised
therein and tried separately, an appeal shall lie on the grounds mentioned in section
100 of the Code of Civil Procedure, 1908;
(a) if
the order be passed by a District Court, to the High Court;
(b) if the order be passed by a single judge of
a High Court consisting of three or more judges, to a Bench of that High
Court."
The
scope of the appeal, therefore, is analogous to that of a second appeal under
section 100 of the Code of Civil Procedure. It is well established that a
finding of fact recorded by a court of first appeal could be reversed by the
High Court in second appeal only if it finds that it is vitiated by substantial
error or defect in procedure or if it is not supported by any evidence
or in other words it is not based on a material defect or sub- stantial error within the meaning of section 100(1)(c) of
the Code, as laid down by the Supreme Court in Ramachandra v. Ramalingam, AIR
1963 SC 302. In the light of the dictum laid down by the Supreme Court in the
above case, it could be seen that no case for interference with the decision of
our learned brother, M. P. Menon J., has been made out.
It has also to be borne in
mind that an order, although void in law, remains for many purposes effective
and operative until it is challenged and its invalidity is declared by a
competent body or court. In the present case, if the shareholder felt aggrieved
by the substitution of the articles in 1965, it was open to him to get the
amendment declared null and void in appropriate proceedings at the appropriate
stage. It is not open to him or the transferee to ignore the amendment which was
registered before the competent authority, namely, the Registrar of Companies,
solely on the ground that the amendment was according to him null and void, or
to resist all consequences flowing from it. As pointed out by H.W.R. Wade in
his Administrative Law, 5th edition, at page 299:
"The correct
conclusion is probably that there can be no hard and fast rule for determining
when the court may or may not allow collateral challenge. In some situations,
it will be suitable and in others, it will be unsuitable, and no classification
of the cases is likely to prove exhaustive."
The same author has also
stated that a void order when quashed is deprived of all legal effect right
from its inception, whereas a voidable order remains valid even when it is
quashed for the period of its operation. The distinction between the
jurisdictional error and errors within jurisdiction also has to be borne in
mind.
For about twenty years,
several transactions might have taken place on the basis of Ext. A-4 articles
of association, and at this distance of time, if we declare that Ext. A-4
articles of association, with particular reference to regulation 24, are null
and void, the result would be that all the transactions entered into by and
with the company would be rendered ineffective and unenforceable in law. Viewed
from this angle also, it is not expedient or necessary for the company court to
enter a finding on issue No. 2.
For the foregoing reasons,
we find that the appeals are without merit, and, therefore, they are dismissed,
however, in the circumstances of the case, without any order as to costs.
Immediately, after the
judgment was pronounced, the counsel for the appellants made an oral request
for leave to appeal to the Supreme Court. We do not consider that this matter
involves any substantial question of general importance which in our opinion
requires to be settled by the Supreme Court and hence the leave requested for
is declined.
[1977] 47 COMP. CAS. 503
(BOM)
HIGH COURT OF BOMBAY
Khandelwal Udyog Ltd. & Acme Mfg. Co. Ltd., In re
MRIDUL
J.
COMPANY
PETITIONS NOS. 146 AND 147 OF 1975.
AUGUST 13, 1976
J.I. Mehta with B.M.
Patil for the Petitioners.
D.R. Zaiwala for two
shareholders, instructed by Eastley Lam & Co.
K.B. Parekh, a shareholder in person.
S.N. Varvaiyya for Engineering Mazdoor Sabha.
A.G. Gandhi for Regional Director of Company
Law Board.
Mridul. J.—Petition No. 146 of 1975 by Khandelwal Udyog Ltd.
(hereinafter referred to as "the transferor-company") is for
sanctioning the scheme of amalgamation and merger with Acme Manufacturing
Company Ltd. (hereinafter called "the transferee-company"). Petition
No. 147 of 1975 is the petition by the transferor-company for sanctioning the
scheme by the aforesaid amalgamation and merger. Since a common question arises
for determination in these two petitions, they have been, by consent of the
parties, heard together and are being disposed of by this common judgment.
The transferee-company was incorporated on 29th
November, 1919. The transferor-company was incorporated on 25th January, 1960.
By virtue of and under their respective memoranda and the articles of
association both the transferor and the transferee-companies are entitled to
carry on the business of manufacturing iron, brass and other metal products. It
is not disputed that their manufacturing and their business activities are
analogous and can be combined economically and fruitfully.
It appears that over the period of years the
transferee-company made large profits ; by all standards it has been and is an
affluent company with great profit-making potentialities. The,
transferor-company, however, appears to have been running marginally. It has
not made large profits and appears to be financially in strained circumstances.
There have been and there are common directors on the board of directors of the
two companies. It was contemplated by the respective board of directors of the
two companies that an amalgamation or merger of the two companies would be
beneficial to both. In so far as the transferee-company is concerned, the
benefits which were within contemplation were : that the transferee-company
would be able to execute large volume of orders which were pending with it by
augmenting its production facilities which merger with the transferee-company
would bring about and through such an amalgamation the transferee-company would
be able to undertake a programme of diversification and expansion as also raise
funds from banks having regard to its increased capital, fixed assets and other
paraphernalia. The benefits which were contemplated for the transferor-company
were not difficult to see. It could by reason of such an amalgamation take the
benefit of larger and better economies prevalent in the transferee-company. In
view of the negotiations which ensued between the directors of the two
companies for proposed amalgamation, the transferee-company got its assets
re-valued by M/s. Itadal Technical Services Private Ltd. (hereinafter referred
to as "the Itadals"). This revaluation, according to the transferee-company,
was justified having regard to the fact that ihe transferee-company was
established as early as 1919 and the value of its assets was not properly
reflected in its books. According to the companies, no re-valuation of the
transferor-company was required or necessary in view of the fact that the plant
and machinery were acquired only in the year 1960 and did not require any
revaluation. Upon the basis of the revaluation made by the Itadals, M/s. Shaha
and Company, chartered accountants, Bombay, were required to prepare a scheme
by the board of directors of the transferee-company. Consequent upon the report
prepared by the said chartered accountants and submitted to the board of
directors of the transferee-company, the board of directors of the
transferee-company proposed a scheme of amalgamation. In substance the said
scheme provided, in so far as the provisions thereof are material for the
present controversy, that the shareholders of the transferor-company shall be
entitled to "the allotment of the fully paid up 10% cumulative redeemable
third preference shares of Rs. 100 each and fifteen fully paid up equity shares
of Rs. 10 each of the transferee-company as against the fully paid up equity
share of Rs. 100 each of the transferor-company". The scheme also provided
for participating and ranking of the shareholders "for dividend out of the
profits of the transferee-company as from 1st day of July, 1974, in all other
respects pari passu with the existing fully paid up shares of Rs. 10 each of the
transferee-company". The proposed scheme was intended to be made with
effect from 1st October, 1974. Similarly, a corresponding proposal was mooted
by the board of directors of the transferor-company. Appropriate resolutions
were passed by the board of directors of the companies and preliminary
directions were obtained from this court in Company Petitions Nos. 147 and 148
of 1974, for convening a meeting of the respective shareholders of the
companies. Pursuant to the directions of this court in the said applications,
meeting of the shareholders of the transferor-company was held on 10th
February, 1975. At the said meeting 29 shareholders attended in person and 57
shareholders attended through their proxies. These shareholders held 12,445
shares of the aggregate nominal value of Rs. 12,44,500. At the said meeting an
amendment for an increase of one per cent, was suggested in respect of the
cumulative redeemable third preference shares and the said amendment was
accepted. The scheme in regard to the said cumulative redeemable third
preference shares was passed at the said meeting, 69 shareholders holding
12,035 shares of the nominal value of Rs. 12,03,500 voting in favour and 15
shareholders holding 140 shares of the nominal value of Rs. 14,000 voting against
the scheme. In the meeting of the shareholders of the transferee-company
resolution was passed by 51 shareholders holding shares of the value of Rs.
23,54,950 as against the opposition of one shareholder holding shares of the
value of Rs. 250.
In these two petitions principal arguments were
canvassed on behalf of Tarachand Dhanaji and Phroj Sehorab India by Shri D. R.
Zaiwala, the learned counsel, appearing on behalf of the said dissentient
shareholders. He was supported by one K. B. Parikh, a shareholder of the
transferor-company and by Shri Varvaiyya, learned counsel, appearing on behalf
of the Engineering Mazdoor Sabha, a union of workers employed in the
transferor-company. The arguments by the workers and the other shareholders
referred to above were merely reiteration of the submissions made by Shri
Zaiwala.
The submissions made by Shri Zaiwala in
resisting the petition may be summarised as follows :
(i) that the transferee-company is a profit making company and that the transferor-company
is a losing company. Having regard to the provisions of law, an amalgamation
and merger of a profit making company is not permissible. The provisions of
section 391 of the Companies Act, 1956, do not apply to such companies as are
in affluent circumstances.
(ii)the companies did not
make a proper disclosure as contemplated by the provisions of section 173 of
the Companies Act, 1956, or in any event by section 393 of the said Act.
Non-compliance of the provisions of the said sections renders the resolutions,
even though passed by the requisite majority of the shareholders at the
meetings convened for the said purposes, a nullity. The non-disclosure,
according to the learned counsel, relates to non-mentioning of the re-valuation
report of the Itadals as also of the chartered accountants and of the fact of
the two companies having common directors on their respective board of
directors.
(iii)the ratio and
proportion of shares fixed upon the basis of the re-valuation of the assets of
the transferee-company is vitiated by reason of the fact that revaluation was
not justified on the facts of the case and in any event because valuers adopted
erroneous principles in that behalf.
The argument as to whether a profit-making
company is entitled to propose a scheme for its amalgamation and merger with a
loss-making company proceeds upon the interpretation sought to be put by the
learned counsel for the dissentient shareholders on the term
"company" occurring in section 391. According to the learned counsel
the said term as defined in section 390(a) means only such companies as are in
financial difficulties and are, therefore, liable to be wound up under the said
Act. The learned counsel submits that section 390(a) in terms provides that a
company for the purpose of sections 391 and 393 means "any company liable
to be wound up under this Act". The learned counsel says that the
expression "any company liable to be wound up under this Act" has
been used to imply companies whose condition is such as would justify their
winding-up. The submission is that the expression does not embrace every
company, whatever be its financial position to which winding-up provisions
contained in the Companies Act, 1956, apply.
The learned counsel emphasises that the
submissions made by him are concluded in his favour by a judgment of this court
(Tarkunde J.) in Seksaria
Cotton Mills Ltd. v. A.E. Naik [1967] 37 Comp. Cas. 656 (Bom). The learned counsel calls attention to the observations made by
Tarkunde J. in the said judgment at page 661. The said observations are as
follows :
"Whatever may be the correct meaning of
the expression 'any company liable to be wound up under this Act' which
occurred in section 153(6) of the Indian Companies Act, 1913, and which now
occurs in clause (a) of section 390 of the Companies Act, 1956, it seems to me
obvious that section 391 of the present Act which empowers the court to
sanction a compromise or other arrangement can have no application to a company
which is in a sound financial condition".
It is undoubtedly true that the aforesaid
observations, couched as they are in categorical language, support the
submissions made by the learned counsel for the dissentient shareholders. This,
however, in my opinion, does not help the dissentient shareholders inasmuch as
the law expounded therein appears to be in the nature of an obiter, if not mere
observation made by the learned judge. Moreover, these observations, in my
respectful opinion, do not state the law accurately.
Judicial decorum and propriety require that the
precedents must have binding effect and an authoritative exposition of law
should not be departed from at the whim or the caprice of a court. The law of
precedents, however, admits of a very unexceptionable principle succinctly
articulated by the Earl of Halsbury L.C. in Quinn v. Leathern [1901] AC 495,
506 (HL) Earl Halsbury said "............. decision is only an authority
for what it actually decides". This principle was noticed and reiterated
by the Supreme Court in State of Orissa v. Sudhansu Sekhar Misra AIR 1968 SC
647. At page 651 of the report, Hegde J., speaking for the unanimous court,
observed as follows ;
"A decision is only an authority for what
it actually decides. What is of the essence in a decision is its ratio and not
every observation found therein nor what logically follows from the various
observations made in it".
The said principle has been often repeated by
the Supreme Court in several cases and it is expounded that "no judgment
can be read as if it is a statute" : Adil. Distt. Magistrate, Jabalpur v.
Shivakant Shukla AIR 1976
SC 1207, 1341.
Seksaria Cotton Mill's case [1967] 37 Comp.
Cas. 656 (Bom) was a case where a company was directed to be wound up by this
court on 28th April, 1958. In the course of the winding-up an intimation was
given by the sales tax authority to the official liquidator requesting him
"to register the claim of the sales tax officer for the above dealer
(company) if it is found after verifying account books of the dealer",
that the sales tax was payable by the said company. However, before assessment
orders could be passed, this court sanctioned a scheme on 28th April, 1961. The
said scheme as sanctioned by the said court, inter alia, provided that
"all preferential claims were to be paid 4-annas in a rupee in full and
final settlement of their respective claims". After this scheme was
sanctioned and after the assessment orders were made on 11th July, 1963, a
notice of demand was issued to the company for payment of certain amounts
payable as sales tax. The company was threatened with recovery proceedings in
the event of non-compliance. The said notices were challenged by the company in
a writ petition under article 226 of the Constitution. In the said writ
petition the argument of the company was that the sales tax authorities were
entitled not to the full amount of the tax assessed but only to the 25% thereof
as the scheme sanctioned by this court earlier was binding on the sales tax
authorities. The claim of the sales tax authorities was that they were not the
creditors of the company at the time when the scheme was sanctioned and,
therefore, the said scheme did not bind them. After noticing the said argument,
the question that was posed by the learned judge was as follows :
"The question to be decided, therefore, is
whether the sales tax department (i.e., the Government of Maharashtra) was a
'creditor' of the company on 28th April, 1961, when Mr. Justice Mody sanctioned
the scheme of reconstruction".
The learned judge answered the question in
favour of the company. The learned judge held that the sales tax officer
concerned was a creditor of the company, that he was an unsecured creditor and
that he was entitled to recover only 25% of his claim. The said findings were
made by the learned judge upon an analysis of the facts of the case in the
context of the provisions of the Bombay Sales Tax Act, 1953, and of sections
439, 474, 528 and other cognate sections of the Companies Act, 1956. On the
facts of the said case, no question arose before the learned judge as to
whether a company which was able to pay its debts or which was in economically
viable condition or was functioning normally could or could not take the
benefits of the provisions of amalgamation, reconstruction and merger of the
companies. No further question could arise before the learned judge as to
whether only such companies as are unable to pay their debts were liable to be
wound up or as to whether provisions relating to winding-up also had within
their reach companies which are economically solvent, viable, or, as
characterised by the learned counsel for the dissentient shareholders,
"profit-making companies". Having regard to the factual parameters
and legal perimeters of the said decision, I am respectfully of the opinion
that the ratio of the said decision is inapplicable to the facts of the present
case.
The binding effect of the observations by
Tarkunde J. abstracted above, being out of way, the question to be determined
is as to whether the said observations contain a correct statement of law. With
great deference to the learned judge, it is my humble opinion that the law laid
down therein is inconsistent with the relevant provisions of the Companies Act,
1956, and the intendment, scheme and the purposes thereof. I respectfully
dissent from the view expressed in the said observations.
Section 390 of the Companies Act, 1956,
corresponds to sub-section (6) of section 153 of the Indian Companies Act,
1913. The said provision is modelled on the provisions of sub-section (6) of
section 206 of the English Companies Act, 1948, or its preceding enactment. The
expression "any company liable to be wound up under this Act
"occurring in the English Act, as foot note 7 of Buckley on the Companies
Acts, 13th edition, page 404 shows, is referable to the provisions of sections
399, 400 and 455 of the English Companies Act, 1948. Section 455 of the English
Companies Act, is an interpretation section. Sections 399 and 400 of the said
Act deal with winding-up of unregistered companies. The reference to the said
three sections, particularly sections 399 and 400 by Buckley gives a clue to
the connotation and meaning of the expression "any company liable to be
wound up under the Act". This expression means all companies to which the
provisions relating to winding up apply. Thus, the expression in section 390(a)
takes within its sweep all companies registered under the provisions of the
Companies Act, 1956, as also all unregistered or other companies in respect of
which winding-up orders can be made by a court under the provisions of the
Companies Act, 1956. In other words, the expression embraces not only companies
which are registered companies under the provisions of the Companies Act, 1956,
but also companies which come within the purview of the provisions of the
Companies Act, 1956, and can be wound up by a court under the provisions
thereof. These latter are the companies which fall within the province of the
provisions of Part X of the Companies Act, 1956. The said part deals with winding
up of the unregistered companies. Section 582 contained in the said part
defines an unregistered company and, inter alia provides that the said concept
includes "any partnership, association or company consisting of more than
7 members". Section 584 contained in the said part confers powers upon the courts in India
jurisdiction to direct winding up of foreign companies also as if they were
unregistered companies provided such foreign companies, although incorporated
outside India, had been carrying on business in India. These provisions of the
Companies Act clearly show that the expression contained in clause (a) of
section 390 was advisedly used so as to enable the unregistered companies or
the foreign companies to be in a position to invoke the provisions of sections
391 and 393 of the Companies Act.
In Seksaria Cotton
Mills' case [1967] 37 Comp. Cas. 656 (Bom.) this court, as noticed above, was
only concerned with the question whether the scheme sanctioned by this court
was binding on the sales tax authorities by virtue of and under the provisions
of sub-section (2) of section 391 of the Act. It was, therefore, necessary for
this court to notice the provisions of sub-section (2) of section 391. In that
case this court was not concerned with the provisions of sub-section (1) of
section 391 which deals with the topic of proposals for compromise or
arrangement. The said subsection contemplates an application by a company or
its creditor or member when such a company is not being wound up for directions
from the court after proposal is made. In regard to the intendment of section
391, Tarkunde J. rightly observed at page 660 as follows :
"It will be
noticed that section 391 applies to a company which is being wound up as well
as to a company which is not being wound up".
This observation has
been made notwithstanding that clause (a) of section 390 which provides that
the expression "company" means "any company liable to be wound
up under this Act". In other words, the learned judge himself held that both
the companies which are being wound up and those which can be wound up are
covered by section 391. The observations of the learned judge, to my mind,
clearly implies that, in order to fall within the definition of clause (a) of
section 390, the company must be a company to which winding-up provisions of
the Companies Act, 1956, apply, irrespective of the fact whether there is an
occasion for the application of the said provisions to the facts pertaining to
a particular company. This is because the critical factor is not whether a
company is being wound up or a company is not being wound up but it is that the
company belongs to the categories of companies which come within the vortex of
the winding-up provisions of the Companies Act.
Tarkunde J. noticed
the decisions in In re Travancore National and Quilon Bank Ltd. [1939] 9 Comp.
Cas. 14 (Mad) and in the matter of the Indian Companies Act VII of 1913 and of
the Traders Bank Ltd., Lahore AIR 1949 Lah 48, before making the observations
relied upon by Shri Zaiwala. The said two decisions dealt with cases of
unregistered companies and determined the question as to whether a foreign
company could take benefit of the provisions
of section 153 of 1913 Act. The view taken by the Madras High Court in
Travancore National and Quilon Bank Ltd., In re [1939] 9 Comp. Cas. 14 (Mad)
was that since a foreign company was liable to be wound up as an unregistered
company within the meaning of section 371 of the Indian Companies Act, 1913, it
was also a "company" for the purposes of section 153 of the said Act.
The judgment rested on the principle that section 153 was intended to apply to
the cases of a going company as also to a company in liquidation and a company
which is being wound-up in the sense that a winding-up petition in respect
thereof was pending before a court. This view was based on a wider
interpretation of the provisions of section 276 of the 1913 Act to the effect
that "an unregistered company shall not, except in the event of its being
wound up, be deemed to be a company under this Act" (underlining
supplied). The wider view taken by the Madras High Court aforesaid was
dissented by the learned single judge of the Lahore High Court in the Traders
Bank Ltd.'s case AIR 1949 Lah 48. The learned judge gave a restricted
interpretation to the expression "in the event of its being wound up"
and held that it could only mean such companies as were exposed to winding up.
The cleavage of judicial opinion disclosed in the two decisions need not be
gone into as no such question arises in the present case. Reference to the said
decisions has been made because the learned judge in Seksaria Cotton Mills'
case [1967] 37 Comp. Cas. 656 (Bom) referred to the said decisions before
making the observation adverted to above. These decisions, however, also
highlight the fact that in both the decisions liability of a foreign company to
be wound up was assumed or accepted. Reference to them also shows that the
question of coverage of section 391 or of interpretation of section 390(a) was
not in the focus of the court's attention in Seksaria Cotton Mills' case [1967]
37 Comp. Cas. 656 (Bom).
There cannot be any dispute that the provisions
of sections relating to compromises, arrangements or the schemes as they are
popularly called are an alternative mode to the winding up of the companies.
But from this it does not follow that section 391 applies only to "a
normally functioning company". Reported judgments show that a
"normally functioning company", that is to say, a company which is
commercially solvent or is otherwise viable or functioning normally can also be
wound up by and under the directions of a court. These reported judgments need
not be analysed for the simple reason that section 433 of the Companies Act,
1956, enumerates the circumstances in which a company can be wound up by a
court. The circumstances enumerated in the said section show—
that an affluent or normally functioning
company can also be wound up if it resolves that it may be wound up by a court:
clause (a) ;
or if it commits defaults in delivering the
statutory report to the Registrar or in holding statutory meetings: clause (b)
; or if the number of members of such company, if it is a public company goes
below 7 or if it is a private company, goes below 2 : clause (d) ;
or if it is a company wherein, having regard to
the deadlock in the management or lack of probity in management or on analogous
grounds, the court comes to the conclusion that it is just and equitable that
the company should be wound-up : clause (f).
These provisions clearly establish that "a
normally functioning company or a profit making company" also come within
the purview of winding up by the court or the provisions of Part VII of the Companies
Act, 1956. These provisions support the view that the expression "liable
to be wound-up" occurring in clause (a) of section 390 connotes companies
to which the winding-up provisions of the Companies Act, 1956, apply.
The opinion expressed above with regard to the
connotation of the expression "liable to be wound up" also follows
from the plain meaning of the word "liable". Etymologically the word
means "exposed to a possibility or risk ". The word
"liable" as held in Saunders v. Newbold [1905] 1 Ch. 260 (CA) does
not necessarily connote an existing liability. (C.F. Stroud's Judicial
Dictionary, 4th edition, volume 3, page 1513). The term is not restricted to
mean liable in point of fact. In the legal context, it means responsibility at
law (see Littlewood v. George Wimpey & Co. Ltd. [1953] 2 QB 501 (CA)). The
word "liable", therefore, predicates a further possibility or
probability which may or may not actually occur. It is this sense which is
normally conveyed when it is said that a person who commits breach of contract
is liable to pay damages or that a person who commits an offence is liable to
penal consequences provided in respect thereof. I am of opinion that the word
"liable" when used in statutes merely shows coverage of the statute.
In other words, it postulates facts being given particular statutory provision
will apply. Seen in this context, the conclusion is irresistible that the
expression "liable to be wound up" would only mean that on factual
ingredients being satisfied a particular company would come within the coverage
of winding-up provisions and would be liable to be wound up. In other words, if
a company is within the reach of the provisions of the Companies Act, 1956,
pertaining to winding up, such a company must be held to be a company
"liable to be wound up under this Act". Such a company would,
therefore, be entitled to invoke the provisions of section 391 of the Companies
Act. I reject the submission of the learned counsel for the dissentient
shareholders that the petitioners are not entitled to have their scheme
sanctioned by reason of the fact that the transferee company is not in
embarrassed circumstances.
The contention that the company did not make
proper disclosure in accordance with the provisions of section 173 or in any event
section 393(1)(a) of the Companies Act, 1956, is without any substance. The
grievance of the dissentient shareholders is that in the statements
accompanying the notices calling the meetings of the members of the companies
for the consideration of the scheme, there was a deliberate omission of fact
that some of the directors were common to both the companies or of the factum
of the report of the chartered accountants or the revaluation report or of
particulars relating thereof. This deliberate omission, according to the
dissentient shareholders, is in breach of the mandatory provisions of
sub-section (2) of section 173 or in any event clause (a) of sub-section (1) of
section 393 of the Companies Act, 1956.
Section 173 occurs in Chapter I, Part IV, of
the Companies Act, 1956. It is amongst a congery of sections dealing with
"meetings and proceedings". Section 165 in the said group deals with
statutory meeting and statutory report of a company. Section 166 deals with
annual general meeting of a company. Section 167 confers powers upon the
Central Government to call an annual general meeting of a company. Section 199
provides for convening of an extraordinary general meeting of a company on
requisition. Sections 171 and 172 deal with procedure in regard to the notices
or contents thereof or the manner of service thereof in regard to the meetings
of a company. By mandate of section 170, provisions of sections 171 to 186
displace all provisions contained in the articles of association of a company
or other instruments as are contrary to or inconsistent with the provisions of
the said sections 171 to 186. It must, therefore, be seen that the focus of the
said catena of sections is on the convening of or the calling of the meetings
of a company. Clause (a) of sub-section (1) of section 173 deals with an annual
general meeting of a company. It enumerates as to what business shall be deemed
to be transacted at the annual general meeting and ordains that all other
business shall be deemed to be special. The provisions of this clause are not
relevant for present purposes. Clause (b) of sub-section (1) of section 173
provides for meetings other than the annual general meeting. Clause (b) takes
its colour from clause (a) and must be deemed as referring to the "other meetings"
of a company. Sub-section (2) of section 173 ordains that there shall be a
statement annexed to the notice convening a meeting "setting out all
material facts concerning each such item of business, including in particular
the nature of the concern or interest, if any, therein of every director, the
managing agent, if any".
The provisions of section 173, as indeed all
other provisions referred to above, are general provisions pertaining to the
meetings of a company, whether an annual general meeting or an extraordinary
general meeting. As against the said provisions, clause (a) of sub-section (1)
of section 393 deals with "a meeting of creditors or any class of
creditors or members or any class of members called under section 391".
The provisions of section 393 take their colour from section 391 which
contemplates convening of the meeting under the directions of a court, "of
creditors or class of creditors or of members or class of members, as the case
may be". Sections 391 and 393 are a code complete in themselves in respect
of provisions or procedure relating to sponsoring of the scheme, the approval
thereof by the creditors or the members, as the case may be, and the sanction
thereof by the court. A combined reading of sections 391 and 393 and its comparison
with the provisions of section 173 shows that the former section deals with a
specific situation to the exclusion of the general provisions made by section
173. Furthermore, section 173 postulates a meeting of a company whereas
sections 391 and 393 contemplate convening of a meeting of members or a class
of members. It is true that any meeting of a company is factually also a
meeting of the members of that company but the thrust of the two sets of
sections clearly establishes a different legal identity of such meetings. This
distinction is also borne out when the language of section 391, is contrasted
with the language of section 186 of the Companies Act, 1956. Both the sections
confer power on the court (section 156 prior to its amendment by the Act 41 of
1974) to convene meetings. Sub-section (1) of section 186 in terms refers to a
"meeting of a company". Section 391 refers to a "meeting of
creditors or class of creditors or members or class of members". There is
deliberate omission of the words "of a company" in section 391. This
omission postulates that different fields and situations are contemplated. The
legislative intent appears to provide by sections 391 and 393 for meetings of
the creditors or the members or classes thereof as contradistinguished from the
meetings of the company. This understanding is further buttressed by the fact
that the chairman of the company does not preside over the meetings of the
members convened under the provisions of section 391. In my opinion, having
regard to the principle that specific excludes the general, it must be held
that when a specific mode is provided by sections 391 and 393 the said mode
displaces the general mode relating to the meetings provided by the catena of
sections falling within the group "meetings and proceedings" in
Chapter I of Part VI of the Companies Act, 1956.
Shri Zaiwala submits that the contention as to
the applicability of sub-section (2) of section 173 to the meetings of the
members convened under the provisions of section 391 is fortified by a judgment
of the Calcutta High Court in the matter of Carron Tea Co. Ltd. [1966] 2 Comp
LJ 278 (Cal). I am afraid this is a wrong reading of the said judgment. The
contention on behalf of the dissentient shareholders in that case was raised by
their counsel, Shri Sen. The contra-argument was made by Shri Ghosh, the
learned counsel appearing for the company in that matter. The argument of the
learned counsel for the company was noticed by the learned judge at page 297.
The argument was to the effect :
"In the case of a meeting held under
section 391, there need not be any explanatory statement under section 173 but
it is sufficient if there is a statement in terms of section 393".
The learned judge dealt with the said argument
and upon the analysis of the provisions of Chapter V came to the following
conclusions at page 298 :
"Hence, section 173 and section 391 lie in
different fields. Consequently, the application of section 173 is excluded to
meetings under section 391.
Section 173 regulates meeting of the companies.
Section 391 does not. Hence, section 173 is applicable (sic : inapplicable).
