Section 174
QUORUM
FOR MEETING
[1958] 28 COMP. CAS. 13 (KER.)
V.
West Coast Planters
Agencies Ltd.
SANKARAN AND RAMAN NAIR JJ.
SEPTEMBER 2, 1957
RAMAN NAIR
J. - These appeals by the State
against acquittal of the same accused persons in two different cases raise the
question whether there can be a general meeting under section 76(1) of the
Indian Companies Act, 1913, of a company consisting only of one member. The
first accused in both the cases is the company itself, a private company as it
happens to be, and the second accused is the managing director of the company
who, at the relevant time, was its sole member. In one case the prosecution was
for an offence under section 76(2) of the Companies Act for failure to hold a
general meeting in the year 1953 as required by section 76(1) ; in the other,
it was for an offence under section 133(3) read with section 131 for failure to
lay before the company in general meeting a balance-sheet and profit and loss
account in the same year ; and in both the liability depends upon whether
section 76(1) enjoins such a meeting in the case of a one man company or,
perhaps, to put it more correctly, whether section 76(1) applies to such a
company. The learned Magistrate who tried the case took what seems to us the
common sense view that for a meeting there must be at least two persons, that a
man cannot meet himself, and that the general meeting required by section 76(1)
being an impossibility, no liability attached under section 76(2) or section
133(3) to either of the accused. In this view he acquitted the accused in both
the cases, and hence these appeals.
2. We are inclined to think
that the common sense view taken by the learned Magistrate is also the true
view in law. The word “meeting’ is thus defined in the Shorter Oxford
Dictionary, “an assembly of a number of people for entertainment, discussion,
or the like,” and in Black’s Law Dictionary, as, “a coming together of persons
; and assembly. Particularly in law, an assembling of a number of persons for
the purpose of discussing and acting upon some matter or matters in which they
have a common interest.” It would follow that for a meeting, there must be at
least tow persons, and that this is the ordinary and natural meaning of the
word is recognised in the only two reported cases that have been brought to our
notice. In the first of these, Sharp v. Dawes the validity of a call made at a
meeting of a company purporting to have been held by one shareholder was in
question. The statute, viz., section 10 of the Stannaries Act, 1869, required
that the call should be made at a meeting of the company with special notice,
and, in pronouncing against the validity of the call on the ground that one man
could not hold a meeting within the meaning of the Act, LORD COLERIDGE C. J.
said : “the word `meeting’ prima facie means a coming together is nothing here
to show this to be the case.” MELLISH L. J. was more forthright and it would
appear that he refused to contemplate a meeting of one person. “It is clear”,
he observed, “that, according to the ordinary use of the English language, a
meeting could no more be constituted by one person than a meeting could have
been constituted if no shareholder at all had attended.”
3. In the second case, East v.
Bennett Brothers Limited WARRINGTON J. following Sharp v. Dawes, and also the
decision of JESSEL M. R. in Sanitary Carbon Co., In re, observed that in an
ordinary case it was quite clear that a meeting must consist of more than one
person. The learned judge however we on to hold that the word “meeting’ was
used in the memorandum of association he was construing in a special sense, and
that having regard to the purpose of the particular clause, namely, that the
formal consent of the preference shareholders should be obtained before
anything was done affecting their rights, the framers of the document, who must
have contemplated the possibility of all the preference shares being held by
one person, must have used the word “meeting” in a sense different from the
ordinary sense and as including the record, in a formal manner, of the assent
of a single person when he happens to be the sole preference shareholder. He
thought that that was one of the cases referred to by LORD COLERIDGE C. J. as
one in which it may be possible to show that the word “meeting” had a meaning
different from the ordinary meaning. The learned Judge also seems to have
thought that the circumstance that in the two cases referred to by him there
were several shareholders whose proxies were held by the single shareholder who
held the meeting, whereas in the case he was deciding there was only one
preference shareholder, made a difference. We agree ; but with due respect we
think the difference makes the case of a one-man company an a fortiori case.
4. It is to be observed that
both LORD COLERIDGE C. J. and WARRINGTON J. were dealing only with civil
obligations and that neither was construing a panel statute. WARRINGTON J. in
particular was construing only a memorandum of association of a company, and
the degree of latitude he allowed himself is apparent from the question he
posed himself, namely. “whether what the company did was in effect, although
not perhaps in terms, within the provisions of the memorandum and articles of
association, and if it was in effect though not in terms, whether there was a
sufficient compliance with the memorandum and articles to render the
proceedings valid,” although he straightaway put it in a different form,
namely, whether, upon the true construction of the memorandum and articles the
proceedings were not really and in terms a compliance with them.
5. One thing is clear from both
these decisions as also on the high authority of JESSEL M. R. in Sanitary
Carbon C., In re (the report of which has however not been placed before us),
and that is that, according to the ordinary use of the English language, a
meeting can no more be held by one person than it can be by none.
6. It is hardly necessary to
repeat what has been so often said that the golden rule of construction is that
the grammatical and ordinary sense of the words used in a statute should be
adhered to unless that would lead to some absurdity or repugnancy or
inconsistency with the rest of the statute. Words have to be given their plain,
fair and natural meaning where it is not apparent from the scope and intendment
of the statute that such a meaning would be inconsistent or would lead to
manifold injustice. It is no more necessary to say that the provisions of a
penal statute must be strictly construed, that a man cannot be punished for
breach of an obligation of which the words imposing that obligation do not give
him clear notice, or to put it somewhat differently, that a man cannot be
punished for failing to do, not what the statute on the face of it requires him
to do according to the ordinary and natural meaning of the words employed, but
according to some meaning that can be read into them by an involved process of
reasoning. No doubt as Maxwell observes (Chapter X, 9th edition) the rule of
strict construction in the case of penal statutes was more rigorously applied
in former times, and the tendency of modern decisions, upon the whole, is to
narrow materially the difference between what is called a strict and a beneficial
construction. The rule of strict construction must yield to the paramount rule
that every statute is to be expounded according to its express or manifest
intention. Nevertheless the intention to use words in a sense different from
their natural and ordinary sense must first be established, and this more
strictly in a criminal case.
7. We are told that section 76
of the Companies Act, in fact the Act as a whole, uses the word “meeting” in a
very special sense as including resolutions. The argument advanced in support
of this view is that, in law, there can be a company with only one member -
although under section 5 of the Companies Act at least tow persons are
necessary for forming a private company and seven for a public company ;
sections 147 and 162 (iv) contemplate the reduction of the membership to below
two. Therefore, since there can be a company with only one member, all the
provisions of the Act, including section 76, must apply to such a company. The
legislature could not have intended otherwise. There are so many provisions in
the Companies Act as, for example, sections 32 and 131 that depend on the
holding of the annual general meetings and many more, that depend on statutory
or extraordinary general meetings, and having regard to the scope and
intendment of the statute, it cannot be that these provisions, with the
obligations that they carry, were not intended to apply to the case of a one
man company.
8. So runs the argument, and
our attention has also been drawn to regulations 51 and 52 of the Regulations
in Table A of the first schedule to the Act (now embodied in section 174 of the
Companies Act, 1956) which read together imply that a meeting can be held with
less than two members. For regulation 51 lays down that two members personally
present shall be a quorum in the case of a private company and regulation 52
says that if at an adjourned meeting a quorum is not present, the members
present (which covers the case of one member, the plural including the
singular, and which, in the case of a private company can be only one) shall be
a quorum.
9. The first answer that occurs
to us to this argument is that if sections 147 and 162 (iv) of the Act
contemplate the case of a one-man company they contemplate also a no man
company, for the reduction of membership below two or seven as the case may be,
can as well be to zero as to one. Similarly in the case of the regulations, the
absence of a quorum of two includes a case where none is present. That this is
in accord with strict legal theory, and that a company does not cease to exist
merely because it has ceased to have any members would appear from the
following observation in Salmond on Jurisprudence (page 339, 10th edition) :
“There is no reason
why a corporation should not continue to live, although the last of its members
is dead.”
By a parity
of reasoning a company should be obliged to hold an annual general meeting of
its members although it has no members.
10. We do not profess to read the
mind of the Legislature apart from what appears from the words it has used, but
it might well be that the Legislature thought it unnecessary that the
obligations under section 76 of the Act and under the other sections depending
on it, should be imposed on a one-man company. All these provisions, it will be
noticed, are primarily designed for the protection of the members of a company
against those in actual management of its affairs. They do not appear to be
designed so much for the protection of the general public, and that is why a
private company, all the members whereof would ordinarily have a hand in the
actual management, is exempt from some of the provisions : see for example
section 77(11) which exempts a private company from the provisions of that
section. Where a company consists of only one member he would naturally be in
conduct of its affairs, and the Legislature might well have thought it
unnecessary to protect him against himself. For the general public dealing with
such a company, it was probably thought that provisions like section 47 and
section 162(iv) would afford sufficient protection.
11. It is also possible that, in
framing section 76, the Legislature lost sight of the fact that there could be
a one-man company and proceeded on the basis that there would always be two or
more members. In any case, the notion of one man calling a meeting of himself,
going to that meeting to meet himself, electing himself to the chair, presiding
over himself, laying before himself the matter to be considered, and, after
having discussed these matters with himself, passing resolutions with regard to
them, and, perhaps, as was the case in Sharp v. Dawes , proposing a vote of
thanks to himself, sounds so Gilbertain that we should think that, unless the
words used expressly, or by necessary implication, point to it, the Legislature
could not have contemplated such a thing.
12. Such words are, in fact, to
be found in the explanation to section 186(1) (as also in the explanation to
section 167(1) of Companies Act, 1956) which states that the directions given
by the court under that sub-section may include a direction that one member of
the company shall be deemed to constitute a meeting. This, we are told, is only
declaratory of the law under section 79(3) of the Act of 1913 as that
provisions was judicially interpreted. That might well be so ; but even so it
clearly implies that in the sense in which the word “meeting” used in the Act
of 1956 (Which cannot be less comprehensive than the sense in which it is used
in the Act of 1913, the provisions of the later Act being more far-reaching)
there cannot be a meeting of one member of a company. It requires a direction
of the court (or of the Central Government as the case may be) before one
member can even be deemed to constitute a meeting. This, we should imagine is
conclusive against the argument advanced on behalf of the State.
13. We have been referred to the
decision of a Bench of this court in Peermade Tea Co. Ltd. v. Executive
Authority, as authority for the proposition, with which we have no quarrel,
that, if the context requires it, a word must be given a meaning wider than its
ordinary or primary meaning. But that decision which concerns itself with the
interpretation of the word “house” as used in a local administration statute,
an ambiguous word which has long outgrown its primary meaning of a building for
human habitation and has, especially in the context of rates and taxes, come to
include all manner of buildings, has no direct bearing on the present case. Our
attention is however invited to the following aphorism of Judge learned hand
which is quoted in that case, “it is one of the surest indexes of a mature and
developed jurisprudence not to make a fortress out of the dictionary.” We can
only observe that it is certainly not the index of such a jurisprudence to make
a flood-gate of the dictionary through which can enter any extravagance of the
mind.
14. It is said that it was the
duty of the company and of the sole surviving member to bring on the register
the legal representatives of the deceased members, and that the accused cannot
be allowed to take advantage of their own remissness. But we have not been
shown any provision of the Act which imposes such a duty ; nor are we aware
that a legal representative can be compelled to come on the register.
15. The
appeals fail and are dismissed.
Appeals
dismissed.
[1970] 40 COMP. CAS. 0593 (GUJ)
CHANCERY
DIVISION
Plowman, J.
March 18, 19,20,21, 24.
1969.
Bernard Finlay Q.C. and S.A. Stamler for the
applicant.
C.A. Settle Q.C. and Allan Heyman for the respondent.
Plowman, J.—This is a summons under section
304 of the Companies Act, 1948, which is as follows:
(1) "If from any cause whatever there is no liquidator
acting, the court may appoint a liquidator. (2) The court may, on cause shown,
remove a liquidator and appoint another liquidator."
The applicant is Mr. Charles Arthur Lyon, who is a
member of the company which is in a members' voluntary winding up, and the
summon asks:
"(1) An order appointing
Walter Basil Scarlett Walker of 11 Ironmonger Lane in the City of London
chartered accountant, to the office of liquidator of the above named company:
Alternatively to (1):—(2)(a) An order removing the said Stanley Wilfred
Oppenheim from the office of liquidator, of above named company, and (b) An
order appointing the said Walter Basil Scarlett Walker in place of the said
Stanley Wilfred Oppenheim."
The circumstances leading up to the application are
these. The company, London Flats Ltd., was
incorporated on February 18, 1936, as a private property company. On February
19, 1963, it went into liquidation. At that the authorised and issued share
capital of the company was £45,000, divided into 45,000 shares of £1 each.
39,900 of these were held by the late Mrs. Victoria Pauline Oppenheim, 15,000
of those 39,900 being held by her; as nominee for her husband, the late Mr.
Abraham Louis Oppenheim 5,000 shares were held by their son, the present
respondent, Mr. Stanley Wilfred Oppenheim, and the balance of 100 by the
applicant, Mr. Lyon who is a chartered accountant who had formerly been
associated with Mr. Oppenheim, senior, in his group of companies, and who for
some years prior to 1958 was a director of the company. On the company going
into liquidation Mrs. Oppenheim was appointed
liquidator. Mr. and Mrs. Oppenheim, senior, had three other children:
Mr. Henry Myer Oppenheim, who gave evidence in this case, and two daughters,
Mrs. Astaire and Mrs. Burkeman.
The main asset of the company was a block of flats at
St. John's Wood known as "Viceroy Court." In November, 1962, this was
sold for £800,000. At the present time, after discharging the liabilities of
the company, there is on deposit at Barclays
Bank a sum somewhat in excess of £800,000.
On March 24, 1963, Mrs. Oppenheim died. By her will,
made in September, 1962, she appointed her
husband, who survived her, her sole executor, and under
that will he became entitled to all her shares in the company. Her will also included
a legacy of £25,000 in favour of the respondent and a further legacy of £10,000
in favour of his wife, but by a codicil made in the following
month Mrs. Oppenheim revoked those two legacies. In April, 1963, the respondent
entered a caveat. This did not involve any challenge to
the disposition of her shares in the company in favour of her husband. The
challenge was to the codicil, which, as I have said, revoked two pecuniary legacies.
Accordingly, in the following month Mr. Oppenheim,
senior, as sole executor, began proceedings in the
Probate, Divorce and Admiralty Division of this court to establish the
will and codicil of his late wife. The respondent was
the defendant to those proceedings, and his defence was that the codicil was
executed under the undue influence of his father, who he is hostile to
him. The effect of those proceedings was that the 39,900 shares in the company
became sterilized and could not be voted on. In this
situation, there being no liquidator of the company as the result of Mrs.
Oppenheim's death, the applicant, Mr. Lyon, called an extraordinary general
meeting of the company for July 26, 1963, and the notice convening that meeting stated that "the following will be
proposed as an ordinary resolution:
That Mr. Cyril Herbert Stanley
Lewis, F.C.A., of Messrs. Finnie, Ross, Welch & Co., Bow Bells House, Bread
Street, London E.C. 4 be and he is hereby appointed liquidator of the company
to fill the vancancy caused by the death of Mrs. Victoria Pauline Oppenheim”.
The only persons entitled
to attend and vote as member were, in the circumstances, the applicant and the
respondent. The applicant’s account of what happened at the present
application, and I think I should read the relevant paragraphs, which are 9 to
12 inclusive, and are as follows:
“The respondent and I
both attended the meeting and in addition there were present at first Mr.
Davies, one peacock of Mr. Lewis’ firm, Mr. Jacobs of the respondent
solicitors, a stenographer and Mr. Corman of my solicitors. The respondent objected
to the presence of anyone other than the registered shareholders and
consequently all persons other than the respondent and myself withdrew. 10 I
began the meeting by reading the notice … and the respondent then insisted that
a chairman be appointment, inviting me to proposed a chairman. I proposed
myself and the respondent then demanded an amendment naming himself as
chairman. On a show of hands each of us voted for our respective nominees and
the respondent then demanded a poll and cast the votes to which he was entitled
by reason of his holding of 5,000 shares in favour of the amendment, no vote
being taken on the resolution itself. 11. The respondent then declared himself
to be chairman (although I voiced my objection) and then stated that as chairman
he had the right to have a stenographer present to take notes. Despite my
strong objections and my reminder to him that it had been agreed before the
meeting that it was to be held with only member present thereafter. Although I
requested the respondent to allow me to consult the company’s solicitors, who
were in the adjoining room, he refused to allow me to do so. 12. The respondent
then invited me to propose the resolution then stated that he was going to
propose an amendment and he got as far as saying ‘that Mr. Stanley Wilfred
Oppenheim be appointed’ (or words to that effect) when I left the meeting
saying to him ‘I withdarw from the meeting—you now have no quorum. I did not
attend the meeting any further.”
The minutes of the meeting
differ only slightly from that account of it. They are as follows, as far as
material.
“The resolution set out in
the notice convening the meeting was read by Mr. Lyon. Mr. Oppenheim pointed
out that no chairman. Mr. Oppenheim proposed an amendment to this proposal that
he, Mr. Oppenheim, be appointed chairman. On a show of hands an equal number of
votes was cast for and against both propositions. A poll was demanded by Mr.
Oppenheim. The amendment was again put to the vote and there being 5,000 votes
in favour and 100 against, the amendment was duly carried, Mr. Oppenheim
then took the chair. Mr. C.A. Lyon proposed the resolution set out in the
notice of the meeting: That Mr. Cyril Herbert -Stanley Lewis ... be and he is
hereby appointed liquidator of the company to fill the vacancy caused by the
death of Mrs. Victoria Pauline Oppenheim.' Mr. S.W. Oppenheim then proposed the
following amendment to that resolution: 'That Stanley Wilfred Oppenheim... be
and he is hereby appointed liquidator of the company to fill the vacancy caused
by the death of Mrs.: Victoria Pauline Oppenheim'—At this point Mr. C. A. Lyon
left the meeting.. The meeting continued. The amendment was put to the vote and
there being one vote in favour and no votes against, the chairman declared the amendment carried. As the meeting had
appointed Mr. Oppenheim to be the liquidator, the resolution for the
appointment of Mr. C.H. Stanley Lewis, F.C.A., was not put to the vote.