Section 173 is a general rule for all meetings
subject to certain exceptions. Section 391 is a special provision for one class
of meeting. Hence, section 173 is inapplicable".
The learned judge in that case in terms made a
finding at page 299 to the following effect :
"Hence, in my opinion, the submission made
by Mr. Ghosh is sound and is acceptable to me".
In my opinion, the judgment of the Calcutta
High Court buttresses the view taken above rather than supports the submissions
made on behalf of the dissentient shareholders before me.
There is no warrant for the contention that the
statement annexed to the notice convening the meetings of the members did not comply
with the requirements of clause (a) of sub-section (1) of section 393. The said
clause requires that the statement contemplated thereby should, (i) set out the
terms of the compromise or arrangement, (ii) explain the effect of the terms of
such compromise or arrangement, (iii) in particular state the material
interests of the directors, managing director or manager of the company, and
(iv) effects on those interests of the compromise or arrangement, if any, and
in so far as it is different from the effect on the like interests of other
persons. These ingredients are culled out by me from the express language of
the said clause (a) of sub-section (1) of section 393. Unlike sub-section (2)
of section 173, clause (a) of sub-section (1) of section 393 does not require
disclosure of all material facts. The clause required disclosure of the facts
enumerated therein. It is not disputed before me that the statement
accompanying the notice convening meetings of the members in the present case
did disclose the terms of the compromise or the effects of the said terms. The
argument, however, is that in so far as it was not disclosed that there were
common directors on the boards of the two companies, there was a non-disclosure
within the meaning of 4th limb of clause (a) of sub-section (1) of section 393
mentioned above. This, in my opinion, is a misconception. The disclosure
contemplated by the said limb relates only to the effect on the interests of
the directors, etc., of the scheme in so far as such effect is different from
the effect on the like interest of the other persons. I am unable to appreciate
as to what effect can there be of the scheme on the common directors of the two
companies or much more how would such effect be different from the effect on
the like interest of other persons, assuming without deciding that interests of
directors are to be disclosed. Even so, there would be no breach of the
provisions. Interest of directors is an expression which has well-defined
connotation. The term "interest" relates to the interest which is
peculiar to each of the directors and does not refer to the factum of knowledge
of a director in regard to the status of every other director or his being
concerned as a director of any other company. Nothing has been shown to me in
support of such a contention. I do not find any authority or justification for
taking such a view.
The grievance that the revaluation report of
Itadals or of the chartered accountant not being disclosed in breach of the
provisions of clause (a) of sub-section (1) of section 393 is equally
untenable. All that the said clause requires is the disclosure as to the terms
of the compromise or the explanation as to the effects thereof on the interest
of the directors, etc. Unlike sub-section (2) of section 173 the said clause
does not ordain disclosure of all material facts. Clause (a) not only
enumerates the categories of particulars but it deliberately makes a departure
by omitting any reference to material facts. The legislature having used a
different phraseology in the said two provisions it must be held that the
legislative intent under section 393 was not to provide for disclosure of all
material facts. That being the position, without expressing any opinion as to
whether the disclosure of facts as to or the contents of the report of Itadals
was or was not necessary or was in point of fact made or not made. I am of
opinion that even if no such disclosure was made, such a non-disclosure will
not come within the mischief of clause (a) of sub-section (1) of section 393.
I, therefore, reject the contention of the learned counsel for the dissentient
shareholders that there was a breach of the provisions of clause (a) of
sub-section (1) of section 393 vitiating the resolution approved by the
majority of members at their meeting.
The last contention of the dissentient
shareholders is also without substance. The contention has two limbs : (i) that
on the facts of the case there was no justification for revaluation of' the
assets of the transferee-company ; and (ii) that the approach of the
valuers—Itadals—was erroneous in point of law and invalidated the sanctioning
of the scheme which took into account the said revaluation for the purposes of
fixing the ratio between the members of the two companies. As to the first, I
find sufficient justification in the contention on behalf of the companies that
the revaluation of the plant and machinery and the other assets of the
transferee-company which was founded in the year 1919 was required to be done
so as to reflect correctly the true worth of the assets and consequently the
true value of the shares of the transferee-company. I am also satisfied with
the explanation of the companies to the effect that no revaluation of the
assets of the plant and machinery of the transferee-company was necessary in
view of the fact that the transferor-company was incorporated in the year 1960
and that a valuation report of the various assets thereof was in point of fact
made in the year 1962.
The learned counsel for the dissentient shareholders
attacked the basis of the valuation or the approach adopted by the valuers on
the ground that the valuers fell in error in evaluating the lands which were
given on lease by the transferee-company to third parties. The grievance of the
learned counsel is that the properties which are already leased out cannot be
valued with reference to the market price prevailing in regard to such
properties. I am unable to understand the logic of such a contention. The
Itadals have merely valued the undeveloped land. The valuation of the
undeveloped land by them is based on the current value of the open land. No
grievance was made in regard to the rate mentioned in the said report. In my
opinion, it is permissible in law to evaluate the lands even though they may be
subject to the leasehold rights. Such evaluations are always done where
compensation is to be determined for properties which are acquired compulsorily
under statutory provisions. Law of compensation for acquisition of land
provides for valuation of such lands as also apportionment of compensation in
that behalf between the lessors and lessees. I do not see any reason why such a
principle could not be invoked by Itadals in the. matter of valuation of the
lands belonging to the transferee-company.
The other grievance that the principle of
valuation adopted for plant and machinery or the tools, jigs and fixtures (sic)
is also untenable. The Itadals divided the machineries in different categories
depending upon the years of their respective installation. After grouping the
plant and machinery in the said manner they adopted the basis of replacement
value thereof. I do not find any error in such an approach. Equally untenable,
in my opinion, is the grievance that the tools, jigs and fixtures have not been
evaluated on correct principles. I find that in valuing the said equipment the
Itadals excluded working tools or consumable items. They valued tools, jigs and
fixtures which were costly and of a durable tenure. The items of equipment
which have been valued are not merely tools or jigs but are, strictly speaking,
machinery such as mixer assembly, capacitors and other heavy equipments. In my
opinion, these equipments required to be valued. I have been shown nothing to
take a different view. I, therefore, reject the last contention raised on
behalf of the dissentient shareholders.
Shri Parikh, a shareholder in person argued on
the same lines as were adopted by the learned counsel, Shri Zaiwala. I reject
the said contention for the reasons for which I reject the contentions advanced
by Shri Zaiwala.
As to the arguments of Shri Varvaiyya, I did
not permit him to argue the matter on the narrow ground that the workers
employed by the companies, not being either the creditors of the companies or
members, had no locus standi in the proceedings under section 391.
No other grounds have been urged in opposing
the sanction of the scheme. I do not find the schemes unfair. Nor do I find any
legal or equitable bar in sanctioning the schemes. The schemes have been passed
by statutory majorities of the companies. The schemes appear to me to be good
and reasonably fair. In the facts and circumstances of the case, I have no
hesitation in according my sanction to the said scheme.
In the result, I make both the petitions, viz.,
Petitions Nos. 146 and 147 of 1975, absolute in terms of prayer (a) and (b)
thereof. I direct that the orders passed in the said petitions be communicated
by the petitioners to the Registrar of Companies within a period of 30 days
from the date of the sealing of the order. As to the costs of the petitions, I
make no order as to the costs save and except that the petitioners in both the
petitions do pay to the Regional Director, Company Law Board, the costs of the
said petitions fixed at Rs. 450 for each of the petitions.
[1973] 43 Comp. Cas. 17 (Bom.)
v.
Lalji B. Desai
S.B. BHASME, J.
First
Appeal No. 262 of 1971
July 26 and 27, 1971
F.S. Nariman for the appellants.
G.A. Thakkar with A.N. Mody,
D.H. Buck with G.K. Munshi for the respondent.
Bhasme, J.—This is an
appeal by defendants Nos. 2 and 3 and is directed against the judgment and
decree passed in the suit filed by respondents Nos. 1 and 2 against the
appellants and respondent No. 3. The suit was for a permanent injunction
restraining respondent No. 3 and its directors, servants and agents from
allowing the appellants to act as directors of the respondent No. 3-company. A
similar injunction was also claimed against the appellants restraining them
from acting in any manner as the directors of the respondent No. 3-company.
Respondent No. 3 is a
public limited company registered under the Indian Companies Act and carries on
business, inter alia, as manufacturer of rayon yarn and has its registered
office at Bombay. It is the plaintiffs’ case that on April 9, 1969, the board
of directors appointed the appellants as additional directors of respondent No.
3-company. The board of directors consisted at that time of 8 members excluding
those additionally appointed directors. The plaintiffs have referred to the 8
directors as functioning directors and that may be to distinguish them from the
appellants who are appointed additional directors. Thereafter notices dated
l0th April, 1969, were received by respondent No. 3-company proposing the
appellants as directors at the next annual general meeting. On June 11, 1969,
the 22nd annual general meeting of the respondent No. 3-company was convened.
At the general meeting two directors, Kasturbhai Lalbhai and Naval H. Tata,
retired by rotation and were again re-elected as directors. At the same meeting
by two separate resolutions, the appellants were appointed directors. The two
resolutions are referred to in the plaint as resolutions Nos. 5 and 6.
The plaintiffs by the suit
challenged the legality of the appointment of the appellants on certain
grounds. According to the plaintiffs the number of directors on the board can
be increased by the company under section 258 of the Indian Companies Act by passing
a resolution. No such resolution was ever duly notified, proposed and passed.
In the absence of any such resolution, respondent No. 3-company had not the
power to appoint the appellants as directors. The plaintiffs submit that
resolution Nos. 5 and 6 are, therefore, invalid, void and of no effect.
The plaintiffs also submit
that without prejudice to the aforesaid ground, the appointment of the
appellants as directors was illegal, void and of no effect as they had not
filed letters of consent under section 264(1) of the Act in respect of their
proposed appointment as directors at the annual general meeting. The
plaintiffs, as shareholders of respondent No. 3-company, have the right to
property in respondent No. 3-company. It is for this reason that they had filed
the suit restraining the appellants from acting as directors of respondent No.
3-company.
Respondent No. 3-company
filed its written statement and submitted that the appointment of the
appellants as directors was valid and legal. It has stated that a separate
resolution to increase the number of directors was not required under the
provisions of the law. The company also stated in paragraph 12(a) of the
written statement that on 9th April, 1969, the appellants had filed their
letters of consent to act as directors, if appointed. After receipt of these
letters the appellants were appointed as directors. It is mentioned in the
written statement that after their appointment as additional directors on 10th
April, 1969, two shareholders delivered to the company notices under section
257 of the Act intending to propose the appellants as candidates for the office
of the directors of respondent No. 3-company at the next annual general meeting
of the company. The appellants were not required to file any letters of consent
under section 264(1) of the Act before their election as directors at the 22nd
annual general meeting. According to the company the appellants were validly
proposed and elected as directors.
The appellants between
themselves filed one written statement and supported the validity of their
appointment on all the grounds alleged by respondent No. 3-company. In addition
the appellants stated that on their appointment as additional directors, the
strength of the board was increased to 10 directors. In paragraph 8 of the
written statement it is submitted that they were not required to file any
letters of consent under section 264(1) of the Act before their appointment as
directors at the meeting. Without prejudice to this defence it is also pleaded
that they did file the letters of consent on 9th April, 1969, with respondent
No. 3-company. They argued that, as additional directors, they were persons to
whom section 264(1) of the Act did not apply. Assuming that there was any such
requirement, it is asserted that it was a mere irregularity and that did not
disable them from acting or functioning as directors. The made it clear that it
was implicit in the two resolutions appointing them as directors that the
number of directors was, if necessary, being increased. According to them no
separate resolution under section 258 or article 169 of the articles of
association of the company was necessary for increasing the number of directors
from 8 to 10. At any rate, the absence of any separate resolution will not
affect the validity of the resolution appointing them as directors of
respondent No. 3-company. They denied that it is mandatory under section 258 of
the Companies Act or under article 169 of the articles of association of the
company that before the number of directors is increased, a resolution
increasing the number of directors ought to have been duly notified or proposed
or passed. There were other allegations made by the appellants against the
plaintiffs but for deciding the points raised in this appeal they are not at
all relevant. As the parties had not sought any issues on the basis of those
allegations, the learned judge was not called upon to consider whether they
were true or false. The substance of those allegations was that according to the
appellants the plaintiffs had filed the suit mala fide at a late stage at the
instance of one Rasiklal J. Chinai who was defeated in the contest for election
of directors at the general meeting of the shareholders of respondent No.
3-company.
At the trial the learned
judge framed the relevant issues. Parties did not lead any oral evidence. By
consent of the parties only documents were exhibited. The defendants had also
resisted the suit on the ground that the plaintiffs being shareholders cannot
have any grievance against respondent No. 3-company as the matter in dispute
was concerning the internal management of the company and the suit by the two
shareholders was not maintainable. Perhaps it was felt by the parties that the
issues arising in the suit are purely questions of law and it was not necessary
to adduce any oral evidence.
The learned judge, on a
consideration of the evidence on record and the submissions of the parties, has
recorded his findings. He held that the present suit is maintainable. He came
to the conclusion that the letters of consent under section 264(1) of the Act
for the appointment of the appellants as directors at the annual general
meeting were not necessary. In view of this finding he held that whether or not
such letters were filed need not be considered. According to him the impugned
resolutions Nos. 5 and 6 passed at the annual general meeting of the company on
June 11, 1969, appointing the appellants as directors of the company were
illegal. Consistent with this finding the learned judge decreed the plaintiff’s
suit and granted the injunctions against respondent No. 3-company and the
appellants.
As stated above the
appellants, aggrieved by the decree, have come to this court with the present
appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody,
instructed by M/s. Haridas & Co., appears for respondents Nos. 1 and 2, the
original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi, instructed by M/s.
Bhaishankar Kanga and Girdharilal,
appears for respondent No. 3-company. It must be stated at the outset that
respondents Nos. 1 and 2 have purported to file cross-objections against the
finding recorded by the learned judge about the consent letters under section
264(1) of the Act. Mr. Thakkar conceded that the cross-objections are
misconceived but mentioned that he had the right, as an advocate appearing for
the respondents, to assail the decree under appeal on any of the grounds
decided against him. Therefore, the points for determination in this appeal
are:
(1) Whether the board of directors of
the company before and after the annual’ general meeting consisted of ten
members or whether at the annual general meeting the strength of the board of
directors was increased from 8 to 10.
(2) Whether the company can increase the
strength of the board of directors only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts.
(3) Has the board of directors
contravened the mandatory provisions of section 173 of the Act by not
furnishing any information about the proposed special business or by furnishing
information, which is hopelessly inadequate or misleading?
(4) Can the plaintiffs rely on the above
contraventions in any form without specific averments in the plaint?
(5) Has the learned judge erred in
holding that the additional directors, like the retiring directors, are not
required to file written consent duly signed before their reappointment as
directors by the company?
(6) Is the suit not competent as the
alleged irregularities arise in the course of the internal management of the
company?
Before
I proceed to consider the various points urged before me, it is desirable to
refer to the relevant provisions of the Companies Act, 1956, and the articles
of association of respondent No. 3-company.
Section
2(13) of the Companies Act defines “director” as any person occupying the
position of director, by whatever name called. Section 255 provides for the appointment
of directors and the proportion of those who are to retire by rotation. Section
256 contains provisions for ascertainment of directors retiring by rotation and
filling up of the vacancies. Under section 257 a person who is not a retiring
director shall be eligible for appointment to the office of director 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. The other provisions
of section 257 are not quite relevant and need not be referred to here.
Under section 358 of the
Act, subject to the provisions of sections 252 255 and 259, a company in
general meeting may, by ordinary resolution, increase or reduce the number of
its directors within the limits fixed in that behalf by its articles. Section
259 in certain cases requires the sanction or approval of the Central
Government for any increase in the number of its directors. Section 260
provides that the board of directors, if permitted by the articles of
association, can appoint additional directors. The board is to exercise that
power so as not to exceed the maximum strength fixed for the board by the
articles. The first proviso to section 260 makes it clear that such additional
directors shall hold office only up to the date of the next annual general
meeting of the company. Section 262 deals with the filling of casual vacancies
amongst directors. Under section 263(1) ordinarily there will be only one
resolution for the appointment of one director at the annual general meeting of
the company. A single resolution is permitted under certain special circumstances
for appointing more than one director. Section 263(2) provides that a
resolution moved in contravention of sub-section (1) shall be void, whether or
not objection was taken at the time to its being so moved. Section 264(1) under
certain circumstances requires that the candidate for directorship should file
his written consent with the company before his appointment as director at the
meeting. Section 264(2) requires that a person appointed as a director shall
not act as a director unless he has within the prescribed time signed and filed
his consent with the Registrar to act as such director.
Apart from the group of
these sections, there are two more sections, which assume importance while
deciding the points, which arise in this appeal. Section 172 requires that
every notice of a meeting of a company shall contain certain relevant
particulars. Leaving the other details, I must only mention that under section
172(1) such notice shall contain a statement of business to be transacted at
the meeting. Under section 173(1)(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of the business relating to four specified items. Item No 3 deals
with the appointment of directors in the place of those retiring. Section 173
(1)(b) makes it clear that in the case of any other meeting, all business shall
be deemed special. Section 173(2) contains a direction that where any items of
business to be transacted at the meeting are deemed to be special under
sub-section (1), there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each such item of business,
including in particular the nature of the concern or interest, if any, therein
of every director, the managing agent, if any, the secretaries and treasurers,
if any, and the manager, if any. The proviso also requires further and better
particulars in specified cases. It is not necessary to refer to that proviso at
any length.
Now it remains
to mention the relevant articles of association of the company. Under article
142, the directors have power at any time and from time to time to appoint any
other qualified person to be a director as an addition to the board so that the
total number of directors at any time shall not exceed the maximum fixed. Any
person so appointed as an addition to the board shall retain his office only up
to the date of the next annual general meeting but shall be eligible for
re-election at such meeting. Under article 164, at every annual general meeting
of the company, one-third of such of the directors for the time being as are
liable to retire by rotation or, if their number is not three or a multiple of
three, the number nearest to one-third shall retire from office. Article 166
makes it clear that a retiring director shall be eligible for re-election. It
is true that counsel on either side did refer to other sections and articles to
elucidate the various points raised by them. I need not consider them all at
this stage.
The
first point made by Mr. Nariman on behalf of the appellants is about the
strength of the board of directors of the company. He objected to the
expression “functioning directors” and “additional directors” as used by the
plaintiffs in the plaint. He said that there is no warrant for any such
distinction. Whether the directors are appointed at the meeting or by the board
of directors, they all together constitute the board. The directors in that
capacity have the same rights, privileges and obligations under the provisions
of the Act. He referred to the definition of “director” as contained in section
2(13) of the Companies Act. In all other places in the Act the board of
directors was mentioned as such and he says that the distinction sought to be
made by the plaintiffs is without any legal significance. It appears to me that
the plaintiffs have used the different expressions only for a better
understanding of their case. The appellants were, in the first instance,
appointed as additional directors and later on they were reappointed as
directors. But, apart from this fine distinction in phraseology, the point of
substance made by Mr. Nariman is that the company had not increased the number
of directors from 8 to 10 at the annual general meeting by the reappointment of
the appellants. When the board of directors in exercise of their power under
section 260 of the Act co-opted the appellants, the number of directors on the
board was increased from 8 to 10. Even at the meeting the number was not
reduced. The two directors retired by rotation and the two additional directors
ceased to hold office. There were, therefore, four clear vacancies. When the
company passed four resolutions reappointing the four persons as directors
there was no increase and the provisions of section 258 are not attracted. I
find it very difficult to accept this submission. The composition of the board
of directors with additional directors will not be the same as the board of directors appointed by the company at the general meeting.
It cannot be said that the company had at any time surrendered its inherent or
statutory power to increase the number of directors on the board when the board
appointed or co-opted additional directors. As observed by Lord Hanworth M.R.
in Worcester Corsetry Limited v. Witting, the power conferred on the directors to appoint
additional directors is a temporary power vested in them, and this is to be
reviewed and perhaps confirmed at the general meeting. Even the wording of
section 260 underlines the temporary nature of this power conferred on the
board of directors. Section 260, first proviso, makes it clear that such
directors shall hold office only up to the date of the next annual general
meeting. It is true that under article 142 of the company, the board of
directors can appoint any number of additional directors at any time and from
time to time so as not to exceed the permitted maximum limit. Consistent with
the first proviso to section 260, the article also makes it clear that the
person so appointed as an addition to the board shall remain in office only up
to the date of the next annual general meeting. I am of the view that the board
of directors cannot by the appointment of additional directors increase the
strength of the board so as to affect the power of the company vested in it
under section 258 of the Act.
Then Mr. Nariman argued
that the learned judge was not justified in holding that the company can
increase the strength of the board only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts. I have not used the exact words of the learned judge but in
substance that appears to be the finding recorded by him. According to Mr.
Nariman all that section 258 requires is that the company, subject to the other
restrictions imposed on it, must resolve to increase or reduce the number of
directors in the general meeting. The section itself has not prescribed any other
formality for effecting the increase or decrease in the number of directors.
Mr. Nariman points out that under the Companies Act, wherever separate
resolutions were found necessary, provisions were made in that behalf. He
referred to section 263 of the Act. I have already mentioned above the
substance of that section. Ordinarily, there will be a separate resolution for
appointing a person as a director at the annual general meeting of the company.
Mr. Nariman says that the company can exercise the power vested in it under
section 258 by passing one or more resolutions and as no form is prescribed,
one will have to look at the substance. When there are 8 members on the board
of directors, the company can by simply appointing two members in addition increase
the number and this can be done without passing a separate resolution. He says
that it is implicit in the act of appointing. The company has exercised the
power to increase the number.
While dealing with this
power of the company to increase the number, Mr. Nariman referred to the
corresponding English law and submitted that the provisions are substantially
similar. Mr. Nariman relied on an English case, Worcester Corsetry v. Witting. The learned judges were considering the effect of two
apparently inconsistent articles of the company. But, as the case also dealt
with the power of the company to appoint directors and thereby increase the
number, it has some relevance while appreciating the point raised before me.
Article 83 of Table A contained the provisions similar to section 258 of the
Indian Companies Act. At page 649, Lawrence L.J. observes as follows about the
existence of the power to increase and its exercise by the company:
“Article 83 of Table A
shows in the plainest terms that the company has power to increase or reduce
the number of its board. It is said that that does not involve the nomination
and appointment of particular gentlemen or ladies as directors, but it seems to
me that that is necessarily implied in the provision of article 83. If, for
instance, there have been four directors, within the maximum number of
directors, and the board desire that two additional directors shall be
appointed, it can convene, in my judgment, a meeting under article 83 for the
purpose of increasing the number of directors by two named persons, appointing
these two persons, and thereby increasing the number of directors”.
Slesser L.J., at page 654,
approves the above observations and says:
“The more natural view of
article 83 is that it is not redundant or merely introducing unnecessary
machinery which is already provided by article 12 in dealing with the maximum
and minimum, but, as Lawrence L.J. has indicated, is itself conferring a power
not only to increase the number but to increase that number by itself
appointing directors to the extent to which it is intended to increase the
number”.
About the power of the
company to increase the number of directors under its articles of association,
the learned author in his book Pennington’s Company Law, 2nd edition, pages
456-57, sums up the legal position as under:
“The power to appoint
subsequent directors is usually exercisable by the members of the company in
general meeting by ordinary resolution. If the articles prescribe the maximum
number of directors who may be appointed, appointments in excess of the maximum
are void. Usually, however, the members are empowered to increase or reduce the
maximum number of directors by ordinary resolution, and then an appointment of
a director in excess
of the former maximum is taken to be an exercise of the power to increase the
number of directors, and is valid”.
While
making the last-mentioned observation, the learned author in the footnote has
referred to the above-mentioned case. So Mr. Nariman argued that section 258
was an enabling section, which authorised the company to increase or decrease
the number of directors just by an ordinary resolution. As singular includes
plural, one has to look at the result and not the number of resolutions to find
out whether the company has exercised the power vested in it.
Mr.
Thakkar, with equal force, stressed the word “resolution” and said that it was
a condition precedent to the valid appointment of directors resulting in the
increase of the number of directors. Any other construction, he says, will
render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish
the said decision on certain grounds. He says that article 83 construed by the
learned judges refers to a general meeting. Section 258 of the Companies Act
provides that the company may in general meeting by ordinary resolution
increase or reduce the number of its directors. In my opinion this distinction
is not one of substance. Any such difference in the wording will not affect in
any manner the efficacy of the observations made by the learned judges in the
above-mentioned case.
Then
Mr. Thakkar was at pains to point out that no such point was ever raised and
debated in that case. The observations of the judges quoted above are merely
obiter dicta. Mr. Thakkar says that the judges were reconciling the two
apparently conflicting articles which conferred the power of appointing
directors on the board of directors and the company. He referred to several
text books on Company Law, viz., Pennington’s Company Law, 2nd edition, page
456-57, Modern Company Law by C.B. Gower, 3rd edition, page 21, Palmer’s
Company Law, page 533, Halsbury’s Laws of England, volume 6, page 279, article
574, Buckley on the Companies Act, 13th edition, page 885, and submitted
that the above-mentioned authority was quoted by the learned authors to show
that the company had not surrendered its power to appoint directors in favour
of the board of directors. But, the decision is not cited by Mr. Nariman as a
binding authority on this court. Mr. Nariman relies only on the wording of the
article considered by the judges, which resembles the wording of section 258.
Under both the provisions the company has the power to increase the number of
directors. When the company at its meeting resolves to appoint additional
directors in excess of the present strength of the board, then it is an
instance where the company is exercising its two-fold powers. The company
increases the number not by separate resolution but by appointing additional
directors. The effect is that the company has increased the number of
directors. That appears to be a sensible construction which can be adopted
while interpreting the relevant provisions contained in section 258 of the
Companies Act, 1956. In the result, in my opinion, it is not necessary for the
company to pass a separate resolution increasing the number of directors before
appointing the directors to fill the additional sanctioned posts. In law it is
possible for the company to comply with the provisions of section 258 when it
chooses to appoint within the permitted limit additional directors so as to
increase the strength of its present board. The learned judge was in error in
coming to the conclusion that in the absence of a separate resolution the
appointment of the appellants as directors of respondent No. 3-compauy was null
and void. The legality of the resolutions Nos. 5 and 6 cannot be challenged on
the ground that there was any contravention of the provisions of section 258 of
the Act.
Then
I propose to consider points Nos. 3 and 4 together as the discussion of law is
likely to be overlapping. Point No. 3 will involve the consideration of the
provisions of sections 172 and 173 of the Act and point No. 4 is about the
sufficiency or otherwise of the pleadings.
I
have already set out above the relevant provisions of section 173 of the Act.
Section 173 will have to be read with section 172(1) of the Act. Under section
172(1) every notice of a meeting of a company, among other things, must contain
a statement of the business to be transacted at the meeting. Section 173(1)
contains classification of the business and indicates when the business shall
be treated as special. Under section 173(2) any items of special business
mentioned in the notice must be accompanied by a statement setting out all
material facts concerning such items of business.
Mr.
Nariman for the appellants drew my attention to the notice of the meeting,
which is produced at exhibit D at page 90 of the paper book. It is worth while
to reproduce the material items of business:
Serial
No. 3
To
elect a director in the place of Shri Kasturbhai Lalbhai who retires by
rotation under article 164 of the articles of association of the. company, but
being eligible, offers himself for re-election.
Serial
No. 4
To
elect a director in the place of Shri Naval H. Tata, who retires by rotation
under article 164 of the articles of association of the company, but being
eligible, offers himself for re-election.
Serial
No. 7
To
appoint a director in place of Shri Laljibhai Chhaganlal Kapadia, who was
appointed an additional director of the company by the board of directors on
10th April, 1969, and who ceases to hold office under section 260 of the
Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act,
1956, has been received by the company.
Serial
No. 8
To appoint a director in
place of Shri Nimjibhai Chhanganlal Kapadia who was appointed an additional
director of the company by the board of directors on 10th April, 1969, and who
ceases to hold office under section 260 of the Companies Act, 1956, on the date
of this meeting in respect of whom a notice as required by section 257 of the
Companies Act, 1956, has been received by the company.
Items Nos. 3 and 4
constitute ordinary business and Items Nos. 7 and 8 constitute special business
within the meaning of section 173 of the Act, Being special business Items Nos.
7 and 8 are followed up by explanatory statements contained in an annexure to
the notice. Explanatory statement accompanying Item No. 7 read as under:
“Shri Laljibhai Chhaganlal
Kapadia was appointed an additional director on 10th April, 1969, by the board
of directors of the company and he retains his office as a director only up to
the date of this annual general meeting under the provisions of section 260 of
the Companies Act, 1956. As required by section 257 of the Companies Act, 1956,
a notice has been received from a member signifying his intention to propose
his appointment as a director. It is recommended that he be appointed as a
director”.