As liquidator of the company, Mr. Oppenheim stated that he would make the
statutory returns, and as chairman of the meeting he formally declared the
meeting ended."
As I say, the applicant's
account is not, I think, really challenged, and I accept the evidence which he
gave in the witness box that he left the meeting before the respondent
had proposed himself as liquidator. In those circumstances,
I shall have to consider later whether the respondent was validly appointed liquidator.
The present summons was issued on August 12, 1963,
and on October 7 an order was made by Pennycuick J. by consent continuing an
injunction which had originally been granted by the
vacation judge which restrained the respondent over the final hearing of the
originating summons from
"acting as or
holding himself out in any way as being liquidator of the above-named London
Flats Ltd. and from dealing in any way whatsoever with any of its assets save
for instructing the bankers of the said company to transfer the moneys now
standing to the credit of the said company on current account to deposit
account."
It has taken over
five and a half years for the summons to come on, but I do not think that any
useful purpose would be served by trying to on blame for that.
On October 10, 1963, Mr. Oppenheim, senior, died. By
his will, which 15, 1963, he appointed as his executors a Dr. Kelsey and
another gentleman who renounced probate, and Dr. Kelsey thus became the
executor by representation of Mrs. Oppenheim as well
as being Mr. Oppenheim, senior’s executor. By this will Mr. Oppenheim,
senior, gave certain legacies, and he left his residuary estate on trust for his grand-children, the children of his
daughters, Mrs. Astaire, and Mrs. Burkeman. Again, the respondent entered a
caveat, and in April, 1964, Dr. Kelsey started another action in the Probate,
Divorce & Admiralty Division to have this will established. Again, the
respondent was defendant to the proceedings, and he put in a defence alleging that his father was of unsound mind at the
relevant time and he counterclaimed that his father died intestate. Part
of the unsoundness of mind was said by the
respondent to be his father’s, obsessional antipathy towards him. There were
considerable delays in the progress of both probate actions, but finally that
concerning Mr. Qppenheim senior's will was fixed for hearing on October 24, 1966,
and at that point a settlement was reached of both probate actions which
involved the payment of a lump sum to the respondent, to include his costs, in
satisfaction of all his claims and his wife's claim and he withdrew his
defences in both actions. Accordingly, on October 24, 1966, Cairns J., after
hearing the appropriate evidence, pronounced, for the will of Mr. Oppenheim,
senior, and on December 22, 1966, Dr. Kelsey otained a grant of probate to Mr.
Oppenheim, senior's estate.
On January 18, 1967, the other probate action came
before Latey J., who pronounced for the validity of Mrs. Oppenheim's will and
codicil, but no grant of probate of her will and codicil has yet been obtained,
because the sterilization of the moneys
available for distribution in the winding up pending the outcome of these
proceedings has made it impossible for Dr. Kelsey to raise the very
considerable sum required for estate duty. In his affidavit
sworn in these proceedings, paragraph 3, he says this about that aspect
of the matter:
"I was successful in obtaining a grant of
probate to Mr. Oppenheim's estate on a credit
basis, and I am, as a result of the orders referred to above, in a Position to
apply for a grant of letters of administration (with will annexed) to Mrs. Oppenheim's estate. I am, however, informed by my
solicitors and believe that the Estate Duty Office will require a payment on
account of estate duty before granting me such letters of
administration; the total duty due in respect of Mrs. Oppenheim's estate is
estimated to be £750,000 but there is also owing the sum of £176,500 as estate
duty on Mr. Oppenheim’s estate. A very substantial part of Mrs. Oppenheim's
estate consists of her beneficial interest in 24,900 out of the 39,900, shares
in London Flats Ltd. Which stand in her name, the proportion of the funds of
London Flats Ltd. distributable to Mrs. Oppenheim's estate being approx imately
£443,220. I am informed by my solicitors and believe that if it were possible
for me to satisfy Barclays Bank Ltd. (where the account of London Flats Ltd.
now stands) that there was a prospect of a distribution of these moneys to Mrs.
Oppenheim's estate within a short period the bank would be willing to make an
advance in the like sum to enable me to make payment to the Estate Duty Office;
this payment together with other sums now available to me; would enable me to
obtain a grant to Mrs. Oppenheim’s estate.”
Many attempts have been made to get the question of a
liquidator agreed; but all in vain., The way in which it appeared from the
applicant's can be illustrated from a letter which his solicitors wrote to the
solicitors then acting for the respondent on April 20, 1967, where they say
this:
“Initially our client applied to the court inter alia
for the appointment of Mr. Walker of Peat Marwick to
be appointed liquidator and this is the subject of one of the disputes
in the action. In our letter of October 15, 1963, with a view to finding a
compromise acceptable to broth sides we proposed that
there be joint liquidators, viz., your client personally and a partner
in one of the 'big five’ of firms of accountants. This offer was not accepted.
Later in July, 1966, Mr. Posner enquired of us whether our client would agree
to a Mr. R.E. Goate, chartered accountant, being appointed joint liquidator
with a named accountant, a partner in one of the 'big five'. Before we could
take instructions Mr. Posner's firm ceased to act in the mater. This matter is
dealt with in our letter to you of September 20, 1966 We. suggested that you
submitted three names to us for the reasons set out in our letter of March 16.
May we suggest that in order to save any misunderstanding you should set out
your client's proposals in this regard and we will
promptly seek our client's instructions thereon. We must now our
client's behalf request a prompt reply so that if the matter is to be fully
litigated the case can be referred to the registrar for early directions.”
There was a reply to that letter on April 26, saying
"we are taking instructions thereon as a matter
of urgency and we will write you again shortly."
Nothing having been heard on May 5, the applicant's
solicitors wrote again:
“We refer to your letter of April 26, 1967, in which,
in acknowledging our letter of April 20, you stated
you were taking your client's instructions on our letter as a matter of urgency
and would write us shortly. We must now please ask you for a reply to
our letter of April 20, by Wednesday next May 10, otherwise the matter must
proceed."
To that letter there was no reply.
The respondent’s attitude is that he was validly
appointed liquidator and that there are good reasons why he should continue to
act as such. He says that he was not agreeable to an accountant being appointed
sole liquidator first because the matter is so complex that an independent
accountant would not be able to deal with certain matters requiring
investigation as efficiently as he (the respondent) could—I will come back to
those matters in a moment—and, secondly, because he did not, want the company
to be charged with a large amount for fees he was the second largest shareholder in the company, holding some 11 percent
of the issued capital. As regards the suggestion of
joint liquidators, he said in evidence that he made enquiries of certain
of the leading London firms of chartered accountants, and he got the impression that they were not in favour of joint
liquidators.
Now I must say something more about the matters
which, according to the respondent, require further investigation. According to
him, his father and mother embezzled the funds of the company during their
lifetimes by pocketing premiums which had been charged on the grant of leases
of Viceroy Court where there were, I understand, some 90 or so flats, and the
suggestion is that the money so acquired was in part placed in bank accounts,
overseas, in part invested in jewellery, and in part retained in cash in
various currencies. It said that two large boxes containing cash and jewellery to the value of some £300,000 were
removed by the respondent's brothers-in-law from his father's bedroom on the
night of his father's death, and the respondent is quite determined that these
moneys shall be recovered. for the company.
I express no view at all whether there is any
substance in these allegations; that is not a matter with which I am concerned.
But I must say this: it would be an understatement to say that the respondent
is not on good terms, with his sisters and their husbands. The words
"feud" and "vendetta" have been
used during the course of the hearing. I do not propose to dwell unnecessarily
on the bitterness which undoubtedly runs through this case; but if there is to be an investigation of the charges which
the respondent makes, I am certain that it is in the interests of
everyone concerned that it should be made by a wholly independent person who is
not involved in the family passions and bitterness.
I come back now to the legal problems which are
involved in this case. First was the respondent ever validly appointed
liquidator? Under section 286(1), of the Companies Act, 1948, the vacancy
caused by Mrs. Oppenheim's death could be filled by the company in general
meeting, and the question is: Was the respondent appointed by the company in
general meeting? In my judgment, he was not for the reason that at the moment
when he was in the course of proposing himself
as liquidator the applicant left the meeting and from that moment there was
only one member present, and therefore no meeting. It is well settled that as a
general rule a single shareholder cannot constitute a meeting I was referred to
the case in the Court of Appeal of Sharp v.
Dawes,
where a meeting of a company was called for the purpose, among other things of
making a call on shares. Only one shareholder turned up at the meeting, and
that shareholder purported to pass a
resolution (see 2 Q.B.D. 26)
"That a call of 4s. 6d. per share be now and is
hereby made payable to the secretary, and that, a discount of 5 per cent be
allowed if paid by January 20, 1875."
and the question was whether that call was validly
made.
Lord Coleridge C.J, said,
at page 28:
“This is an attempt to enforce against the defendant
a call purporting to have been made under
section 10 of the Stannaries Act 1869. Of course it cannot be enforced unless
it was duly made within the Act. Now, the, Act says that a call may be made at
a meeting of a company with special notice, and we must ascertain what within
the meaning of the Act is a meeting, and whether one person alone can
constitute such a meeting. It is said that the requirements of the Act are
satisfied by a single shareholder going to the place appointed and professing
to pass resolutions. The 6th and 7th sections of the Act show conclusively that
there must be more than one person present; and the word 'meeting' prima facie
means a coming together of more than one person. It is, of course, possible to
show that the word ‘meeting' has a meaning different from the ordinary meaning,
but there is nothing here to show this to be the case. It appears therefore to
me that this call was not made at a meeting of the company within the meaning
of the Act. The order of the court below must be reversed”
and the other members, Brett
and Amphlett JJ.A., of the court concurred in that judgment.
That case was followed by Sir George Jessel M.R. in
In re Sanitary Carbon Co.
That was a winding-up petition by an unpaid judgment creditor.
"It was opposed by the company on the ground
that a 'meeting' of the company had been held at which one shareholder only,
named Worswick, was present, he having in his pocket
the proxies of the only three other shareholder of the company. Worswick voted
himself into the chair, proposed a resolution to wind up voluntarily, declared
the resolution passed, and appointed a liquidator……..The Master of the rolls
said that , apart from any authority, he was quite prepared to hold that there
had been no meeting of the company, but Sharp v. Dawes
was conclusive on the subject. In that case, as in this, one shareholder held a
‘meeting’ ,and the only point of difference between the two case was, that
there the shareholder passed a vote of thanks to himself ! There must be the
usual compulsory order.”
A case of the sort
envisaged by Lord Coleridge C.J., where it was possible to show that the word
“meeting" bore a different meaning from its ordinary meaning, was
East v. Bennett Brothers Ltd.
The head note is this:
“A company was incorporated with a capital divided
into preference and ordinary shares. The
memorandum of association empowered the company to increase its capital, but
provided that no new shares should be issued so as to rank equally with or in
priority to the preference shares, unless such issue was sanctioned by an
extraordinary resolution of the holders of the preference shares present at a
separate 'meeting' of such holders specially summoned for the purpose of
considering the question. The articles of association contained a similar
provision. Shortly after the incorporation of
the company meetings were held at which a special resolution was passed and
confirmed increasing its capital by a fresh issue of
preference shares. At that time B. was the holder of all the original
preference shares. He presided at the first meeting, moved the resolution for
the issue of the new preference shares, and signed a document in the
minute-book recording his assent as the holder of all the original preference shares to the issue of the new preference shares. In
pursuance of this resolution and in reliance on B.'s assent the new
preference shares were subsequently issued:—
“Held that, there being nothing in the constitution
of the company to prevent the whole of the original
preference shares being held by one shareholder, the word ‘meeting’ in the
memorandum and articles must be taken to have been used not in its
strict sense, but as applicable to the case of a single shareholder:—
"Held, therefore, that there had been a sufficient
compliance with the requirements of the memorandum and articles, and that the
new preference shares had been validly issued."
Warrington
J., after referring to the two cases which I have already cited, said,
at page 169:
“But now what I have to consider is whether this is
not one of the cases referred to by Lord Coleridge
C.J. as one in which it may be possible to show that the word 'meeting'
has a meaning different from the ordinary meaning.
For that purpose I think I am entitled to see what is the object of the
provision in the memorandum of association. Plainly, as I have already said,
that object is that before affecting the rights of the preference; shareholders
it shall be necessary to obtain and record in a formal manner the assent of the
preference shareholders to that course. I think I may, take
it also that the persons who framed this document may have had,
and" must be taken to have had, in their minds the possibility at all
events that'' this particular class of shares might fall into the hands of one
person. There is nothing to prevent it in the constitution of the company. One must regard the memorandum as far as possible as
providing for circumstances, which in the ordinary course may arise. That being
so, I think may very fairly say that where one person only is the holder of all
the shares of a particular class, and as that
person cannot meet himself, or form a meeting with himself in the ordinary
sense, the persons who framed this memorandum
having such a position in contemplation must be taken to have used the word
'meeting,' not in the strict sense in which it is usually used, but as
including the case of one single shareholder. There is,
of course, no difficulty in treating the formally expressed assent of Bennett
as a resolution. The only question is the purely technical difficulty arising
from the use of the word ‘meeting' in the memorandum. I think on the whole that
I may give effect to obvious common sense by holding that in this particular
case, where there is only one shareholder of the class on the true construction
of the memorandum, the expression 'meetings’ may be held to include that case.
It seems to me, therefore, that the shares were validly
issued, and that there is therefore no necessity for the rectification of the
register. I refuse the motion on that ground."
In the present case I can find no context which enables me to say that a meeting of one member is good enough
It is true that in In re Hartley Baird Ltd.
Wynn-Parry J. held on the construction of the
company's memorandum and articles, which were, I think, so far as material, similar
to those in the present case, that if a, quorum was present at the beginning of
a meeting the subsequent departure of a member reducing the meeting below the
number required for a quorum does not invalidate the proceedings of the meeting
after his departure. But the quorum in that
case was 10, and the departure of one member still left nine, so that the point
with which I am concerned did not arise. There, the question was quorum or no
quorum, while here it is meeting or no meeting.
It is also true that there are certain circumstances
in which the Companies Act, 1948, enables one member
of a company to constitute a meeting. They may be found in section
131(2) and section 135(1). But they are exceptional Cases
which have no application here.
In my judgment, therefore
the respondent's purported appointment of himself as liquidator was a nullity.
But in case that view should be wrong and this matter should go further,
I ought to add that, on the evidence. I should have felt obliged to make an
order under section 304(2), removing the respondent and appointing an
independent liquidator in his place. I have already stressed the reasons why,
in my judgment, it is essential in the this case that the liquidator should be wholly independent of the Oppenheim
A number or cases were cited to me which show that
the court has a wide discretion, but I need not, I think, refer to them,
because Mr. Settle, for respondent, concedes that if I take the view that it is
for the benefit of the liquidation, and in the
interests of everyone concerned to make such an order then I am entitled to do
so.
What I propose to do,
therefore, is to refer the matter back to chambers for the appointment
of an independent liquidator. I do not propose to appoint the applicant's
nominee, not because there is the slightest reflection
on him, but because the applicant himself in his second affidavit says this:
"Mr. Walker is, I
understand, still willing to act, though I now understand that (although I have
no connection at all with him or his firm)" his firm, acts as
auditors to a company with which the respondent's brothers-in-law are
associated. I cannot, with the greatest respect to the respondent, believe that this connection could in any way affect Mr.
Walker's discharge of his responsibilities, but I am quite willing to
meet the respondent by agreeing (as my solicitors already suggested in the
correspondence) that a partner in any one of the big city firms of chartered
accountants be appointed."
As I say, I think it is better to have someone with
no connection at all with any of the Oppenheim family.
The registrar tells me that he will give an
appointment to both sides on this matter at
2.15 p.m. tomorrow afternoon; so there is no question of any delay. The
applicant, I suppose, should formally restore the summons in the registrar's
chambers first, and that appointment is available, as I say, at 2.15 p.m.
tomorrow.
Order accordingly.
[1955] 25 COMP. CAS. 386 (CH. D)
[1955] L.R. 1 CH. D. 143]
WYNN-PARRY J.
NOVEMBER, 29, 1954
Wynn-Parry J., after stating the facts: In the
interpretation of such a commercial document as articles of association, the
maxim ut res magis valeat quam pereat should certainly be applied, and I propose
to interpret these articles in the light of that maxim. The language of article
52, on the face of it, is quite clear. It provides that no business is to be
transacted at a general meeting unless a condition is fulfilled, and that
condition is a composite one. It requires not only that a quorum is to be
present, but qualifies that by saying that the quorum is to be present when the
meeting proceeds to business, then a formula is set out for calculating the
number who are to form the quorum. It could only be by implication that that
language could be extended to cover the position when the meeting proceeds to
the vote because, on the face of it, the condition of the article is fulfilled
if the quorum is present when the meeting proceeds to consider the business for
which it was convened.
Looking still only at these
articles, I think that that interpretation is underlined when one considers and
analyses article 53, which is designed to cover the position which would arise
if a quorum was not at any time present, and not merely where the numbers
present were reduced below the number required for a quorum under article 52,
because article 53 says: "If within half an hour from the time appointed
for the holding of general meeting a quorum is not present," then certain
consequences are to follow. Putting aside the case of a meeting convened on the
requisition of members, the result would be that there would be an automatic
adjournment for one week, and then the members present would form a quorum.
That article is clearly designed to save a meeting which has been properly
convened, but which cannot proceed to business because no quorum is ever
present; but it does not apply in the case of a meeting at which a quorum is
present at the beginning when the meeting proceeds to business, but at which a
quorum has ceased to be present at the time when the meeting proceeds to vote
on any resolution before it.
Either then there is a gap in the
scheme of the articles, which would be unfortunate, or else there is no gap; but
there can be no gap only if the interpretation which I have placed on article
52 is the right one. I should myself have felt no doubt whatsoever on the
matter but for Henderson v. James Louttit & Co. Ltd., where
the court had to consider a petition for the winding-up of the company under
the supervision of the court. In the course of that case, the court had to
consider an article in all material respects similar to article 52, but so far
as I can see from a study of the report, the article corresponding to article
53 in the company's articles in this case was not cited to the court, nor was
the argument put before me by Mr. Russell in any way adumbrated.
The Lord President took the view,
in which the other two members of the court concurred, that a quorum must not
only be present at the commencement of the meeting, but also at the time when
the business was transacted. In the course of the judgment he said:
"It would be a highly inconvenient not to say unnatural meaning to attribute to it, [the article] to hold that all that is
necessary to the validity of the proceedings is, that at the earliest stage of
the meeting a quorum should be present, but that after the real business of the
meeting is started and under consideration the quorum might go away.
Prima facie those words are apt to apply to the case before
me, but as I read the somewhat short report and look at the facts, it appears
to me that that statement can be properly regarded as obiter dictum. In any
event, with all respect to that decision of the Court of Session, I feel
compelled primarily to concentrate on the language of the two relevant articles
before me. From the force of that language, I have come to the conclusion that
I ought not to follow the Scottish case, but that I ought to conclude that the
meeting in question of the holders of the " B " ordinary shares was
one at which a valid class resolution was passed, because at the beginning of
the meeting, that is, when the meeting proceeded to business there was present
a quorum as provided by article 46 of the articles of association.
His Lordship then heard the petition on its merits.
[1987]
62 COMP. CAS. 865 (KER)
HIGH COURT OF KERALA
v.
Majestic Kuries and Loans (P.) Ltd.
AUGUST 18, 1987
P.K. Balasubramonyam for
the Petitioner.
K. A. Nair for the
Respondent.
S. Padmanabhan, J.—Plaintiffs are the revision petitioners. The two revision
petitions arise from O. S. No. 728 of 1986 on the file of the Subordinate
Judge, Trichur, and O. S. No. 2510 of 1986 on the file of the Munsiff, Trichur.
Order in I. A. No. 1842 of 1986 in O. S. No. 728 of 1986 gave rise to C. M. A.
No. 92 of 1986 before the District Judge, Trichur. Order in I. A. No. 3732 of
1986 in 0. S. No. 2510 of 1986 gave rise to C. M. A. No. 127 of 1986. Both the
CM.As. were disposed of by the District Judge, Trichur, by a common judgment.
C. R. P. No. 1285 of 1987 is against the order in C.M.A. No. 127 of 1986 and
C.R.P. No. 1286 of 1987 is against the order in C. M. A. No. 92 of 1986.
First defendant in both the
cases is- the Majestic Kuries and Loans (P.) Ltd., High Road, Trichur, a
company incorporated under the Companies Act for the conduct of kuries worth
about Rs. 10 crores. There are 25 shareholders. Plaintiffs in both the cases
are shareholders of the company. The fourth annual general meeting of the
company was held on October 12, 1985. Thereafter, there were some disputes.
There was a request to convene an extraordinary general meeting. The right of
the second defendant to continue as chairman of the company was also disputed.
So also some of the members contended that defendants Nos. 3 and 4 in 0. S. No.
728 of 1986 are not shareholders. It was for these purposes that a request was
received to convene an extraordinary annual general meeting. The board of
directors instead of holding an extraordinary annual general meeting decided to
hold the fifth annual general meeting itself on August 28, 1986. Last and sixth
item in the agenda of that meeting was removal of the second respondent from
the board of directors. When the board of directors issued notice to convene
the fifth annual general meeting on August 28, 1986, one shareholder filed 0.
S. No. 728 of 1986 for an injunction directing the second defendant not to
preside over the meeting and to take up item No. 6 in the agenda, namely,
removal of the second defendant from the board of directors as the first item.
So also, he wanted a direction that defendants Nos. 3 and 4 are not entitled to
participate in the meeting since they are not shareholders. For these purposes,
the plaintiff moved I. A. No. 1842 of 1986 in O. S. No. 728 of 1986.
The annual general meeting
proposed to be held on August 28, 1986, could not be held for want of quorum.
Even before that, the Subordinate Judge granted an interim order in I. A. No.
1842 of 1986 directing the second defendant not to preside over the meeting,
that item No. 6 in the agenda to be taken up as the first item and that
defendants Nos. 3 and 4 shall not participate in the meeting. The adjourned
meeting was held on September 4, 1986. In that meeting, the second defendant
was removed from the board of directors. The vacancies in the board of
directors were filled up. The remaining agenda for the meeting were also gone
through.
Ignoring the meeting held
on September 4, 1986, the second defendant issued exhibit A-4 notice on
September 16, 1986, for the purpose of convening the fifth annual general
meeting on October 15, 1986. At that time, another shareholder filed 0. S. No.
2510 of 1986 before the Munsiff's Court, Trichur, for a declaration that the
annual general meeting held on September 4, 1986, is valid and for an
injunction restraining the meeting proposed to be held on October 15, 1986. In
that suit, the plaintiff also filed I. A. No. 3732 of 1986 for a temporary
injunction restraining the holding of the meeting.
In I. A. No. 1842 of 1986
in O. S. No. 728 of 1986, the Subordinate Judge found that the plaintiff was
not able to establish a prima facie case for injunction against defendants Nos.
3 and 4. So also it was found that there is nothing wrong in the second
defendant presiding over the meeting and casting his vote. The meeting held on
September 4, 1986, was held to be invalid on account of the injunction against
interested parties. At the same time, in I. A. No. 3732 of 1986 in 0. S. No.
2510 of 1986, the Munsiff found that the meeting held on September 4, 1986, is
valid and, therefore, there is no question of again calling the fifth annual
general meeting on October 15, 1986. Injunction was granted against that
meeting.
Thereafter, the former
board of directors filed O. S. No. 982 of 1986 before the Subordinate Judge,
Trichur, and filed I. A. No. 2511 of 1986 for injunction against the board of
directors elected on September 4, 1986. An ex parte order of injunction was
obtained on that application. C.M.A. No. 108 of 1986 filed by the defendants in
that case was allowed by the District Judge and the matter was remanded. That
was also by the same common order by which C. M. A. Nos. 92 and 127 of 1986
were disposed of. I was told that another revision petition has been filed
against the order of remand.
In C. M. A. Nos. 92 and 127
of 1986, the learned District Judge did not come to any conclusion on merits.
The District Judge' found that the validity of the annual general meeting held
on September 4, 1986, is a matter to be decided in the suit. At the same time,
a commissioner was ordered to be appointed for holding the fifth annual general
meeting.
The two questions that
arise for consideration, on the basis of the arguments addressed before me, are
: (1) Whether the annual general meeting held on September 4, 1986, and the
decisions taken therein are valid, and (2) Whether the direction given by the
District Judge to conduct the fifth annual general meeting through the
commissioner is legal.
On the first point, learned
counsel for the respondents strenuously argued that the meeting is not legal
because it was conducted at a time when there was injunction against defendants
Nos. 2, 3 and 4. So also he pointed out that immediately after the injunction
was vacated, the board of directors issued exhibit A-4 notice to convene the
meeting on October 16, 1986. The interpretation of section 174(4) of the
Companies Act was one of the main items of dispute between the parties at the
time of arguments in this respect. Section 174(4) of the Companies Act reads :
"In any other case,
the meeting shall stand adjourned to the same day in the next week, at the same
time and place, or to such other day and at such other time and place as the
board may determine".
Learned counsel for the
respondents said that while interpreting section 174(4), the provisions of
sections 166, 167, 168, 169, 171, 175 and 189(2) as well as rule 9 of the
Companies (Court) Rules and section 151 of the Code of Civil Procedure also
will have to be taken into account. I do not think that there is much merit in
that argument. Section 166(1) of the Companies Act only deals with the
liability to hold the annual general meeting and fixes the outer limit of
fifteen months. Proviso (2) to that sub-section authorises the Registrar to
extend that period up to a maximum limit of three months for special reasons.
Section 167 only deals with the power of the Central Government to hold the
annual general meeting in case of default by the company. Section 168 only provides
for penalty in cases of non-compliance with the provisions of section 166 or
167. Section 169(1) and (6) only deal with convening of meetings on
requisition. Section 171 is the section providing for the length of notice for
convening meeting. These provisions have absolutely no impact on the
interpretation of section 174(4).
Section 174(4) deals with
two situations. The first is where the meeting is not adjourned to any date. In
such a situation, what the sub-section says is that "the meeting shall stand
adjourned to the same day in the next week". In my opinion, this is an
automatic statutory adjournment of the meeting without the intervention of
human agency. The second situation contemplated under sub-section (4) is to
hold the meeting on such other day and at such other time and place as the
board may determine. In my opinion, the operation of the second part of
sub-section (4) comes into play only when the meeting is adjourned by the board
of directors to be convened on any particular day and time at any particular
place on the date of the meeting itself or at any rate before the commencement
of the same day in the next week. If no such date is fixed before that time
limit, the first part of sub-section (4) automatically operates and the
convening of the meeting on the same day in the next week at the same time and
place is nothing but legal and proper. Therefore, on that ground, the validity
of the meeting held on September 4, 1986, cannot be challenged.
So far as the second
defendant is concerned, the injunction was only against himself presiding over
the meeting. But defendants Nos. 3 and 4 were restrained from participating in
the meeting. Whether, on that ground, the meeting held on September 4, 1986, is
invalid or not is a matter that could be decided only by the final decision of
the suit. There is a contention that on account of the contravention of some
provisions of the articles of association, defendants Nos. 3 and 4 are not
shareholders. This contention is opposed by the other side. A decision on the
merits on that question is not possible at present. The learned District Judge
rightly held that this is a matter for final decision. Therefore, at present, I
am not in a position to express any final opinion regarding the validity of the
annual general meeting held on September 4, 1986, and the decisions taken
thereon.
But the fact remains that
the fifth annual general meeting was held on September 4, 1986. Before entering
a finding that the said meeting is invalid, the District Judge was not justified
in ordering the same fifth annual general meeting to be held once again through
a commission. If ultimately the meeting was held on September 4, 1986, and the
decisions taken thereon are held to be valid, the meeting ordered by the
learned District Judge will amount to a duplication. That will only help to add
to the confusion.
Further, the authority of
the District Judge to order convening of such a meeting was also under serious
challenge. The only two provisions in the Companies Act under which the courts
could act in such cases are sections 186 and 633. Section 633 is at any rate
not applicable for our purpose. Section 186, as it stood before the amendment,
authorised the court to convene a meeting other than an annual general meeting.
That authorisation itself is only in favour of the company court and not the
civil court. Even that section has been amended in 1974 and instead of court
the Company Law Board was substituted.
In the decision in R.
Rangachari v. S. Suppiah [1975] 45 Comp Cas 641 (SC), even though the Madras
High Court took the view that the court could appoint a chairman for the
meeting, the Supreme Court said that it could not. It was also pointed out by
the Supreme Court that after the amendment, the jurisdiction is only with the Company
Law Board. In the
decision in Coal Marketing Co. of India P. Ltd., In re [1967] 37 Comp Cas 720, the Calcutta High Court expressed the view that
the courts have no power to call, hold, conduct or control annual general
meetings.
Learned counsel for the
respondents relied on rule 9 of the Companies (Court) Rules and section 151 of
the Code of Civil Procedure to argue that even in the absence of a specific
provision, inherent powers are there. Inherent powers saved under rule 9 of the
Companies (Court) Rules are only in favour of the company courts. What that
rule says is that nothing in these rules shall be deemed to limit or otherwise
affect the inherent powers of the court to give such directions or pass such
orders as may be necessary for the ends of justice or to prevent abuse of the
process of the court. Exactly those are the powers saved under section 151 of
the Code in favour of civil courts. Inherent powers cannot be invoked when
express provisions are there. In the Companies Act, there are express
provisions for reliefs and the authorities are also provided. Section 167
authorises the Central Goyernment for convening meetings in certain
contingencies and section 186 authorises the Company Law Board. Under the
proviso to section 166, the Registrar is also given power to extend time under
certain contingencies. Under such circumstances, it may not be proper to
contend that the meetings could be convened by the civil court in exercise of
the inherent powers. In Nungambakkam Dhana-rakshaka Saswatha Nidhi Ltd. v. Registrar of Companies
[1972] 42 Comp Cas 632, the Madras High Court
said that the inherent power of the court cannot be invoked where express
provision is made for relief by conferring power upon other authorities. In
these circumstances, the learned District Judge was not correct in ordering to
hold the fifth annual general meeting through a commissioner appointed by that
court.
Learned counsel for the
respondents argued that if the next annual general meeting is ordered to be
held without invalidating the fifth annual general meeting, it may cause
serious prejudice to his clients. In that connection, it has to be remembered
that nothing prevented the second respondent from participating in that
meeting. Learned counsel for the revision petitioners told me that even if
respondents Nos. 2 to 4 participated in that meeting, the decision would not
have been otherwise. In support of that argument, it was pointed out that only
11 shareholders participated in that meeting and the decision to remove the
second respondent was unanimous. So also I was told that the other decisions
were taken by a majority of 9 : 2 and that even if respondents Nos. 2 to 4
participated and voted, the difference at the maximum would have been only 9:5.
I do not think that those are matters to be considered at this stage.
The fourth annual general
meeting was held on October 12, 1985, and the fifth annual general meeting was
held on September 4, 1986. Subject to the final decision regarding the validity
of the fifth annual general meeting held on September 4, 1986, it is almost
time for convening the (next) sixth annual general meeting. Especially, in view
of the provisions contained in section 166 of the Companies Act and the
penalties provided under section 168, it is necessary that the next meeting
will have to be convened. I am giving a direction for the convening of the
sixth annual general meeting without prejudice to the right of the parties to
challenge the validity of the fifth annual general meeting and the decisions taken
therein.
The civil revision
petitions are partly allowed and the judgment of the learned District Judge
directing holding of the fifth annual general meeting by appointment of a
commissioner is hereby cancelled. Instead, there will be a direction to the
board of directors elected on September 4, 1986, to take necessary steps and
hold the sixth annual general meeting of the company on September 30, 1987. As
earlier stated, this will be without prejudice to the challenge directed
against the fifth annual general meeting held on September 4, 1986, and the
decisions taken thereon which will be considered on merits by the trial court
while deciding the suit finally. For the meeting to be held on September 30,
1987, notice shall be issued to respondents Nos. 3 and 4 also. They will also
be entitled to participate and vote. This also will be subject to the final
decision and without prejudice to the contentions on either side. Parties are
directed to suffer costs.
[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
MAY 15, 1986
Arun Jain for the
Petitioners.
N.K. Sodhi, H.S. Bajwa, N.C.
Sahni and Rajiv Narain Raina for the Respondents.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs.
10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up
capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in
arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
Col.
Kuldip Singh, petitioner |
No.
1 |
20 |
|
Hardev Singh
Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev
Singh," |
No. 3 |
20 |
|
Smt. Nasib Kaur," |
No. 4 |
20 |
|
Iqbaljit
Singh," |
No. 5 |
20 |
|
Smt. Kirpal
Kaur," |
No. 6 |
20 |
|
Smt. Chanan
Kaur," |
No. 7 |
20 |
It is alleged that the affairs of the company are being conducted prejudicially to public interest and in a manner oppressive to the petitioners, who are in minority, as detailed below:
(i) The company had been allotted 490 equity shares of Punjab Iron and
Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife
(124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran
Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares).
These were transferred in a clandestine manner and without having been offered
to any other shareholder including the petitioners, for a consideration of Rs.
3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other irregularities
were also committed by the board of directors in calling and holding the
meeting. Thus, the transfer of shares is not binding on the company.
(ii)Shri Ramesh Inder Singh
was the managing director of the company in the year 1976 and he had been
operating the bank account of the company maintained in the Central Bank of
India, Civil Lines, Jalandhar City, without any authority. He issued cheques in
fictitious names with the result that amounts to the tune of lakhs of rupees
were misappropriated.
(iii)Mohinder Singh had
been appointed as manager-cum-cashier of the company during the regime of
Pavittar Singh, father of Ramesh Inder Singh. The books of account were
maintained by Mohinder Singh. As a result, it is alleged, an amount of Rs.
2,68,000 had been defalcated by him in the year 1976. The board of directors
decided to take action against him. The matter was taken in various meetings of
the board of directors but no action was taken against him. Thus, the interest
of the shareholders was not protected by the management.
(iv)The minutes book of the
company relating to the meetings of the board of directors and shareholders was
not kept properly from November, 1978, to September, 1979. Some of the
proceedings have not been signed by the chairman. There are various violations
of the provisions of section 193 of the Act. Therefore, the business transacted
in the meetings during that period is illegal and void ab initio.
(v)The company had been
advancing loans to some persons without any documents. It is alleged that it
advanced loan without interest and without getting executed any document to
PISCO. An amount of Rs. 14,309.57 stands due from it to the company and an
amount of Rs. 36,730.52 from Mohinder Singh as on December 31, 1978, but no
action has been taken to recover the amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and mismanagement
of the affairs of the company and its winding up on just and equitable grounds.
The petition is mala fide and had been filed at the behest of Col. P. S.
Dhillon who had been the managing director till April 20, 1982, when he had
been removed. Petitioners Nos. 1 and 3 are tne real brothers of Col. Dhillon
and petitioner No. 4 is his real sister. The main allegation in the petition,
it is stated, related to the transfer of 490 shares held by the company in
PISCO. The matter had been decided in company petition filed by Col. P. S.
Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared invalid
in the absence of PISCO. The other allegations in the petition have been
controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first
preliminary objection raised by Mr. Sodhi is that the petitioners have no right
to maintain the present petition as they did not own 10 per cent, shareholding
on the date of filing the petition. On the other hand, Mr. Jain, counsel for
the petitioners, has argued that the petitioners had 150 shares out of 1,000
shares on the date of filing the petition as given in the petition. Thus, they
had the right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the
time of filing the petition, the petitioners were shareholders of the company.