Explanatory statement
accompanying Item No. 8 is identical with the difference that it is in respect of
the other additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on
the contents of the notice in general and the explanatory notes in particular,
Mr. Nariman submits that there is compliance with the requirement of section
173 of the Act. Mr. Nariman points out that under article 164 of the articles
of association of the company, at every annual general meeting of the company,
one-third of such of the directors for the time being as are liable to retire
by rotation or if their number is not three or a multiple of three, the number
nearest to one-third are to retire from office. The strength of the board was 8
and obviously the number of directors retiring by rotation will be two. Items
Nos. 3 and 4 in the notice in unmistakable terms give an indication of this
factual and legal position. As these items of business were not special there
was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8
constituted special business. The contents of these items conveyed to the body
of shareholders sufficient information about the proposal to fill up additional
posts. The two persons had acted as additional directors and they ceased to
hold office under section 260 of the Act on the day of the meeting. It is
stated that the company had received proposals about their appointment under
section 257 of the Act. It is implicit in this statement that the board wants
the company to consider the appointment of directors for two additional posts.
The explanatory statement contains one important additional particular. The
board of directors has made a recommendation that the two persons who have
acted as additional directors be appointed directors at the meeting, According
to Mr. Nariman the board has complied with the provisions of section 173 of the
Act.
Then Mr. Nariman argued
that in the present state of pleadings, it was not open to the plaintiffs to
raise any objections about the non-compliance with the requirement of section
173 of the Act. He says that the plaint nowhere refers to section 173 of the
Act. A fair reading of the plaint would show that the main grievance of the
plaintiffs was that no resolution was proposed or passed under section 258 of
the Companies Act read with article 169 of the articles of association of the
company about increasing the strength of the board of directors. According to
the plaintiffs the two resolutions appointing the appellants as directors are
not valid as they in effect increased the number of directors from 8 to 10
without an appropriate resolution being passed as required by section 258 of
the Act. This is the only grievance of the plaintiffs about the non-compliance
with the condition in section 258 of the Act. Mr. Nariman says that in view of
this specific case made out by the plaintiffs, there was no occasion for the
defendants to meet any other case about the illegality resulting from the
non-compliance with the provisions of section 173 of the Act. Mr. Nariman in
this connection heavily leaned upon a decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti
Prasad jain. The learned
judges of the Division Bench of that
High Court had to tackle a similar point about the sufficiency or otherwise of the
pleadings. While dealing with the issue No. 4(a) in that proceeding Misra J.,
at page 202, in paragraph 17, observed as follows:
“The notice is challenged
as fraudulent and contrary to the statute. None of the grounds have been
pleaded. For the first time this contention appears to have been advanced in
course of argument before Mr. Justice Barman. In none of the affidavits the
petitioner swears that the notice was tricky, misleading or insufficient. The
question is one of mixed question of fact and law, and it is not permissible to
be taken at the stage of hearing for the first time”.
The learned judge certainly
refers later on to section 172(1) and section 173(2) of the Act. At page 214,
paragraph 58, Das J. observed as follows:
“At the outset, I must say
that the plea of invalidity of the notice was not taken either in the plaint
which was filed in the court of the subordinate judge or in the petitions and
affidavits before the honourable company judge of this court. At a fairly late
stage of the case, oral submissions were made challenging the validity of the
notice for the extraordinary general meeting of 29-3-1958. On that ground
alone, the point could have been left out of consideration”.
However, it must be stated
that the learned judges, despite the insufficiency of the pleadings, considered
the merits of the case, and held that the notice was in compliance with the
statutory requirements of section 173 of the Companies Act, as the meeting held
on the basis of such notice and the resolutions passed therein were not in any
way invalid. Mr. Nariman says that this authority has acquired additional
sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain
v. Kalinga Tubes Ltd. Wanchoo J., at page 1545, paragraph 24, has observed as
follows:
“It is, however, urged that
the notice for the general meeting of the 29th March, 1958, was not in
accordance with section 173, and so the proceedings of the meeting must be held
to be bad. This objection was, however, not taken in the petition and we have,
therefore, not permitted the appellant to raise it before us, as it is a mixed
question of fact and law. We may add that, though the objection was not taken
in the petition, it seems to have been urged before the appeal court. Das J.
has dealt with it at length and we would have agreed with him if we had
permitted the question to be raised”.
Relying on these decisions
Mr. Nariman maintained that the resolutions cannot be challenged on the ground
that the notice of the meeting and the explanatory statements accompanying the
notice were defective in any manner.
Mr. Nariman also submitted
that the provisions of section 173 were directory and not mandatory. Strict
compliance with section 173 was not necessary and there was in the present case
substantial compliance with the provisions of that section. It is for this
reason that, according to Mr. Nariman, any defect in the notice is capable of
being waived by the shareholders as the company had unanimously appointed the
appellants at the annual general meeting. If there were any averments in the
plaint setting out the various defects and irregularities in the drafting of
the notice and the explanatory statements, then it was open to the defendants
to adduce evidence and satisfy the court that the plaintiffs by their conduct
were stopped from objecting to the legality of the resolutions. As an instance
of the so-called irregularity, Mr. Nariman referred to In re Express
Engineering Works Ltd. It was a case where the legality of the company’s meeting
was challenged on the ground that it was styled a directors’ meeting and
business was transacted as if it was a general meeting. The issue of debentures
at the meeting W.I.P challenged
as not valid. Younger L.J. agreed with Lord Sterndale M.R., who held that the
shareholders must be deemed to have acted in the meeting as shareholders and
not as directors. What is stated by Younger L.J. at page 471 is to the
following effect:
“I am of the same opinion.
I am content to rest my conclusion upon what was said by Lord Davey in
Solomon’s case that a company is bound in a matter which is intra vires
by the unanimous agreement of all the corporators”.
But, this decision is not
of any assistance to us. A syndicate of five persons formed a private company.
They were all the directors and also shareholders. They all attended the
meeting and transacted business. The objection to the legality of the meeting
was rightly overruled.
Mr. Nariman then dwelt on
the case, In re Oxted Motor Company Ltd The court held that it was not open to a creditor to
impeach the validity of a resolution to wind up the company as it was competent
to 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. Even this
decision will not carry us any further as in the present case everything turns
upon the interpretation of the words of section 173 of the Companies Act.
Then Mr. Thakkar for the
respondents submitted that section 173 was in terms mandatory and not
directory. He strongly relies upon a decision of the Gujarat High Court in
Sheth Mohanlal Ganpairam v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. Mr. Thakkar pinpoints the following observations of
Bhagwati J. (as he then was), at page 338:
“The object of enacting
section 173 is to secure that all facts which have a bearing on the question on
which the shareholders have to form their judgment are brought to the notice of
the shareholders so that the shareholders can exercise an intelligent judgment.
The provision is enacted in the interests of the shareholders so that the material
facts concerning the item of business to be transacted at the meeting are
before the share holders and they also know what is the nature of the concern
or interest of the management in such item of business, the idea being that the
share holders may not be duped by the management and may not be persuaded to
act in the manner desired by the management unless they have formed their own
judgment on the question after being placed in full possession of all material
facts and apprised of the interest of the management in any particular action
being taken. Having regard to the whole purpose and scope of the provision
enacted in section 173, I am of the opinion that it is mandatory and not
directory and that any disobedience of its requirements must lead to the
nullification of the action taken”.
Mr. Thakkar reinforced his
argument by reference to a Calcutta decision in which it was held that it was incumbent on the
directors to disclose in the notice of the general meeting full facts. Before I
refer to the relevant observations of the learned judges, it is necessary to
know in brief the facts of that case. Section 294(2) of the Companies Act (as
amended by Act 65 of 1960) provides that the appointment of a sole selling
agent by the board of directors shall cease to be valid if it is not approved
by the company in the first general meeting held after the date on which the
appointment is made. The court held that the provision was not directory but
mandatory. The mere substantial compliance was not enough but there must be a
strict compliance. The impugned agreement about the appointment was referred to
in the report of the directors and the same was adopted in the subsequent
adjourned annual general meeting. But the adoption or approval of the report
was treated as ordinary business and not as a special business. In the
circumstances, the learned judges allowed the appeal and granted ad-interim
injunction against the company and the directors restraining them from getting
passed the resolution in the ensuing annual general meeting of the company. At
page 124 of the report (Shalagram Jhajharia v. National Co. Ltd.) Bose C.J. has made the
following observations after quoting section
173(2) and (3) of the Act:
“So it appears that under
section 173(2) an explanatory note with regard to the special items of business
has to be annexed to the notice of the meeting; but this was not done with
regard to the agreement dated the 27th January, 1962. Therefore, there was no
compliance with the requirements of the statute inasmuch as it was incumbent
under the section, if any special business was to be transacted at the meeting,
to specify the nature of such business in the notice”.
Mitter J., at page 134,
dilates as follows on the importance of the statutory provision:
“The provision for
inspection of the agreement at the registered office of the company in terms of
section 173(3) is not sufficient for the purposes of section 173(2)... As the
legislature has thought it fit to provide that shareholders must approve of the
appointment of selling agents the opportunity given to the shareholders must be
full and complete and there must be a full and frank disclosure of the salient
features of the agency agreement before the shareholders can be asked to give
their sanction. The provision for inspection of the agreement at the registered
office of the company
is not enough. Few shareholders have either the time or inclination to go to
the registered office to find out what the company is about to do. Moreover,
such an opportunity is illusory in the case of shareholders who do not live in
Calcutta, when the registered office is situate here”.
Coming
nearer home, Mr. Thakkar quotes a recent decision of this court in Firestone
Tyre and Rubber Co. v. Synthetics and Chemicals Ltd Madon
J. reviewed the entire case law on the subject while interpreting section
173(2) of the Act. I reproduce the headnote which neatly summarises the
conclusions of the learned judge:
“Under
section 173(2) of the Companies Act, where any items of business to be
transacted at the meeting are deemed to be special, there shall be annexed to
the notice of the meeting, a statement setting out all material facts
concerning each such item of business, including, in particular, the nature of
the concern or interest, if any, therein, of every director, the managing
agent, if any, the secretaries and treasurers, if any, and the manager, if any.
The object underlying section 173(2) is that the shareholders may have before
them all facts, which are material to enable them to form a judgment on the
business before them. Any fact which would assist them in making up their mind,
one way or the other, would be a material fact under section 173(2) and has to
be set out in the explanatory statement. This provision is mandatory and not
directory and disobedience to its requirements must lead to nullification of
the action taken”.
Then
Mr. Thakkar brought to my notice one more decision of the Calcutta High Court
in Shalagram Jhajharia v. National Company Ltd. It must be noted that the
subject-matter of the litigation in this case was an impugned selling agency
agreement which figured in the Calcutta decision cited earlier by Mr. Thakkar.
The plaintiff challenged the legality of the notice of the annual general
meeting on the ground that the explanatory statement attached to the proposed
ordinary resolution was in contravention of section 173 of the Act. On facts it
was held that the explanatory statement was misleading in relation to the facts
stated and it did not disclose certain other material facts. While concluding
that the explanatory statement in that case was bad and in violation of section
173 of the Act A.N. Ray J. indicated the correct principle of law. He says at
page 36:
“The
further question is whether the explanatory statement is in violation of
provisions contained in section 173 of the Companies Act.... It depends upon
the facts of each case as to whether an explanatory statement is tricky or
misleading”.
Ray
J. in Biswanath Prasad Khailan v. Neiv Central Jute Mills, while considering the essentials
of a valid notice convening an extraordinary general
meeting, extracted two broad principles from the authorities died before him.
At page 135, he says:
“Two broad principles can
be extracted from the authorities: First, that notice must be fairly and
intelligently framed and it must not be misleading or equivocal. A benevolent
construction cannot be applied. Secondly, some matters must be brought
pointedly to the attention of the shareholders, for example, where the
directors are interested in a contract or matter which is to be submitted to a
meeting for confirmation or approval, it appears to be desirable and in certain
cases absolutely necessary to disclose the fact in the notice convening the
meeting or in some accompanying circular”.
In the wake of these
various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the
comments of the learned author of Law and Practice of Meetings by Frank
Shackleton, 5th edition. At page 27 under the caption “Special Business must be
clearly stated” the following requirements are noted:
“As to the essentials of a notice,
it must state clearly the nature of any special business to be transacted, as
no other business can be transacted in addition or otherwise, unless the notice
refers to ordinary business which it is competent for the meeting to transact
It is, however, always desirable to state clearly the nature of any special
business to be transacted, and if the regulations provide for notice of such
special business, any resolutions passed without due notice will be invalid”.
To reiterate with emphasis
the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v.
Great Boulder Proprietary Gold Mines Ltd. Article 102 of the articles of associations of the
company provided as follows:
“If at any general meeting
at which an election of directors ought to take place the place of any director
retiring by rotation is not filled up, he shall, if willing, continue in office
until the ordinary meeting in the next year, and so on from year to year until
his place is filled up, unless it shall be determined at any such meeting on
due notice to reduce the number of directors in office”.
The question arose whether
the plaintiff, a retiring director, despite his failure to get re-elected, continued
in office. His claim was resisted on the ground that the company in effect had
at its meeting reduced the number of directors. Cohen L.J. overruled the
contention and held that the number of directors in office cannot be reduced
unless there was a specific resolution of the company to that effect after a
mention of the general nature of such a resolution has been made. The
concluding words of
article 102 require a specific notice to that effect. Lord Greene M.R., at page
30 of the report, clarifies the legal position in the following words:
“In
the present case counsel for the company argued that the company had, in
effect, determined to reduce the number of directors in office (a) by requiring
to reelect the retiring plaintiff, and (b) by not electing anybody to fill that
vacancy. I do not accept that argument. It. appears to me that the concluding
words of article 102 require a specific resolution, not merely to re-elect A,
but a specific resolution that nobody shall be elected to fill the vacancy”.
It
must be noted that the absence of due notice and a specific resolution was
linked up with certain legal consequences, for instance, continuation of the
retiring director in office. It was mostly on account of the peculiar wording
of article 102 that the court held that a proper resolution after due notice of
the proposed special business was absolutely necessary.
Then
Mr. Thakkar cited a decision in Tiessen v. Henderson . The relevant part of the
headnote of that case may be stated:
“The
notice of an extraordinary general meeting must disclose all facts necessary to
enable the shareholder receiving it to determine in his own interest whether or
not he ought to attend the meeting; and pecuniary interest of a director in the
matter of a special resolution to be proposed at the meeting is a material fact
for this purpose”.
While
restraining the company by an ad-interim injunction from acting upon or
carrying into effect certain special resolutions for reconstruction alleged to
have been passed and confirmed at its extraordinary general meetings, the
learned judge, Kekewich J., has made rather strong remarks at page 866 of the
report:
“The
application of the doctrine of Foss v. Harbottle to joint stock companies involves as a necessary corollary the
proposition that the vote of the majority at a general meeting, as it binds
both dissentient and absent shareholders, must be a vote given with the utmost
fairness—that not only must the matter be fairly put before the meeting, but
the meeting itself must be conducted in the fairest possible manner”.
Then,
at pages 870-871, the learned judge makes a further observation:
“If
a meeting properly convened, and properly instructed as to the purpose for
which it is convened, chooses to assent to this, there is no reason why it
should not do so; but I think it ought to have the opportunity of considering
the point. The man I am protecting is not the dissentient, but the absent
shareholder—14 the man who is absent because, having received and
with more or less care looked at this circular, he comes to the conclusion that
on the whole he will not oppose the scheme, but leave it to the majority. I
cannot tell whether he would have left it to the majority of the meeting to
decide if he had known the real facts. He did not know the real facts; and,
therefore, I think the resolution is not binding upon him”.
Now,
I may sum up what emerges from these various authorities cited by Mr. Thakkar.
Bearing in mind the object of the legislature, I must say that section 173 is
mandatory and not directory. It is in the interest of the general body of
shareholders that the legislature has made provisions in section 173(2)
requiring the notice of a meeting to set out a statement containing all
material facts concerning each special item of business. A notice of meeting
when it contains items of special business within the meaning of section 173(1)(b)
must disclose all the material facts. All the shareholders must be in a
position to make up their mind in advance whether they will attend the meeting
or leave it to the good sense of the majority at the meeting. Any
non-compliance with this requirement will nullify the action taken at the
meeting. While considering the efficacy of any such notice, a benevolent
construction will not be adopted so as to defeat the provisions of the statute.
It is also clear that whether or not a particular notice or an explanatory
statement in a given case complies with the statutory requirement is a question
of fact. There are two ways in which the mandatory provisions contained in
section 173 may be contravened. It may be a case where no explanatory statement
is at all appended to the item of a special business, or it may be a case where
the statement is incomplete, misleading or tricky. The contravention may be the
result of an act of omission or an act of commission. Whatever be the nature of
the contravention, the question always is a mixed question of fact and law.
When a challenge is made in a court of law the court will have to consider all
the facts and circumstances of the case and then decide one way or the other.
As
the contravention alleged by the plaintiffs in this case is a mixed question of
law and fact, the pleadings certainly assume importance. Mr. Nariman has made a
point, as stated above, that the pleadings give no indication that the
plaintiffs ever alleged any contravention of section 173. As the resolution is
challenged on the ground of breach of section 258 in particular and the
provisions of the Companies Act in general, there is certainly some difficulty
in permitting the plaintiffs to raise this point.
Mr.
Thakkar has not accepted the position that the plaint does not contain
sufficient averments. He has pointed out from the plaint and the written
statement that the pleadings certainly give an indication that the plaintiffs
wanted to challenge the legality of the action on the ground of either want of
or a defective resolution. Mr. Thakkar relied upon the averments in paragraph 7
of the plaint. The plaintiffs have averred that before
increasing the number of directors under section 258 of the Act and article 169
of the articles of association, a resolution ought to have been passed after
due compliance with the requirements of the provisions of the Companies Act.
Mr. Thakkar says that though the plaintiffs have alleged contravention of the
Companies Act, they have by implication referred to the requirements of an
explanatory statement under section 173 of the Act. Then Mr. Thakkar also read
out portions of the written statement of the appellants, particularly
paragraphs 9 and 10, which, according to Mr. Thakkar, show that the defendants
were aware of the challenge made by the plaintiffs to the legality of the
resolutions on the various grounds. Even apart from the pleadings, according to
Mr. Thakkar, the parties were aware of all the relevant facts and the point
about the applicability of section 173 of the Act. In this connection reliance
was also placed on the affidavits filed at the interlocutory stage in support
of the notice of motion taken out for interim relief. Plaintiffs had in their
affidavits referred to the defective explanatory statement and said that there
is non-compliance with the requirements of section 173. A reference was also
made to the appeal memo. (A.O. No. 436 of 1970) filed by the respondents in
this court against the interlocutory order. After considering all these submissions,
I am of the opinion that Mr. Thakkar can at best show in this case that there
is no explanatory note at all accompanying the item of special business. But,
the averments referred to above are certainly insufficient to cover a plea that
the explanatory statement appended to the notice of the meeting about the
special business is insufficient or misleading. Any such plea about
insufficiency of the explanatory statement is very much like the plea of fraud.
It is well-settled that the plea of fraud must be substantiated by all relevant
particulars disclosed in the pleadings.
Then I have to deal with
the points raised by Mr. Thakkar that in the present case there is no
explanatory statement and, therefore, there is a clear contravention of the
provisions of section 173 of the Act. Mr. Thakkar says that there was no
proposal in so many words about the increase of the number of directors. There
was no such item in the notice. Therefore, there was no occasion for any
explanatory statement.
I have already referred to
the contents of the items Nos. 3, 4, 7 and 8 in the notice of meeting. Items
Nos. 3 and 4 refer to ordinary business inasmuch as the directors retiring by
rotation were to be re-elected. The permanent strength of the board of
directors was 8. Under article 164 of the articles of association of the
company, the number nearest to one-third had to retire from office. Items Nos.
3 and 4 certainly indicate that the company was to fill up the two vacancies
caused by the retirement of the directors by rotation. Now, items Nos. 7 and 8
state that the board had appointed two additional directors on 10th April, 1969.
Those directors will cease to hold office under section 260 of the Act on
the date of the meeting, Notices, as required under section 257 of the Act,
have been received by the company proposing the candidature of these additional
directors at the meeting. This information about the item of business has to be
considered along with the corresponding explanatory statement. The explanatory
statement virtually restates what is contained in items Nos. 7 and 8. One
additional particular is also mentioned and that is the recommendation of the
board of directors that the named persons be appointed as directors. Items Nos.
7 and 8 along with the explanatory statement certainly convey to the
shareholders that the board of directors have made a proposal that two more
additional directors be appointed at the meeting and if possible the two named
persons be elected to fill up those additional posts. In my opinion this is
nothing short of a proposal to increase the strength of the board of directors
from 8 to 10. Mr. Thakkar tried to show that all this information has nothing
to do with the proposal to increase the number of directors. But, despite his
best efforts, he was not in a position to convince me that all this information
was in connection with some other intelligible topic, I have not been able to
place any other construction on items Nos. 7 and 8, and in my opinion the
plaintiffs have failed to make out a case that there is no information at all
about the proposed special business accompanied by the required explanatory
statement.
Then Mr. Thakkar argued
that at any rate the court must hold that the information given along with the
explanatory note is wholly misleading. Mr. Thakkar pointed out that the board
of directors has nowhere indicated in the notice or the explanatory statement
as to why it had made a proposal for increasing the number of directors.
Mr. Nariman, on the other
hand, submitted that the board can only disclose known reasons and it is not in
a position to disclose the unknown reasons. I do not find any substance in
either of these contentions. In the absence of a pleading in fact, Mr. Thakkar
cannot subsequently show that there was no reason contained in the statement
about the proposed increase. In my opinion the statement is a comprehensive and
compendious statement. The board has in a way indicated the reasons for the
increase. It has stated that it was required to appoint two men of their confidence
as additional directors. It is implicit in this action and the statement that
the company needed their services. This is followed by a recommendation by the
board that the two named persons be appointed to fill up the additional posts.
This is sufficient reason for the proposed increase. A shareholder, after
reading this information, can certainly form an intelligent judgment and make
up his mind one way or the other. He may either choose to attend the meeting or
leave it to the good sense of the majority of the voters. As the plaint does
not show in what way the explanatory statement is defective, there is no reason
to further examine the so-called defect pointed out by Mr. Thakkar. Mr.
Nariman’s distinction between known and unknown reasons is also very far from
convincing. One acts only for known reasons. Acting without reasons is a leap
in the dark and, therefore, there is never any occasion for giving unknown
reasons. But, I must make it clear that under section 173(2) material facts
will not necessarily include the reasons. It will all depend upon the nature of
the subject-matter which constitutes the special business. Sometimes the facts
stated are sufficiently eloquent and there is no need to justify the proposed
action by giving reasons. In the absence of sufficient pleadings, the
plaintiffs in the present case cannot challenge the statements contained in the
notice and the explanatory statement on the ground that the particulars are
insufficient and/or misleading. In the result I disagree with the finding of
the learned judge and hold that there is no contravention of the provisions of
section 173 of the Companies Act.
Then Mr. Thakkar argued
that the learned judge was in error in holding that the additional directors,
like the retiring directors, are not required to file any written consent duly
signed by them before their reappointment by the company. This question
involves the interpretation of section 264(1) of the Act. Section 264(1), as it
originally stood in 1956, has gone through a process of one or two amendments.
Before I consider the point and the various possible interpretations of section
264, it will be necessary to state a few more facts.
On April 9, 1969, there was
a move for appointing the appellants as additional directors. On the same day
two letters were separately addressed by the appellants to the company. The
letters purported to be consent in writing duly signed under section 264(1) of
the Act. The appellants have indicated their consent to act as a director of
the company if appointed. On April 10, 1969, the board of directors appointed
the appellants as additional directors under section 260 of the Act. On April
10, 1969, separate proposals by two members were made in favour of the
appointment of the appellants as directors at the ensuing meeting. Defendant
No. 1, the company, in its written statement, has stated that after the receipt
of the letters of consent dated April 9, 1969, the appellants were appointed as
additional directors. Mr. Thakkar referred to Form No. 29, which was submitted
on April 26, 1969, that is, long before the annual general meeting of the
company. All these facts and circumstances, according to Mr. Thakkar, show that
the letters of consent were, in fact, filed by the appellants in connection
with their appointment as additional directors. The learned judge has accepted
this position. But, Mr. Nariman for the appellants is challenging this finding.
I may not consider this controversy at this stage
As
stated above, it will be necessary to point out the legislative changes before
I consider section 264 in its present form. Section 264 as originally enacted
read as follows:
“(1) A person who
is not a retiring director shall not be capable of being appointed director of
a company unless he has, by himself or by his agent authorised in writing,
signed and filed with the Registrar, a consent in writing to act as such
director.
(2) Sub-section
(1) shall not apply to a private company unless it is a subsidiary of a public
company”.
The
provision as enacted required all persons who desired to be considered for
appointment as directors to file a written consent before their appointment.
The consent had to be given before the appointment as without such consent the
person was not capable of being appointed and he could not be considered a
qualified or a fit person for appointment as director. Only one person was
exempted from this condition and that was a retiring director. It was not
necessary for him to file any consent before his reappointment as a director.
Then as a result of the amending Act 65 of 1960, a new section 264 was
substituted with effect from December 28, 1960. The new section reads as under:
“264. (1) Every
person (other than a person who has left at the office of the company a notice
under section 257 signifying his candidature for the office of a director)
proposed as a candidate for the office of a director shall sign, and file with
the company, his consent in writing to act as a director, if appointed.
(2) A person other
than a director reappointed after retirement by rotation shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar, his consent in writing to act as such
director.
(3) This section
shall not apply to a private company unless it is a subsidiary of a public
company”.
The
significant change in the wording is the deletion of the words “shall not be
capable of being appointed”. Section 264(1) dispenses with the formal consent
in the case of a person who has proposed himself as a candidate for the office
of a director under section 257 of the Act. Subsection (2) requires all persons
newly appointed as directors to file with the Registrar within 30 days of their
appointment a consent in writing to act as a director. Sub-section (2) makes it
clear that, unless such a consent is filed, the person appointed shall not act
as a director.
Thereafter,
by Act No. 31 of 1965, the section is substantially amended and I have to
consider the section so amended. The section, in the present form, is as
follows;
“264. (1) Every
person (other than a director retiring by rotation or otherwise or a person who
has left at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other
than—
(a) a director reappointed after retirement by
rotation or immediately on the expiry of his term of office, or
(b) an additional or alternate director, or a
person filling a casual vacancy in the office of a director under section 262,
appointed as a director or reappointed as an additional or alternate director,
immediately on the expiry of his term of office, or
(c) a person named as a director of the company
under its articles as first registered,
shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar his consent in writing to act as such
director.
(3) This section shall not apply to a private
company unless it is a subsidiary of a public company”.
The
first point debated before me by counsel on either side is whether section 264 is
directory or mandatory. As the point is not covered by any direct authority,
the counsel had to rely upon their original submissions and they have also
referred to decisions which deal with the construction of statutes.
Mr.
Thakkar says that the section is mandatory because the condition referred to in
the section of filing a written consent is a condition precedent to the valid
appointment. The consent required under section 264 is to be in writing and
duly signed. Section 264(1) provides that the person who is a candidate for the
office of a director shall file his consent in the prescribed form to act as a
“director, if appointed. Mr. Thakkar says that the use of the expression
“shall” indicates that the section is mandatory. Mr. Thakkar invited my attention
to a number of judicial decisions about the interpretation of statutes. He
relied upon a decision of the Supreme Court in Aswini Kumar Ghose v. Arabinda
Bose for the proposition that if the specific words used by the
legislature are clear then for interpretation the courts could not rely upon
the statement of objects and reasons. Patanjali Shastri C.J., at page 378
(paragraph 32), has made the following observations:
“As
regards the propriety of the reference to the statement of objects and reasons,
it must be remembered that it seeks only to explain what reasons induced the
mover to introduce the bill in the House and what objects he sought to achieve. But, those objects and reasons
may or may not correspond to the objective which the majority of members had in
view when they passed it into law. The Bill may have undergone radical changes
during its passage through the House or Houses, and there is no guarantee that
the reasons which led to its introduction and the objects thereby sought to be
achieved have remained the same throughout till the Bill emerges from the House
as an Act of the legislature, for they do not form part of the Bill and are not
voted upon by the members. We, therefore, consider that the statement of
objects and reasons appended to the Bill should be ruled out as an aid to the
construction of a statute”.
But Mr. Thakkar admitted
that the rigour of the rule laid down in the above-mentioned case was relaxed in
a subsequent decision of the Supreme Court in Commissioner of Income-tax v. Smt. Sarda Devi , where Bhagwati J., at page 835, says:
“It is clear that unless
there is any such ambiguity it would not be open to the court to depart from
the normal rule of construction which is that the intention of the legislature
should be primarily gathered from the words which are used. It is only when the
words used are ambiguous that they would stand to be examined and construed in
the light of surrounding circumstances and constitutional principle and
practice”.