From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that
the petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made
reference to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that
subsequent withdrawal of the consent could not affect the right of the
petitioner to proceed with the petition or the jurisdiction of the court to
dispose of it on merits. In my view, the observations in the above case are of
no assistance to Mr. Sodhi. Consequently, I overrule this preliminary
objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands
established. In support of his contention, he places reliance on Shanti Prasad
Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth
Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas
P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976
SC 565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression by the majority in
the management of the company's affairs and such oppression must involve at
least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is
just and equitable not only to the persons applying for winding up but also to
the company and to all its shareholders. It is further observed that the court
will have to keep in mind the position of the company as a whole and the
interest of the shareholders and to see that they do not suffer in a fight for
power that may ensue between the two groups. Similar observations were made in
Seth Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in
making an order for winding up on the ground that it is just and equitable that
a company should be wound up, the court shall consider the interest of the shareholders
as well as of the creditors. It is not necessary to dilate further on this
matter. It is sufficient to observe that if the allegations in the petition are
taken to be established, the petitioners are entitled to obtain an order of
winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35
Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and
Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand,
Mr. Jain has argued that if the effect of a single act is continuously
oppressive, the court is entitled to pass an order under sections 397 and 398.
He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 that in order to file an application under section 397, if must be shown
that the conduct of the majority shareholders was oppressive to the minority
members and this requires that events have to be considered not in isolation
but as part of a consecutive story. There must be continuous acts on the part
of the majority shareholders, continuing up to the date of the petition,
showing that the affairs of the company were being conducted in a manner
oppressive to some part of the members. Same view was expressed by P. N.
Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777
(Guj). It was observed therein that sections 397 and 398 postulate that there
must be at the date of the application a continuing course of conduct of the
affairs of the company which is oppressive to any shareholder or shareholders
or prejudicial to the interests of the company. I am in respectful agreement
with the above observations. It is true that in Sindhri Iron Foundry's case
[1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta
High Court that if the court is satisfied that a single wrongful act is such
that its effect will be a continuous course of oppression and there is no
prospect of remedying the situation by the voluntary act of the party
responsible for the wrongful act, the court is entitled to interfere by an
appropriate order under section 397 of the Act. However, the above observations
are not in consonance with those of the Supreme Court in Shanti Prasad Jain's
[1965] 35 Comp Cas 351. Consequently, it is not possible for me to rely upon
the view expressed by the Calcutta High Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that arises
for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to
attend three consecutive meetings and thus they would be deemed to be not
present in the meeting. In this way, only six directors would be deemed to be
present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had
been re-elected as director on June 30, 1978, and, therefore, he did not suffer
from any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of
section 287 provides that the quorum for a meeting of the board of directors of
the company shall be one-third of its total strength or two directors,
whichever is higher. In clause (a) of sub-section (2) of section 287, the total
strength of the board of directors of a company has been denned as the total
strength of the board of directors as determined in pursuance of the Act, after
deducting there from the number of directors, if any, whose places may be
vacant at the time. It is thus evident that for constituting quorum, l/3rd of
the total number of directors who do not suffer from any disability are to be
taken into consideration. The effective number of directors who admittedly
ceased to be so is 8. Thus, the number of effective directors was 24 and out of
them 8 directors could constitute the quorum. The directors present in the
meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt.
Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar
Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt. Inderjit
Kaur and Shri Ravinder Singh ceased to be directors. There is a dispute as to
whether Shri Pavittar Singh was re-elected as a director or not. Even if it may
be assumed that Shri Pavittar Singh had been re-elected as director, the quorum
was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if
not with what effect. Mr. Jain has argued that the copy of the despatch
register of the company from October 16, 1978, to February 19, 1979, exhibit
P-74, does not show that any notice was issued for the said meeting. On the
other hand, Mr. Sodhi, has argued that the only requirement under section 286
is that the notice of the meeting should be in writing. It does not prescribe
the manner in which it is to be served on the directors. The notice under
article 82 of the articles of association can be served personally. He submits
that notices were not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no
reliable evidence on record to prove that notices were sent through messenger
and, therefore, it cannot be held that notices were given to the directors. It
is essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed
at the meeting and where no notice was even given to one of the directors, the resolution
passed at the meeting of the board of directors is invalid. Consequently, I am
of the opinion that the resolution dated November 30, 1978, is invalid on this
ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my notice
the fact that the signatures of the chairman at the end of the minutes bear the
date November 30, 1979, instead of November 30, 1978. The arguments have been
considered by me but I do not agree with them. The proceedings book is
page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the
resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr.
Jain has challenged the said resolution on four grounds, out of which three
grounds are the same on which resolution, exhibit P-1, was challenged. The
fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib
Kaur, Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri
Swaran Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt. Nasib Kaur. |
|
2. |
Smt. Mohinder Kaur, |
|
3. |
Smt. Rajinder Singh Johal, |
|
4. |
Smt. Gurbax Kaur, |
|
5. |
Shri Pavittar Singh, |
|
6. |
Shri Ravinder Singh, |
|
7. |
Shri Swaran Singh, |
|
8. |
Smt. Inderjit Kaur, |
|
9. |
Shri Rameshinder Singh, and |
|
10. |
Shri Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the
following persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B.
Out of 6 transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were
transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder
Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to
be a director. If the presence of the five transferee-directors and that of
Smt. Inderjit Kaur is not taken into consideration, then the quorum is
incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh,
after he had ceased to be a director, was re-elected on June 30, 1978. However,
he admits that Smt. Inderjit Kaur ceased to be a director. He further submits
that the transferees did not cease to be directors at the time of passing the
resolution and at the most they ceased to be so after the resolution had been
passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri
Ravinder,Singh and Shri Rameshinder Singh had ceased to be directors on that
date because they took part in the meeting at the time of passing the resolution,
exhibit P-2. Relevant parts of sections 283(1)(i) and 299 read as follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by director.—(1)
Every director of a company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into, by or on behalf of the
company, shall disclose the nature of his concern or interest at a meeting of
the board of directors.".
From a reading of section
283, it is clear that the office of the director becomes vacant when a director
acts in contravention of section 299. It is enjoined by section 299 that a
director, who is interested in a contract entered into by or on behalf of the
company, should disclose the nature of his interest at a meeting of the board
of directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises, whether
the resolution, exhibit P-2, is invalid on this ground. Sub-section (1) of
section 300 provides that no director of a company shall, as a director, take
any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently,
the resolution, exhibit P-2, cannot be held to be invalid on this ground.
However, it may be reiterated that the shares were transferred in the names of
some of the directors. Thus, the action of the directors in passing the
resolution amounts to oppression of the minority shareholders in spite of the
fact that it is not an invalid resolution. In the above observation, I find
support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it
was held that a resolution may be passed by the directors which is perfectly
legal in the sense that it did not contravene any provision of law, and yet it
may be oppressive to the minority shareholders or prejudicial to the interest
of the company. Such a resolution can certainly be struck down by the court
under section 397 or 398.
Now, it is to be seen
whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt.
Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978,
and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on
June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter
she ceased to be so. Consequently, she was a director on the date of the
meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be
directors. If the presence of two directors, namely, Ravinder Singh and Smt.
Inderjit Kaur, is not taken into consideration, eight directors were still present
in the meeting. The total number of directors, as already mentioned, was 24.
Thus, the quorum was complete.
Mr. Jain next submits that
no notice of the meeting was sent to the directors and, consequently, the
meeting was illegal. There is force in this submission. The copies of the
despatch register from October 16, 1978, to February 19, 1979, exhibit P-74,
show that no notice was sent regarding the meeting. A similar argument was
raised earlier and was dealt with while determining the validity of the
resolution dated November 30, 1978. For similar reasons, the resolution dated
December 30, 1978, is also invalid.
Mr. Jain has then argued
that in the resolution dated November 30, 1978, it was decided that the shares
be offered to the existing shareholders. Shri R. S. Johal was authorised to do
so. However, he did not offer the shares to the other shareholders and,
therefore, the transfer of shares to Pavittar Singh, etc., amounts to
oppression on the minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should
have been transferred to one who made the highest offer. However, it was not
done. It is true that Shri Johal says that he told orally all the shareholders
in this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them
from the company for interest at the rate of 15% per annum and that amount has
not been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took
part in the meeting dated December 30, 1978, without disclosing their interest
in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and
Shri Avtar Singh admittedly ceased to be directors. The total number of
directors present was eleven and in case the aforementioned seven directors are
excluded, the number of directors present remained four. The quorum of the
meeting should have been eight and thus the resolution is invalid. I agree with
the submission of learned counsel. It is not necessary to dilate (further) on
the paint as the matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on
February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of
Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to
whether the quorum of the meeting was complete. Eleven directors were present
in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder
Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As
already held, they ceased to be directors on December 30, 1978. Out of the
remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt.
Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six
directors are to be excluded for the purposes of quorum. Consequently, five
directors would be deemed to be present in the meeting. The quorum for the
meeting was eight. I am, therefore, of the opinion that the resolution dated
February 28, 1979, is also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh,
Ravinder Singh and Swaran Singh and voted against the resolution. The resolution,
therefore, stood defeated. The directors who signed the letter walked out of
the meeting in protest against the overbearing, arbitrary, unconstitutional and
illegal action, arrogant attitude and threatening behaviour of the directors
interested in the transferees. The latter prevailed upon the managing director
and, therefore, he refused to record their disapproval and vote of dissent. It
was requested by them that the minutes be not recorded, contrary to the will
and verdict of the majority of the directors. The letter is signed by 11
directors and addressed to the managing director. From the above letter, it is
evident that eleven other directors were present in the meeting but neither
their presence nor their vote of dissent against the resolution was recorded.
Shri R. S. Johal appeared in the witness-box as P.W.-4 and affirmed the stand
taken in the letter, exhibit P-76. He stated that in the meeting held on
February 28, 1979, there was a dispute regarding the sale of shares in favour
of Rameshinder Singh and his partymen and that some of the directors, namely,
Shri N. S. Domeli, Shri Puran Chand, Smt. Beant Kaur, Shri Didar Singh, Smt.
Ravinder Kaur, Smt. Rattan Kaur, Shri Puran Singh, Shri Hardev Singh, Smt.
Nasib Kaur and Mrs. Vaneet, walked out of the meeting. There is no mention
about the dispute in the minutes. Shri Domeli also admits his signature on the
letter. I am, therefore, of the opinion that the resolution dated February 28,
1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171.
Length of notice for calling meeting.—(1)
A general meeting of a company may be called by giving not less than twenty-one
days' notice in writing.
(2) A general meeting may be called after giving
shorter notice than that specified in sub-section (1), if consent is accorded
thereto—
(i) in the case of an annual general meeting, by all the members
entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent, of such
part of the paid-up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than
95 per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the members
who are entitled to vote in the meeting accord their consent for doing so.
Previously, fourteen days' notice was provided but later the period of notice
was extended to 21 days on the report of the Company Law Committee. The reasons
for extension of period have been given in the report, the relevant portion of
which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days
is too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have
further challenged the validity of the resolution of the board of directors
dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and
loss account for the year ending December 31, 1978. Mr. Jain submits that the
quorum in the meeting was not complete and, therefore, the resolution was
invalid. I do not find any substance in the argument. In the meeting, eight
directors were present. As already mentioned, there were only twenty-four
directors of the company. Consequently, eight directors constituted the quorum.
I am, therefore, of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his
contention, he places reliance on the balance-sheet ending December 31, 1976,
exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and
the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find
substance in this submission. The shares were not quoted on the stock exchange.
No reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the
balance-sheet ending December 31, 1978, some profit is shown to have been
earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs
odd. The aforesaid figure shows that PISCO was not faring well.
The respondents produced
Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs. 625
in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the
respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of India, Civil Lines, Jullundur, and Indian
Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh
Domeli, chairman of the company, and Shri Rameshinder Singh, director of the
company in place of Shri Pavittar Singh, managing director. It was further
stated that in future any two of the three persons, namely, Shri Naranjan Singh
Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate
the accounts. It has been certified to be a true copy by Shri Mohinder Singh as
the managing director. The original resolution purports to bear the signatures
of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing
director of the company nor was Bir Singh Johal its chairman. The resolution
does not find a place in the original minutes book of the board of directors.
Some resolutions dated April 11, 1976, are entered in the minutes book (copy
exhibit P. 3-A). These resolutions are different from the resolution, exhibit
P-3. Mr. Sodhi has not been able to show any other resolution in the minutes
book, copy of which is exhibit P-3. In the circumstances, it is evident that
the affairs of the company were mismanaged by the respondents.
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the Punjab and
Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it
cannot be held that Jagtar Singh was a fictitious person.
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was
given to the company. It is further stated that Shri Mohinder Singh had
introduced false credits in the account books in favour of Sarabha Land and
Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said
company. These entries were got fictitiously made by him. In the resolution,
exhibit P-67, it was said that certain irregularities were committed by Shri
Mohinder Singh and, therefore, his services had been terminated. It was
resolved that a sub-committee consisting of the chairman and the managing
director be appointed to go into the accounts and submit a report for taking
appropriate action against him.
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the
petitioners that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on
January 1, 1977. No amount of interest was debited to their account. No
document was got executed from the said debtors. The aforesaid amounts have not
been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that
Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh,
Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors.
It appears that the amounts were advanced to PISCO without interest because the
said directors wanted to help their concern. After taking into consideration
all the circumstances, I am of the view that the affairs of the company were
conducted by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits
P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at the
meetings was incomplete and no proper notice of the meeting was given to the
directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act
provides that the acts done by a person as a director shall be valid
notwithstanding that it may afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. It is evident from
the language of the section that it gives protection to the acts of the
directors if their appointments were invalid on account of any defect or
disqualification or the same had come to an end. It does not give protection to
their acts which are otherwise illegal. Thus, the resolutions passed in a
meeting which had not been properly convened are not valid resolutions.
Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot
be held valid under the said section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were
directors of the company and the sixth was the wife of one of them. The sole
object of the directors in passing the resolution was to promote their
self-interest. Moreover, the benefit of the said section can normally be taken
by a third person and not by the directors or their close relations. It is
further noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the
observations therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
[1951] 21 COMP. CAS. 351 (MAD.)
S. RM. S.T.
Narayanan Chettiar
v.
Kaleeswarar
Mills Ltd.
SATYANARAYANA RAO AND CHANDRA
REDDI, JJ.
APPEAL NO. 36 OF 1950
SEPTEMBER 7, 1950
V.C. Gopalratnam and L.V.
Krishnaswami Ayyar, for the Appellants.
K. Raja Ayyar, K. Krishnaswami
Ayyangar and K. Parasurama Ayyar, for the Respondent.
Satyanarayana Rao, J.—This appeal relates to a
dispute between two rival groups of shareholders of Kaleeswarar Mills Ltd.,
Coimbatore, each attempting to obtain control over the management of the
company. For this purpose, these two factions have engaged themselves in a
battle of wits for a long time with the result that the business of the company
has been seriously affected. For the purpose of this appeal, it is not
necessary to advert to the incessant quarrels between the two groups since 1931.
It would be sufficient to start from 1948. The two factions are led by Sathappa
Chettiar on the one hand who represents the plaintiffs' group and A.L.A.R.
family consisting of three brothers of whom the eldest, Kalairaja Chettiar, is
the leader. The annual meeting of the company, which is the first defendant in
the case, for the year ending 1947 was held on 30th September, 1948. The agenda
paper for that meeting contained four subjects:—
(1) to receive and adopt the directors' report and the
audited profit and loss account for the year ended 31st December, 1947, and the
audited balance sheet as at 31st December, 1947;
(2) to elect directors in the place of
the two directors who retired by rotation;
(3) to appoint a n auditor or auditors
and to fix his or their remuneration;
(4) to approve the co-option of Messrs P.K. Palaniappa
Gounder and A.L.A.R. Arunachalam Chettiar.
The company was incorporated
under the Indian Companies Act, 1882, in or about 1906. Its main object was to
manufacture cotton goods. Among the signatories to the memorandum of
association are included the legal luminaries of the Madras Bar at the time,
viz., Sri V. Bhashyam Aiyangar, P.R. Sundaram Aiyar, V. Krishnaswami Aiyar and
S. Srinivasa Ayyangar, besides business magnates. The articles of association
of the company excluded the application of Table A in the first schedule to the
Indian Companies Act; but the regulations framed were modelled more or less on
the regulations contained in Table A. The capital of the company, which then consisted
of nine lakhs of rupees, was divided into 9,000 shares of Rs. 100 each,
Sathappa Chettiar's group owned in 1948 as many as 3,450 shares while the
A.L.A.R. group owned only 2,300 shares. Before the general body meeting of
September, 1948, however, the A.L.A.R. group increased their voting capacity by
splitting their shares and transferring single shares to various individuals.
About 450 single shares were registered with that end in view in the name of
450 individuals who were not members before.
The proceedings of the meeting of
the 30th September, 1948, (Ex. A. 2 in A.S. No. 29 of 1949) show that
Palaniappa Gounder, the present fifth defendant, who was the chairman of the
board of directors entitled to preside at every general meeting under Article 73,
presided at that meeting and disposed of the
various objections raised at that meeting. Before the subjects on the agenda
were considered, objection was taken on behalf of the A.L.A.R. group that
proxies filed on behalf of the plaintiffs' group were not valid as they were
not given particularly for that meeting but they were general in language. The
objection was answered on behalf of the plaintiffs' group by Mr. Lakshmanan,
the present second plaintiff stating that the proxies were intended only for that
meeting which was made clear from the date given in the proxies. On this the
Chairman ruled that the proxies were valid. Mr. Lakshmanan also Seems to have
objected to the validity of about 49 revocations of proxies filed by the
opponents but the chairman overruled that objection. The most important
objection that had to be considered, however, raised by the second plaintiff
was that shareholders owning less than five shares were not entitled to vote in
view of Article 88 which provided that every shareholder not disqualified shall
have one vote in respect of every five shares. After due consideration, the
chairman overruled this objection. The subjects which were on the agenda were
taken up for consideration and were put to vote one after the other. On a show
of hands, the sense of the meeting was in favour of the resolutions and at each
time a poll was demanded and on a poll, 859 votes were cast in favour of the
resolutions and 703 votes against. At the end of each poll, the plaintiffs'
party demanded a further poll which is styled under the articles, as a
"poll of the whole company" ' but this was rejected. The result,
therefore, of the poll at this meeting was that the A.L.A.R. group was
successful and the plaintiffs-party lost. The two plaintiffs in the present
suit, who were the sitting directors, were unseated and in their place,
defendants 6 and 7 were elected and the co-option of the 4th and 5th defendants
was approved.