At page 839, a further rule
of construction of statute is stated:
“Though it is not
legitimate to refer to the statement of objects and reasons as an aid to the
construction or for ascertaining the meaning of any particular word used in the
Act or statute (see Aswini Kumar Ghose v. Arabinda Bose), nevertheless this court in
Stale of West Bengal v. Subodh Gopal Bose , referred to the same ‘ for the limited purpose of
ascertaining the conditions prevailing at the time which actuated the sponsor
of the Bill to introduce the same and the extent and urgency of the evil which
he sought to remedy.’ “
Mr. Thakkar says that it is
the primary rule of construction that the statute should be interpreted without
looking into any other extraneous circumstances. It is only when there is some
ambiguity that, as stated by the Supreme Court, reference may be made to the
objects and reasons for the limited purpose of finding out the particular
reason which prompted the legislature to pass that enactment.
Then Mr. Thakkar referred
to the rule which, in the judicial parlance, is recognised as the golden rule
of construction of statutes. The statement of the rule by Burton J. in
Warburton v. Lovelavd is reproduced by
the learned author in Bindra’s Interpretation of Statutes, 5th edition, at page
71, and is to the following effect:
“I apprehend it is a rule
in the construction of statutes that, in the first instance, the grammatical
sense of the words is to be adhered to. If that is contrary to, or inconsistent
with any expressed intention, or any declared purpose of the statute, or if it
would involve any absurdity, repugnance or inconsistency, the grammatical ser
se must then be modified, extended or abridged so far as to avoid such
inconvenience, but no further”.
The following passage in
Chapter XIII from Maxwell on the Interpretation of Statutes, 12th edition, page
314, also lays down a sound principle:
“It is impossible to lay
down any general rule for determining whether a provision is imperative or
directory. ‘No universal rule’, said Lord Campbell L.C can be laid down
for the construction of statutes, as to whether mandatory enactments shall be
considered directory only or obligatory, with an implied nullification for
disobedience. It is the duty of courts of justice to try to get at the real
intention of the legislature by carefully attending to the whole scope of the statute
to be construed.’ And Lord Penzance said: ‘I believe, as far as any rule is concerned, you cannot
safely go further than that in each case you must look to the subject-matter; consider
the importance of the provision that has been disregarded, and the relation of
that provision to the general object intended to be secured by the Act; and
upon a review of the case in that aspect decide whether the matter is what is
called imperative or only directory”.
Viewed in the light of
these principles, the section, in my opinion, appears to be directory in so far
as the person who desires to be a candidate for the office of a director would
be required to file his consent. The object of the legislature is evident when
one considers the various amendments made by the legislature before the section
was enacted in the present form. Those who have once acted as directors were
only seeking reappointment. It was considered throughout that the formal
consent on their part was not necessary. It is very clear as to why such a
condition was found necessary. It may be that a person who is appointed as a
director may refuse to act on the ground that he had never consented to act as
a director. When such a flaw is discovered later on and the appointment will
have to be ignored as ineffective, the company will have to take again further
steps for filling the post of such director. Ordinarily, a person appointed as
a director is not likely to refuse to act. In a rare case, he may do so. It is
only to avoid the attending inconvenience that the legislature has prescribed
the condition. In the section as originally worded, somewhat strong language
was used. It was enacted that a person shall not be capable of being appointed
as a director unless he had filed earlier his consent in writing to act as such
director. The deletion of these words in the subsequent amended form of the
section is not without significance. Perhaps the legislature thought that the
condition was given comparatively more importance when it was introduced in the
section. If this is the only object which the legislature sought to achieve by
prescribing a prior consent in writing then there is no reason why the absence
of consent in all cases should invalidate the appointment. Even without a
consent a person appointed may accept the appointment and prefer to act as a
director. This is likely to happen in a majority of cases. Considering the
section as a whole and bearing in mind the object of the legislature and
magnitude of the mischief intended to be avoided, I hold that section 264(1) is
clearly directory and not mandatory. I am only interpreting section 264(1) of
the Act and it is not necessary to pronounce any opinion about section 264(2). Whether
it is mandatory or directory will have to be decided in a suitable case. But, I
cannot help expressing my opinion that the difference in the language has
certainly assisted me in reaching my conclusion about the directory nature of
section 264(1) of the Act. The consent under section 264(2) which is to be
filed with the Registrar is a condition precedent for acting as a director. The
sub-section provides that a person, who is being appointed for the first time
as a director, shall not act as a director of the company unless he has filed
the consent within the prescribed time. No argument is necessary for saying
that the sub-section is mandatory.
Then Mr. Thakkar submitted
that the learned judge was in error in holding that there is realty no
difference between the retiring director and the additional director while
considering the application of section 264(1) of the Act. As all the relevant
points were urged before me I had to consider them and give my decision
accordingly. In fact when I found that the section is directory it is
sufficient for the final disposal of the appeal but these are all points of law
touching the interpretation of section 264(1) as a whole and, therefore, I must
consider each point urged by the counsel separately.
That takes me to the
interpretation of the key words in section 264(1) “or otherwise”. The learned
judge while considering these words has relied on the dictionary meaning of the
expression “retire”. A person retires when he ceases to hold a particular
office. There is no difference between retiring by rotation and retiring by
ceasing to hold office. The additional directors appointed under section 260
hold office only up to the date of the next annual general meeting. In other
words, they cease to hold office before the date of the next annual general
meeting. Mr, Thakkar says that the learned judge was not right in reaching this
conclusion. According to Mr. Thakkar there is material difference between the
two sets of directors. Mr. Thakkar points out that under section 256(1) of the
Act certain proportion of directors retire by rotation. Under section 256(2)
the directors retire by rotation at every annual general meeting, whereas under
section 260, first proviso, the additional director holds office only up to the
date of the next annual general meeting of the company. In other words, the
additional director ceases to hold office earlier and thereafter the retiring
director who vacates the office at the meeting remains in office for at least a
short duration. Mr. Thakkar says that this distinction between the tenure of
the two classes of directors is recognised even under the English law. Mr.
Thakkar has relied on a decision in Eyre v. Milton Proprietary Ltd. The court in that
case was required to consider the exact connotation of two articles 85 and 90
of the articles of association of the company. The court had to decide the
meaning of the expression “of the whole number of directors” in article 85.
That was necessary to determine the number of directors who had to retire in a
particular year. There was no doubt that the expression “whole number of
directors” did not include the managing director. Article 90 provided that the
board may from time to time appoint additional directors but any director so
appointed shall hold office only until the next following ordinary general
meeting of the company, and shall then be eligible for re-election. The point
for consideration depended for its answer on the words of article 85 as
compared with the words of article 90 and, in particular, certain later words
of article 85. According to the court there must be some point of time at which
it was to be ascertained as to who are the whole number of directors to whom
must be applied the provision relating to retirement. That point of time was to
be at the ordinary general meeting. It was clear from article 90 that at the
annual general meeting the two additional directors will not be in office as
they were to hold office only until the next following ordinary general meeting
of the company. At the commencement of the ordinary general meeting they will
be no longer in office. But, the retiring directors and the other continuing
directors will act as directors throughout the meeting. In others words, they
would constitute the total number of directors for deciding the proportion of
the directors retiring. Romer L.J., at page 257, sums up the legal position in
the following words:
“I agree that in the
circumstances the number of directors to be considered is the number of
directors existing at the moment when the ordinary general meeting begins, and
inasmuch as at the particular moment that it begins the two directors elected
under article 90 cease to be directors, the number of directors then must be
taken to be five and not seven”.
Mr. Thakkar relies on this
decision for underlining a similar distinction between the directors retiring
by rotation at every annual general meeting and the additional directors
holding office only up to the date of the next annual general meeting. Mr.
Thakkar says that when the legislature has used the expressions like “retiring”
and “holding office” up to a particular point of time, the court will have to
interpret the different words in a different way. In support of this rule of
interpretation he relies on a decision of this court in East and West Insurance Co. Ltd. v. Mrs.
Kamala Jayantilal Mehta. Chief Justice, Chagla, who delivered the judgment of the Bench, says at
page 543:
“Now, the normal canon of
construction either of a statute or of articles of association is that when
different expressions are used they are intended to connote something
different”
There cannot be any dispute
about this rule of interpretation. Giving full effect to the rule it only means
that a retiring director ceases to hold office later than the additional
director. The difference in the duration of their tenure is brought out by the legislature
by using appropriate expressions. But, it will not be correct to carry this
distinction too far. While interpreting the words appearing in section 264, the
expression “retiring by rotation” has to be understood in conjunction with or
along with the other key words “otherwise”. These two expressions certainly are
used for covering or for including different sets of directors who cease to
hold office. We know very well what is meant by a director retiring by
rotation. Section 256(1) provides that at the first annual general meeting
one-third of the directors for the time being as are liable to retire by
rotation, or if their number is not three or a multiple of three, then the
number nearest to one-third, shall retire from office. Then the question arises
on a literal interpretation of the words as to who are the other directors who
otherwise retire, that is, retire otherwise than by rotation. Mr. Thakkar says
that the articles of association of a company may provide that all the
directors en bloc shall retire and in that case the company might appoint
directors to fill up all the vacancies. Mr. Thakkar has not been able to
indicate any other class of directors who will be covered by the expression “or
otherwise”. He maintained that under section 256(1) a company may by its
articles provide that a certain proportion of directors will ever remain in
office and only the remaining directors will wholly retire and it is to cover
such a class of directors retiring In this manner that the expression “or otherwise”
is used by the legislature in section 264(1) of the Act.
It is difficult to accept
this interpretation of section 256(1). Section 256(1) provides:
“....one-third of such of
the directors for the time being as are liable to retire by rotation, or if their
number is not three or a multiple of three, then, the number nearest to
one-third, shall retire from office”.
In the illustration given
by Mr. Thakkar, certain fixed number of directors will remain in office
permanently and the others will retire, so as to enable the company to fill up
those vacancies. Those who are retiring in this manner are, according to Mr.
Thakkar, not retiring by rotation. I am not prepared to accept this
interpretation of section 256(1) of the Act. When few of the directors retire
in the manner indicated in section 256(1) of the Act, then they are retiring by
rotation. If the articles so provide, all the directors may retire and that
retirement certainly will not be covered by the expression “retiring by
rotation”. On a reference to the Shorter Oxford Dictionary, volume II: N-Z, 3rd
edition, revised with addenda, I find that the adverb “otherwise” means in
another way or in other ways. Whether the expression “otherwise” would include
one or more classes is not clear. At any rate, the expression is somewhat
equivocal. In such a case I will be justified in following the dictum laid down
by the Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhanvadia . The Supreme Court in that case, while interpreting
certain articles of the Constitution, relied upon the statement of objects and
reasons. The Supreme Court had to decide whether certain provisions were
directory or mandatory. As the provisions themselves were not clear, reliance
was placed on the statement of objects and reasons for finding out the
intention of the legislature. I may reproduce the following passage from the
judgment of Mitter J. which appears at page 769, paragraph 11, of the report:
“The above cases are
sufficient to show that non-compliance with the provisions of a statute or
Constitution will not necessarily render a proceeding invalid if by considering
its nature, its design and the consequences which follow from its
non-observance one is not led to the conclusion that the legislature or the
Constitution-makers intended that there should be no departure from the strict
words used”.
So, in other words, while
interpreting the words or even while departing from the strict words used, the
court may find out the intention of the legislature by referring to the
statement of objects and reasons. Mr. Nariman rightly says that relying on this
decision one can look at the notes on clauses preceding the amendment of
section 264 of the Act. (See Gazette of India, Extraordinary, Part II, sec. 2, 1964, dated
September 21, 1964). Clause 32 reads as under:
“Section 264 requires that
a person proposed as a candidate for the office of director shall file with the
company his consent to act as director, if appointed. It also requires that a
person other than a director re-appointed after retirement by rotation shall
not act as director unless he has filed with the Registrar his consent in
writing to act as such. This amendment seeks to exempt persons who have served
as directors in the immediate preceding term from these requirements. It is
felt that in the case of such persons the requirement to file their consent in
writing is a formality which could well be dispensed with”.
Clause 32 shows in
unmistakable terms as to why the exceptions were enacted to dispense with the
filing of consent in certain cases. No such consent either under section 264(1)
or sub-section (2) was necessary in the case of persons who had immediately
before the reappointment acted as directors. Considering the object of the
amendment there is no reason why the additional directors who are expressly
exempted from the requirement of filing a consent under section 264(2) should
be excluded while construing a somewhat similar exemption under section 264(1)
of the Act. In my opinion the expression “otherwise” covers all the other
directors who for one reason or the other cease to hold office and are
immediately thereafter reappointed as directors. For these reasons I hold that
the learned judge was right when he recorded a finding that additional
directors are not required to file any written consent under section 264 of the
Act, as a condition precedent for the validity of their re-appointment.
Then Mr. Nariman submitted
that no such consent under section 264(1) is required for appointment of any
person as an additional director under section 260 of the Act. He relies on the
wording of section 264(1), viz.:
“Every
person.......proposed as a candidate for the office of a director shall sign
and file with the company, his consent in writing to act as a director, if
appointed”.
These words, according to
Mr. Nariman, indicate that the consent contemplated is referable to the
candidature of the person for the office of director. That can only be at the
meeting of the company in which directors are appointed by unanimous or
majority vote of the shareholders. Mr. Nariman says that section 260 confers
power on the board of directors’ to appoint additional directors when so
permitted by the articles of association of the company. Neither in section 260
nor anywhere in the articles of the company are there provisions requiring the
person to file his consent before his appointment as additional director. A
closer reading of section 264(1) furnishes one more reason in support of the
interpretation suggested by Mr. Nariman. One of the persons, who is exempted
from the condition of filing such a consent, is one who has left at the office
of the company a notice under section 257 signifying his candidature for the
office of a director. This clearly shows that the provision about consent is in
connection with the appointment of directors at the meeting of the company.
Even the consent that is prescribed is to be in writing to act as a director,
if appointed. There are no such words to show that the consent is given to act
as a director or an additional director. These various expressions used by the
legislature certainly indicate that section 264(1) does not in any manner
regulate the appointment of additional directors under section 260 of the Act.
It is not disputed before
me nor was there any dispute before the learned judge about the fact that there
is one set of written consent filed in this case on behalf of the appellants.
It is not necessary to resolve the controversy whether it was with reference to
the appointment as an additional director or with reference to the
reappointment as a director. If no consent was required for any appointment
under section 260 that consent, if filed, will be redundant. It is true that
the company by its written statement has taken up a contention that after
receipt of these consents the appellants were appointed is additional
directors. Mr. Thakkar also submitted that that may be accepted or a fact in view of the various facts
and circumstances mentioned above. But, the appellants in their written
statement have pleaded that these written consents certainly validated their
appointment in the general meeting. Once it is found as a fact that no consent
was required for the appellants’ appointment as additional directors, then
there is no reason why the appellants should not be allowed to rely upon the
letters of consent, when the validity of their appointment is challenged by the
plaintiffs. Letters of consent were to be filed duly signed by the persons
concerned with the company. They are so signed and filed with the company.
There are no words used in the letters to indicate that they had given the
consent only to act as additional directors, if appointed. In the absence of
any such restrictive words, it can be fairly assumed that they gave their
consent in writing not only to act as additional directors, if appointed, but
also to act as directors, if appointed. In my opinion even for this additional
reason the appointment of the appellants cannot be challenged.
The last point raised in
the present appeal is about the maintainability of the suit. Mr. Nariman,
consistent with the appellants’ stand in the lower court, submits that the
plaintiffs have come to the court with certain grievances about the
irregularities committed by the company while appointing the appellants as
directors. Mr. Nariman relied upon a decision of this court in V.N. Bhajekar v.
K.M. Shinkar. It was a suit by the shareholders challenging
irregularities committed by the directors. It was held that such a suit was not
competent. The headnote indicates that there are certain recognised exceptions to the rule that
mere irregularities committed during the course of the management of the
internal affairs of the company do not furnish any cause of action to the
shareholders. The relevant headnote is to the following effect:
“The
supremacy of the majority of shareholders is subject to certain exceptions,
viz.:
(1) Where
the act complained of is ultra vires the company;
(2) where
the act complained of is a fraud on the minority; and
(3) where there is an absolute necessity to
waive the rule in order that there may not be a denial of justice”.
Mr.
Nariman submits that the present case is not covered by any one of these three
exceptions. The appellants were appointed directors by an unanimous resolution
passed by at the meeting of the company. The plaintiffs after a long lapse of
time had no reason to rush to the court for any relief. It is not an act which
is patently illegal or ultra vires the company. But, I find it difficult to
accept this contention of Mr. Nariman. I have already held that section 173 is
mandatory and not directory. Any non-compliance with the provisions of section
173 will result in the nullification of the Act. The plaintiffs have alleged
that there was contravention of section 258 of the Indian Companies Act, as
there was no valid resolution proposing the increase in the number of directors.
It may be that the plaintiffs have not eventually succeeded in the suit. In
view of the findings recorded by me, it cannot be said that the suit as framed
is not competent. In my opinion the plaintiffs’ case will be covered by the
first of the three exceptions mentioned above. The learned judge was,
therefore, right when he held that the suit as framed was maintainable.
Mr.
Buch with Mr. Munshi, who appeared for respondent No. 3-company, submits to the
orders of this court.
In
the result the appeal is allowed, the judgment and decree of the lower court is
set aside and the plaintiffs’ suit is dismissed with costs throughout.
Respondents Nos. 1 and 2 will not be liable to pay the costs of respondent No.
3 throughout.
[1985] 57 COMP. CAS. 12 (BOM.)
Centron Industrial Alliance Ltd
v.
Pravin Kantilal Vakil
MRS. SUJATHA V. MANOHAR, J.
COMPANY APPLICATION NO. 235 OF 1982 IN COMPANY
PETITION NO. 84 OF 1981 CONNECTED WITH COMPANY APPLICATION NO. 2665 OF 1980.
AUGUST 13, 16, 1982
M.H. Shah ,Y.H.
Mithi, A.M. Setalwad, S.H. Doctor, K.H. Bhabha, M.O. Chinoy, I.M. Chagla, Jimmy
Avasis, C.A. Shah, Kuldip Dharampal,
J.I. Mehta and J.J. Bhatt for Appearing parties.
Sujata V. Manohar, J.—The petitioner-company, Centron
Industrial Alliance Limited, has filed a Company Petition bearing No. 84 of
1981 (See [1984] 55 Comp Cas 731 (Bom)), under the provisions of s. 391 of the
Companies Act, 1956, for sanctioning a scheme of amalgamation of the
petitioner-company with M/s. Brooke Bond India Ltd. The petitioner-company was
incorporated in the year 1949. It became a public limited company in the year
1974. It is admittedly in financial difficulties since 1975. In September,
1976, the board of directors of the petitioner-company was reconstituted and
directors sponsored or nominated by the State Industrial and Investment
Corporation of Maharastra Ltd. (SICOM) and United Commercial Bank (UCO Bank)
were inducted on the board of directors of the petitioner-company. Ever since
the petitioner-company became a public limited company in the year 1974, the
petitioner-company has not paid any dividend whatsoever to the shareholders.
The company has been declared a relief undertaking under the provisions of the
Bombay Relief Undertakings (Special Provisions) Act, 1958, with effect from
January 1, 1977. In these circumstances, in or about 1980, a scheme of
amalgamation was proposed on behalf of the petitioner-company for its
amalgamation with the Brooke Bond India Ltd. Thereafter, in pursuance of an order
passed by this court in November 26, 1980, statutory meetings of the
shareholders, secured creditors and unsecured creditors of the
petitioner-company were held on January 27, 1981, to consider the proposed
scheme of amalgamation. At the meetings so held, 97.30 per cent. of the
shareholders, 100 per cent. of the secured creditors and 98.50 per cent. of the
unsecured creditors approved of this scheme. Thereafter, on March 6, 1981,
Company Petition No. 84 of 1981 (See [1984] 55 Comp Cas 731 (Bom) ) was filed
for sanctioning the said scheme of amalgamation. An application was also made
to the Central Govt. under the provisions of s. 23 of the Monopolies and
Restrictive Trade Practices Act, 1969 (hereinafter referred to as "the
MRTP Act"), for its approval to the said scheme of amalgamation.
It
seems that at about the time that the scheme of amalgamation in question was
propounded, there was an alternative scheme under which Harbans Lal Malhotra
and Sons Ltd. (hereinafter referred to as "the Malhotras"), who were
competitors in trade of the company, had proposed to take on lease the factory
premises of the petitioner-company. This alternative
proposal was rejected at that time by the board of directors and the two
secured creditors (SICOM and UCO Bank) of the petitioner-company as not
advantageous to the company.
When the petitioner-company
applied for approval of the Central Govt. under s. 23 of the MRTP Act, the
scheme was strongly opposed by the Malhotras. The secured creditors, on the
other hand, supported the scheme of amalgamation. By an order dated January 21,
1982, the Central Govt. approved of the proposal of M/s. Brooke Bond India Ltd.
for amalgamation of the petitioner-company with it as contained in the
application dated February 20, 1980. The Malhotras moved the Supreme Court
against the order of the Central Govt. dated January 21, 1982. The Supreme
Court, however, by its order dated March 12, 1982, declined to stay further
proceedings in any High Court or any authority but ordered that any order passed
would be subject to the result of the appeals. It also directed that in the
event of either of the High Courts sanctioning the scheme of amalgamation, the
judgment will not take effect for a period of four weeks. After the above order
was passed by the Supreme Court, the opponents in this company application,
Pravin Kantilal Vakil and another, lodged a requisition dated May 28, 1982,
signed by the requisite number of shareholders at the registered office of the
petitioner-company requisitioning an extraordinary general meeting of the
company to be held on July 9, 1982, to consider the following resolution:
"Resolved that the company renegotiate
with the Brooke Bond India Ltd. and/or examine alternate scheme(s) in the
interest of the company and for the purpose, resolved further that the company
should withdraw Company Petition No. 84 of 1981 (See [1984] 55 Comp Cas 731
(Bom)) filed in the High Court in Bombay from the date of this
resolution".
There was an explanatory
statement annexed to this notice to which I will refer later. Pursuant to this
requisition, the board of directors by their notice dated June 11, 1982,
convened an extraordinary general meeting of the company as requisitioned. The
notice convening the extraordinary general meeting is exhibit "C" to
the petition. Thereafter, one Bhagwandas, a shareholder of the
petitioner-company, filed a suit in the Bombay City Civil Court for an
injunction restraining the company from holding the extraordinary general
meeting. He also took out a notice of motion for an injunction to restrain the
holding of the meeting. The City Civil Court, however, did not grant such an
injunction. Thereafter, the applicant herein, who is also a shareholder of the
petitioner-company, has taken out the present judge's summons for an order,
that pending the hearing and final disposal of Company Petition No. 84 of 1981
(See [1984] 55 Comp Cas 731 (Bom)), the opponents, their servants and agents
should be restrained from holding and proceeding with the extraordinary general
meeting.
In order to consider
whether an injunction as prayed for can be granted or not, it is necessary to
consider the nature of the requisition which has been received by the
petitioner-company and the purpose for which the requisition is made. The
resolution which is proposed to be considered at the requisitioned meeting is
in two parts. The first part of the resolution calls upon the company to
renegotiate with M/s. Brooke Bond India Ltd. and/or to examine alternate
schemes in the interest of the company. The main part of the resolution,
however, calls upon the company to withdraw Company Petition No. 84 of 1981
(See [1984] 55 Comp Cas 731 (Bom)). The main purpose of requisitioning the
meeting of shareholders is to compel the company to withdraw Company Petition
No. 84 of 1981 (See [1984] 55 Comp Cas 731 (Bom)) which is a petition for
sanctioning the scheme of amalgamation. The resolution itself makes it quite
clear that unless Company Petition No. 84 of 1981 is withdrawn, the company
cannot either renegotiate with M/s. Brooke Bond India Ltd. or examine any
alternative schemes. It was strongly argued by Mr. Bhabha, the learned counsel
for the opponents, that the requisitioned meeting has been called mainly for
the purpose of considering alternative schemes which may be beneficial to the
company. On a perusal of the said resolution and the explanatory statement
attached to it, it becomes quite clear that the requisitionists have not put
forth before the shareholders any alternative scheme whatsoever. The explanatory
statement sets out the following:
(i) That one of the shareholders of the company, Mr. Joseph Sabastian
D'Mello has filed an affidavit setting out the facts and figures for the
proposed scheme of amalgamation with M/s. Brooke Bond India Ltd. as not fair and
equitable to the shareholders of the company. Under sub-paras, (a) to (e), the
explanatory statement sets out why, according to the requisitionists, the
scheme of amalgamation is not beneficial to the shareholders of the
petitioner-company.
(ii)In the next paragraph,
it is stated that the final sanctioning of the scheme will not be granted
before September, 1982, and this delay is very long. It then sets out that the
company should either renegotiate the terms of merger with M/s. Brooke Bond
India Ltd. or it should examine any alternative course of action. There is
nothing in this explanatory statement which would show either that there are
any alternative proposals more beneficial to the company, or that there is any
possibility of renegotiation, with M/s. Brooke Bond India Ltd. Quite clearly,
the purpose of requisitioning the meeting of the shareholders is to get rid of
the company petition which is pending before this court for considering the
scheme of amalgamation with M/s. Brooke Bond India Ltd.
Under s. 391 of the
Companies Act, 1956, whenever a scheme of amalgamation is put before the
members or classes of members or creditors or classes of creditors of a company
at the statutory meetings convened for the purpose under s. 391(1) of the
Companies Act, 1956, if a majority in number representing three-fourths in
value of the class of members or creditors, as the case may be, present and
voting at the meeting agree to any compromise or arrangement, it shall, if
sanctioned by the court, be binding on all the members or creditors of the
class, as the case may be, and also on the company. As pointed out by the Privy
Council in the case of Raghubar Dayal v. Bank of Upper India Ltd., AIR 1919 PC
9, the arrangement will take effect from the date of approval of the
arrangement at the statutory meeting held for the purpose, and not from the
date of sanction by the court. Thus, under s. 391 of the Companies Act, 1956, a
specific method is provided for obtaining the approval of the members and
creditors of a company to a proposed scheme. Once such an approval is obtained
in the manner provided by s. 391, the scheme, subject to it being sanctioned,
becomes binding on all the members and/or creditors of the company as also on
the company from the date of granting of such approval by the members and/or
creditors. Under r. 79 of the Companies (Court) Rules, 1959, where the proposed
compromise or arrangement is agreed to, with or without modification, as
provided by sub-s. (2) of s. 391, the company shall, within 7 days of the
filing of the report by the chairman of the statutory meeting(s), present a
petition to the court for confirmation of the arrangement. If the company fails
to present any petition for confirmation within the time prescribed, it shall
be open to any creditor or contributory, with the leave of the court, to
present the petition and the company shall be liable for the costs thereof.
Thus, after a scheme is approved at the statutory meeting(s) held for the
purpose, the company is under an obligation to present a petition for
confirmation of the scheme within 7 days of the filing of the report by the
chairman of such meeting or meetings.
Can the shareholders
thereafter requisition a meeting for the purpose of compelling the company to
withdraw the petition for sanctioning the scheme ? In other words, is it open
to the shareholders to compel the company to resile from its legal obligation
to present a petition for confirmation of the scheme ?
It is nobody's case in this
application that the statutory meetings which were convened and held for the
purpose of considering the scheme for the amalgamation in question were either
not properly convened or that there was any withholding of the relevant
information from the persons attending and voting at these meetings. The
statutory meetings were properly convened and properly held. At these meetings,
there was no dispute that an overwhelming majority of members and secured
creditors and unsecured creditors approved of the scheme. What is stated is
that, now, the secured creditors and a substantial body of the shareholders
have changed their mind; and they wish to demonstrate this change of mind at
the requisitioned meeting. The two secured creditors of the company,
"SICOM and UCO Bank", have appeared through a common counsel and have
stated that they do not now support the scheme of amalgamation. While
"SICOM" has filed an affidavit purporting to explain this change of
stand, no affidavit has been filed on behalf of "UCO Bank". I have to
consider whether such a subsequent change of mind by some of the members and
creditors of the company can be taken note of and whether it is necessary to
permit the shareholders to hold a requisitioned meeting of the company in order
to demonstrate that they have changed their stance.