Two of the shareholders thereafter filed on the 7th
October, 1948, a representative suit on behalf of themselves and on behalf of
the shareholders of Kaleeswarar Mills Ltd. (O.S. No. 325 of 1948, Sub Court,
Coimbatore) to declare that the resolutions passed at the general body meeting
were illegal and void and that the newly elected and co-opted directors were
not entitled to act. There were various objections to the resolutions passed at
that meeting which were considered by the learned Subordinate Judge who tried
the suit. He dismissed the suit overruling the contentions of the plaintiffs in
that action. There was an appeal to this court against that decision in A.S.
No. 29 of 1949 and in that appeal, the plaintiffs confined their objections to
the resolutions to three grounds: firstly, that persons who owned less than
five shares were allowed to vote when the poll was taken which was contrary to
the provisions of the articles of association; secondly, the demand for a poll
of the whole company should have been allowed by the chairman; thirdly, that
Palaniappa Gounder the present fifth defendant, was not competent to act as
chairman of the meeting as the confirmation of his co-option as a director was
one of the subjects comprised in the agenda for that meeting. On the first of
the three questions there was a difference of opinion between Horwill, J. and
Raghava Rao, J., who heard the appeal in the first instance, the former holding
that every shareholder even if he owned less than five shares was entitled to
vote but if a shareholder owned five or more shares, he would be entitled to one
vote in respect of every five shares. In other words, a shareholder having
between 5 and 9 shares will have only one vote and those having between 10 and
14 shares two votes and so on; but a person holding less than five shares would
be entitled to one vote. This view, however, was not shared by Raghava Rao, J.
As there was a difference of opinion on this point, the case was laid before a
third Judge, Viswanath Sastri, J., who agreed with Horwill, J. On the other two
questions, both the learned Judges concurred. The second poll is no doubt a
unique feature of this company, but according to the learned Judges such a poll
should be taken if demanded in the manner provided by the articles of
association. A poll of the whole company was probably intended, as observed by
Horwill, J., "to afford an opportunity, where a considerable number remain
dissatisfied after the show of hands and polls are taken, for the whole
company, including those not present in person or by proxy at the meeting, to
express their opinion on the matter."
On the third question, also, both the learned Judges were
unanimous in holding that it was an elementary principle of justice that a
person should not preside while the meeting is considering a question which
personally affects him. The result was that the learned Judges directed that
before the decisions on the various resolutions in which a second poll was
demanded can be considered final, there should be another poll at the
registered office of the company at such time as the fifth defendant should
direct and that he should vacate the chair when a resolution relating to his
co-option is to be taken up for consideration. The decree of the High Court
(Ex. A-4) directed, after setting aside the decree of the trial court
dismissing the suit:—
(1) that
before the decisions on the various resolutions in which the second poll was
demanded can be considered final, a fresh poll shall be held at the registered
office of the company at such time as the fourth defendant (the present fifth
defendant) shall direct;
(2) that the fourth defendant (the present fifth defendant)
should not preside when the question of his co-option is in question;
(3) that at the poll to be held in pursuance of clause (1)
supra, each member will be entitled to vote, the number of votes being
calculated according to the provisions of Article 88 of the articles of
association.
The plaintiffs' party were
anxious to know the addresses of some of the shareholders comprised in the
newly added 450 members with a view to canvass their support for the second
poll. Their complaint was that particulars regarding the shareholders so added
were not given in the register as required by Sections 31 and 32 and Form E of
the third schedule to the Indian Companies Act. There was some correspondence
between Sathappa Chettiar and Kaleeswarar Mills Ltd. on this point but there
was no sign of getting the required information. On the 29th August, 1949,
three of the directors of the plaintiffs' party sent notices calling for a
meeting of the directors to be held at the registered office of the company on
the 6th September, 1949, at 10 a.m. to consider the matters on which they
required information and also to waive under Article 94 of the articles, the
rule relating to deposit of proxies for the purpose of poll. On the same day
the fifth defendant published a notice, Ex. A-8, to the shareholders of the
company intimating that the second poll of the annual general body meeting held
on the 30th September, 1948, would be taken on Monday, the 5th September, 1949,
commencing from 3 p.m. at the registered office of the said company. The
plaintiffs' party sent a circular to the shareholders newly added, Ex. A-12,
and obtained revocations of the proxies. On the 4th September, 1949, Ex. A-11
was addressed to the fifth defendant, the chairman of the board of directors,
by four people of the plaintiffs' group in which they impeached the bona fides
of the chairman and intimated that they lost their confidence in him to act
impartially as chairman at the meeting for conducting the second poll. They
also anticipated that the chairman had made up his mind to summarily reject all
revocations obtained by the plaintiffs' group. Some of these revocations have
been marked as Ex. B-3 series. It is agreed before us that the total
revocations covered proxies in respect of 230 votes which were obtained by the
plaintiffs and which would have the effect of cancelling the proxies already
obtained and deposited by the defendants' group before the meeting of the 30th
September, 1948. On the 5th September, 1949, at 3 p.m. the shareholders
assembled at the registered office of the company and the revocations forms
were handed over to the chairman. The chairman, the fifth defendant, than
decided that he did not intend to preside at the meeting for two reasons; firstly, because the High Court had
directed that he should not preside at the second poll when the subject of his
co-option would be under consideration and secondly because he had received a
communication from some shareholders, apparently referring to Ex. A-11, in
which advice was given to him as to how he should give his rulings. He
requested the members to choose a chairman to take the poll. The names of two
directors were suggested, Messrs. Alagappa Chettiar, the third defendant and K.
Srinivasa Ayyar. The former belongs to the A.L.A.R. group and the latter to the
plaintiffs' group. The plaintiffs did not then object that the chairman had no
right to decline to preside at the poll. On the contrary, they accepted the
position that the chairman was entitled to decline to preside and to put up a
candidate of their own for the chairmanship. The plaintiffs' candidate
Srinivasa Ayyar was defeated by a large majority and Alagappa Chettiar was
elected chairman by the shareholders. Then the proceedings continued and
Arunachala Ayyar and Narayanan Ghettiar were appointed scrutineers. The
revocations received that day were rejected as unacceptable. The first
plaintiff objected that the revocations filed before 30th September, 1948,
numbering 49 should not be accepted as they were not stamped; but his objection
was overruled. At about 10 p.m. one of the scrutineers who belonged to the
defendants' group filed a memo before the chairman of the meeting raising three
objections. The second of it was that the proxies filed by Narayanan Chettiar,
Lakshmanan Chettiar and Ramanathen Chettiar (plaintiffs' group) for the meeting
of the 30th September, 1948, were not properly stamped as they were not proxies
but were powers of attorney and should have been stamped as such. The other
scrutineer was however of the view that the objections of Arunachala Aiyar were
untenable. The chairman adjourned this question for decision being given before
10 a.m. the next day. The poll was than taken on all the resolutions which
resulted in securing 793 votes in favour of the resolutions and 767 against. On
the next day, 6th September, 1948 the chairman gave his ruling that the proxies
were invalid and they should be excluded. Consequently, 661 votes cast against
the resolutions were excluded as a result of which the number of votes against
the resolutions were reduced from 767 to 106. There were therefore 793 votes in
favour of the resolutions and 106 against. The plaintiffs, therefore, lost in
this poll and the election and co-option of directors was upheld and the two
plaintiffs were unseated.
The unseated directors instituted the suit which has given
rise to this appeal objecting to the poll taken on three grounds: firstly Palaniappa
Gounder, the fifth defendant, had no right to decline to preside at the poll
and that the share holders had no right to elect the third defendant as
chairman; secondly, that the revocations should not have been rejected and
thirdly, that the proxies were valid and the votes recorded under those proxies
should not have been excluded. The first defendant to the suit is the company,
the fourth and fifth defendants are the co-opted directors, the sixth and
seventh defendants the newly elected directors, the third defendant is the
chairman who presided at the poll and the second defendant is Kalairaja
Chettiar, the leader of the defendants' group. In the lower court, the parties
did not lead any oral evidence and contented themselves by filing documents.
The trial court rejected the contentions of the plaintiffs and dismissed the
suit. Hence this appeal.
The same questions have again been argued elaborately
before us. The first question for consideration is whether the fifth defendant
was bound to preside at the poll. On this point we have no hesitation in
agreeing with the conclusion of the learned Subordinate Judge that the fifth
defendant cannot be compelled to continue to act as chairman notwithstanding
the fact that his bona fides were questioned earlier by the plaintiffs and this
court directed, at any rate, that so far as one of the subjects was concerned,
he should not preside at the poll. The argument before us on behalf of the
plaintiffs by the learned advocate was that the decision of the High Court
precluded the chairman from declining to preside at the poll. No doubt, the
judgment of the High Court and the decree proceeded on the assumption that the
chairman of the board of directors would continue to preside even at the poll
as the poll was nothing but a continuation of the meeting of the 30th
September, 1948. The decree directed that he should fix the time for the second
poll. This was done by him and there is no other indication in the judgment
preventing him from having the right recognised by Article 78. That article
provides that the chairman of the board of directors should preside only if he
is willing. There is nothing in law to compel a man to do that which he is not
willing to do. Express power is recognised in the article itself to give up the
right if he so chooses. The chairman of the meeting is not entitled to stop the
meeting at his own will and pleasure. If a meeting is called for a particular
purpose of the company, undoubtedly, a person should preside at that meeting
and invariably the constitution of the company provides for the same. It is not
open to the chairman to stop the meeting and dissolve it before the business of
the meeting is finished. It is the privilege and the right of the shareholders
assembled at the meeting to decide whether they should continue the business of
the meeting on that day or adjourn it for a subsequent date. If the chairman
unjustly and without the consent of the shareholders stops the meeting and
declares it dissolved, it is perfectly within the powers of the meeting to
elect a chairman and conduct the business remaining unfinished; but there is no
authority in support of the proposition that a chairman is not entitled to give
up his right to preside at a meeting. There is no direct authority on the
question but Article 78 itself recognises that the chairman of the board of
directors can preside over the meeting only if he is willing. That it is not
open to a chairman of the meeting to stop the meeting or adjourn it at his
sweet will and pleasure has been decided by Chitty, J., in National Dwelling
Society v. Sykes. See also 8 Halsbury, page 61, para. 108 and 5 Halsbury, page
364 para. 592, Hailsham Edition. Chatesby v. Burnett, is an instance in which
also the chairman of the meeting declared that the business was closed and left
the chair and the hall whereupon the shareholders elected another to the chair
and carried on the business of the meeting. The second poll also is undoubtedly
a part of the meeting and the contention of the appellants that it was not open
to the shareholders to elect another chairman, in our opinion, proceeds on a
wrong hypothesis. In support of the contention, a passage in the judgment of
Curgenven, J., in Srinvasan v. Watrap Subramania Aiyar was relied on by the
appellants where the learned Judge observed: "The original meeting in law
continues until the chairman has carried out the directions given to him by the
shareholders to take a poll. It is a national meeting, not dependent for its
existence and continuity upon the shareholders being actually in session and
business being transacted. The actual process of holding the poll is not a
'meeting' at all. It differs in several of its features from any meeting of
shareholders."
These observations of the learned Judge have to be taken in
relation to the facts of that case. In that case, the chairman of the meeting
directed, when a poll was demanded on a resolution, that it should be taken on
a subsequent day between 4 and 6 p. m. and appointed the company manager, one
Mr. Church, as returning officer for the purpose of taking it. The poll,
however, was not taken on the 20th as for some reason Mr. Church was unable to
attend to the poll. The question that had to be' considered was whether the
process of holding the poll was a detached portion of the general meeting or
was, at any rate, a meeting within the meaning of the articles of association.
This point became material as it was contended that when the Commissioner, Mr.
Church, was absent to take the poll, it was open to the shareholders assembled
to have elected a new chairman for the meeting and as they did not do so, the
meeting was at an end. In answer to these objections, it was pointed out that
the original meeting continued in law until the chairman had carried out the direction
given to him by the shareholders to take a poll. The actual process of holding
the poll was not a meeting at all though the result of the poll formed part of
the meeting at which the poll was demanded. The meeting therefore did not come
to an end until the result of the poll was ascertained in the manner provided
by the articles. The original meeting continued therefore for the purpose of
taking the poll until the poll was closed. For this position, the decisions in
Harben v. Phillips, The Queen v. Wimbledon Local Board, Shaw v. Tati Concessions Ltd. and Spiller
v. Mayo Development Co., Ltd. were relied on. The decision in Srinivasan v. Watrap Subramania Aiyar in our opinion, far
from supporting the contention of the appellants, is against them. The meeting
of the shareholders on the 5th September, 1949, was a continuation of the
meeting and it was open to the shareholders to elect a chairman when the fifth
defendant declined to preside at the meeting. The chairman so elected was not
like the Commissioner, Mr. Church, in the case in Srinivasan v. Watrap
Subramania Aiyar. His function was not merely to supervise the recording of the
votes. He was entitled to exercise all the functions of a chairman at the
meeting. For these reasons we think that the objections of the appellants on
this point are not well founded and must be rejected.
The next point that has to be considered is whether the
chairman was justified in rejecting the revocations. Until recently, both in
England and in India, a member had no right to vote by proxy unless the
articles provided for such a right as common law did not recognise voting by
proxy. The articles, however, generally conferred such a right subject to such
conditions and limitations as are prescribed thereunder. This right has now
been recognised by statute both in England from 1947, now enacted as Section
136 of the Act of 1948, and by Section 79 of the Indian Companies Act, as
amended in 1936. As the articles generally recognised a right to vote by proxy,
it is a contractual right as the articles of association undoubtedly
constituted a contract between the company on the one side and the members on
the other. Independently of the contract, therefore, until the statute altered
it there was no right of voting by proxy. The reason why the right to vote by
proxy was not recognised seems to be that "when persons agreed," as
pointed out by Bowen, L.J., in Harben v. Phillips, "to act together in the
conduct of a business, the way in which that business is to be carried on must
depend on each case on the contract, express or implied, which exists between
them as to the way of carrying it on."
The decision on every question relating to the business of
an incorporated company should essentially be that of the shareholders, having
regard to their interest in the company. Unless, therefore, there was a
contract between the company and the shareholders, they could not delegate this
power of expressing their opinion at a meeting of the company to another. These
propositions are so well established as not to require citation of a number of
authorities in support of them. It is summarised in Palmer's Company Law, 19th
Edition, at page 153. A proxy is defined by Lord Hanworth, M.R., in Cousins v.
International Brick Co. as "a person representative of the shareholder who
may be described as his agent to carry out a course which the shareholder
himself has decided upon" and the Lord Justice in the same case defined a
proxy as an agent of the shareholder who, as between himself and the principal,
was not entitled to act contrary to his instructions in the matter. It cannot
therefore be seriously disputed that the relationship brought about between the
shareholder and his proxy is that of a principal and agent. The argument of the
respondents is that unless the power revocation is expressly conferred by the
articles under which a right of voting by proxy is recognised, the power of
revocation does not exist and that the contract creating the agency is
exhaustive of the rights and duties of the proxy. This contention proceeds upon
a wrong view of the incidents of a contract of agency. When once the
relationship of principal and agent is created by contract, the incidents of
that contract of agency are governed and have to be determined by applying the
law of contracts. In India such law is to be found in the Contract Act. The
argument on behalf of the respondents amounts to this that all the rights and
liabilities which flow from a contract by reason of the application of the
general law of contracts do not attach themselves to a contract unless they are
enumerated in the contract itself. In other words, if there is a contract of
sale of goods unless all the rights and liabilities of the seller and buyer
which are to be found in the Sale of Goods Act are specifically enumerated in
the contract itself, they have no application. When once there is a contract
all the legal incidents of such a contract are governed by the law of contracts
whether it is in the form of a statute as in India or is ascertainable from
judicial decisions as in England. It will be an intolerable state of affairs if
one is obliged to embody in every contract the provisions of the Contract Act
or the Sale of Goods Act, as the case may be, relevant to such a contract. When
once the relationship enters the region of contract, the law of contract alone
must determine its incidents. On the argument of the respondents, the
relationship of agent and principal brought about by the execution of the
proxies cannot be terminated even by death though they are forced to concede
that such a termination follows and that even when the principal is present in
person at the meeting, the right of the proxy to exercise his vote on behalf of
the principal must yield to the right of the principal to exercise the vote
personally. If so much is conceded, it is difficult to see why the principal
should be denied-his right to revoke a contract which brought about the
relationship of principal and agent. The articles might make the proxy
irrevocable or impose restrictions or circumscribe the limitations within which
the power of revocation should be exercised. But all these are matters within
the region of contract between the parties and in the absence of anything to
the contrary, there is no reason to exclude the right of revocation which is
recognised under Section 203 of the Contract Act. There are other limitations
imposed by the Contract Act on the exercise of the power of revocation, e.g.,
if the revocation is made after the authority had been partly exercised,
Section 204 of the Act preserves the validity of such acts and obligations and
makes the revocation effective only in respect of future acts. If the agency is
limited to a period of time and without sufficient cause it is revoked before
the expiry of the period, under Section 205 the agent is entitled to
compensation. The principal is bound to give reasonable notice of revocation as
otherwise he would be liable to pay damages to the agent which result from such
act of his. As regards third persons, under Section 208 the termination of
authority of the agent does not take effect before it becomes known to them so
that if third persons are sought to be affected by revocation of the authority
of the agent, the principal must give due notice of the same. Termination of
the authority by death of the principal is recognised under Section 209, On an
examination of the authorities cited at the Bar, it will be seen that the same
principles have been applied for the revocation of proxy by a shareholder.
The subject of revocation of proxy is dealt with by Palmer
in his book on Company Law, 19th Edn., page 154, and he summarises the law on
the subject in these terms:—
"The appointment of a proxy, unless made irrevocable
for valuable consideration, can be revoked. The revocation must, however,
conform to any provisions in the articles.
If the shareholder, after appointing a proxy, himself
attends the meeting, he can vote in person. The right of the shareholder to
vote in person is paramount to the right of the proxy. The presence of the
shareholder does not avoid the instrument of proxy; but if he votes before his
proxy has voted for him, he impliedly revokes the proxy.
The death of a shareholder who has appointed a proxy, in
the absence of the provisions in the articles, revokes the authority of the
proxy."
This summary by the learned author is based on the
decisions in Spiller
v. Mayo Development Co. Ltd., Cousins v. International Brick Co., Knight v. Bulkeley. The subject is also discussed and the same
principles more or less have been recognised in Halsbury's Laws of England,
Vol. 5, pages 364 and 365, where voting by proxy and revocation of proxy are
discussed; 8 Halsbury 61, paragraph 108, discusses the subject of proxies;
Buckley on Companies Acts, 12th Edn., pages 324 and 325; Shackleton on Law
Relating to Meetings, 1934 Edn., at page 62.
In Spiller v. Mayo Development Co., one of the articles
provided that "a vote given in accordance with the terms of an instrument
of proxy or power of attorney shall be valid notwithstanding the previous death
of the principal or revocation of the proxy, or power of attorney, or transfer
of the share in respect of which the vote is given, provided no intimation in
writing of the death, revocation or transfer shall have been received at the
office before the meeting." After a poll for the election of a director
the scrutineers discovered that a proxy was revoked by the principal before the
poll. The votes recorded on the strength of that proxy were excluded from the
poll. If such votes were allowed the plaintiff in the action would have been
successful in the election as a director and the respondent would have been
defeated. The question that had to be decided was whether the exclusion of the
votes from the poll by the chairman was justified. The article clearly provided
that the notice of revocation should be received at the office before the
meeting, i.e., before the commencement of the meeting. The revocation in that
case that had been recived was communicated to the office only before the poll
and not before the meeting. The communication therefore was ineffective to make
the revocation operative. It was therefore held by Russell, J., that the votes
were improperly rejected. In the course of the judgment, the learned Judge
stated the law in these terms:—
"The matter really turned upon article 88, which he
had been told was also in common form, but, if so, in his view it was a
somewhat unfortunate common form. Omitting for the moment the proviso, it
seemed quite clear, upon the construction of that article, that a vote given by
proxy was by contract between the shareholders, to be valid notwithstanding
that the shareholder had died before the vote was taken, and notwithstanding
that the shareholder had revoked the proxy before the vote was given; but that
contractual result, which might in certain instances be somewhat startling,
could be avoided if the proviso was complied with, It could be avoided
apparently if an intimation in writing of the death or revocation was received
at the office 'before the meeting'. Two points had been urged by Mr. Gordon
Brown on behalf of the plaintiff why these votes should not have been objected
to. The first point was there had been in fact no intimation of any revocation
at all. In his Lordship's opinion that could not be sustained. The second point
was in his view a more formidable one, It was said that no intimation of the
revocation was received before the meeting. In his Lordship's opinion, if
English language meant anything, the article required that in order to
invalidate the vote, intimation in writing of the revocation must be received
at the office before the meeting, and in his view that must mean before the
commencement of the meeting.
It was well settled that the taking of a poll was not a
meeting of the company in the strict sense, but was in law a mere continuation
of the meeting at which the poll was directed to be taken. For the particular
purpose in question therefore the meeting must be held to have begun on December
15 and to have come to an end at the declaration of the poll, a week later. The
intimation of revocation, however, had been received between those two dates.
In his opinion it was impossible to say on the true construction of the
particular article that the proviso has been complied with, namely, that
intimation in writing of the revocation had been received before the meeting. .
In his Lordship's view it was received after the meeting had commenced; it had
been received during the meeting. Accordingly the proviso did not operate, and
the original part of the article must be held to operate, namely, that the vote
given by the proxy was valid notwithstanding the revocation of the proxy during
the meeting."
If the articles lay down the limitations within which a
power to vote by proxy can be exercised, it should be strictly observed. This
follows from the fact that the right to vote by proxy is founded on contract.
For this reason, it was held in Harben v. Phillips that were the articles
requird that the proxy papers should be attested in a particular manner and if
this condition is not satisfied, they should be rejected. McLaren v. Thomson
also illustrates the same principle. The article in that case required that the
instrument appointing a proxy should be deposited at the registered office of
the company not less than two clear days before the day of the meeting. The
proxies were lodged between the dates of the original meeting and its
adjournment. It was held that the adjourned meeting when held was really a
continuation of the meeting at which the adjournment took place and as the
proxies were not deposited before the date for holding the meeting as required
by the article they were invalid and were therefore rejected. Astbury, J., says
at page 46: "There is no inherent or equitable right in any shareholder to
vote by proxy; such right, if it exists, must be found in the contract binding
the shareholders generally, that is in the company's regulations or
constitution, and it then exists only in the form and subject to the
limitations therein appearing. There is no room for contending that an
appointment of a proxy, irregularly made, is within the spirit or equity of any
inchoate right so to vote existing in the shareholder; he has either complied
with the terms of the contract upon which alone the right is based or he has
not. Prima facie a provision that a proxy must be lodged before the day for
holding or before the time for holding a meeting means that it must be lodged
before the beginning and not before the end of the gathering.
These and similar observations in other decisions were
relied on behalf of the respondents as establishing the proposition that unless
the right of revocation is expressly conferred by the articles, there is no
right of revocation. The restrictions on the power to vote by proxy are
undoubtedly absolute but the power of revocation is an incident of the contract
of agency and wherever a power to vote by proxy is conferred, the power of
revocation unless excluded under the articles, exists as the relationship of
principal and agent is governed by the law of contracts. The right to vote by
proxy and the right of revocation are distinct powers. In Cousins v.
International Brick Co , there were two provisions in the articles of
association, one providing that the instrument appointing a proxy should be
deposited at the office not less than 48 hours before the time of holding the
meeting at which it should be used and the other regulation that a vote given
in accordance with the terms of the instrument of proxy will be valid
notwithstanding the previous revocation of the proxy provided no intimation in
writing of the revocation shall have been received at the office before the
meeting. Some shareholders purported by notice in writing to revoke the proxies
given by them previously, while others without giving notice to revoke the
proxies voted personally at the meeting. The revocation of the proxies was not
in accordance with the articles of association as the intimation in writing of
the revocation was not received at the office before the meeting. The case
therefore was directly governed by the decision in Spiller v. Mayo Development
Co. The further question was whether the shareholders were entitled to vote
personally without revoking the proxies given by them. The Court of Appeal
accepted the view of Russell, J., on the question whether the revocation was
effective. On the second question, it was held that the person by giving a
proxy was not thereby deprived of exercising the vote personally before the
proxy had exercised the vote. Lord Hanworth, M.R., pointed out in the course of
his judgment that it is open to provide by articles to exclude the right to
vote personally when a proxy was given; but if this is not done and there are
no clear words taking away the shareholder's personal right to vote after he
has put in force the proxy system the personal right remains and the
shareholder is entitled to attend and give his vote according to his choice.
The proxy is not entitled to prevent him from exercising the vote. Lawrence,
L.J.. and Romer, L.J., put it also on the ground that,
"every proxy is subject to an implied condition that
it should only be used if the shareholder is unable or finds it inconvenient to
attend the meeting. The proxy is merely the agent of the shareholder, and as
between himself and his principal is not entitled to act contrary to the
instructions of the latter."
"A proxy is always subject to an understanding that
the shareholder giving it does not elect to give his vote in person and when he
in fact gives a vote in person he is not revoking the proxy but taking a step
which obviates the necessity of the proxy being used at all." (Per Romer,
L.J., at page 103).
From these observations it follows that the exercise of a
personal vote by the shareholder after he had adopted the proxy system does not
revoke the proxy but only prevents the exercise of the vote by the proxy. The decisions in In re
Haven Gold Mining Co., and Colonial Gold Reef Ltd, v. Free State Rand Ltd.,
also illustrate the same proposition that the
various matters relating to the poll are matters of contract as provided by the
articles. It is unnecessary to deal with those decisions in detail and none of
the decisions, therefore, relied on behalf of the respondents, support the
proposition that the shareholder has no right to revoke a proxy once given
unless such a power is expressly conferred by the articles.
Articles 91 to 97 of the articles of association of the
first defendant company relate to proxies. None of these articles exclude the
power of revocation nor do they lay down any restrictions as to the manner in
which the power of revocation should be exercised as in Spiller v. Mayo Development Co.,
and Cousins v. International Brick Co. The
power of revocation, therefore, is unfettered and if it is communicated in due
time to the company, there is no reason for holding that it does not take effect. The
requirement as to notice to the company of the revocation is to be derived from
the provisions of the Contract Act, Section 208, which enacts that the
termination of the authority of an agent does not take effect so far as third
parties are concerned before it becomes known to them.
The next line of argument adopted
by Mr. Rajah Aiyar learned advocate for the respondents is based on the
language of Article 96 which states, "Any instrument appointing a
permanent proxy or attorney to vote may be registered with the Company once for
all and shall be in force until the same shall be revoked." It was suggested
that this article specifically confers a power of revocation in respect of a
permanent proxy or attorney and an express mention of specific power is made in
the case of a permanent proxy, the power of revocation in the case of specific
power must be deemed to have been excluded on the maxim expressio unius est
exclusio alterius (the express mention of the thing implies the exclusion of
anoter) which has been applied in the construction of written instruments. In
the first place the article does not expressly confer a power of revocation. On
the contrary it assumes that the power was existing and therefore lays down
that the instrument appointing a permanent proxy will hold good untill the same
is revoked. The maxium therefore, has no application at all. Further the subject
matter of Article 96 is a permanent proxy and not a specific proxy. If power of
revocation of a limited nature is recognised in respect of a specific proxy by
any article then it would be possible to contend that by reason of the express
mention of the limited power any other power is excluded. The argument proceeds
on a misconstruction of Article 96 and on a wrong appreciation of the scope of
the maxim.
It is next contended that a proxy
can be revoked only before its use and as in the present case, the proxies were
used to exercise the vote at the first poll of the same meeting, it is too late
to revoke the proxies. In other words, a proxy cannot be revoked between one
poll and another and these two polls at the same meeting should be treated as one
act and not as a series of acts. The power to revoke an authority given to an
agent, after the authority has been partially exercised, has been recognised by
Section 204 of the Contract Act. The revocation cannot have the effect of
invalidating acts and obligations already done in the exercise of that
authority as an agent. The first poll of the meeting at which the proxies were
exercised became final and the effect of revocation of the proxies cannot in
any manner affect the declaration of the result of that poll; but the second
poll which is styled as the whole company's poll is a different act in a series
of acts done at the meeting. There is no
reason nor is there any authority in support of the contention that at that
point of time a proxy could not be revoked or authority of the agent could not
be terminated. On the principle underlying Section 204 of the Contract Act, it
is difficult to accept the contention of the learned advocate for the
respondents.
Lastly, it is urged that there was no notice by the
principal to the agent and therefore the revocation was not valid. There is
undoubtedly notice to the third party, i.e., the company. But it is not
suggested on behalf of the appellants that there was any notice of revocation
to the proxy. The effect of the want of notice to the agent does not invalidate
the revocation or the termination of the authority but makes the principal
liable for any damage that results to the agent by reason of such want of
notice. There is no complaint here by the persons in whose favour the proxies
were given that they had suffered any damage nor is it relevant for the purpose
of this case. The contention, therefore, that the revocation is invalid on this
ground must be rejected.
From the foregoing discussion in follows that the rejection
of the revocations by the chairman was wrong.
The next and the more difficult question for decision is
whether the rejection of the proxies by the chairman was justified. The proxies
were rejected on the ground that they were insufficiently stamped. According to
the respondents, the proxies are in the nature of powers of attorney under
Article 48 of the Indian Stamp Act and should have been stamped as required by
that article and that they were not proxies within the meaning of Article 52 to
justify a stamp of two annas. The first defendant company was incorporated
under the Indian Companies Act, 1882, and the articles of association were
modelled on the articles contained in Table A of that Act. The Indian Act of
1882 was framed on the lines of the English Companies Act, 1862 (25 and 26
Vict. Ch. 89). In Ex. A-2, the articles of association of the defendant
company, the form of the proxy is provided by Article 97. This form word for
word is the same as the form in Article 51 in Table A of the Indian Act of
1882, and Article 51 of Table A of the English Act of 1862, though there are a
few alterations particularly at the end where the words "or, generally as
the case may be, in the same manner as I myself could vote if personally
present provided he be then a member of the company and be entitled or admitted
to vote" are found. The addition of the expression "generally as the
case may be" at the end of the sentence (or at any meeting of the company
that may be held within the period of……….from the date hereof, or generally as
the case may be) is an innovation. The form also states that the stamp payable
is one anna which was the stamp duty payable at the time as it was only in 1923
by an Amending Act that a duty of two annas was made payable in Article 62 of
the Stamp Act.
The stamp duty fixed under the Articles was presumably on
the footing that it was a proxy within the meaning of Article 52 of the Stamp
Act and not a general power of attorney under Article 48. It must be remembered
in this connection that the question whether it was a proxy of the specific
meeting or it was a general power was specifically raised at the time of the
poll on the 30th September, 1948, (Ex. A-2 in A.S. No. 29 of 1949) by
Arunachala Ayyar and the objection was met by Mr. Lakshmanan on the ground that
the proxy objected to was intended only for the meeting of the 30th September,
1948, as was clear from the date given in the proxies. No doubt this objection
was not based on insufficiency of stamp but if it is held to be a specific
power, it follows that the proxy was properly stamped. The then chairman of the
meeting, the fifth defendant, overruled the objection and allowed the proxies
as valid. Under the above circumstances, the question that naturally arises is
whether the chairman of the meeting of the 5th September, 1949, was entitled to
reopen the question.
As pointed out by Earl of Selborne, L.C., in In re Indian
Zoedone Go. the duties of the chairman who presides at the meeting are:—
"has to received the poll and declare its result, has
prima facie authority to decide all emergent questions which necessarily
require decision at the time, his decision of those questions will naturally
govern, and properly govern, the entry of the minute in the books; and, though
in no sense conclusive, it throws the burden of proof upon the other side, who
may say, contrary to the entry in the minute book, following the decision of
the chairman, that the result of the poll was different from that there recorded."
If the chairman in the exercise of his powers comes to a
decision whether the votes which are in question shall be disallowed or not and
if that decision is not vitiated by fraud or misconduct on the part of the
chairman that decision is binding: see the observations of Pollock, M.R., in Wall v.
Exchange Investment Corporation Ltd. There is
no decided case, however, how far and to what extent a ruling or a decision
given by a chairman on a question raised at one stage of the meeting would bind
himself or his successor at a later stage of the same meeting. Article 82 of
Ex. A-2 no doubt provides in the case of resolutions that a declaration given
by a chairman at meeting that a resolution has been carried thereat is
conclusive. But there is no provision in the articles giving finality to the
rulings of the chairman at a meeting. There is no reason, however, to hold that
the ruling of a chairman given at one stage of a meeting is not final and
binding on the chairman or his successor at a later stage. If such a finality
is not recognised, the proceedings of the meeting cannot be conducted in an
orderly manner and will very often end in confusion and disorder. The chairman
is expected to act impartially uninfluenced by party politics. He has to hold
the scales even between the majority and the minority parties and his decision
on all the questions must be unbiassed and impartial. It is not suggested that
the ruling of the fifth defendant on the 30th September, 1948, was vitiated by
fraud or misconduct and there is no reason to hold it as not being final. What
would have happened if the objection on the ground of insufficiency of stamp
was raised in a court of law and the court decided at one stage of the suit
that the. disputed instrument was properly stamped? Under Section 36 of the
Stamp Act if the instrument is admitted in evidence overruling the objection
concerning stamp duty, such admission cannot be called in question at any stage
of the same suit or proceeding on the ground that the instrument has not been
duly stamped. No doubt, a chairman is not a person authorised by law or consent
of parties to receive evidence within the meaning of Section 35 of the Stamp
Act. But there is no reason for not applying the same principle of finality to
the ruling of the chairman on the nature of the instrument in dispute.
There is another aspect from which the matter may be
considered. The articles of association prescribe the form of the proxy by
Article 97 and on the footing that it is a proxy within the meaning of Article
52 stated that the stamp duty payable was one anna under the law as it then
stood and these articles we are told, were drafted by eminent lawyers of the
Madras bar. If a shareholder complies with the requirements of that article and
pays stamp duty of two annas under the law as altered on the footing that it is
a proxy and not a general power of attorney, the chairman has no option but to
accept the proxy even if he comes to a conclusion that the stamp duty was not
proper. If the proxies conform to the articles in all respects they cannot be
rejected by the chairman (see Shackleton, Law of Meetings, page 98). The
articles constitute a contract binding on the company and the members in all
matters. The chairman, therefore, was not entitled to go behind the articles
and to reject the proxies on the ground that they were not duly stamped.
Insufficiency of stamp does not affect the validity of the instrument but makes
it inadmissible, (See Joyma Bewa v. Easin Sarkar) except in the case of
instruments requiring one anna stamp. The policy underlying the provisions of
the Stamp Act is as far as possible to give an opportunity to the person
concerned to make good the stamp except in the case of instruments required to
be stamped with one anna. Under Section 35 in the case of instruments
insufficiently stamped, the instrument may be admitted in evidence on payment
of penalty and the deficit stamp duty. If an instrument is impounded under
Section 33 of the Act, the Collector gives an opportunity to the person concerned
to make good the deficit stamp duty and also pay penalty—Section 41. The final
authority under the Act to decide the questions relating to stamp duty is the.