There have been instances
where at the time of consideration of a scheme of amalgamation, a dispute has
been raised as to whether the statutory meetings held for the purpose of
considering the scheme of amalgamation were properly held or not. In Dorman Long
and Co. Ltd., In re [1934] 1 Ch D 635, there was a dispute as to whether the
statutory meetings for considering the scheme had been properly held and
whether voting was properly recorded at the statutory meetings. It was, in this
context, that the court was required to consider whether the petition should be
dismissed or whether fresh meetings should be summoned. The question of holding
a fresh meeting for considering the scheme on account of a subsequent change in
the stand of the members did not arise in that case at all. In Waxed Papers
Ltd., In re [1937] 156 LT 452, the court was required to consider whether proxy
votes which were cast at the statutory meeting convened for considering the
scheme were valid. The difficulty in that case arose because the proxy votes
were utilised for voting on a resolution to adjourn consideration of the scheme
and a point was raised that the power to vote by proxy on the scheme did not
entail a power to vote on a resolution to adjourn the consideration of the
scheme. Once again, the dispute related to the manner in which the statutory
meeting had been held. The court was not called upon to consider any subsequent
change of mind by any members. In that case, however, Lord Justice Slesser
observed:
"Speaking for myself, I should like to
reserve the question, whether, in any event, a subsequent change of mind on the
part of the shareholders is a matter which the court ought to consider at all
if when considered by the court, the scheme cannot be legally impeached for
reasons other than those which would be appropriate at the meeting. I do not
think that in the present case, it is necessary to express a final conclusion
upon the matter, because the learned judge has said that such change of mind as
did arise in this case was induced by statements which were not fair, and,
therefore, I think that he was perfectly justified in disregarding that matter;
but it would appear, when the section is looked at, that that which the court
is sanctioning is the arrangement or compromise made at the meeting which has
been called under the order of the court. I think it is difficult to see how,
if no new matters, had they been known at the time the meeting was held, would
have influenced the position (so that at that time, the scheme was a proper one
for all reasons to sanction) a mere change of mind later, on the part of
persons, either transferees of the shares or the shareholders themselves, where
there were really no new circumstances producing any different legal situation,
could be a matter to be considered by the court. Certainly, the number of such
persons do not seem to me material in this sense, that, while it is true that
under sub-s. (2) the majority to approve the scheme must represent
three-fourths in value of the members or class of members, it cannot I think
make any difference that the members who change their minds and oppose later on
are or are not more or less than three-fourths in number, if they have a good
ground for opposition, that ground would be good, even if they were less than
three-fourths in value, if they have no ground, it does not seem to me to avail
them to show that they represent more than three-fourths in value".
Nearer home, in the case of
Sidhpur Mills Co. Ltd., In re, AIR 1962 Guj 305, a learned judge of the Gujarat
High Court, while considering a scheme of amalgamation, observed as follows (at
p. 311):
"Therefore, in my judgment, the correct
approach to the present case is (i) to ascertain whether the statutory
requirements have been complied with, and (ii) to determine whether the scheme
as a whole has been arrived at by the majority bona fide and in the interests
of the whole body of shareholders in whose interests the majority purported to
act, and (iii) to see whether the scheme is such that a fair and reasonable
shareholder will consider it to be for the benefit of the company and for
himself............. I do not wish to be understood to say that, in no case
post facto circumstances or events cannot be taken into account, but, on the
whole, I have come to the conclusion that, whilst, in some rare and exceptional
cases, the court may take into consideration subsequent events to protect the
interests of the company or the shareholders, as a general rule, the court
should consider the resolution on the footing of the circumstances which were
in existence at the time when the scheme was formulated, deliberated upon and
approved. If any other approach were to be made, then, in that case, there
would be no sanctity about business contracts. In fact, such an approach may
induce interested persons to shape [future events and circumstances in such a
way as to convert a reasonable scheme into an unreasonable one".
With all respect to the
learned judge, I am inclined to agree with his observations.
I have not been shown a
single case where in considering a scheme of amalgamation, the court ordered a
fresh meeting of the members and/or creditors on the ground that after the
statutory meetings were held, the members or creditors have had second thoughts
about the scheme. All cases where the question of reconvening the statutory
meeting was discussed, were cases where there were disputes relating to the
validity of the statutory meetings. There is no such dispute in the present
case. Secondly, though the requisition talks about a change of circumstances, I
have not been told what these changed circumstances are which make it necessary
for the members to reconsider the scheme. Mr. Bhabha has pointed out lapse of
time as one such circumstance. He has submitted that more than 20 months have
elapsed since the scheme was put before the statutory meetings of the members
and the creditors. This delay, however, has been occasioned because sanction of
the Central Govt. was required under the MRTP Act, and the application for
sanction was strenuously opposed by persons who were interested in the
alternate scheme. How this delay of 20 months has affected the merits of the
scheme has not been explained by anybody. Nor is there any guarantee that any
alternate scheme will be sanctioned within a shorter period. It was also
submitted before me that alternative and better schemes are forthcoming. No
particulars, however, have been given in any affidavit of anybody as to what
these alternative schemes are, who has submitted them and in what manner such
alternative schemes are more beneficial. SICOM, who is one of the secured
creditors of the petitioner company, has filed an affidavit in which it has
stated as follows:
"After the scheme of merger was presented
to this Hon'ble court and the meetings of the shareholders and the creditors
were held in January, 1981, the Government of Maharashtra which is holding 100
per cent. shares of SICOM received an alternative proposal for rehabilitation
of the petitioners which, according to the Government, had the main advantage
of continuing the petitioners as an independent entity.
The Government of Maharashtra, therefore,
instructed SICOM to withdraw its support to the merger".
It is apparent from this
affidavit that SICOM has withdrawn its support to the merger on instructions
from the Government of Maharashtra. Apart from a bare reference to the
alternative proposal, there is nothing in this affidavit which would show that
SICOM is aware of the nature of the alternative proposal or whether it is
better than the existing proposal or whether it is sufficiently worked out so
as to be capable of being put before the statutory meetings of members and
creditors of the company. If there is such a scheme which is more beneficial to
the company, there is nothing which prevents any member or creditor from coming
before the court and asking for the scheme being considered at the statutory
meeting, though whether the propounding of a subsequent but more beneficial
scheme can be a good reason for not sanctioning a scheme beneficial to the
company and binding on the company and its members and creditors, is a moot
point.
It has also been submitted
that the shareholders are entitled to express their views and the voice of the
shareholders should not be stifled. If the shareholders or any of them have
good grounds for opposing the scheme of amalgamation, there is nothing which
prevents such shareholders from appearing at the company petition for
sanctioning the scheme of amalgamation and pointing out their objections. If
the objections are weighty, they can be certainly considered at the time of the
hearing of the company petition. It makes no difference whether such an
objection is by one shareholder or a large number of shareholders. What matters
is the basis of the opposition. Thus, the requisition is wholly misconceived.
It has next been submitted
that under s. 391, statutory meetings are required to be called to ascertain
the views of the shareholders. If the voice of the shareholders is required to
be heard, then they must be allowed to hold a requisitioned meeting. A
requisitioned meeting, however, is not the only way in which the voice of the
shareholder can be heard, nor is such a requisitioned meeting contemplated in
the scheme of s. 391. Views of the shareholders under s. 391 are required to be
ascertained by calling a statutory meeting of the shareholders for that
purpose. In addition, the shareholders also have a right to appear at the
hearing of the scheme of amalgamation and to put forth their objections to the
scheme, if they have any. Both these methods clearly ensure that the voice of
the shareholders will be heard, and there is no need, nor is there any legal
sanction, for departing from the prescribed method.
It has been submitted
before me that it will be easier for the shareholders to attend the
requisitioned meeting, and it will be more difficult for the shareholders to
appear in court in order to voice their objections. I do not see how it will be
more difficult for the shareholders to appear in court. Undoubtedly, their
objections, if voiced before the court, will have to be supported by reasons,
while presumably, in a requisitioned meeting, the resolution can be carried by
a majority vote without having to assign any reason for it. If giving reasons
for objections make for hardship, then there is a hardship in appearing before
the court. In the interests of justice, the shareholders must put up with this
hardship.
It has next been submitted
that by calling the requisitioned meeting, the shareholders will be able to
draw attention to the change of circumstances that has taken place. In spite of
my repeated enquiries, I have not been told what these changed circumstances
are except that a period of about 20 months has elapsed since the scheme was
first proposed. This lapse of 20 months does not, in my view, justify the
calling of the requisitioned meeting.
As I have pointed out
earlier, under r. 79 of the Companies (Court) Rules, 1959, the company is
required to present the petition for sanctioning the scheme within 7 days of
the filing of the report by the chairman; and if the company does not do so,
then any member or creditor has been given the right to present a petition for
sanctioning the scheme. The company is thus under a statutory obligation to
present a petition for sanctioning the scheme. The requisitioned meeting
clearly interferes with the company's obligation in this connection.
It is also extremely
doubtful if any subsequent change of circumstances can be taken into account
while considering the scheme of amalgamation (See Sidhpur Mills Co. Ltd., In
re, AIR 1962 Guj 305).
The opponents, in the
present case, have strongly relied on the provisions of s. 169 of the Companies
Act and have submitted that no injunction should be granted restraining the
holding of a requisitioned meeting of the company. Under the provisions of s.
169 of the Companies Act, the board of directors of a company shall, on the
requisition of such number of members of the company as is specified in sub-s.
(4) forthwith proceed duly to call an extraordinary general meeting of the
company. Thus, if the board of directors receive a valid requisition signed by
the requisite number of members, they are bound to call a requisitioned meeting
of the company. In this connection, the opponents rely upon a decision in the
case of Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch D 320 (CA). The
court, in that case, held that it would not interfere with the internal working
of the company and that when the shareholders had requisitioned a meeting, the
board of directors is bound to call such a meeting and it cannot refuse to call
such a meeting on the ground that some of the resolutions, if passed at such a
meeting, would be irregular. Lord Justice Lindley observed in that case as
follows (at p. 333):
"We must bear in mind
the decisions in Foss v. Harbottle [1843] 2 Hare 461 and the line of cases
following it, in which this court has constantly and consistently refused to
interfere on behalf of shareholders, until they have done the best they can to
set right the matters of which they complain, by calling general meetings.
Bearing in mind that line of decisions, what would be the position of the
shareholders if there were to be another line of decisions, prohibiting
meetings of the shareholders to consider their own affairs ? It appears to me
that it must be a very strong case indeed which would justify this court in
restraining a meeting of shareholders. I do not mean to say of course that
there could not be a case in which it would be necessary and proper to exercise
such a power. I can conceive a case in which a meeting might be called under
such a notice that nothing legal could be done under it. Possibly in that case
an injunction to restrain the meeting might be granted".
In the case of Crickel Club
of India Ltd. v. Madhav L. Apte [1975] 45 Comp Cas 574 (Bom), a special case
was taken before a learned single judge of this court to consider the question
whether the board of directors of a public limited company was bound to call a,
meeting requisitioned by its members when the resolution which was purported to
be passed in such a meeting was contrary to the provisions of s. 274 of the
Companies Act. The learned single judge, who answered this question, held that
the board of directors were bound to call a meeting which was so requisitioned,
even though the resolution which would be passed at such a meeting would be
contrary to the provisions of s. 274 of the Companies Act. Now, these cases
pertain to the shareholders calling a requisitioned meeting of the company for
considering matters relating to the internal management of the company. In
neither of these cases, there was any question of a requisitioned meeting being
called to consider matters which affected persons other than the members and the
company or to compel the company to resile from its statutory obligations or to
interfere with the exercise of the court's jurisdiction under s. 391 of the
Companies Act.
One of the main reasons why
injunctions are not normally granted to restrain the holding of a requisitioned
meeting is that the shareholders ought to be allowed to regulate and set right
the affairs of the company by calling general meetings. The court, has,
therefore, been reluctant to interfere in the internal management of the
company. Secondly, such injunctions were sought in the cases cited before me by
the board of directors of the company. The courts have not normally permitted
the board of directors of the company to sit in judgment over the requisition
received by them to call a meeting of the shareholders. Normally, such a
meeting would be required to be requisitioned by the shareholders in order to
pass resolutions which are not supported by the board of directors or the management
of the company. The board of directors would, therefore, be expected to thwart
the calling of such requisitioned meeting. It is thus undesirable that the
board of directors should be allowed to refuse to call a requisitioned meeting,
because the board considers the resolutions which were proposed to be passed at
such a meeting, undesirable or not in the interest of the company. Courts have,
therefore, consistently held that if the requisition is called for the purpose
of passing a resolution which can be implemented in a legal manner, although
the form in which the resolution has been proposed is irregular on the face of
it, nevertheless, such a meeting must be called because ultimately a decision
taken at the meeting can be implemented in a legal manner. Lord Justice Lindley
has, in the case of Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch D 320
(CA), in his guarded language, expressed a view that if the resolution proposed
to be passed at the requisitioned meeting were wholly illegal, then the board
of directors would be under no obligation to call a meeting requisitioned for
the purpose of passing such an illegal resolution. Left to myself, I would
rather lend my humble support to the weighty pronouncement of Lord Justice
Lindley rather than to the stand taken by learned brother, Desai J. when he
stated that the requisitioned meeting must be called, even if the resolution
proposed at the requisitioned meeting was illegal. To my mind, there can be no
point in calling a meeting for passing a resolution which would be wholly
illegal. In any event, in the present case, it is not necessary to decide one
way or the other on this aspect, because there are various reasons why the
meeting sought to be requisitioned in the present case is not covered by any of
the considerations which have led the courts in the past to refuse to injunct
such meetings.
In the first place, the
present meeting has not been called to consider the internal management of the company.
The resolution which has been proposed does not deal with matters which concern
only the company and its shareholders. The purpose of the requisition is to
compel the company to withdraw the petition for amalgamation which is pending
before the court. Such a resolution does not pertain only to the company's
management and the line of decisions starting with Foss v. Harbottle [1843] 2
Hare 461, therefore, cannot have any bearing on such a meeting. Secondly, the
board of directors are not asking for an injunction to prevent the shareholders
from discussing the management of the company. They have called the
requisitioned meeting. If the meeting has been called to pre-empt a
consideration by the court of the scheme of amalgamation, the calling of such a
meeting can be questioned by any affected person. It is irrelevant whether such
a person has been put up by the board of directors or not.
A scheme of amalgamation
affects not merely the company and its shareholders, but it also vitally
concerns an important body of outsiders, viz., the creditors of the company,
both secured and unsecured. It is, therefore, important that any opposition to
this scheme should be expressed and taken note of in the manner provided in s.
391 of the Companies Act and not by the shareholders requisitioning a meeting
in order to compel the company to withdraw the petition. In the present case,
there appears to be a clear attempt on the part of the opponents to interfere
with the petition under s. 391 which is pending in this court. It seems that
the opponents, by calling a requisitioned meeting of the shareholders, are
seeking to undo the effect of the statutory meetings which have been already
held to consider the scheme and are seeking to postpone the sanctioning of the
scheme by the court as far as possible. In fact, the timing of the requisition
lends support to such a suspicion. The requisition has been made after the
Supreme Court refused to stay consideration of the amalgamation petitions
pending in the High Court. The requisitioned meeting in the present case,
therefore, is convened for a purpose which is totally different from the
purpose for which such meetings are ordinarily convened. The ratio, therefore,
of Isle of Wight Railway Co. v. Tahourdin [1884] 25 Ch D 320 (CA) and Cricket Club of India Ltd. v.
Madhav L. Apte [1975] 45 Comp Cas 574 (Bom)
does not apply to the present application.
Lastly, learned counsel
appearing for the opponents and for the secured creditors have urged that the
requisitioned meeting has been called to consider alternative schemes. Even if
I accept this submission, it is clear from the requisition that no alternative
schemes are being put before the shareholders at the requisitioned meeting. The
resolutions which are proposed to be moved themselves do not refer to any
specific alternative scheme. In the explanatory statement annexed to the
requisition by the requisitionists, there is no reference to any specific
alternative proposal. The explanation is confined mainly to pointing out in
very vague and general terms why, according to the requisitionists, the Brooke
Bond Scheme should not be approved. The requisitionists have not put forth any
alternative or better scheme for the consideration of the shareholders at the
requisitioned meeting. If the purpose of calling the requisitioned meeting is
for the shareholders to consider an alternative proposal which may be more
beneficial to the company, that purpose is not going to be served by calling
the requisitioned meeting. It has been argued before me that in the 30th annual
report of the company for the year ending December 31, 1980, it has been
mentioned that a modified proposal to lease the company's factory at Aurangabad
to M/s. Harbans Lal Malhotra and Sons Ltd. had again been revived and that this
has been forwarded to the solicitors and chartered accountants for advice. In
the 31st annual report of the company for the year ended December 31, 1981, it
has been stated that a proposal to lease the company's undertaking by Harbans
Lal Malhotra & Sons Ltd., which has been dealt with in the last annual
report, has not been further considered in the light of legal advice that such
a scheme of leasing would also require the approval of the Government of India
under the MRTP Act. Learned counsel for the opponents and for the secured
creditors have submitted that in view of the statements made in the two annual
reports, it must be presumed that the shareholders knew what was the
alternative scheme; and, hence, in the requisition or in the explanatory statement,
it was not necessary to set out any alternative scheme. This contention cannot
be accepted. In the first place, I have not been shown in either of the two
annual reports in question, the alternative scheme of Harbans Lal Malhotra and
Sons Ltd. set out in detail anywhere. Secondly, in the explanatory statement,
there is not even a reference to the proposal of Harbans Lal Malhotra and Sons
Ltd. If the purpose of calling the requisitioned meeting was to consider the
scheme proposed by Harbans Lal Malhotra and Sons Ltd., it should have been so
stated. The explanatory statement, in my view, is extremely vague and somewhat
tricky. In fact, the explanatory statement is insufficient and misleading. If
this is so, then the requisition for calling the meeting must be considered as
bad in law. In this connection, reference may be made to the decision in the
cases of Laljibhai C.
Kapadia v. Lalji B. Desai [1973] 43 Comp Cas 17 (Bom) and Firestone Tyre and
Rubber Co. Ltd. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377 (Bom). The explanatory statement which is required
to be annexed under s. 173 is for the purpose of ensuring that all facts which
have a bearing on the question on which the shareholders have to form their
judgment are brought to their notice. If this requirement is not complied with
and all relevant facts in the present case, and the alternative schemes are not
put before the shareholders fairly, then the resolutions will become bad in
law. Calling such requisitioned meeting, assuming that the requisitioned
meeting is to consider alternative schemes, will, in any case, be bad in law.
To sum up, the
requisitioned meeting which is being called is not to consider matters which
affect the company's management or which affect only the company and its members.
In view of the several features of the meeting requisitioned in the present
case, which distinguished it from ordinary requisitioned meetings, this is a
fit case where shareholders can be prevented from holding the requisitioned
meeting.
It was submitted by Mr.
Bhabha, learned counsel for the opponents, that s. 391 is not the only section
under which a scheme can be presented. He drew my attention to s. 395 of the
Companies Act and to s. 494 of the Companies Act. The latter deals with the
power of the liquidator to accept shares as a consideration for the sale of the
property of the company in liquidation. He submitted that it is open to the
shareholders to present a scheme under any of these provisions of the Companies
Act also. The requisition, in the present case, however, is not for the purpose
of presenting any scheme under any of the provisions of the Companies Act. The
purpose is only to get the pending petition under s. 391 of the Companies Act
withdrawn.
It was lastly submitted
that this is a fit case where a suit should be filed against the company and
that a judge's summons is not a proper method for obtaining reliefs. It was
also pointed out that a suit had, in fact, been filed in the city civil court
for this purpose. My attention was also drawn to a decision of the Kerala High
Court in the case of Prakasam v. Sri Narayana Dharmc Paripalana Yogam [1980] 50
Comp Cas 611 (Ker). In this case, the Kerala High Court held that the company
court will not assume jurisdiction where a member seeks to redress an
individual injustice done to him. In the present case, however, the resolution
is aimed at withdrawal of a petition pending under s. 391 of the Companies Act.
The meeting which is requisitioned has a direct nexus with the pending petition
under s. 391 of the Companies Act; and hence the company court exercising its
jurisdiction under s. 391 of the Companies Act can certainly deal with the
judge's summons taken out for the purpose of restraining the holding of such a
meeting. In the premises, the judge's summons is made absolute in terms of
prayer (a) except for the bracketed portion. The opponents to pay to the
applicant the costs of the judge's summons fixed at Rs. 300.
[1971] 41 COMP. CAS. 377(BOM)
HIGH COURT OF BOMBAY
Firestone Tyre and Rubber Co.,
v.
Synthetics and Chemicals Ltd.
MADON J.
SUIT NO. 522 OF 1969 AND SUIT NO. 681 OF 1969
NOVEMBER 7, 1969
Notices
of motion in both the suits.
F.S.
Nariman with A. B. Diwan and A. M. Setalvad for the Plaintiffs.
A.K.
Sen with Mrs. Sen, M. H. Shah and I.M. Chagla for defendant No. 1
C.K.
Daphtary with J. I. Mehta and R.N. Banerjee for defendant No. 2.
R.B.
Bhatt with N.G. Thakkar for defendants Nos. 3 and 4.
M.R.
Modi with P.P. Khambatta and R.J. Joshi for defendant No. 5.
As
these two notices of motion were heard together, it will be convenient to
dispose of them by one judgment. Both the above suits arise out of the
appointment for a further term of Kilachand Devchand and Co. Private Ltd., the
second defendants in Suit No. 522 of 1969 and the fifth defendants in Suit No.
681 of 1969, as the sole selling agents of Synthetics and Chemicals Ltd., the
first defendants in both the suits. It will be convenient to refer to these two
companies hereinafter as "the private company" and "the
company", respectively.
These
notices of motion were argued elaborately and at great length and as if their
hearing were a dress rehearsal for the hearing of the suits. I propose to set
out first the material facts necessary for understanding the matters in controversy
between the parties and deal with the other facts while considering the rival
contentions under each head of controversy raised before me. The company was
incorporated on January 20, 1960, as a result of collaboration between the
plaintiffs, The Firestone Tyre and Rubber Company, a company incorporated under
the laws of the State of Ohio in the United States of America and
Tulsidas Kilachand and others to whom, for the sake of
convenience, I will hereinafter refer as "the Kilachand group". The Kilachand
group consists of Tulsidas and his three brothers, Ramdas, Ambala and
Chinubhai, and their relatives and other concerns and companies owned or
controlled by the Kilachand family. The main object of the company is to
manufacture and deal in synthetic rubber and it is the only company in India
which manufactures synthetic rubber. The authorised share capital of the
company is Rs. 15,00,00,000 divided into 15,00,000 shares of Rs. 100 each. The
issued and subscribed share capital of the company is Rs. 5,75,00,000 divided
into 5,75,000 equity shares of Rs. 100 each, its paid up share capital being
Rs. 5,74,42,545. The plaintiffs have invested large amounts both by way of
loans and share capital in the company. The amount of their loan investment as
on December 31, 1968, including unpaid interest was about Rs. 3,46,16,124.
There is also a sum of about Rs. 83,71,875, for the balance due to the
plaintiffs on account of continuing know-how and technical services rendered by
the plaintiffs under an agreement dated March 25, 1960, between the plaintiffs,
the company and the private company. The plaintiffs are the holders of 1,43,650
fully paid-up equity shares of the face value of Rs. 100 each; in the company.
Fifty shares are held by F.J Reighley, 50 shares by G.T. Warner and 4 shares by
V.N. Karode, these three being the finance director, the sales director and the
secretary and director of Firestone Tyre and Rubber Company (India) Private
Ltd., a wholly owned subsidiary company of the plaintiffs. These shareholdings
are admitted. The aggregate of these shareholdings in the company is thus a
little over 25 per cent. So far as the Kilachand group is concerned, I am
informed by learned counsel for the company that the Kilachand group holds or
controls voting rights in respect of shares of a little over 27 per cent, of
the total paid-up share capital of the company. Tulsidas, who is not a
defendant in Suit No. 522 of 1969 but is the second defendant in Suit No. 681
of 1969, and his brother, Ramdas, were at all times and still are directors of
the company, Tulsidas at all times being also the chairman of the board of
directors of the company.
The
private company is a subsidiary of another private company, Kesar Corporation
Private Ltd. The majority of shares of the private company are held by Kesar
Corporation Private Ltd. and the remaining shares by Tulsidas and his brothers.
The Kilachand group controls Kesar Corporation Private Ltd. and holds most of
its shares. Tulsidas and Ramdas were at all material times and are directors of
both the private company and Kesar Corporation Private Ltd.
At
the meeting of the board of directors of the company held on July 17, 1963, it
was decided to appoint the private company as the sole selling agents of the
company. In pursuance of such decision the following two c-49 resolutions were
passed at the annual general meeting of the company held on September 23, 1963,
the first of such resolutions as a special resolution and the second as an
ordinary resolution :
"Resolved
that pursuant to section 314 and other applicable provisions of the Companies
Act consent be and is hereby given to the appointment as the sole selling
agents of the company for all the territories comprised within the Republic of
India, Nepal, Bhutan and Sikkim, of Messrs. Kilachand Devchand and Company
Private Ltd., a company in which Mr. Tulsidas Kilachand and Mr. Ramdas
Kilachand, directors of this company, are interested as directors and
members".
Resolved
that pursuant to section 294 and other applicable provisions of the Companies
Act, Messrs. Kilachand Devchand and Co. Pvt. Ltd. be and they are hereby
appointed the sole selling agents of the company for all the territories
comprised within the Republic of India, Nepal, Bhutan and Sikkim for a period
of five years commencing on the 1st October, 1963, and that the terms and
conditions as to remuneration and otherwise contained in an agreement, the
draft thereof has been placed before the meeting and for the purpose of
identification initialled by the chairman of this meeting be and the same are
hereby approved.
"Resolved
that the board of directors be and they are hereby authorised to cause the said
agreement when engrossed to be executed on behalf of the company".
It
appears that the fifth defendant company was claiming to have incurred
expenditure for setting up a sales organisation for the company prior to the
aforesaid board meeting. Accordingly, in the said annual general meeting the
following resolution was also passed as a special resolution:
"Resolved
that Messrs. Kilachand Devchand and Co. Private Ltd., a company in which Mr.
Tulsidas Kilachand and Mr. Ramdas Kilachand, directors of this company, are
interested as directors and members, be paid a sum equal to 2% of the net sale
price of the company's products sold up to the date of this meeting in
reimbursement of the expenses incurred by them in setting up a sales
organization".
In
pursuance of the said resolutions, by an agreement dated September 24, 1963,
the private company was appointed the sole selling agents of the company for
all: territories comprised within India, Nepal, Bhutan and Sikkim for a period
of five years commencing from October 1, 1963. Under the said agreement, each
party had the right to terminate the agreement prior to the expiry of its term
by giving four calendar months' notice to the other side. The private company
had to set up and maintain at its own cost an adequate organisation for sale of
the company's products within the said territories and to bear and pay all
expenses relating to such organisation. The private company had to procure
orders for the purchase of products at the prices and on the terms and
conditions of sale determined by the board of directors of the company and
forward them to the company's office for acceptance and the same were to be
binding on the company only when and to the extent confirmed by the company.
The private company undertook full responsibility for the collection of price
and all other amounts due from the buyers and to make immediate payment to the company
whether the amounts were actually collected from the buyers or not, on the same
being demanded by the company. The private company was to be paid a commission
at the rate of 2 per cent, on the net selling price exclusive of Government
excise duty and sales tax or other like charges of the products sold by or
through the selling agents within the said territories during the period of the
said agreement. On products sold directly by the company the private company
was to be paid such commission as the board of directors might decide, not
exceeding the said rate of 2 per cent, on the net selling price. The account of
commission was to be made up at the end of each quarter in each financial year.
The said agreement further provided that if and when any goods manufactured by
the company were sold outside the said territories during the period of the
said agreement, the board of directors of the company and the private company
would decide mutually whether any commission on such sales should be paid by the
company to the private company and the rate of such commission, if any. Clause
13 of the said agreement provided as follows :
"The
terms of this agreement may be modified by mutual agreement of the board of
directors of the company and the selling agent except that the rate of
commission payable to the selling agents as provided in clause 12 hereof shall
not be so modified".
It
appears that the plaintiffs were not happy at the idea of granting a sole
selling agency and had protested against the same. The plaintiffs, however, did
not oppose the passing of the said resolutions.
The
company started commercial production of synthetic rubber in about May, 1963.
It will be interesting at this stage to know the working of the company during all
these years. In no year has the company declared any dividends. For the year
ending December 31, 1963, the company's balance-sheet and profit and loss
account showed a loss of Rs. 29,25,604 without providing for depreciation for
that year amounting to Rs. 1,03,57,132. The previous year's- loss was Rs.
9,38,858 and after making certain adjustments on account of tax, the aggregate
amount of loss for these two years came to Rs. 38,87,990 which was carried
forward to the next year. During this period the commission paid to the private
company under the agreement dated September 24, 1963, including reimbursement
of expenses said to be incurred by the fifth defendant, prior to their
appointment, was Rs. 1,71,291. For the year ending December 31, 1964, the company's
balance-sheet and profit and loss account showed a profit of Rs. 16,49,410
without providing for any depreciation for that year amounting to Rs.
1,04,42,634. Thus the total arrears of depreciation for the years 1963-64, not
provided for, aggregated to Rs. 2,10,03,222. This resulted in the balance of
loss aggregating to Rs. 23,05,929 being carried forward. The selling agency
commission paid to the private company in that year was Rs. 8,68,117. For the
year ending December 31, 1965, the net loss was Rs. 19,34,186 after providing
for depreciation for that year. For the year ending. December 31, 1966, the
company earned a profit of Rs. 1,00,64,823 which included a sum of Rs.