Collector, (See Section 31), who however has the right in case of doubt to
refer the matter for the opinion of the chief controlling revenue authority and
the chief controlling revenue authority in his turn has the right under Section
57 to refer the matter to the High Court for opinion. All these provisions
clearly indicate that the instrument could always be validated by paying the
deficit stamp duty at a later stage together with penalty and the sole
authority vested with the power of finally deciding the question of stamp duty
is the Collector acting under Section 31 of the Act. If a person votes or
attempts to vote under any proxy not duly stamped he is liable for punishment
with a fine which may extend to Rs. 500 under Section 62(1)(c) of the Act. But
as indicated in the proviso to Section 43, the intention must be one of evading
payment of the proper duty. In the present case, it is difficult if not
impossible, to hold that there was an intention on the part of persons holding
the proxies to evade the stamp duty as they had acted bona fide and followed
the articles of association and paid two annas stamp on each proxy. The fifth
defendant gave his ruling at the meeting of the 30th September, 1948, that it
was a specific power. On the 6th September, 1949, when the chairman, the third
defendant, gave his ruling that the proxies should be rejected as in, valid,
the plaintiff's party filed a memo, Ex. A-13 dated 6th September, 1949, in
which it was pointed out that the form used by them was the exact one
prescribed by Article 97 and the stamp duty paid was two annas instead of one
anna under the altered law. They also offered that if the objection is to be
sustained, it would only involve payment of extra stamp duty with penalty which
may be fixed by the Collector and that they were prepared to pay it if and when
it is decided that it is payable in the present case. Even at that stage, if
the chairman acted fairly and in a judicial manner, it was open to him to have
referred the matter to the Collector for decision under Section 31 of the Stamp
Act particularly as the plaintiffs' party offered to pay the stamp duty and
penalty if so decided by the Collector. The chairman could have postponed the
declaration of the result of the poll until the decision of the Collector was
obtained if he really was acting in an impartial manner. The objection itself
was taken at a very late stage at about 10 p.m. in the night when the votes
were being scrutinised by the scrutineers and there was hardly any time for the
plaintiffs' party to ascertain the opinion of the Collector and to make good
the deficit stamp duty if really such stamp duty was required. The chairman, in
our opinion, acted very unfairly to the minority and was wrong in rejecting the
proxies without giving an opportunity to the plaintiffs to make good the
deficient stamp duty after ascertaining the opinion of the Collector in the
matter.
The argument most strenuously pressed before us on behalf
of the respondents is that a person in the position of a chairman was not bound
to accept a document which was insufficiently stamped. In support of this proposition,
reliance was strongly placed on the decision ,of the Court of Appeal in England
in Maynard v. The Consolidated Kent Collieries Corporation Ltd., which related
to a transfer of shares in a company. The instrument of transfer in that case
was stamped in accordance with the consideration stated in the face of the
document but it was discovered that the consideration appearing on the face of
the document was far less than what it really was. The directors thereupon
refused to register the transfer. An action was brought to recover damages for
wrongful refusal of the registration of the transfer. It was decided by the
Court of Appeal that it was the bounden duty of the plaintiff in the. action
who claimed the right to register the transfer to tender a transfer which was
right in all respects and which would be available to the directors of the
company in a court of law if it became necessary to enforce the rights under
the document against the transferee or if they were called upon to defend
themselves against a hostile attack levelled against the transfer on the faith
of which they acted. Similarly, if a vendor offers to the purchaser a sale deed
not duly stamped, it is argued that he was not bound to accept it. This
position regarding the right of a person whould be entitled to claim rights
under an instrument cannot be questioned as he is entitled to get from the
other party a deed valid in all respects and enforceable in a court of law. But
does that apply to a proxy under which a person is entitled to vote? The
company, and much less the chairman of the meeting, claims no rights of
property under the instrument. All that he is entitled to do under the
instrument is to exercise the vote. No question of establishing rights in a
court of law under the document or defending the rights on the basis of the
document ever arises under the proxy. So long as a shareholder complies with
the formalities laid down by the articles regarding stamp duty on the basis
enacted in the articles, it is the bounden duty of the chairman to accept the
proxy and he is not entitled to reject it. We are not now concerned with a
situation similar to the one that came up for consideration in In re Tata Iron
Steel Co. Ltd., where the proxies were unstamped. The contention, therefore, that
the chairman was entitled to reject the proxies in the circumstances, on the
ground that they were not duly stamped, cannnot be accepted.
We may dispose of a contention urged on behalf of the
appellants based upon the decision of the House of Lords in the well known case
of Kenneth Matheson
v. Alexander Ross. The argument was based upon
the assumption that the proxy contains two powers one a specific power to vote
at the meeting of the 30th September, 1948, and the other a general power to
vote at any other meeting. It is argued that the two can be separated and that
the chairman should have allowed the proxies as valid to the extent of voting
at the specific meeting of the 30th September, 1948, which was adjourned to 5th
September, 1949. There was a judicial conflict of opinion regarding the
applicability of the principle of that decision under the Indian Stamp Act
having regard to the language of Section 35 of the Act. Under Section 35, no
instrument chargeable with duty shall be admitted in evidence for any purpose
by any person having by law or consent of parties authority to receive
evidence, or shall be acted upon, registered or authenticated by any such
person or by any public officer unless such instrument is duly stamped.
Notwithstanding the clear language that the instrument shall not be admitted in
evidence for any purpose whatever, some decisions have taken the view that the
instrument could be used for what is styled as a collateral purpose. This
conflict, however, has now been set at rest by the Judicial Committee in Ram
Rattan v. Parma Nand. Sir John Beaumont observed at page 296 as follows:—
"As already noted, Section 35 of the Indian Stamp Act
enacts that no instrument chargeable with duty shall be admitted in evidence
for any purpose. Mr. Rewcastle as part of his argument, for the respondent
adopted the note on the words 'for any purpose' in Section 35 contained in the
4th edition of Sir Dinshaw Mullah's book on the Indian Stamp Act, 1899. He
pointed out that the words 'for any purpose' first appeared in India in the
Stamp Act of 1879, and in England in the Stamp Act of 1891, and that under the
earlier Acts there were decisions in both countries that an unstamped document
might be admitted in evidence for a collateral purpose, that is, to prove some
matter other than the transaction recorded in the instrument, and he submitted
that these cases applied even under the later Acts. Their Lordships do not take
this view. A document admitted in proof of some collateral matter is admitted
in evidence for that purpose, and the statute enacts that is shall not be
admitted in evidence for any purpose. Their Lordships see no reason why the
words 'for any purpose' in the Indian Act of 1879 should not be given their
natural meaning and effect. Such words may well have been inserted by the
Legislature in order to get rid of the difficulties surrounding the question of
what amounted to a collateral purpose."
It must be remembered that the decision of the House of
Lords was pronounced before the English Stamp Act of 1891. It is, therefore,
impossible for the appellants to maintain that the document could be split up
in the manner contended for. Especially in a court of law it Would not have
been permissible to so dissect the instrument into two parts and use the unobjectionable
part in evidence. Under Section 5 of the Stamp Act an instrument which
comprises or relates to several distinct matters is chargeable with the
aggregate amount of the duties with which separate instruments, each comprising
or relating to one of such matters, would be chargeable under this Act. If
therefore the proxy contains the specific power as well as the general power,
it would be admissible only if the aggregate amount of the duties in respect of
two such separate instruments is paid, as under the charging section, Section
3, the instrument should be charged with the duty indicated in the schedule. Of
course, the schedule must be taken along with the sections in order to
determine the proper stamp duty. Under Section 6 if an instrument falls within
the several descriptions of schedule I and the duties are different, it should
be chargeable only with the highest of such duties.
Whether the proxies are general powers of attorney within
the meaning of Article 48 of the Stamp Act or specific powers under Article 52
is a difficult question and does not seem to us as easy to decide as the
chairman, the third defendant, thought. One specimen form of proxy seems to
have been marked for identification; but as we did not find it in the records
sent to this court, we called for the proxy forms and we find that they are
similar in language as in Article 97 of Ex. A-2 For easy reference the language
in the form is quoted herein.
"Every proxy shall be in the following form, or shall
contain words to the following effect,
(stamp 1 anna)
"The Kaleeswarar Mills Limited,"
I of being a member of "The Kaleeswarar Mills Ltd.", and entitled to vote, do hereby appoint of as my attorney or substitute to vote for me and on my behalf at the (Ordinary or extraordinary, as the case may be) General Meeting of the company to be held on the day of and at any adjournment thereof (or at any meeting of the company, that may be held within the period of from the date hereof, or generally as the case may be) in the same manner as I myself could vote if personally present provided he be then a member of the company and be entitled or admitted to vote.
As witness my hand this day of "signed by the said in
the presence of " It consists of two parts: "do hereby appoint as my
attorney or substitute to vote for me and on my behalf at the (Ordinary or
Extraordinary, as the case may be) General Meeting of the company to be held on
the 30th September, 1948, and at any adjournment thereof." The second part
is "(or at any meeting of the company, that may be held within the period
of one year from the date hereof, or generally as the case may be)". It is
not disputed that so far as the first part is concerned, notwithstanding the
words, "Ordinary or Extraordinary" within brackets, it authorises the
person only to vote at the meeting of the 30th September, 1948, or at any
adjournment thereof. The words "as the case may be" clearly indicate
that the word "or" in the expression, "Ordinary or Extraordinary"
is disjunctive and if the instrument had stopped with this clause, it is not
disputed that the instrument was duly stamped. The trouble arises by the
existence of the second clause. It is argued that the word "or"
occurring at the beginning of the expression "or at any meeting of the
company'' is not disjunctive but is used as meaning " and ". Having
regard to the context, we are not inclined to accept the interpretation that
the word "or" in the context means " and ". It is a
co-ordinating article indicating an alternative.
The question then is even if "or" is disjunctive,
whether the expression "at any meeting of the company that may be held
within the period of one year from the date hereof, or generally as the case
may be" means only at any one meeting of the company or at all the
meetings of the company that may be held within a period of one year. There is
also the question as to the meaning to be given to the expression
"generally as the case may be," The construction suggested on behalf
of the respondents is that it means at any meeting of the company within a
period of one year or generally without any limitation as to time. The meaning
of the expression, to our mind, is clear and it cannot be said that the
oontention urged on behalf of the respondents is unreasonable.
Even then does the word "any" mean all the
meetings or any one meeting of the company? of the latter, the object of the
instrument is undoubtedly to give an option to the person concerned to vote
either at the meeting of the 30th or at any other one meeting of the company.
If the former, it means the person is entitled to vote either at the meeting of
the 30th or its adjournment or at his option at all the meetings of the company
to be held within one year or without any limitation as to time. If the latter
construction is to be adopted, undoubtedly as it gives a power in the
alternative, in the first instance specifically and in the second instance, in
the alternative generally, it would fall within Section 5 of the Stamp Act and
require to be stamped in accordance with it or at any rate under Section 6 and
stamp duty will be one rupee in the latter case. If, one the other hand, it is
confined to any one meeting of the company, the stamp duty paid is proper. The
decisions under the English Act are of no assistance as the language is not
similar. Section 80 of the English Stamp Act, 1891, (54-55 Vic, c. 39) requires
that every letter or power of attorney for the purpose of appointing a proxy to
vote at a meeting, and every voting paper, hereby respectively charged with the
duty of one penny, is to specify the day upon which the meeting at which it is
intended to be used is to be held, and is to be available only at the meeting
so specified, and any adjournment thereof and the first schedule to that Act
referring to letter or power of attorney and commission, factory, mandate or
other instrument in the nature thereof for the sole purpose of appointing or
authorising a proxy to vote at any one meeting at which votes may be given by proxy,
whether the number of persons named in such instrument be one or more, the duty
payable is one penny. In other cases, it is ten shillings. The Act both in the
section and in the schedule requires that it should be for the sole purpose of
voting at any one meeting and the day upon which the meeting is to be held is
also to be specified. The language of Article 52 of the Indian Act is ''proxy
empowering any person to vote at any one election of the members of a district
or local board, or of a body of municipal commissioners, or at any one meeting
of (a) members of an incorporated company or other body corporate whose stock
or funds is or are divided into shares and transferable." (The rest of it
is omitted as being irrelevant). It need not be for the sole purpose of voting
at one meeting, but it must be sufficiently clear that the proxy is intended to
exercise the vote at any one meeting of the company. If, therefore, on a fair
reading of the instrument, it is possible to come to the conclusion that it is
intended to authorise the person to vote at any one meeting, though the power is
given in the alternative as "at the meeting of the 30th September or at
any other meeting," the stamp duty payable would be two annas. That there
is some indication that the parties intended that the sole object of the proxy
is to enable the person to vote at any one meeting may be inferred to some
extent from the fact that they fixed the stamp duty as one anna in the articles
of association and the proxy holders also sent a covering letter (dated 25th
September, 1948) along with the proxies that they were intended to be used at
the meeting of 30th September, 1948. The word "any" as pointed out in
Webster's Dictionary has also the meaning of one of three or more, and in the Oxford
Dictionary, its meaning is given as "an indeterminate derivative of one,
or rather of its weakened adjectival form, a, an, in which the idea of unity is
subordinated to that of in difference as to the particular one or ones that may
be selected" (Vol. I page 378); so that on a fair reading of the
instrument, we have come to the conclusion, though with hesitation, that the
instrument is a proxy within the meaning of Article 52 and the proper stamp
duty payable is two annas. No doubt, as pointed by learned counsel for the
respondents, in some context "any" may be read as "or" as in the case of The Isle of Wight Railway
Co. v. Tahourdin, relied on in Stroud's Judicial Dictionary, Vol. I, page 92.
We have to consider the context in which the word is used and interpret it and
no invariable rule can be laid down. We felt some difficulty in deciding
whether assuming that the proxy is a general power of attorney, the clauses in
Article 48 of the Stamp Act apply to the present case. The clauses which have
to be considered are. clauses (d), (e) and (g) of Article 48. As pointed out in
Donough's Indian Stamp Law, 9th Edn. at page 707, clause (g) has to be read
with clause (e). When so read, it means that if there are more than ten persons
authorised to act jointly or severally in more than one transaction or
generally, then stamp duty payable is according to the number of persons and it
is one rupee to each person authorised. Clause (d) applies when the authority
is given to not more than five persons and relates to more then one transaction
or generally. In Referred Case No. 75 of 1905 cited in the Stamp Manual, this
court decided that a document of the present description would fall under
clause (g). We do not see any reason to differ from that view as otherwise a power
of attorney in favour of one person in respect of more than one transaction
would escape stamp duty altogether.
Lastly, Mr. Gopalaratnam, learned counsel for the
appellants argued that in any event the direction of the lower court that the
plaintiffs should pay separate sets of costs to the first defendant, second
defendant, third defendant, fifth defendant and defendants 4 and 7 is not
justifiable. The learned Judge did not give any reasons in his judgment for
allowing separate sets of costs to each of the defendants. They had no separate
interest in the suit and the questions that were considered were common
questions. Merely because the defendants chose to engage separate advocates,
that will not justify the course adopted by the learned Subordinate Judge. We
think that this direction regarding costs is not justified.
Our conclusion in the result is that the rejection of the
revocations affecting 230 votes and of the proxies relating to 661 votes was
not justified. The defendants' party, according to the chairman, after these
exclusions obtained 793 votes in favour of the resolutions while the
plaintiffs' party obtained only 106. If the excluded proxies are added, the
votes in favour of the plaintiffs' party will be 767, i.e., 106 plus 661, while
the votes obtained in favour of the resolution by the defendants' party would
be 793 minus 230 leaving a balance of 563. The resolutions therefore must be
taken to have been defeated. It follows from this result that the plaintiffs
are entitled to the declarations asked for and they are also entitled to a
permanent injunction restraining the first defendant company from giving effect
to the said resolutions and defendants 4 to 7 from acting as directors of the
first defendant company. The appeal therefore must be allowed and the decree of
the learned Subordinate Judge dismissing the suit must be set aside and there
should be a decree in favour of the plaintiffs as prayed for with costs here
and in the Court below.
[1949]
19 COMP. CAS. 175 (MAD.)
HIGH COURT OF MADRAS
v.
SATYANARAYANA RAO AND
PANCHAPAKESA SASTRI, JJ.
O.S.A NO. 22 OF 1948
OCTOBER 5, 1948
V.C.
Gopalaratnam and N. Rajagopala Aiyangar, for the Appellant.
O.T.G. Nambiar instructed by King
and Partridge and L.V. Krishnaswami Aiyar, for the Respondent.
This appeal
arises out of an action by the members of the Madras Race Club. The action was
tried on the original side by Bell, J., and by his judgment he dismissed the
suit of the plaintiffs. Hence this appeal by the plaintiffs.
The Madras
Race Club is a body corporate registered under the Indian Companies Act of 1913
before it was amended in 1936. The object of the Club, as its name indicates,
is to carry on the business of a race club and to provide certain amenities to
its members. The Memorandum of Association and the Articles of Association are
contained in Ex. P-29. The Memorandum of Association prohibits the division of
profits by way of dividend amongst the members, and they have to be utilised
only for the purpose of the club. There are two classes of members, namely,
club members and stand members. There are about 260 club members, and they
alone are entitled to vote, while the stand members have certain other
privileges, but not the right to vote. The management of the business of the
Club is vested in six Stewards who must be club members. They occupy the
position of the directors of a company and discharge similar functions in
respect of the Club. The Articles provide as usual for the qualification for
Stewards, for their retirement by rotation, filling up of vacancies, and also
their powers and duties. After every annual general meeting of the club the
senior Steward is elected at the first meeting of the Stewards, who is to preside
at every meeting of the Stewards. The quorum for a meeting of the Stewards is
fixed at three. They are charged with the duty of calling for a general meeting
annually and also, on the requisition of a prescribed number of members,
calling for an extraordinary general meeting for special business. Article 50
prescribes the period or notice and the manner of issuing the notice for a
general meeting. The senior Steward also presides as chairman at a general
meeting. Article 73 lays down the manner of serving notices on members. After
the Companies (Amending) Act of 1936 was passed the Articles of this Club were
also amended in 1941, and Ex. P-29 contains the articles which were in force in
1947.