84,39,325 for claims recovered against loss of profit policy and Rs. 5,03,220
being the amount received against insurance claims. After providing for
depreciation for that year and for 1963 and adjusting the depreciation for the
year 1965 and the loss carried forward, the total loss carried forward was Rs.
43,86,461. For the year ending December 31, 1967, the company earned a net
profit of Rs. 41,62,635. After providing for depreciation for that year and the
previous year's loss carried forward, the total loss was about Rs. 2,23,826
carried forward to the next year. For the year ending December 31, 1968, the
net loss suffered by the company, after providing for depreciation for the
years 1964 and 1968, was Rs. 26,52,335. For the years 1965, 1966, 1967 and 1968
the selling agency commission paid to the private company was Rs. 14,88,318, Rs.
16,86,971, Rs. 19,86,250 and Rs. 22,50,440, respectively. Thus, the total
amount of commission paid to the company for the period of the said agreement
dated September 24, 1963, aggregated to Rs. 84,63,849.
It
appears that in 1965 some correspondence took place between the Company Law
Board and the company. Ultimately, by its letter dated July 28, 1965, the
Company Law Board intimated to the company that after careful consideration of
the information furnished by the company it appeared to the Company Law Board
that the terms of appointment of the company's sole selling agents were
prejudicial to the interest of the company and the company was required to show
cause why the Company Law Board should not, in exercise of the powers conferred
upon it under section 294(5)(c) of the Companies Act, 1956, read with the
Government of India, Ministry of Finance, Department of Revenue, Notification
No. G.S.R. 178, dated February 1, 1964, vary the
terms and conditions of appointment of the private company as sole selling
agents. The variations proposed by the Company Law Board were to make the
private company liable to pay to the company the amount of price and other
amounts due from the buyers, whether actually collected from the buyers or not,
within 60 days from the date of the sale and not when demanded as provided in
the said agreement; that no commission should be payable to the private company
in respect of sales made by the company to those consumers borne on the
register of the Director-General, Technical Department, Government of India,
who had been required by the Government of India to furnish confirmation
letters that they would purchase indigenous synthetic rubber from the company to
the extent allocated to them by the Government, and that the commission on
sales outside the agency territories should not exceed 2½ per cent, on the net selling
price. This show-cause notice from the Company Law Board was considered by the
board of directors. The attitude adopted by those directors who represented the
plaintiffs' viewpoint was that the sole selling agency should be terminated as
it was working detrimentally to the interest of the company. The board of
directors also set up a sub-committee to consider the position brought about by
the said show-cause notice. This sub-committee resolved that the secretary of
the company should be authorised to send a suitable letter requesting for
extension of time from the Company Law Board up to October 15, 1965, for
submitting a representation. The plaintiffs, however, continued to insist that
the sole selling agency should be terminated. I do not consider it necessary to
set out the details relating thereto. Suffice it to say that an extension was
granted by the Company Law Board. It is not clear from the record whether any
written representation was in fact submitted on behalf of the company, but from
the letter of June 15, 1966, from the Company Law Board it appears that a
personal hearing was given on May 26, 1966. By the said letter the company was
informed that having regard to the circumstances of the case the Company Law
Board had "decided not to take any further action in the matter under
section 294(5) of the Act at this stage ". It was further stated in the
said letter that:
"The
Board would suggest, however, that at the time of the renewal of the agreement
with the sole selling agents in 1968, your company should bear in mind the
views of the Board which were communicated to you (that is, the company) in
their letter of even number dated the 28th July, 1965, read with their letter
of even number dated the 18th September, 1965 ".
The
letter of September 18, 1965, merely corrects some typographical errors in the
earlier letter of July 28, 1965.
By
a letter dated April 4, 1968, the private company intimated to the company that
the company had suffered a considerable increase in their expenses due to the
high price of imported alcohol and that the company had made very strenuous
efforts with the Government of India to be allowed an increase in the selling
price in order to offset the increased cost, but the selling price fixed by the
Government of India with effect from April 1, 1968, did not offset such
increased cost. It was further stated in the said letter that, in the interest
of the company and in order to tide over the difficult situation of the company
and in the mutual interest of both the parties and as a matter of commercial
expediency, the private company was prepared to continue to charge selling
agency commission as from April I, 1968, at the rate of 2 per cent, on the net
selling price of the company's products as prevailing on November 5, 1967,
exclusive of Government excise duty, sales tax or other like charges sold by or
through the private company. The letter concluded by saying : "You will
kindly appreciate that this is an ad hoc arrangement". By its letter dated
August 31, 1968, the private company pointed out to the company that the sole
selling agency agreement was valid up to September 30, 1968, and requested the
company to renew the said agreement "on the same terms and conditions as
stipulated in the earlier agreement" for a further period of five years,
that is, from September 30, 1968, to September 30, 1973. This letter was placed
before and considered by the board of directors of the company at its meeting
held on November 14, 1968. At that meeting Warner was in the chair, the other
directors present being Reighley, Tulsidas, Ramdas, S.L. Kirloskar, R.R. Ruia
and Mr. B.K. Daphtary, a solicitor and partner in the firm of solicitors,
Messrs. Daphtary, Ferreira and Diwan, who were and are the solicitors for the
company as also the private company. I will hereinafter refer to Mr. B.K.
Daphtary as "the solicitor-director". At the said meeting Reighley
and Warner opposed the further appointment of the private company. Ultimately,
the solicitor-director moved the following resolution which was seconded by the
said Kirloskar:
"Resolved
that Messrs. Kilachand Devchand and Co. Pvt. Ltd. be and are hereby appointed,
but subject to the condition that the appointment shall cease to be valid if it
is not approved by the company in the first general meeting held after today,
the sole selling agents of the products of the company for a period of five
years commencing on 1st October, 1968, upon the terms and conditions contained
in the agreement dated 24th September, 1963, as clarified by the selling agents
in their letter dated 4th April, 1968, and that the acts and deeds of Messrs.
Kilachand Devchand and Co. Pvt. Ltd. done on or after the 1st October, 1968, be
and the same are hereby ratified and confirmed and that for such services, they
be paid commission as provided in the said agreement dated 24th September,
1963, clarified as aforesaid.
Further
Resolved that an agreement with Kilachand Devchand and Co. Pvt. Ltd., the
selling agents of the company, be prepared on the same terms and conditions as
are contained in the said agreement, dated 24th September, 1963, and that the
seal of the company be affixed on the engrossment in token of execution by the
company, in the presence of any two directors of the company and the secretary
of the company, Mr. K.B. Dabke, who do sign
the same but before such execution a clarification be endorsed or attached to such
agreement duly signed by or on behalf of the selling agents in terms of their
letter dated 4th April, 1968".
The solicitor-director,
Kirloskar and Ruia voted in favour of the resolution, while Reighley and Warner
voted against it. Tulsidas and Ramdas, being interested in the said resolution,
abstained from voting. I may mention at this stage that all through there has
been a dispute between the parties as to whether the minutes of the board of
directors of the company have been correctly recorded. It is not necessary for
the purpose of these motions to go into the details of this controversy. All
that is necessary to set out is that at the meeting of the board of directors
held on February 3, 1969, the minutes of the board meeting held on November 14,
1968, were confirmed and Reighley read out a statement on behalf of Warner and
himself requesting that it should be made a part of the minutes. By his letter
dated February 4, 1969, Reighley has reproduced the text of that memorandum.
According to that memorandum, at the said meeting Warner and Reighley submitted
that the resolution for further appointment of the private company was not
valid inasmuch as the vote of the solicitor-director could not be considered as
at all material times he was and continued to be an interested director, being
a solicitor for the private company and there were therefore two valid votes
for and two valid votes against the resolution, the resolution was not carried.
On February 18, 1969, an agreement was executed between the company and the
private company appointing the private company as the sole selling agents of
the company for the aforesaid territories for a period of five years commencing
from October 1, 1968. All the other terms of this agreement are the same as in
the said agreement dated September 24, 1963, except that there is a new clause
in this agreement, namely, that the appointment of the private company was
subject to the condition that it should not be valid if it was not approved by
the company in the first general meeting held after the date on which the
appointment was made. To this agreement was attached a letter dated February
18, 1969, from the private company to the company recording that it had
executed the said sole selling agency agreement and confirming that the
clarification contained in the said letter dated April 4, 1968, from the
private company to the company would continue to remain in force and that the
letter of February 18, 1969, should be attached to and form part of the
agreement. The contents of the said letter of April 4, 1968, were reproduced in
the said letter of February 18, 1969. By his letter dated February 24, 1969,
Warner called upon Tulsidas to amend the minutes of the said meeting of the
board held on November 14, 1968, so as to provide that the aforesaid resolution
was not carried. It appears that no reply was. sent to the said letter.
Thereafter,
by their letter dated March 17, 1969, addressed to the company and its
directors, the plaintiffs required them to convene an extraordinary general
meeting of the company for the purpose of passing the following resolution as
an ordinary resolution, namely :
"Resolved
that the appointment of Kilachand Devchand & Co. Private Ltd. as the sole
selling agents of the company's products for a period of five years commencing
on 1st October, 1968, for the territories comprised within the Republic of
India and Nepal, Bhutan and Sikkim made by the board of directors of the
company by a resolution passed at their meeting on 14th November, 1968, be and
the same is hereby not approved".
The
plaintiffs also set out the statement which they desired to have included in
the explanatory statement to be annexed to the notice convening the said
meeting. This letter came up for the consideration of the board at its meeting
held on March 21, 1969, when it was resolved that the matter should be placed
for the consideration of the board at the next meeting thereof to be held on
March 27, 1969. At the meeting of the board held on March 27, 1969, the
following resolution was passed by a majority, Reighley and Warner voting
against the same. That resolution is as follows:
"Resolved
that pursuant to the provisions of section 294 and other applicable provisions
of the Companies Act, if any, the company hereby approve the appointment of
M/s. Kilachand Devchand and Co. Private Ltd. as the sole selling agents of the
products of the company for all the territories comprised within the Republic
of India, Nepal, Bhutan and Sikkim for a period of 5 years commencing on 1st
October, 1968, upon the terms and conditions as to the remuneration and
otherwise contained in the agreement, dated 18th February, 1969, as clarified
by the selling agents in their letter, dated 18th February, 1969, annexed to
the said agreement, which agreement with letter annexed is placed before the
meeting".
Prior
thereto, Reighley moved and Warner seconded the proposition that the meeting
requisitioned by the plaintiffs should be called first. This proposition failed
and thereafter another resolution was passed by a majority, namely, that the
extraordinary general meeting to be convened by the company should be held on
April 28, 1969, at 4 p.m. at Patkar Hall of S.N.D.T. University and that the
extraordinary general meeting requisitioned by the plaintiffs should be held on
April 29, 1969, at 4 p.m. at the same place. It was also resolved that the
secretary of the company should send out notices of the said meeting together
with the explanatory statements in consultation with the solicitors of the
company. In pursuance of these resolutions two notices, both dated March 27,
1969, were sent out to the shareholders, the one calling the extraordinary
general meeting convened by the company and the other calling the extraordinary
general meeting requisitioned by the plaintiffs.
The convening of these two meetings resulted in a regular proxy-battle between
the plaintiffs and the Kilachand group. A large number of proxies were lodged
by both sides as also a large number of letters revoking the proxies given in
favour of the other group. Circulars and statements to the shareholders in the
form of advertisements in newspapers were issued by both sides. The meetings
were held in a "pandal" put up in the open space adjacent to the said
Patkar Hall. At both the said meetings Tulsidas took the chair. According to
the plaintiffs, there were protests and objections to Tulsidas presiding at the
said meetings. It is admitted that there were such protests and objections so
far as the first meeting was concerned. At both the said meetings a poll was
demanded and it was ordered by Tulsidas as chairman of the said meetings to be
taken immediately and accordingly a poll was so taken. In respect of the poll
taken at both the said meetings, defendant Nos. 3 and 4 in Suit No. 681 of 1969
were appointed as scrutineers. Both these defendants are chartered accountants.
The third defendant is a partner in the firm of chartered accountants who are
the company's auditors, while the fourth defendant is a partner in Messrs.
Ford, Rhodes, Parks and Company, chartered accountants, who are the auditors of
the said Firestone Tyre and Rubber Company of India Private Ltd. After the poll
was taken at the meeting of April 28, 1969, Tulsidas announced that the result
of the poll would be declared by May 26, 1969, by an announcement in
newspapers. Similarly, after the poll was taken at the meeting held on April
29, 1969, Tulsidas announced that the result of the poll would be declared 15
days after the result of the poll taken at the meeting held on April 28, 1969.
Thereafter, by an announcement in newspapers, the announcement of the result of
the poll of the meeting of the 28th April was postponed to the end of June,
1969.
On June 3, 1969, the
plaintiffs filed Suit No. 522 of 1969. In this suit the plaintiffs have challenged
the validity of both the initial appointment of the private company as the sole
selling agents of the company as also their appointment as such sole selling
agents for a further term. The plaintiffs have also challenged the validity of
the resolution of the board passed on November 14, 1968. They have further
contended that a special resolution was necessary for approving the appointment
of the private company and that as the meeting of the 28th April was convened
only for passing the resolution as an ordinary resolution, the private company
had vacated their office as sole selling agents as from April 29, 1969. They
have also prayed for a refund by the private company to the company of all
amounts of commission received by it, and for an injunction restraining the
company and the private company from either acting upon the said resolution of
the board of November 14, 1968, or on the said agreement of February 18, 1969,
read with the said letter dated February 18, 1969, and restraining the company from
paying to the private company and the private company from receiving from the
company any remuneration as and by way of sole selling agency commission or
otherwise in the future. In Suit No. 522 of 1969, the plaintiffs took out a
notice of motion on June 11, 1969, in which they have prayed for an interim
injunction for restraining the company from making any payment to the private
company by way of commission or otherwise under the said resolution of the
board dated November 14, 1968, or the said agreement dated February 18, 1969,
read with the said letter dated February 18, 1969, or from implementing in any
manner or acting upon the said resolution or the said agreement. On June 30,
1969, the result of the poll of the meeting held on April 28, 1969, was announced
in newspapers. According to the said announcement, the votes cast in favour of
the resolution were 2,47,480 and the votes cast against the said resolution
were 2,27,309. Accordingly, by the said announcement, Tulsidas as the chairman
declared that the said resolution was carried.
Several important events
took place between the date of the issue of the said notices convening the
meetings and the aforesaid announcement. Correspondence also took place between
the parties both before and after the announcement of the result. Some of these
facts are disputed, but some and particularly those which are necessary for
forming an opinion on the order to be made on these motions are admitted. I
will deal with these facts in detail while considering the arguments advanced
with respect to the validity of the result of the poll.
On July 16, 1969, the
plaintiffs filed Suit No. 681 of 1969. In this suit they have challenged the
validity of the said notices convening the meetings, the conduct of the said
meetings, the manner in which the result of the poll taken at the meeting of
the 28th April was arrived at and the result of such poll. In the said suit the
plaintiffs have prayed for a declaration that the said meeting held on the 28th
April and the declaration of the result of the poll taken thereat were illegal
and void and that the said meeting was not properly held as required by law. In
the alternative they have prayed that the court should give directions for
scrutinising the votes, proxies and letters of revocations in respect of the
said two extraordinary general meetings and should appoint a fit and proper
person to scrutinise them and to determine and decide the result of the said
meetings and should remove Tulsidas and defendants Nos. 3 and 4 as the chairman
and scrutineers respectively of the said meeting of the 29th April. In the said
Suit No. 681 of 1969 the plaintiffs took out a notice of motion on July 17,
1969. In the said motion they have prayed for an interim order and injunction
restraining Tulsidas and the scrutineers from exercising any power as chairman
or scrutineers of the said general meeting of the 29th April in connection with
the scrutiny of proxies, letters of revocations or votes cast thereat, as also for restraining the company,
Tulsidas and the private company from in any manner implementing or acting upon
the footing that the resolution proposed at the said meeting of the 28th April
was passed, and restraining the company from making any payment to the private
company and the private company from receiving from the company any payment,
whether by way of commission or otherwise, under the said resolution of the
board of directors passed on November 14, 1968, or under the said agreement of
February 18, 1969, read together with the said letter dated February 18, 1969,
and restraining the company, Tulsidas, the private company and the scrutineers
from disposing of or otherwise dealing with the papers and documents in
connection with the polls taken at the said two extraordinary general meetings
including certain documents specified in exhibit "Z-9" to the plaint,
and for an order permitting the plaintiffs to inspect the said papers and
documents. Before issuing the said notice of motion the plaintiffs, after
giving notice to the defendants in the said suit, made an application to me on
July 16, 1969, for ad interim reliefs, and after hearing counsel on behalf of
the parties, I issued an ad interim injunction restraining the defendants to
the said suit, namely, the company, Tulsidas, the scrutineers and the private
company, and each of them and their servants and agents from disposing of or in
any manner dealing with the papers and documents in connection with the polls
taken at the said two extraordinary general meetings including those mentioned
in exhibit "Z-9" to the plaint or from opening the packets in which
the papers may have been kept.
Though
a large number of grounds have been taken in both these suits at the hearing:
of these notices of motion Mr. Nariman, learned counsel for the plaintiffs, has
confined himself to arguing certain points only. This he has done only for the
purposes of these motions and without in any mariner giving up the right to
argue the said points at the hearing of the suits; for instance, though in the
said Suit No. 522 of 1969 the validity of the initial appointment of the
private company as sole selling agents of the company made in September, 1963,
has been challenged, Mr. Nariman for the purposes of these notices of motion
did not argue this point at the hearing of these motions. I may also mention
that all parties before me are agreed and further applied to me that it would
be in the interest of the parties if the hearing of both these suits were
expedited, a view which I too am inclined to take. It was also not disputed by
any of the defendants that an interim injunction may be granted restraining
Tulsidas and the scrutineers in terms of prayer (a) of the said notice of
motion in Suit No. 681 of 1969, namely, restraining Tulsidas and the
scrutineers from proceeding further with exercising any power as chairman or
scrutineers at the said extraordinary general meeting of the company held on
April 29, 1969, in connection with the scrutiny or examination of the proxies,
revocations of votes cast thereat in connection with the declaration of the
result of the poll taken thereat. The reason for this is obvious. Either the
company had validly approved the further appointment of the private company at
the meeting held on April 28, 1969, and the resolution moved thereat was duly
passed, assuming an ordinary resolution only was required, or it had not. In
either event, the passing or rejecting of the resolution moved at the
requisitioned meeting held on April 29, 1969, would be immaterial. If the further
appointment was approved at the meeting of the 28th April its disapproval at
the meeting of the 29th April would not have any effect. If the said further
appointment was not approved at the meeting of the 28th April, its express
disapproval at the meeting of the 29th April would be redundant. The parties
are also agreed that the papers and documents in connection with the polls
taken at the said two meetings should be kept in safe custody and that the
parties should be permitted forthwith to take inspection thereof under proper
safeguards without waiting for formal discovery, so that the hearing of the
suits and particularly of Suit No. 681 of 1969 may be expedited. Though at one
stage the parties agreed as to the person who should have the custody of these
papers and documents and give inspection thereof, as the parties could not
agree upon the form of the consent order in that behalf, no order by consent
can, however, be passed with respect thereto.
I
will now deal with the various points argued at the hearing of these notices of
motion in the order in which they arise. Chronologically, therefore, I will
first take up plaintiffs' objections to the said resolution passed at the
meeting of the board of directors of the company held on November 14, 1968. The
contentions in that behalf are taken in Suit No. 522 of 1969. It is contended
that the solicitor-director was prohibited by section 300 of the Companies Act,
1956, from taking any part in the discussion of, or vote on, the said
appointment for a further term of the private company and that, since he took
part in the discussion and voted, his vote is void and therefore as there were
two votes in favour of the proposition that the private company should be
appointed for a further term and two votes against the said proposition, the
resolution was not duly passed. On behalf of the contesting defendants, namely,
the company, Tulsidas and the private company, it is contended that the
solicitor-director had no such concern or interest in the matter of the further
appointment of the private: company as sole selling agents as required by
section 300 of the Companies Act, 1956, and that assuming he had any
such interest or concern, the plaintiffs all throughout knew about the
same and did not raise any objection to the solicitor director taking part in
the discussion or voting at the said meeting of the board held
on November 14, 1968, and the plaintiffs are, therefore, estopped from taking
up this contention. The relevant provisions of law are to be found in
sub-sections (1) and (4) of section 299 and sub-sections (1), (3) and (4) of
section 300 of the Companies Act, 1956. These provisions are as follows:
"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...
(4) Every director who fails to comply with sub-section (1)
or (2) shall be punishable with fine which may extend to five thousand
rupees".
"300.Interested director not to participate or vote in
board's proceedings.—(1) 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, or to be entered into, by or on behalf of the company, if he is in any
way, whether directly or indirectly, concerned or interested in the contract or
arrangement; 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………
(3) In the case of a
public company or a private company which is a subsidiary of a public company,
if the Central Government is of opinion that having regard to the desirability
of establishing or promoting any industry, business or trade, it would not be
in the public interest to apply all or any of the prohibitions contained in sub-section
(1) to the company, the Central Government may, by notification in the official
gazette, direct that the sub-section shall not apply to such company, or shall
apply thereto subject to such exceptions, modifications and conditions as may
be specified in the notification.
(4) Every director
who knowingly contravenes the provisions of this section shall be punishable
with fine which may extend to five thousand rupees".
Sections
299 and 300 reproduce the provisions of sections 91A and 9IB of the Indian
Companies Act, 1913, with certain changes. I have indicated by means of
underlining
the material difference between the old sections and the new sections. The
material provisions of sections 91A and 91B of the old Companies Act were as
follows:—
"91A.
Disclosure of interest by director.—(1) Every director who is directly or indirectly concerned
or interested in any contract or arrangement entered into by or on behalf of
the company shall disclose the nature of his interest at the meeting of the
directors at which the contract or arrangement is determined on, if his
interest then exists, or in any other case at the first meeting of the
directors after the acquisition of his interest or the making of the contract
or arrangement...
(4) Every officer of
the company who knowingly and wilfully acts in contravention of the provisions
of sub-section (3) shall be liable to a fine not exceeding five hundred
rupees".
"9IB. Prohibition of voting by interested
director.—(1) No director shall, as a director, vote on any contract or
arrangement in which he is either directly or indirectly concerned or
interested nor shall his presence count for the purpose of forming a quorum at
the time of any such vote ; and if he does so vote, his vote shall not be
counted :…………
(2) Every director
who contravenes the provisions of sub-section (1) shall be liable to a fine not
exceeding one thousand rupees".
In
addition to the penal consequences provided for by section 299(4), a director
who acts in contravention of section 299 vacates his office as such director
under section 283(1)(i) of the Companies Act, 1956. It may be mentioned that
article 184B(1) of the articles of the company reproduces the provisions of
section 300(1).
The
facts which are said to make the solicitor-director an interested director
within the meaning of section 300 may now be stated. These facts are all
admitted by the defendants. The solicitor-director is a partner in the firm of
solicitors, Messrs. Daphtary, Ferreira and Diwan. He and his firm have for
several years been acting as general solicitors for the Kilachand family and in
particular for Tulsidas and Ramdas and for all Kilachand concerns. They were
and are solicitors for the said Kesar Corporation Private Ltd., which is the
holding company of the private company, the solicitor-director being himself a
subscriber to the memorandum and articles of association of the said Kesar
Corporation Private Ltd. and at one time a shareholder thereof. They are also
solicitors for the company and the private company right from the respective
dates of their respective incorporation and the solicitor-director is a
subscriber to the memorandum and articles of association of the company along
with Tulsidas, Ramdas, their brother, Ambalal, Suresh, the son of Tulsidas, and
Rajnikant, the son of Ambalal. At the time of the incorporation of the private
company on or about January 6, 1960, another partner of the firm of Messrs.
Daphtary, Ferreira and Diwan filed with the Registrar of Companies, Bombay, a
declaration of compliance with the provisions of the Indian Companies Act,
1913. Further, the solicitor-director has been a director of Track Private Ltd.
since 1951 and holds more than 20 per cent, of the shares in Track Private Ltd.
The said Track Private Ltd. has its registered office at the same address as
the registered office of the company and the private company. The said Track
Private Ltd. is the company owned and controlled by the Kilachand group in
which Tulsidas, his three brothers and his son, Suresh, Ambalal's son the said
Rajnikant, and Tonil, the son of Ramdas, are shareholders, the word
"Track" being a coined word representing the first letters in the
personal names of Tulsidas, Ramdas, Ambalal, Chinubhai and the family name,
Kilachand. The solicitor-director is also a director and shareholder of
Polychem Ltd. in which the Kilachand brothers and their relatives hold
considerable financial interest. The sole selling agents of the said Polychem
Ltd. are Indian Commercial Company Private Ltd. of which almost all except two
shares are held by the Kilachand family and the said Kesar Corporation Private
Ltd. The solicitor-director was also a subscriber to the memorandum and
articles of association of the said Indian Commercial Company Private Ltd. and
the said firm of Messrs. Daphtary, Ferreira and Diwan have been and are the
solicitors of the said company. The legal work of the Kilachand family and the
Kilachand concerns and companies is personally attended to by the
solicitor-director, including their tax matters and contentious and
non-contentious matters. The proxies for the meetings of the 28th and the 29th
April which Tulsidas obtained were in favour of Tulsidas or failing him the
solicitor-director or failing the solicitor-director the said Ruia or failing
the said Ruia the said Kirloskar. Along with the said Ruia and the said
Kirloskar the solicitor-director issued to the shareholders of the company a
printed circular asking them to vote in favour of the resolutions to be moved
at the said extraordinary general meeting of the 28th April. It is contended by
the plaintiffs that the said firm of Messrs. Daphtary, Ferreira and Diwan and
the solicitor-director as a partner in that firm have earned and are earning
large sums of money as solicitors from the Kilachand family and the Kilachand
concerns and companies and that as a result of his long association with the
Kilachand family the solicitor-director is a family solicitor and also a close
friend and a person in the confidence of the Kilachand family. It is,
accordingly, submitted by the plaintiffs that the solicitor director was
concerned or interested, if not directly, at least indirectly, in the further
appointment of the private company and that by reason of his long association
and professional relationship and close friendship with the Kilachand family
and particularly with Tulsidas, he was interested in safeguarding and promoting
the interests of the Kilachand family and the Kilachand concerns and,
naturally, therefore, was interested and .concerned in seeing that the highly
remunerative sole selling agency was granted to the private company for a
further maximum period of five years. It is further submitted that there was
thus a conflict between his interest in the Kilachand family and Tulsidas and
the private company and his duty as a director of the company.
Section
300 of the Companies Act, 1956, embodies, just as section 91B of the Indian
Companies Act, 1913, did, the general rule of equity (see Pratt (T. R.)
(Bombay) Ltd. v. M. T. Ltd. The clearest
exposition of this rule is to be found in Aberdeen Rly. Co. v. Elaikie. In that
case, Lord Cranworth said :
"A
corporate body can only act by agents, and it is of course the duty of those
agents so to act as best to promote the interests of the corporation whose
affairs they are conducting. Such agents have duties to discharge of a
fiduciary nature towards their principal. And it is a rule of universal
application, that no one, having such duties to discharge, shall be allowed to
enter into engagements in which he has, or can have, a personal interest
conflicting, or which possibly may conflict, with the interests of those whom
he is bound to protect. So strictly is this principle adhered to, that no
question is allowed to be raised as to the fairness or unfairness of a contract
so entered into. It obviously is, or may be, impossible to demonstrate how far
in any particular case the terms of such a contract have been the best for the
interest of the cestui que trust, which it was possible to obtain. It may
sometimes happen that the terms on which a trustee has dealt or attempted to
deal with the estate or interests of those for whom he is a trustee, have been
as good as could have been obtained from any other person, they may even at the
time have been better. But still so inflexible is the rule that no inquiry on
that subject is permitted".
Though
this was a case from Scotland, the rule of English law is the same, for, as
observed by Swinfen Eady L.J., in Transvaal Lands Company v. New Belgium (Transvaal)
Land and Development Company, the doctrine rests on such obvious principles of
good sense that it is difficult to suppose that there could be any system of
law in which it would not be found. In Transvaal Land Company's case it was held
at page 503 that:
"Where
a director of a company has an interest as shareholder in another company or is
in a fiduciary position towards, and owes a duty to, another company which is
proposing to enter into engagements with the company of which he is a director,
he is in our opinion within this rule. He has a personal interest within this
rule or owes a duty which conflicts with his duty to the company of which he is
a director. It is immaterial whether this conflicting interest belongs to him
beneficially or as trustee for others"
This
rule was characterised by Lord Cairns L.C. in Parker v. McKenna as not a
technical or arbitrary rule but a rule founded upon the highest and truest
principles of morality. Thus, this rule applies not only where there is a
conflict of interest or conflict of interest and duty but also where there is a
conflict of two duties. It is immaterial whether the interest is a personal
interest or arises out of a fiduciary capacity or whether the duty which is
owed is in a fiduciary capacity. Actual conflict is also not necessary. A
possibility of conflict is enough to bring the case within the ambit of this
rule nor does the application this rule depend upon the extent of the adverse
interest. Directors stand towards] the company in a fiduciary position. In
India this fiduciary character has received statutory recognition in section 88
of the Indian Trusts Act, 1882. The reason underlying this rule is that the
company has a right to the unbiassed voice, advice and collective wisdom of its
directors. (See Benson v. Heathorn Imperial
Mercantile Credit Association v.Coleman and Victors
Ltd. v. Lingard).
The
section itself makes it clear that the interest or concern need not be direct.
It may be indirect. Further, the words used in the section are "concerned
or interested". The phrase "concerned in a contract" has been
the subject-matter of judicial interpretation in England. In Nutton v. Wilson , the Court
of Appeal had to consider rule 64 of Schedule II to the Public Health Act,
1875, under which a member of a local board who "in any manner "was
"concerned in any bargain or contract" entered into by such board
ceased (except in certain cases) to be such member and his office was thereupon
to become vacant. By rule 70 of the said Schedule a penalty was imposed upon a
person who acted as such member when disabled from acting by any provision of
the Act. The defendant, a member of a local board, was employed by persons with
whom the board had contracted for the performance of certain works on the
premises of the board, to do the portion of the work so contracted. The trial court
held against the defendant and an appeal against the said decision was
dismissed. In the Court of Appeal Lindley L.J. observed at page 748 :
"There
does not seem to be any question here of participating in the profits of a
contract; but the question is whether the defendant can be said to have been
concerned in any bargain or contract entered into by the board. The expression
' in any manner concerned ' is a somewhat lax one. Cases may be put in which a
person might perhaps be said in one sense to be concerned in a contract entered
into by the board, and yet it might be tolerably obvious that he was not '
concerned in the contract' in the sense in which the Act uses the words. To
interpret words of this kind, which have no very definite meaning, and which
perhaps were purposely employed for that very reason, we must look at the
object to be attained. The object obviously was to prevent the conflict between
interest and duty that might otherwise inevitably arise".
In
Barnacle v. Clark the
respondent was a member of a school board. He sold sand and gravel to a builder
who had entered into a contract with the board for the building of a school. At
the time of the sale the respondent was aware that the sand and gravel were
intended to be used, as they were in fact used, in the building of the school.
The respondent was prosecuted under section 34 of the Elementary Education Act,
1870, under which a member of a school board who, inter alia, "shall in
any way share or be concerned in the profits of any bargain or contract with or
any work done under the authority of such school board "was liable to a
penalty and his office became vacant. The justices for the county of
Northampton holding that the respondent was not guilty of any offence dismissed
the in formation. Upon a case being stated to the court it was held that the
respondent was guilty. Ridley J. referred to Nutton v. Wilson and
observed that, though that was not a precise authority in favour of the
appellant's contention, it showed the lines upon which similar statutory
enactments had been construed. The court came to the conclusion that, having
regard to the object of the Act, it should be carefully and strictly construed
and, although the respondent had unwittingly offended against the provisions of
the section and although there was no suggestion that what he did was done with
a corrupt purpose or from a corrupt motive and although no blame attached to
him, he ought to have been convicted. The test laid down in Nutton v. Wilson was
accepted by the Court of Appeal in England v. Inglis and
followed by Astbury J. in Holden v. Southwark Corporation. The word
"interest" occurring in section 12(1) of the Municipal Corporations
Act, 1882, of England, came up for consideration of the Court of Appeal in
England v. Inglis.
In that case, the defendant, who was a member of a municipal corporation,
carried on business as a jeweller and optician. The optical department was
managed by his son who was not a partner but was a paid employee. A contract
was made between the son in his own name and the municipal corporation for the
supply of spectacles to the children of the schools controlled by the
corporation's education committee. The contract was carried out by the son, the
spectacles were paid for by him with his own cheque and he received moneys in
his own name from the corporation and paid the amounts so received into his own
banking account. The spectacles were supplied in cases bearing the son's name
but the defendant's business address, some of the cases being taken at the
expense of the defendant out of his stock, but the shop was provided and the
establishment expenses paid by the defendant and the fact that the spectacle
cases bore the defendant's address helped to advertise his business with the
consequent probability of increasing his custom. Salter J. held that
"interest" in a contract within the meaning of section 12(1) of the
Municipal Corporations Act, 1882, must be something more than a sentimental
interest, such as arises from the natural love and affection of a man for his
son ; it must be a pecuniary or, at least, a material interest; but it need not
be a pecuniary advantage. On the facts of the case the Court of Appeal held
that the defendant had a pecuniary interest of an adverse kind in the contract
and that it could properly be held that the defendant had a pecuniary advantage,
or a reasonable expectation of a pecuniary advantage, from the contract, for in
any event this helped to advertise his business. In K.F. Narintan v. Municipal
Corporation of Bombay, Mulla J.
had to construe clause (p) of section 36 of the City of Bombay Municipal Act,
1888, as that Act was then entitled. That clause provided:
"A
Councillor shall not vote or take part in the discussion of any matter before a
meeting in which he has, directly or indirectly, by himself or by his partner,
any share or interest such as is described in clauses (g) to (1) both inclusive
of section 16, or in which he is professionally interested on behalf of a
client, principal or other partner".
After
referring to England v. Inglis , Mulla J.
said that it therefore followed that, where there is a pecuniary advantage, or
a reasonable expectation of a pecuniary advantage, it must be regarded as an
"interest" within the meaning of that section. If the interest in a
contract was pecuniary, it was immaterial that the amount involved was
trifling. If the interest was not pecuniary, it must at least be a material
interest. Mulla J. also referred with approval to the test laid down in Nutton
v. Wilson
and accepted in later cases mentioned above.
In
the present case the solicitor-director held, vis-a-vis the company, a dual
fiduciary character. He was both a director of the company as also the
solicitor for the company. He was also the solicitor for the private company,
for the Kilachand family and all the Kilachand concerns and companies. The
position of a solicitor who acts for two clients came up for consideration
before the Court of Appeal in Moody v. Cox and Hatt . In that
case the plaintiff had contracted to purchase from Hatt, who was a solicitor,
and Cox, his managing clerk, who were trustees, a portion of their trust
property. Throughout the transaction Hatt acted through Cox as solicitor both
for vendors and purchaser. Cox failed to disclose to the plaintiff certain
valuations previously obtained showing that the property was not worth the
price which the plaintiff agreed to pay. The plaintiff knew that the vendors
were trustees. In the course of the negotiations the plaintiff offered and Cox
accepted a bribe. Thereafter the plaintiff filed an action for rescission of
the contract. The defendants counter-claimed for specific performance. Younger
J., in the trial court, held that the plaintiff was entitled to succeed on the
ground that Hatt had failed to fulfil his obligation as solicitor for the
plaintiff to disclose to him all material facts in his knowledge relating to
the matter. As to the giving of the bribes, he held that the defendant Hatt, by
affirming the contract, which he might have repudiated, had removed the blot
upon it and placed the parties in the position in which they would have been if
no bribes had been given and the plaintiff was not, therefore, deprived of his
equitable right to rescission. The defendants filed an appeal which was
dismissed. In the Court of Appeal Scrutton L.J. said
"Two
questions will arise in cases of solicitor and client—first, as to the relation
which will create this obligation, and, secondly, as to the nature of the obligation
created. Where the relation of solicitor and client occurs in the very
transaction attacked it will, in my view, be almost, if not quite impossible to
avoid the obligation, and an independent solicitor should be employed by the
client. It is called ' putting him at arm's length'. It might perhaps also be
effected by a clear declaration of the position by the vendor, such as this : '
Mind, I am going to get the highest price I can; be on your guard;' but the
position would have to be made very clear in order to relieve the solicitor of
obligations far exceeding those of an ordinary vendor, and is a position to be
avoided. More difficult questions arise when the employment as solicitor has
been In other matters more or less numerous or recent, and the transaction in
question is a separate transaction in which the solicitor does not act as such.
It is a question of degree in every case......The relation may then be an
actual relation of solicitor and client in the transaction impugned, or such an
antecedent relation as gives rise to the influence by the solicitor and
confidence by the client the effect of which has not ceased at the time of the
transaction impugned………But it is said that he could not disclose that
information consistently with his duty to his other clients, the cestuis que
trust. It may be that a solicitor who tries to act for both parties puts
himself in such a position that he must be liable to one or the other, whatever
he does. The case has been put of a solicitor acting for vendor and purchaser
who knows of a flaw in the title by .reason of his acting for the vendor, and
who, if he discloses that flaw in the title which he knows as acting for the
vendor, may be liable to an action by his vendor, and who, if he does not
disclose the flaw in the title, may be liable to an action by the purchaser for
not doing his duty as solicitor for him. It will be his fault for mixing
himself up with a transaction in which he has two entirely inconsistent
interests, and solicitors who try to act for both vendors and purchasers must
appreciate that they run a very serious risk of liability to one. or the other
owing to the duties and obligations which such curious relation puts upon
them".
Lord
Cozens-Hardy M.R. described the defendants' case as almost unarguable. He said
at page 81:
"A
man may have a duty on one side and an interest on another. A solicitor who
puts himself in that position takes upon himself a grievous responsibility. A solicitor may have a duty on one side and
a duty on the other, namely, a duty to his client as solicitor on the one side
and a duty to his beneficiaries on the other ; but if he chooses to put himself
in that position it does not lie in his mouth to say to the client 'I have not
discharged that which the law says is my duty towards you, my client, because I
owe a duty to the beneficiaries on the other side'. The answer is that if a
solicitor involves himself in that dilemma it is his own fault"
The principles laid down in
Moody v. Cox and Halt were
followed in Goody v.
Baring.
On behalf of the contesting
defendants it was submitted that sections 299 and 300 provide for penal
consequences and that not only there was a liability to be prosecuted under
these sections and fined, but under section 283(1)(i) a director who acted in
contravention of section 299 vacated his office and these sections should,
therefore, receive a strict construction. It was further submitted that the
Companies Act was a complete code and no disqualification would be imported
into sections 299 and 300 unless such disqualification could be found in the
sections themselves and the scope of the sections cannot be enlarged on any
equitable principles which may have applied prior to the enactment of the
sections. It was further submitted that an interest in the contract or
arrangement which the sections require must be a pecuniary or a material
interest. It must relate to the contract or arrangement itself and must be such
as creates a conflict between the interest of the director concerned as a
director of the company and his own interest in the contract and not any one
else's. Before considering these arguments I may mention that in the present
case assuming the solicitor-director had a concern or an interest in the
appointment for a further term of the private company, he had not at any time
made a disclosure thereof under section 299.
In my opinion, it is not
strictly correct to say that section 300 is a disqualifying section. It is a
prohibitory section. What section 300 does is to prohibit a director of a
company holding a particular character from doing certain acts, namely, from
taking any part in the discussion of, or voting on, any contract or arrangement
entered into, of to be entered into, by or on behalf of the company, if he is,
in, any way, whether directly or indirectly, concerned or interested in the
contract or arrangement. After prescribing these prohibitions the section lays
down the consequences of infringing them. That section 300(1) contains
prohibitions is also made clear by sub-section (3) of section 300 which confers
upon the Central Government the power in certain circumstances where it is of
the opinion that "it would not be in the public interest to apply all or
any of the prohibitions contained in sub-section (1) to a company", to direct that that
sub-section shall not apply to such company or will apply with such exceptions,
modifications and conditions as may be specified. It may also be pointed out
that the criminal liability imposed both by sections 299 and 300 is not an
absolute one. It is only in respect of 'a director who knowingly contravenes
the provisions of these sections. Thus, knowledge is the gist of the offence
under both these sections. It is true that the sections must be strictly
construed but not in favour of the directors as contended. They must be construed,
as pointed out by Lindley L.J. in Nutton v. Wilson, looking at
the object to be attained by the enactment of the sections. Both under the
Companies Act as in the statutes which were considered in Nutton v. Wilson, Barnacle
v. Clark
and England v. Inglis the object
intended to be attained by the enactment of such prohibitions was to prevent
the conflict between interest and duty which might otherwise inevitably arise.
In enacting sections 299 and 300, the legislature wisely did not attempt to
define "concern "or" interest". Since these sections were
enacted in the interest of the shareholders, so that they may have the benefit
of the independent, unbiassed and collective judgment, opinion and wisdom of
their board of directors, the words used in the sections have been purposely
used in as general a sense as possible. To have laid down any confining limits
to the operation of these sections may have resulted in defeating the very
object for which these sections were enacted. As pointed out by the Privy
Council in T.R. Pratt (Bombay) Ltd. v. M.T. Ltd and by the
Supreme Court in Narayandas Sreeram Somani v. Sangli Bank Ltd.. with
reference to the old sections 91A and 9IB, the sections contain concise
statement of the general rule of equity fully considered and accepted by the
Court of Appeal in Transvaal Lands Company v. New Belgium (Transvaal) Land and
Development Company As pointed
out by Upjohn L.J., while sitting in the Court of Appeal in Boulting v.
Association of Cinematograph, Television and Allied Technicians
"The
principle is one of the most firmly established in our law of equity and it has
been repeatedly recognised and applied by the Lord Chancellors and by the House
of Lords……………The rule is not directed at corrupt or fraudulent bargains
(though, of course, it brings them within its umbrella) The rule is one of
principle which depends not at all on any corrupt mens rea in the mind of the
person holding the conflicting capacity …….. This rule extends to all manner of
relationships and the reports are full of examples of its application to many
different circumstances. Like all rules of equity, it is flexible in the sense
that it develops to meet the changing situations and conditions of the
time………….".
The
sections must, therefore, be construed bearing in my mind the old long
established rule of equity which they enact and having regard to the object
intended to be attained.
In
support of the other submissions of the contesting defendants, Mr. Sen, learned
counsel for the company, placed reliance upon K.F. Nariman v. Municipal
Corporation of Bombay. Now, in
order to understand what precisely was laid down by Mulla J. in that case, it
is necessary to look somewhat more closely at the facts of that case and the
points which there arose for the court's decision. At a meeting of the Bombay
Municipal Corporation a proposition was moved that the report "regarding
the revision of the present scale of tramway fares be approved and adopted
". To the above proposition an amendment was moved that the further
consideration of the report be adjourned till a particular date when a new
corporation would have been formed. On a poll being taken, there were equal
number of votes in favour of and against the amendment, and the chairman
exercised his additional or casting vote against the amendment and declared
that the amendment was lost. The plaintiff's allegation was that 6 out of the
17 councillors who had voted against the amendment were disqualified from
voting having regard to the provisions of clause (p) of section 36 of the City
of Bombay Municipal Act, 1888, now entitled the Bombay Municipal Corporations
Act, 1888. While denying this the defendants contended that two councillors who
voted for the amendment were disqualified from voting. Under clause (p) a
councillor is prohibited from voting or taking part in the discussion of any
matter before a meeting in which he has, directly or indirectly, by himself or
by his partner, any share or interest such as is described in clauses (g) to
(1), both inclusive, of section 16, or in which he has a professional interest
on behalf of a client, principal or other person. Now, it is obvious that
clause (p) is in terms materially, different from section 300(1). Under clause
(p) the share or interest must be such as is described in clauses (g) to (1) of
section 16. Further, the matter before the meeting must be one in which his
interest on behalf of another person is a professional interest. The concern or
interest described in section 300(1) is not subject to any such restriction. In
that case with respect to certain councillors it was alleged that they were
shareholders of the Bombay Electric Supply and Tramways Company Ltd. which
owned and conducted tramways in the city of Bombay. Mulla J. held that if a
councillor was also a shareholder of the said company and had a beneficial
interest in the shares, he was disqualified from voting. He, however, held that
where the shares stood in the name of a councillor who had no beneficial
interest in them but was a mere trustee for another, he was not disqualified
from voting, because though he was under an obligation to his cestui que trust
to vote at meetings of the said company in a manner beneficial to the interest
of the beneficiaries, as he did not owe the membership of the corporation to
his being a shareholder of the said company, it was no part of his duty to vote
at any meeting of the corporation as his beneficiary would have him to do. If,
therefore, no such duty was imposed upon him by law, it could not be said to be
a case of conflict between two duties or between interest and duty, his duty or
his interest in the beneficiary being no higher than what a father has in the
prosperity of his son. While considering how far this decision applies it
should be borne in mind that in the course of his judgment Mulla J. cited with
approval and without qualification Nutton v. Wilson and England
v, Inglis
and the other English authorities referred to above. In Nutton v. Wilson the word
"concerned" was given a very wide meaning. Mulla J. pointed out that,
though in most of those cases the question before the court was
whether a councillor had an interest in contracts with the local board,
while the question in the case before him was whether the said
councillors had a share or interest in the said company, the principle
laid down in those cases afforded a fairly good guide to the
determination of the points before him. Mulla J. was, however,
dealing only with the case of a "share or interest" under section
36(p) of the City of Bombay Municipal Act and not of a "concern
"in the matter in question. The share or interest which clause (p)
describes is the interest of a councillor by himself or by his partner
only, or a professional interest. But the more important point of distinction
is that the decision in Transvaal Lands Company v. New Belgium (Transvaal) Land
and Development Company was not
cited before Mulla J. This is important because in Transvaal Lands Company's
case
fiduciary capacity was expressly held to be such an interest as would give rise
to a conflict. The Privy Council in T.R. Pratt (Bombay) Ltd. v. M. T. Ltd and the
Supreme Court in Narayandas Sreeram Somani v. Sangli Bank Ltd.
unequivocally approved and accepted the principles laid down in Transvaal Lands
Company's case
and pointed out that section 91B of the 1913 Act (corresponding to the present
section 300) contained a concise statement of the general rule of equity
explained in that case. K.F. Nariman's case was, of
course, decided before the privy Council and the Supreme Court decisions. The
point, however, is now concluded by this pronouncement of the highest courts.
It should also be noted that section 300(1) does not merely use the word
"interest" but speaks both of "concern"
or"interest", whether direct or indirect, and in this connection
reference may again be made to the observations of Lindley L.J. in Nutton v.
Wilson
of Darling J., in Barnacle v. Clark and of
Romer J., in Victors Ltd. v. Lingard referred to
above.
It
was next submitted that the interest of the solicitor-director in the private
company was at the highest a sentimental interest as, for example, that of a
father in his son or of a man in a relative of his and that he was under no
legal duty to protect or advance the interest of the private company and cannot
therefore amount to an "interest" under section 300 and in support of
this, reliance was placed upon the judgment of a learned single judge of the
Rajasthan High Court in Ramji Lal Baisiwala v. Baiton Cables Ltd . In that
case it was held that concern or interest in a contract did not include the
concern or interest of a relative. Of course, there is no question of the
solicitor-director being a relative of any of the Kilachands, but what was said
was that, if a man has no higher than a sentimental interest in the welfare of
his relative, he cannot have a higher interest in the welfare of his friend and
accordingly the friendship between the solicitor-director and Tulsidas and the
other members of Tulsidas' family cannot constitute an interest. Two Division
Bench judgments of this High Court have, however, taken a different view with
respect to interest arising out of relationship. In Special Civil Application
No. 1807 of 1955, decided
by Chagla C. J. and Dixit J., on December 7, 1955, it was held:
"In
our opinion, the interest here is not the interest which a man may have in the
prosperity of his friend. There the interest is clearly sentimental or
emotional. When you have a person living jointly with his father, it seems to
be inarguable that the son's interest in the prosperity of his father is purely
sentimental or emotional. If the father earns more, he has more to spend on the
family. His prosperity must affect the position of the son and the interest
that the son has in the prosperity of his father is clearly a material or a
substantial interest".
This
case was followed in Dattatraya Awadaji Shinde v. S.V. Bhave by the
Division Bench consisting of Dixit and Badkas JJ. Both these were cases under
the Bombay Provincial Municipal Corporation Act, 1949, and in Dattatraya
Awadaji Shinde v. Bhave the
Division Bench pointed out that unless cases of conflict between interest and
duty arising out of the relationship of husband and wife or father and children
were avoided, purity in municipal administration would be impossible to
achieve. Further, the argument of the contesting defendants overlooks the fact
that the plaintiffs' case is not based merely upon the friendly relations
between the solicitor-director and the Kilachands. It is based upon the
fiduciary character which the solicitor-director holds, vis-a-vis, Tulsidas,
the Kilachand family and the Kilachand concerns and companies, by reason of the
fact that his firm and he on behalf of his firm have for all this long period
of years been their general solicitor and that his confidential relationship
has deepened by reason of the close personal relationship which has sprung up
between them.
It
was next submitted that there was nothing to show that the solicitor-director
or his firm would be acting as solicitors for the private company in the matter
of its appointment as sole selling agents for a further period, and in this
connection reliance was placed upon Mohan Lal v. Grain Chambers Ltd., which was
affirmed in appeal by the Supreme Court in Selh Mohan Lal v. Grain Chambers
Ltd. In
that case the board of directors of the Grain Chambers Ltd. an association of
grain merchants, passed a resolution containing the terms upon which an entry
of transactions in future in gur were to be effected. This resolution was
passed in pursuance of the general policy of the company in carrying on its
business and functions. It provided how future transactions in gur were to take
place. The question whether directors of that company were interested within
the meaning of the old section 91B arose for consideration of the court in
petitions filed for winding up of that company. It was held that the word
"arrangement" in section 91B did not cover a general scheme of the
type under which at the time when the scheme was approved by the board of directors,
no rights or liabilities accrued or were incurred by the members of the
company, the directors or the company itself; the word "arrangement
"as used in the section being intended to cover such transactions in which
a director at once becomes interested, so that he either acquires some rights
or incurs some liabilities as a result of it. On appeal to the Supreme Court it
was held that by passing that resolution, all that was resolved at the
directors ' meeting was that the company should commence business in future in
gur according to the rules set forth in the resolution and, therefore, the
directors were not voting on a contract or arrangement in which they were
directly or indirectly concerned or interested. Now, I do not see what
application this case has to the facts before me. That was a case of an
association framing rules for the future transaction of its own business. That
case is wholly distinguishable on facts. What is apposite in this connection
are the following observations of Scrutton L. J. in Moody v. Cox and Halt :
"The
relation may then be an actual relation of solicitor and client in the
transaction impugned, or such an antecedent relation as gives rise to the
influence by the solicitor and confidence by the client the effect of which has
not ceased at the time of the transaction impugned"
Moody
v. Cox and Halt
was sought to be distinguished on the ground that its ratio applied only to the
case of a solicitor acting as common solicitor for both vendor and purchaser
and had no application to other transactions. In my opinion, this is not a
correct reading of that authority. Moody v. Cox and Hatt was decided
as much on the general principle of equity already sufficiently referred to
above in the other cases. One must bear in mind, as Upjohn L.J. pointed out in
Boulting v. Association of Cinematograph, Television and Allied Techniciansa that this
rule of equity is a flexible one and it develops to meet the changing
situations and conditions of the time. What is important and should never be
lost sight of are the words of Lord Cairns L.C. in Parker v. Mckenna that "this is a rule founded upon the
highest and truest principles of morality ". If so heavy and onerous a
duty lies upon a solicitor who acts as common solicitor in just one
transaction, it would be absurd to say that the duty of that solicitor would be
less or would be non-existent where that solicitor has been for a long period of
time the general solicitor of one of the parties in all matters.
It
must again be emphasised that section 300(1) refers not only to an
"interest "but also to a "concern". Here reference may
usefully be made to Baits Combe Quarry Ltd. v. Ford relied upon
by Mr. Nariman, learned counsel for the plaintiffs. In that case the vendors of
the Batts Combe Quarry covenanted with the purchasers "that they would not
within ten years either solely or jointly with or as agent, officer, manager,
servant, director or shareholder of any other person or company, directly or
indirectly, carry on or assist in carrying on or be engaged, concerned,
interested or employed in the business of a quarry within 75 miles as the crow
flies of Batts Combe Quarry". One of the vendors within ten years provided
a sum of money to enable his three sons to purchase the Chelms Combe Quarry in
the immediate neighbourhood of the Batts Combe Quarry and for working capital. He
also took part on his sons' behalf in preliminary negotiations for the purchase
of machinery and equipment for the Chelms Combe Quarry. He was not a partner in
the sons' business nor in any way financially interested in it and he took no
part in its management. The Appeal Court held that the father had committed a
breach of the covenant. Lord Greene M.R. said:
"Quite
apart, however, from the words 'assist in carrying on' there are other words here
which appear to me to cover this case. In my view, in doing what he did, the
father was 'concerned in' the sons business. The word 'concerned' is of quite
general import. Clearly it cannot be limited
to 'concerned' in the sense of financial interest or of being an employee of
the business. Again, I can see no more effective way of being concerned in a
business than by providing the capital necessary to establish it, and the word
'concerned' seems also to cover the assistance given by the father in the course
of the negotiations".
In the light of these
authorities I am at this stage inclined to take the prima facie view that the
solicitor-director was directly, and if not so, at least indirectly, concerned
or interested in the contract of appointment of the private company for a
further term as the sole selling agents of the company and, therefore, the vote
cast by him was void and there being no majority in favour of the resolution,
no valid resolution was passed at the meeting of the board held on November 14,
1968.
It was, however, submitted
on behalf of the contesting defendants that the plaintiffs are estopped from
contending that the solicitor-director was an interested or a concerned
director. In this connection, the contesting-defendants have relied upon
various statements made by the plaintiffs in the plaint in Suit No. 522 of 1969
to show that the plaintiffs and Warner and Reighley were aware that the
solicitor-director was solicitor for the private company. They have further
placed reliance upon statements made in the correspondence by the plaintiffs,
to show that Warner and Reighley represented the interest of the plaintiffs on
the board of directors of the company. It was, therefore, contended that the
knowledge of Warner and Reighley must be taken to be the knowledge of the
plaintiffs and the presence of Warner and Reighley at the meeting of the board
held on November 14, 1968, must be taken to be for and on behalf of the
plaintiffs and that Warner and Reighley not having protested at the said meeting
against the solicitor-director taking part in the discussion or voting, the
plaintiffs must equally be taken as having acquiesced therein. Now, it cannot
be denied that there are statements in the plaint and on the record as stated
by the contesting defendants. The effect of these statements now falls to be
considered. On behalf of the contesting defendents reliance was placed on T.R. Pratt (Bombay)
Ltd. v. M.T. Ltd., Narayandas
Sreeram Somani v. Sangli Bank Ltd. and Ramji
Lal Baisiwala v. Baiton Cables Ltd. In T.R.
Pratt (Bombay) Ltd. v. M. T. Ltd. it was held
that the old section 91 B did not operate to
deprive of the benefit of his contract with the company a third party who had
no notice of the defect in the directors' authority, for to so hold would be
contrary to principle and, therefore, such a person was entitled to assume that
the internal mangement of the company had been properly conducted. The question
before the Judicial Committee was the interest of directors in the execution of
a deed of equitable mortgage by Pratts Ltd. and by M.T. Ltd., of their property in favour of
E.D. Sassoon and Co. Ltd. to secure loans advanced by that company to Pratts
Ltd. through M.T. Ltd. The question arose in the liquidation of Pratts Ltd.
when E.D. Sassoon and Co. claimed to be the secured creditors of Pratts Ltd.
and M. T. Ltd. and in the alternative to be the unsecured creditors for the
amounts secured by the deed of mortgage. The directors of Pratts Ltd. were all
directors and shareholders of M.T. Ltd., and one of the directors of Pratts
Ltd. was the managing director of Sassoons Ltd. and was invested with all the
powers of the directors of that company. On these facts the Judicial Committee
held that it was impossible to regard E.D. Sassoon and Co. Ltd. as being
ignorant that in any question between Pratts Ltd. and M.T. Ltd., the former had
no independent board and indeed no single director who was not interested on
behalf of M. T. Ltd. and that, therefore, E. D. Sassoon and Co. Ltd. could not
disclaim knowledge of the interest of the directors of Pratts Ltd. and were not
entitled to assume that the provisions of section 91B had been complied with. I
do not see how this authority supports the contesting defendant's case. Here
also Tulsidas and Ramdas who by themselves and through concerns and companies
controlled by them owned all the shares in the private company were the
directors of both the company and the private company. They of course knew that
the solicitor-director was the solicitor of the private company, their own
personal solicitor and the personal solicitor of their other family members and
their other concerns and companies and a shareholder and director in some of
their concerns. Both of them were present at the said meeting of the board held
on November 14, 1968. Though they did not participate in the discussion and
abstained from voting, being present they certainly heard what was being said
and saw what was happening and if the solicitor-director had an interest or
concern in the matter of this appointment for a further term, Tulsidas and
Ramdas had full knowledge of that fact and the private company, therefore, can
hardly be said to be "a third party who had no notice of the
defect"in the directors' authority. In Narayandas Sreeram Somani v. Sangli
Bank Ltd..
the question arose under somewhat peculiar circumstances. Narayandas was one of
the directors of the company. Ramnath was his brother. Ramnath became indebted
to the company in large amounts. In order to comply with the requirements of
the Reserve Bank to re-call the loan to Ramnath, Ramnath repaid the entire
balance of Rs. 1,04,198-8-0 due by him. Out of this a sum of Rs. 1,00,000 was
paid on behalf of Ramnath by Narayandas who on the same date obtained a loan of
Rs. 1,00,000 from the company by executing a promissory note in the said sum as
collateral security along with a letter of pledge in respect of cloth, saris,
etc., valued at Rs. 1,50,000. Narayandas failed to repay the loan. Further, in order to comply with the requirements of section 277, the
directors of the company including Narayandas decided that they or their
nominees would subscribe for a large number of shares and accordingly
Narayandas decided to subscribe for 2,000 shares in the names of his wife and
mother and the wife of Ramnath, and shares were accordingly allotted to these
three ladies. The allotment moneys were not paid in cash but by hundis drawn in
favour of the company. In suits filed against Narayandas and Ramnath for
recovery of the various amounts it was contended that the allotment of the said
2,000 shares was illegal inasmuch as Narayandas was present at the board
meeting at which the said shares were allotted and had voted for the allotment.
The Supreme Court held that under section 91B, if a director was an interested
director, his vote was not to be counted and his presence also would not count,
towards the quorum, that is to say, the minimum number fixed for the
transaction of business by a board meeting, for a quorum must be a
disinterested quorum and it must comprise of directors who are entitled to vote
on the particular matter before the meeting. Their Lordships further pointed
out that if an interested director voted and without his vote being counted
there was no quorum, the meeting was irregular and the contract sanctioned at
the meeting was voidable at the instance of the company against the director
and any other contracting party having notice of the irregularity and since
section 91B is meant for the protection of the company, the company may, if it
chooses, waive the irregularity and affirm the contract. Their Lordships,
therefore, held that the company having chosen to affirm the contract of
allotment of shares by filing a suit, the allotment was valid and binding on
the allottees. Their Lordships further held that Narayandas could not be heard
to say that there was no valid allotment of the shares, since he was a director
of the company and a party to the impugned resolution and had dealt with the
shares on the footing that the allottees were the holders of the shares with a
clear knowledge of the circumstances on which he might have founded his present
objection. Now, the distinguishing feature of the Supreme Court decision is
that it was the interested director who after having taken the benefit of the
contract was seeking to repudiate it and thereby his liabilities and
obligations thereunder by setting up the defect in his own authority of which
he naturally had knowledge. This, according to their Lordships of the Supreme
Caurt, he was estopped from doing. This case rests, therefore, on a wholly
different footing from the case before me. In the present case it is not the
interested director who is challenging the contract or the resolution
sanctioning it on the ground of his own defect or want of authority. It is a
shareholder who considers himself aggrieved by this contract who is challenging
it. In the present case the question of the company affirming the contract also
does not arise. One of the main disputes in Suit No. 681 of 1969 is whether the
resolutions approving
the appointment of the private company for a further term was in fact passed.
Even the result of the poll as declared by Tulsidas shows that nearly 48 per
cent, of the shareholders have voted against the resolution. A large number of
proxies obtained by the plaintiffs have been rejected by Tulsidas as being
invalid. Similarly, a large number of proxies in favour of Tulsidas, in respect
of which letters of revocation were obtained by the plaintiffs and filed with
the company, have been held to be not validly revoked and treated as valid by
Tulsidas. If, as mentioned in the latter part of the judgment while dealing
with the extraordinary general meeting of April 28, 1969, some of the decisions
given by Tulsidas on the validity of proxies and revocations are contrary to
law and in respect of some others there is strong reason to believe that they
were not given bona fide, it can hardly be said that the company has affirmed
the contract. In any event, in Narayandas case the company
affirmed the contract with full knowledge of the fact that Narayandas was an
interested director. In the present case the shareholders were never made aware
that the solicitor-director had an interest or concern in the contract of
appointment of the private company for a further term or that, but for his
vote, the resolution would not have been passed at the board meeting or that
his vote was void. The company acting through its board of directors did not at
any time place these facts before the shareholders. It is true that in the
circulars which were issued by both sides the plaintiffs had mentioned that the
solicitor-director was an interested director, but in the circulars issued by
Ruia, Kirloskar and the solicitor-director the contrary position was taken up
or in any event suggested. Thus, the shareholders had no clear indication
whether the solicitor-director had any interest or concern as alleged by the
plaintiffs and they could not be said to have voted in favour of the resolution
approving the appointment for a further term with knowledge of the interest or
concern of the solicitor director and its consequent effect on the resolution
of the board. There can be no ratification except with full knowledge of the
facts and the shareholders were never asked to ratify the said resolution after
the aforesaid facts were made known to them. In Spackman v. Evans, Lord
Chelmsford observed :
"To
render valid an act of the directors of a company which is ultra vires, the
acquiescence of the shareholders must be of the same extent as the consent
which would have given validity from the first, viz., the acquiescence of each
and every member of the company. Of course, this acquiescence cannot be
presumed unless knowledge of the transaction can be brought home to every one
of the remaining shareholders".
While
referring to this case the Privy Council in Premila Devi v. Peoples Bank of
Northern India Ltd. pointed out
that by knowledge of the transaction Lord
Chelmsford clearly meant knowledge of the invalidity of the transaction. In the
Privy Council case it was held that there can be no ratification without an
intention to. ratify, and there can be no intention to ratify an illegal act
without knowledge of the illegality. In Ratnji Lal Baisiwala v. Baiton Cables
Ltd., it
was held that if without the vote of the interested director, the contract
would still have been carried through, it is not affected. But if without the
vote of the interested director, the contract would not be carried through or
without him there would be no quorum, then the contract was voidable at the
option of the company. On facts, however, it was held that two directors formed
a quorum, and out of the three directors of the company, the two who voted had
no concern or interest. In the present case, without the vote of the
solicitor-director the board's resolution of November 14, 1968, would not have
been passed as there would have been no majority and the question of the
company affirming it, as pointed out above, cannot arise, assuming the contract
is voidable. It is true that today, at the hearing", the company is
supporting this resolution, but then the persons fighting the litigation on
behalf of the company are its board of directors or rather the majority of the
board of directors which is controlled by Tulsidas and they cannot be said to
represent or reflect the opinion of the company acting through its
shareholders.
It is also pertinent to
note that section 300(1) makes a significant departure from the language used
in the old section 91B. While section 91B provides "and if he does so
vote, his vote shall not be counted ", section 300(1) enacts "and if
he does vote, his vote shall be void". It was submitted that this was not
a material change and did not alter the position, and in support of this,
reliance was again placed upon the observations, at page 192, in Ramji Lal Baisiwala
v. Baiton Cables Ltd. to the
effect that the substitution of the expression "his vote shall be
void" in place of "his vote shall not be counted" does not make
any difference, for if a vote was not to be counted, that vote was a nullity,
that is, void. With respect to the learned single judge who decided this case I
am unable to subscribe to this view. The Companies Act, 1956, is as its long
title shows "An Act to consolidate and amend the law relating to"
companies……"While re-enacting section 91 B as 300(1) the legislature has
made a departure in the language used. The difference in the language is in a
very material part of the section inasmuch as that part enacts one of the consequences
of contravening the prohibition laid down in that section. Such change of
language must, therefore, be taken to have been made deliberately and with the
intention of preventing the object underlying the section from being defeat ed.
When something is declared by a statute to be void, it cannot be validated on
the theory of acquiescence or, ratification. There can be no estoppel against a
statute. The word "void" cannot be equated with the word
"voidable". To my mind the object of providing that the "vote
shall be void" was to make the vote a nullity and incapable of affirmance
or ratification. If, therefore, without the vote in question being counted, a
resolution could not have been passed, then the resolution must be taken not to
have been passed.
It was next submitted that
Warner was in the chair and that he having declared the resolution as having
been passed, he should be taken to have given his second or casting vote in
favour of the resolution. The short answer to this is that a casting vote has
to be given and is not a matter of presumption. On the facts, it would also be
illogical to draw any such presumption. Admittedly, Warner voted against the
resolution. He, therefore, cannot, consistently With this, cast his second vote
in favour of the resolution, unless the whole matter were to be treated as a
farce. Further, even assuming that the acts of Warner and Reighley are to be
taken as the acts of the plaintiffs, the facts on the record do not make out a
case of estoppel apart from the position that there cannot be an estoppel
against a statute. When the draft minutes of the meeting held on November 14,
1968,were circulated to the directors, Reighley altered the said draft minutes.
The minutes then came up for approval before the meeting of the board of
directors held on February 3, 1969. At that meeting Reighley read out a
memorandum on behalf of himself and Warner and requested that the said
memorandum should be made a part of the minutes. Reighley and Warner voted
against confirmation of the said minutes as written in the minutes book. The
solicitor-director, Ruias and Kirloskar voted for confirming the said minutes
and the minutes as written in the minutes book and approved by the majority of
the directors were confirmed and signed, Tulsidas and Ramdas were also present
at this meeting but abstained from voting. This is shown by the minutes of the
meeting held on February 3, 1969. On the next day, by his letter dated February
4, 1969, Reighley reproduced the said memorandum which clearly states that the
vote of the solicitor-director could not be considered as he was at all
material times and continued to be an interested director and as there were two
valid votes for and two valid votes against the resolution, the resolution was
not carried. The said memorandum further states that unless this was properly
recorded in the minutes of the meeting of November 14, 1968, the minutes should
not be considered as having been approved. Thus, before the minutes were
confirmed, Warner and Reighley have recorded their objection. The sole selling
agency agreement was executed thereafter on February 18, 1969, with full
knowledge of this objection. I, therefore, do not find it possible at this
stage to hold that by any act of theirs Warner and Reighley have induced the
company or the private company to believe that the said resolution was validly passed and
to act upon such belief and thereby alter its position to its prejudice.
It
is also difficult to accept the proposition that because certain directors
represent the interests of a shareholder, they are in their capacity as
directors or agents of that shareholder. Warner and Reighley are shareholders
in their own right and have been elected as directors by the shareholders of
the company. Mr. Nariman, learned counsel for the plaintiffs, has in this
connection relied upon a decision of the Court of Appeal in Gramophone and
Typewriter Ltd. v. Stanley. The
question arose whether an English company was liable to income-tax upon the
full amount of the profits made by a German company. It was held that the fact
that the English company held all the shares in the German company by itself
did not make the business of the German company the business of the English
company and the English company was only liable to pay income-tax upon such
profits of the German company as had been received in England. This case is,
however, not relevant. In view of the mandatory prohibition contained in
section 300(1) and of the deliberate departure made in the language of that
section from the language used in section 91B, I am at this stage inclined to
hold that the vote of the solicitor-director cannot be validated but is void-
and that the resolution was not duly passed. I am also not inclined at this
stage to accept the contention that the plaintiffs are estopped from taking up
this ground.
There
can be no estoppel against a statute nor can a person waive any right or
benefit conferred by a statute unless it is of a personal and private nature.
There is a clear distinction between a contractual or a statutory right created
in favour of a person for his own benefit and a right which is created on the
ground of public interest and policy. The rule of waiver cannot apply to a
prohibition based on public policy (see Post Master-General, Bombay v. Gangaram
Babaji Chavan).
The prohibitions contained in section 300(1) are prescribed in public interest
and policy to safeguard the interests of the shareholders. It was, however,
urged on behalf of the contesting defendants that the proposition that there is
no estoppel against a statute is too wide and that principle has not been
accepted in several cases. In support of this submission reliance was, however,
sought to be placed upon only one case, namely, Towers v. African Tug Company. That case
arose under peculiar circumstances. The secre tary and manager of a company who
was a party to the payment of an interim dividend out of capital had received
dividend on shares held by him. He and another shareholder who had also
received dividend on the shares held by him filed a suit on behalf of
themselves and all other shareholders of the company, other than those who were
defendants, for an order to compel the directors to make good to the company
the amount distributed as such dividend. The Court of Appeal negatived the
claim. Vaughan Williams L.J. held that the fact that capital had been
distributed in the payment of this dividend was recognised by the company and
the shareholders and that this was an interim dividend and they were minded to
replace this capital and had further prospects of completely replacing it out
of the profits of .that very year and, therefore, the action was wholly
unnecessary. He further stated that the court is not bound when it sees that an
ultra vires act is in the course of being put right to give relief to a plaintiff
who has acquiesced in the wrong and who has himself part of the proceeds of the
wrong in his pocket. Stirling L.J. expressly starts his judgment by saying that
he desired to rest his decision on the particular facts of that case and held
that the action ought to have been dismissed on the ground that the personal
conduct of the plaintiffs was such as to preclude them from obtaining relief.
The company had also filed a counter-claim to recover from the plaintiffs the
very dividends which they had in their pockets. This counter-claim was allowed.
This case was distinguished in a later court of appeal case, namely, Mosely v.
Koffyfontein Mines Ltd. on the.
ground that the plaintiff in that case did not seek an injunction or anything
with reference to the future but a personal order upon the directors to refund
to the assets of the company the amount which had been wrongfully abstracted
from the capital. Towers v. African Tug Company turned upon
its facts, and I fail to see how it bears out the proposition canvassed by the
contesting defendants.
The
next point for consideration is whether a special resolution was necessary for
the appointment for a, further term of the private company as sole selling
agents of the company either under the provisions of section 314 of the
Companies Act, 1936, or article 183 of the articles of association of the
company. When the private company was appointed the sole selling agents in
1963, the resolution appointing it was passed as a special resolution. This was
done as it was then considered that by reason of the fact that Tulsidas and
Ramdas were directors and members of the private company, section 314 applied
to the appointment of the private company as sole selling agents. Under section
189(2) of the Companies Act, 1956, a resolution is a special resolution when,
inter alia, the intention to propose the resolution as a special resolution has
been duly specified in the notice calling the general meeting or other
intimation given to the members of the resolution and the votes cast in favour
of the resolution (whether on a show of hands, or on a poll, as the case may
be) by members who, being entitled so to do, Vote in person, or where proxies
are allowed, by proxy, are not less than three times the number of the votes,
if any, cast against' the resolution by members so entitled to vote; The notice
convening the extraordinary general meeting of April 28, 1969, however,
specifies the intention to propose the resolution in question as an ordinary
resolution nor are the votes cast in favour of the requisite majority required
by section 189(2), the votes in favour of the resolution as declared by
Tulsidas being a little over 52 per cent, of the votes cast both in person and
by proxy. Since the plaintiffs who opposed the appointment for a further term
of the private company hold more than 25 per cent, of the shares in the
company, it is obvious that if a special resolution were required, it could
never be passed.
To
understand the plaintiff's submissions based on section 314 of the Companies
Act, it is necessary to see the relevant provisions of sections 204, 294 and
314 of the Companies Act, 1956.
"204.Restriction on appointment of firm or body
corporate to office or place of profit under a company.—(1) Save as provided in
sub-section (2), no company shall, after the commencement of this Act, appoint
or. employ any firm or body corporate to or in any office or place of profit
under the company, other than the office of managing agent, secretaries and
treasurers or trustee for the holders of debentures of the company, for a term
exceeding five years at a time:……..
(4) Nothing
contained in sub-section (1) shall be deemed to prohibit the re-appointment,
re-employment, or extension of the term of office, of any firm or body
corporate by further periods not exceeding five years on each occasion:
Provided
that any such re-appointment, re-employment or extension shall not be
sanctioned earlier than two years from the date on which it is to come into
force.
(5) Any office or
place in a company shall be deemed to be an office or place of profit under the
company, within the meaning of this section, if the person holding it obtains
from the company anything by way of remuneration, whether as salary, fees,
commission, perquisites, the right to occupy free of rent any premises as a
place of residence, or otherwise….".
"294. Appointment
of sole selling agents to require approval of company in general meeting.—(1)
No company shall, after the commencement of the Companies (Amendment) Act,
1960, appoint a sole selling agent for any area for a term exceeding five years
at a time:…….
Provided
that nothing in this sub-section shall be deemed to prohibit the
re-appointment, or the extension of the term of office, of any sole selling
agent by further periods not exceeding five years on each occasion.
(2) After the
commencement of the Companies (Amendment) Act, 1960, the board of directors of
a company shall not appoint a sole selling agent for any area except subject to
the condition that the appointment shall cease
to be valid if it is not approved by the company in the first general meeting
held after the date on which the appointment is made.
(2A)If
the company in general meeting as aforesaid disapproves the appointment, it
shall cease to be valid with effect from the date of that general
meeting…….".
"314.
Director, etc., not to hold office or place of profit.—(1) Except with the
consent of the company accorded by a special resolution,—
(a) no director of a
company shall hold any office or place of profit, and
(b) no partner or relative of such a director, no firm in which such
a director or relative is a partner, no private company of which such a
director is a director or member, and no director; managing agent, secretaries
and treasurers, or manager of such a private company shall hold any office or
place of profit carrying a total monthly remuneration of five hundred rupees or
more, except that of managing director, managing agent, secretaries and
treasurers, manager, legal or technical adviser, banker or trustee for the
holders of debentures of the company,—
(i) under the
company; or
(ii) under any subsidiary of the company, unless the remuneration
received from such subsidiary in respect of such office or place of profit is
paid over to the company or its holding company:
Provided that it shall be
sufficient if the special resolution according the consent of the company is
passed at the general meeting of the company held for the first time after the
holding of such office or place of profit…...
Explanation.—For the
purpose of this sub-section, a special resolution according consent shall be
necessary Sot every appointment in the first in stance to an office or place of
profit and to every subsequent appointment to such office or place of profit on
a higher remuneration not covered by the special resolution, except where an
appointment on a time scale has already been approved by the special
resolution……….
(2) If any office or place
of profit is held in contravention of the provisions of sub-section (1), the
director, partner, relative, firm, private company, managing agent, secretaries
and treasurers or the manager, concerned, shall be deemed to .have vacated his
or its office as such on and from the date next following the date of the
general meeting of the company referred to in the first proviso or, as the case
may be, the date of the expiry of the period of three months referred to in the
second proviso to that sub-section, and shall also be liable to refund to the
company any remuneration received or the monetary equivalent of any perquisite
or advantage enjoyed by him or it for the period immediately preceding the date
aforesaid in respect of such office or place of profit……..
(3) Any office or
place shall be deemed to be an office or place of profit under the company
within the meaning of sub-section (1),—...
(b) in case, the office or place is held by an
individual other than a director or by any firm, private company or other body
corporate, if the individual, firm, private company or body corporate holding
it obtains from the company anything by way of remuneration whether as salary,
fees, commission, perquisites, the right to occupy free of rent any premises as
a place of residence, or otherwise".
Sub-section
(1) of section 314 formerly required the previous consent of the company
accorded by a special resolution in cases where the provisions of that
sub-section were applicable. By the Companies (Amendment) Act, 1965 (31 of
1965), in order to obviate the difficulties which might arise from this
stringent restriction, the word "previous "was deleted and the first
proviso was inserted so as to now provide for the passing of the special
resolution according consent at the first general meeting held after the
appointment. The Explanation was added to sub-section (1) by the Companies
(Amendment) Act, 1960. It is the plaintiffs' case that a sole selling agency is
an office or place of profit and that, since Tulsidas and Ramdas were and are
members and directors of the private company, the provisions of section 314
were attracted by reason of the Explanation to sub-section (i) and as the
consent of the company was not accorded by a special resolution, the private
company vacated its office from April 29, 1969, and is also liable to refund to
the company any commission received. by it for the period October 1, 1968, to
April 28, 1969, in respect of such sole selling agency. In support of this
contention Mr. Nariman, learned counsel for the plaintiffs, has relied upon
Shalagram Jhajharia v. National Company Ltd. in which
A.N.Ray J. of the Calcutta High Court held that a sole selling agency is an
office of profit for the purposes of section 314. On behalf of the contesting
defendants it was urged that section 314 had no application to the sole selling
agencies because section 314 is a general section, while section 294 contains
special provisions dealing with sole selling agencies and that these specific
and special provisions exclude the general provisions of section 314 and,
therefore, what applied to the present case were only the provisions of section
294 which require only an ordinary resolution. It was further submitted that in
Shalagram Jhajharia's case this aspect
was not urged and, therefore, not considered by the court.
If
we examine the scheme underlying sections 204, 294 and 314, it will be seen
that section 204 places restrictions on the appointment of firms and bodies
corporate to any office or place of profit under the company other than certain
offices specified in the said section. In substance the restriction is as to
the term for which such appointment can be made. Section 201 deals generally
with all offices and places of profit. Section 294 deals with the specific case
of appointment of sole selling agents. In addition to the restriction on the
term for which such appointment can be made, section 294 also provides for the
approval of the company to such appointment. It also confers powers upon the
Central Government to exercise supervision and control over such appointments
by entitling it in the prescribed manner to vary the terms and conditions of
the agency so as to make them no longer prejudicial to the interests of the
company. The case of sole selling agents is dealt with separately as it is a
highly lucrative appointment and for this reason the restrictions imposed are
more elaborate than in the case of other office or places of profit. The object
underlying section 314 is, however, different. The mischief which section 314
seeks to remedy is the holding by a director either personally or indirectly
through other persons mentioned in clause (b) of sub-section (1) of section 314
of an office or place of profit under the company or its subsidiary. The object
is to prevent directors from taking advantage of their position to earn
profitts from the company in addition to their remuneration as directors. Thus,
section 314 deals with a wholly different problem from that dealt with under
sections 204 and 294 and there is, therefore, no question of the provisions of
section 294 excluding those of section 314.
On
behalf of the contesting defendants it was further submitted that a sole
selling agency was not an office or place, and, assuming it was an office or
place, it was in any event not an office or place under the company. It was
submitted that in ordinary parlance the word "office "means a
particular place or position with duties attached to it and the words
"office or place "used in conjunction with the word "under
"implies subordination and, consequently, a relationship of employer and
employee. It was further submitted that under the agreement dated February 18,
1969, as also under the earlier agreement dated September 24, 1963, the private
company as sole selling agents was not a subordinate or employee of the company
but had independent functions to perform and that the said agreements were as
between principal to principal and under them the private company was an
independent contractor. In support of these submissions reliance was placed on
Guru Gobinda Basu v. Sankari Prasad Ghosal. The
question which arose in the case was whether the appellant was disqualified
from being chosen as, and from being a member of the House of the People under
article 102(1)(a) of the Constitution. The Election Tribunal held that the
appellant was a partner in a firm of chartered accountants who were auditors
for several Government companies and, therefore, was a holder of offices of
profit both under the Government of India and the Government of West Bengal and
was, accordingly disqualified from standing in
the election under article 102(1)(a) of the Constitution. It was not contended
by the appellant before the Supreme Court that this was not an office of
profit, but what was contended was that the office was not held under the
Government of India or the Government of any State. The Supreme Court held that
for holding an office of profit under the Government, one need not be in the
service of the Government and there need be no relationship of master and
servant. The decisive test is the test of appointment. The Supreme Court did
not accept the submission advanced on behalf of the appellant that the several
factors which entered into the determination of this question—namely, the
appointing authority, the authority vested with power to terminate the
appointment, the authority which determined the remuneration, the source from
which the remuneration is paid, and the authority vested with power to control
the manner in which the duties of the office are discharged and to give
directions in that behalf-must all co-exist and each must show subordination to
Government and that it must necessarily follow that if one of the elements is
absent, the test of a person holding an office under the Government is not
satisfied. Their Lordships observed that in the cases referred to and approved
by them, it was pointed out that the circumstances that the source from which
the remuneration was paid was not from public revenue was held to be-a neutral
factor, not decisive of the question. Their Lordships held that whether stress
is to be laid on. one factor or the other will depend on the facts of each
case. Relying upon this authority it was submitted that in the present case the
sole selling agency agreements satisfied none of the tests laid down therein.
This authority, however, is expressly against this submission. What was held in
Guru Govinda Basu v. Sankari Prasad Ghosal was that
whether stress is to be laid on one factor or the other would depend on the
facts of each particular case and the contention that all the factors
enumerated should co-exist was expressly rejected. Further, this submission is
not even justified by the terms of the agreement. By clause (1) of the
agreement dated February 18,1969, as also of the earlier agreement dated
September 24, 1963, the company expressly appointed the private company as its
sole selling agents. It is thus an appointment which was made by these
agreements. Section 294 of the Companies Act also speaks of appointment of sole
selling agents by a company. Thus, the test laid down by the Supreme Court to
be the decisive test is satisfied in the present case. The other clauses of the
agreements also show that the company is to exercise control over the private
company in respect of the working of the sole selling agency. It is the board
of directors of the company which is to fix from time to time the selling price
of the company's products and the terms and conditions of sale. The private
company is to obtain orders for purchases at the prices and on the terms and
conditions thus determined
and forward them to the company's office for acceptance. Such orders are to be
binding on the company for execution only when and to the extent confirmed by
the company and are to be subject to such other terms and conditions as the
board of directors of the company may from time to time determine. The private
company is expressly prohibited from accepting any order on its own authority.
The board of directors of the company has the power from time to time to
prescribe forms for orders, contracts, etc. Further, the company is conferred
the power to terminate the agreement at any time by notice in the event of the
private company committing a breach of the agreement. The private company
receives a commission from the company. Clause 12 of both the agreements, which
is the relevant clause, provides as follows :
"In
consideration for the foregoing services to be rendered by the selling agents,
the company shall pay to the selling agents a commission…………"
Thus,
as the words underlined by me
show, the parties have expressly agreed that under the said agreements the
private company has to render services to the company.
The
complete answer to this contention is, however, to be found in sub-section (3)
of section 314. Sub-section (3) as originally enacted prescribed when an office
or place in a company should be deemed to be an office or place of profit under
the company within the meaning of sub-section (1). By the Companies (Amendment)
Act, 1960, the words "in a company "were omitted and the sub-section
as amended provides as follows :
"Any
office ok place shall be deemed to be an office or place of profit under the
company within the meaning of sub-section (1)…………"
Sub-section
(3) is a deeming provision and by the operation of the legal fiction created by
sub-section (3), inter alia, in case a private company (in which a director of
the company is a director or member) holding a place or office obtains from the
company anything by way of commission, it is to be deemed to be an office or
place of profit under the company. Such an office or place need not be in fact
in the company or under the company in the sense canvassed by the contesting
defendants. In the present case, the private company is to receive commission
under the sole selling agency agreements, the commission is to be obtained by
it for services to be rendered by it and, as pointed out above, the company
controls the manner in which the sole selling agency is to be performed.
It
is also pertinent to note that sub-section (1) expressly excludes some, of the
offices and places of profit which would not be office or place of profit if
the contention of the contesting defendants were correct. Amongst the offices
and places so excluded are those of banker and trustee for the holder of
debentures. In Astley v. New Tivoli Ltd., the
articles of association of the defendant-company provided that the office of a
director would be vacated if he accepted or held any other office or place of
profit under the company, except that of a managing director. The plaintiff, a
director-of the defendant-company, was by resolution of the board of directors
appointed one of the trustees for the holders of debentures issued by the
company. Under the trust deed the trustees were to receive annually a sum of
money as remuneration. The question which arose for determination was whether
the plaintiff, by reason of his being a trustee of the trust deed relating to
debentures issued by the company, had vacated his office by reason of the
aforesaid article. It was held that the trusteeship was a place of profit under
the company though there may be difficulty in saying that it was an office
under the company. The object underlying the relevant article was thus stated
by North J. at pages 155-156
"I
think that the meaning really is to prevent the directors, who are acting as
the agents of the company, doing anything by which a director can continue as
director, and yet accept or hold an additional office or place of profit under
the company. It is intended to prevent the directors having power to accumulate
in themselves various places of profit. A director is not to be a master and
servant at the same time…….I think a man who has been selected by the
company—by the directors—to fill the position of trustee of a covering deed on
the terms of receiving from the company, out of the coffers of the company,
regular payment of so much a year during the time that he continues to fill
that office, in addition to his payment as director, is occupying a place of
profit".
The
object underlying section 314 is the same as stated by North J. It is to
prevent a director, or his partner or relative, or any firm in which a director
or his relative is a partner, or a private company of which such a director or
member, and director, managing agent, secretaries and treasurers, or manager of
a private company in which such a director is a director or member, from
holding any office or place of profit carrying a total monthly remuneration of
five hundred rupees or more under the company and thereby put in his pocket,
directly or indirectly, additional profit above the remuneration to which he is
entitled as such director, unless three-fourths of the members of the company,
voting either in person or by proxies, agree to this being done at a meeting
called to pass such a resolution. To hold that a sole selling agency is not an
office or even a place of profit and that the appointment as sole selling agent
of. persons mentioned .in section 314 can be made by an ordinary resolution
requiring only a bare majority for it to be passed, while in respect of the holding
by such persons of other offices and places of profit a special resolution is
required, would be to exclude from the restrictive effect of section 314 highly
lucrative place or office of profit while bringing within its fold other
offices and places of profit not so lucrative. Section 294A also expressly
refers to a sole selling agency as an office. I am, therefore, of the opinion
that the private company was appointed to an office or place of profit under
the company and that since two of the directors of the company, namely,
Tulsidas and Ramdas, were both directors and members of the private company, it
would be an office or place of profit under the company within the meaning of
section 314.