Some time in
April, 1947, 45 members of the Club sent a requisition to the Club for
convening an extraordinary general meeting, inter alia, to appoint a committee
to consider the revision of the Articles of Association and to suggest changes
wherever necessary (Ex. P-1). In pursuance of this, an extraordinary general
meeting was duly held on the 21st of June, 1947, and in that meeting a special
committee of seven members besides the Stewards, who were ex officio members
thereof, was constituted for the specific purpose of the revision of the
Articles of Association and the suggestion of changes. They were required to
submit a report on that behalf by the end of September, 1947, and it was also
decided that a meeting of the general body should be called for not later than
31st of October,. 1947, for the consideration of the report. The special
committee had several sittings, and in the meeting of the 13th of September,
1947, they proposed several alterations to the Articles, the most important of
which were that the management of the business of the Club should vest in a
managing committee of 12 members instead of the Stewards, and that from among
the members of the managing committee a senior Steward and five other Stewards
should be elected, who should be solely responsible for the racing. They also
recommended the abolition of the proxy system of voting. Under a licence
granted by the Central Government under Section 26 (2) of the Indian Companies
Act, 1913, the Club was permitted to be registered as a company with a limited
liability without the addition of the word "limited" to its name. The
Provincial Government on whom the duty of issuing licences subsequently
devolved framed regulations under the said section governing the issue of
licences (vide Development Department Notification, Fort St. George, March 6th,
1937, G.O. No. 549). Under clause 8 of this Notification, "If the
Memorandum and Articles of Association are altered without the previous
approval of the Government having been obtained in that behalf, the licence
granted by the Government shall be deemed to have become void."
In view of
this requirement the special committee directed the solicitors of the Club to
draft the necessary resolutions in proper form altering the Articles of
Association in the manner suggested, and at a subsequent meeting of the 26th of
September, 1947, in which some more alterations were suggested, the Club's
solicitors were also requested to further revise the draft and send it to the
Government for approval. The solicitors sent the revised draft to the
Government on the 29th of September, 1947 (Ex. P-5). On the 11th of October,
1947, the Government approved the revised Articles of Association proposed by
the Club but with one modification relating to Article 69. The Government also
pointed out that the revised Articles of Association should be adopted by
passing a special resolution under Section 81(2) of the Indian Companies Act.
Section 20 of the Indian Companies Act also requires a special resolution to
alter or add to the existing Articles. On the 15th of October, 1947, the special
committee at its meeting considered the order of the Government and resolved
that an extraordinary general meeting of the members be convened on the 7th of
November, 1947, at 6-30 p.m. to consider the report and pass a special
resolution and requested the solicitor, Mr. Small, to draft the resolutions.
The committee was adjourned to meet again at 5 p.m. on 7th November, 1947
(P-1). At this meeting of the special committee were present nine members of
whom one was the senior Steward, Mr. Annamalai Chettiar, and two Stewards. On
the 16th of October, notice was issued to the Club members of the extraordinary
general meeting on the 7th of November, 1947, at 6-30 p.m. The contents of this
notice (P-8) are material for the decision of this case, and therefore it is
necessary to set them out in extenso:—
"Notice
hereby is given, that an Extraordinary General Meeting of Club members of the
Madras Race Club will be held at the Members' Stand of the Club at Guindy on
Friday the 7th day of November, 1947, at 6-30 o'clock in the evening for the
following purpose:—
(1) To receive the report of the Chairman of the
Special Committee constituted to revise the Articles of Association of the Club
and to suggest developments to the Club's present amenities;
(2) To consider and, if thought fit, to pass as
a Special Resolution That the Article in the printed document submitted to the
meeting, and for the purpose of identification subscribed by the Chairman there
of be approved, with or without modification, and adopted as the Articles of
Association of the Club in substitution for and to the exclusion of all the
existing Articles of Association thereof".
(3) If the said Special Resolution be duly
passed ,then to elect twelve Club members as the first Managing Committee of
the Club to hold office until the Annual General Meeting of Club Members to be
held in November, 1948; and
(4) To consider the Special Committee's
following proposals for development of the Club's amenities and to give
directions to the Managing Committee thereon:—
(a) That the present lunch room be furnished
suitably to serve as a lounge for Club members:
(b) That the northern corner of the verandah
adjoining the lunch room be equipped to serve as a card room for Club members;
(c) That the present billiards room be
reserved for use only by Club members when a separate recreation room can be
provided for trainers and jockeys; and
(d) That
arrangement be made to serve Refreshments also.
N.B.—(1) A
print of the proposed amended Articles of Association will follow shortly.
(2) Each nomination of a Club member as a candidate for election to the
Managing Committee should be signed by two Club members and sent to the
Secretary fourteen clear days before the date of meeting."
This notice,
it is common ground, was posted at Guindy on the 16th October. About the same
time notice of the annual general meeting of the Club fixed to 18th November,
1947, was also issued to the members. The extraordinary general meeting was
also advertised in the Hindu of 18th October, 1947, (Ex. P-10) and the Madras
Mail of even date (Ex. P-11.) In pursuance of this notice, Ex. P-8, the Club
received 24 nominations for the membership of the Managing Committee which was
communicated to the members by notice, dated 27th October, 1947 (Ex. P-12). By
29th October, 1947, the Club received notice of amendments to the Articles of
Association from Messrs. T.T. Krishnamachari, G. Narasimham, A.R. Srinivasan
and the Raja of Vizianagaram, and these were notified to the members by a
notice of 29th October, 1947 (Ex. P-13). On the 21st of October, 1947 (it is
admitted before us by both sides, though there is no evidence regarding it) the
Club sent the printed draft of the proposed amendments to the Articles of
Association (Ex. P-30) to all the members. On the 5th of November, 1947, the
Government of Madras suggested that the Articles of Association might be
suitably amended to eliminate voting by proxy and to delete Articles 55, 56 and
57 altogether with a view to make the members of the Race Club take full
responsibility for the proper conduct of racing. In the light of this
suggestion the Government wanted a fresh draft on those lines, or alternatively
that the existing Articles suitably altered and approved by the general body be
submitted to them through the Registrar of Joint Stock Companies, Madras, for
approval before "it is finalised". At 5 p.m. on the 7th November,
1947, the Special Co a-mittee met and considered the proposal of the
Government. They passed at that meeting two resolutions:
"(1) Resolved
that the letter be placed before the General Body Meeting to be held at 6-30
p.m. with the recommendation that the suggestion of the Government be accepted;
and
(2) Resolved also that this Committee recommends
that the spirit of the letter of the Government of Madras be observed by
refraining from using proxies at today's meeting and subsequent meetings as
well as the Annual General Body Meeting."
These
resolutions were passed, one member Mr. Annamalai Chettiar dissenting. The
extraordinary general body meeting was held on the 7th November, 1947, at 6-30
p.m. which was presided over by Mr. P. Natesan as the senior Steward, Mr.
Annamalai Chettiar expressing his unwillingness to take the chair. What exactly
happened at that meeting is a matter of serious controversy between the
parties, and the fate of this case mostly depends upon our decision on this
point. What purported to be the proceedings of the meeting of the 7th November
were communicated by the Club to the members, and the plaintiffs filed the
communication received by them, which is marked as Ex. P-18. The solicitors of
the Club by their letter of 10th November, 1947, communicated to the Registrar
of Joint Stock Companies the proposed revised Articles which, it was alleged,
were adopted at the meeting of the 7th November. The Registrar of Joint Stock
Companies through a telephonic message of 14th of November, 1947, asked the
solicitors whether the revised set of Articles was adopted by a special
resolution at the meeting of the 7th, and that, if so, a copy of the resolution
and a copy of the notice convening the meeting should be sent to him for
reference. It was also pointed out by the Registrar that if the Articles were
adopted by a special resolution, prior sanction of the Government ought to have
been obtained and the Government might have to be addressed to condone the
omission. To this the solicitors replied by their letter of 15th November,
1947, pointing out that there was no such necessity. The general meeting was
held on the 18th at which some formal business was transacted, and the members
were informed that there was no necessity to elect the Stewards as at the first
meeting of the Managing Committee held on 10th of November, 1947, Mr. P.
Natesan was elected Chairman and five persons were elected as Stewards. Mr.
Annamalai Chettiar wrote to the Registrar of Joint Stock Companies on the 18th
(Ex. P-20) that the proposed special resolution had not been put to the meeting
at all by the Chairman, Mr. Natesan, on the 7th of November, 1947, and that it
had not been passed by the requisite statutory majority. The present
plaint-iris issued through their lawyers a notice to the Club questioning the
legality of the meeting of the 7th November and of the election of the members
of the Managing Committee on that date on the grounds elaborately specified in
that notice including the fundamental objection that the special resolution was
not moved or put before the meeting and was not voted upon. The notice demanded
the Managing Committee to accept the invalidity of the proceedings of the
meeting of 7th November failing which it was intimated a suit would be
instituted for appropriate reliefs. The reply of the Club is Ex. P-23, dated
25th of November, 1947, and was sent through their solicitors. In this the
allegations in the notice Ex. P-21 were denied.
This was
followed by the present suit which was filed on the 8th of December, 1947, by
two members of the Club for themselves and on behalf of the other members of the
Club other than those who were originally impleaded as defendants in the suit
after obtaining the necessary permission under Order 1, Rule 8, Civil Procedure
Code. The first defendant is the Race Club. Defendants 2 to 13 are members of
the Club who were elected as members of the Managing Committee. The suit was
originally filed impleading only defendants 1 to 13. Defendants 14 to 90 who
are some of the other members of the Club were impleaded as parties at their
own request, as they wanted publicly to dissociate themselves from the
plaintiffs.
The main
reliefs claimed in the plaint were: (1) a declaration that the meeting of the
general body of the members of the Club held on the 7th November, 1947, was invalid
and void and that all business transacted thereat was invalid, null and void;
(2) a declaration that the Managing Committee comprising defendants 2 to 13
purported to have been elected at the said meeting was not lawfully or validly
elected and were not entitled to assume office; (3) a declaration that the
proposed amended Articles have not been duly passed and are ineffective; (4) a
declaration that the Stewards who were in office prior to 7th November, 1947,
still continue to be in office and are the persons legally and lawfully
entitled to be in management and control of the Club; and (5) a declaration
that the proceedings of the general meeting of the 18th of November, 1947, are
illegal, invalid and void. There is also a relief for an injunction against
defenants 2 to 13.
The grounds
on which the reliefs claimed in the plaint were sought to be sustained before
us may be catalogued as follows: (1) The meeting of the 7th of November, 1947,
was not convened by the proper authority under the Articles, viz., the
Stewards. (2) The notice of the meeting (Ex. P-8) which was posted on the 16th
October, 1947, contravened the provision of Section 81 (2) of the Indian
Companies Act as 21 days were not allowed between the date of the meeting and
the receipt of the notice. (3) The notice of the meeting did not contain the
necessary particulars as it did not comply with the requirement that the
general nature of the business should be indicated in it, the proposed amended
Articles of Association not having been sent along with the notice so as to
give notice thereof of 21 clear days. (4) Item No, 2 in the agenda, the special
resolution relating to the proposed amendment of the Articles, was not moved or
put before the meeting for being voted upon. (5) In any event even if the
voting of 66 members at that meeting was in support of the special resolution,
that did not constitute the statutory three-fourths majority of the members
present, who numbered according to the plaintiffs 105. (6) The amendments moved
were not within the scope and ambit of the original resolution and could not
have been validly made. (7) The election of the 12 members of the Managing
Committee was illegal as the notice regarding it was insufficient as regards
the time and was also defective as the members were not informed of the
qualifications and the functions of the Managing Committee before they were
called upon to submit nominations. (8) The election of the entire Managing
Committee was illegal, or in any event that of Mr. Natesan, was clearly illegal
as he was disqualified to preside at the meeting, being himself a candidate for
election to the Managing Committee. (9) If the meeting of 7th November, 1947,
was void, the annual general meeting of 18th November, 1947, was equally void,
as proxies were illegally excluded.
These charges
are of course denied by defendants 2 to 8, 10, 12 and 13. In paragraph 5 ot the
written statement filed on behalf of the first defendant, the first defendant
stated with reference to the allegations in paragraph 6 of the plaint that
although 105 members signed the attendance sheet during the period of the
meeting and 49 proxies were registered, only 66 members were actually present
at the time when the resolution to adopt the new articles was put to vote. The
other defendants 2 to 8, 10, 12 and 13 filed a separate written statement
practically adopting the written statement filed on behalf of the first
defendant. Defendant 9 seems to have signed the written statement of defendants
2 to 8, 10, 12 and 13 but without looking into the written statement filed on
behalf of the first defendant. Mr. Vijayaraghavan, the 9th defendant, wanted to
see the written statement of the first defendant before their written statement
was actually filed into Court. For this purpose he wrote to his solicitors on
the 10th of January, 1948, communicating his intention to see the written
statement of the first defendant before the written statement bearing his
signature was actually put into Court. To this the reply of the solicitors
dated 12th January, 1947, was that their written statement was filed in Court
on that day as Mr. Small was otherwise engaged that morning and that it was too
late to withhold the filing of their written statement. Mr. Vijayaraghavan was
informed that the written statement signed by him merely adopted the written
statement filed on behalf of the Club. On the 15th January, 1948, Mr.
Vijayaraghavan by his letter protested against this action of the solicitors
and pointed out that paragraph 5 of the first defendant's written statement was
highly misleading and even incorrect. According to him, when the resolution was
put to vote at the meeting, 66 persons voted for, one member said he was
neutral and about 30 to 35 other members did not vote either way. He pointed
out that the statement in paragraph 5 of the written statement of the Club that
only 67 members were present at that time was not true and that therefore he
could not subscribe to it. After this protest when the written statement of the
defendants 2 to 8, 10, 12 and 13 was returned the solicitors scored out his
name. Mr. Vijayaraghavan filed a separate written statement engaging another
counsel. Mr. Vijayaraghavan in his written statement denied the allegations in
paragraph 5 of the written statement, reaffirmed the facts as stated in his
letters and left other questions to be decided by the Court. Annamalai Chettiar
also filed a separate written statement setting out his contention.
The learned
Judge who tried the suit held that though there were some irregularities at the
meeting and though he was not prepared to accept it in their entirety the
contentions put forward by the Club relating to "waiver",
"estoppel" and the like, the plaintiffs had failed to substantiate
their contention on the material issues. He was of opinion that there was no
illegality in the proceedings of the meeting of 7th November, and that the
special resolution was validly passed at that meeting. He characterised the
action as a case of "a storm in a tea cup" and dismissed the plaintiffs'
suit.
At the outset
it is necessary to consider the question whether the suit as framed is
maintainable. The action was brought by two plaintiffs who are the members of
the Club for themselves and also on behalf of the other members after obtaining
the requisite leave under Order 1, Rule 8, Civil Procedure Code. The learned
Judge was of opinion that the suit was incompetent as what is known as the rule
in Foss v. Harbottle applied to
the case. The rule in Foss v. Harbottle is that a Court will not interfere
with the ordinary management of a company acting within its powers and has no
jurisdiction to do so at the instance of the shareholders. A shareholder is
entitled to institute a suit to enforce his individual rights against the
company such as his right to vote, or his right to stand as a director of a
company at an election. If the shareholder however intends to obtain redress in
respect of a wrong done to the company or to recover monies as damages alleged
to be due to the company, the action should ordinarily be brought by the
company itself. In order therefore to enable a shareholder to institute a suit
in the name of the company, in such a case, there must be the sanction of the
majority for corporate action. In ordinary cases, therefore, this principle
implies the supremacy of the will of the majority. It is open to a majority
always to set right a thing which was done by the majority either illegally or
irregularly, if the thing complained of was one which the majority of the
company were entitled to do legally and was within the powers of the company by
calling a fresh meeting. That is the reason why in such cases the Court refuses
to interfere at the instance of a shareholder even in a representative action
brought by him. If the majority however act in an oppressive manner, it is not
as if the minority are without a remedy. This possibility was foreseen by Sir
James Wigram, Vice-Chancellor who delivered the judgment in Foss v. Harbottle. At page 492
the Vice-Chancellor says:—
"If a case should arise of injury to a
corporation by some of its members, for which no adequate remedy remained,
except that of a suit by individual corporators in their private characters and
asking in such character the protection of those rights to which in their
corporate character they were entitled, I cannot but think that the principle
so forcibly laid down by Lord Cottenham in Wallwonh v. Holt , and other
cases would apply and the claims of justice would be found superior to any
difficulties arising out of technical rules respecting the mode in which
corporations are required to sue."
In such a case where action by a shareholder is
permitted, the plaintiffs would not have a larger right to relief than if the
company itself were the plaintiff and are not entitled to complain of acts
which are valid, if done with the consent of the majority of the shareholders
pr are capable of ratification by the majority.
The later decisions however have recognised
exceptions to what is conveniently known as the rule in Foss v. Harbottle. James, L.J.
in MacDougall v. Gardiner considered
the rule and stated the exceptions in the following passages at page 21 which
has since become classic:—
"I think it is of the utmost importance in all
these companies that the rule which is well known in this Court as the rule in
Mozley v. Alston
and Lord v. Copper Miners Co. and Foss v
Harbottle
,should be always adhered to ; that is to say, that nothing connected with
internal disputes between the shareholders is to be made the subject of a bill
by some one shareholder on behalf of himself and others, unless there be
something illegal, oppressive, or fraudulent—unless there is something ultra
vires on the part of the company qua company, or on the part of the majority of
the company, so that they are not fit persons to determine it ; but that every
litigation must be in the name of the company, if the company really desire
it."
From this it follows that a shareholder or
shareholders are entitled to bring an action (1) in respect of matters which
are ultra vires the company and which the majority of shareholders were
incapable of sanctioning (see Burland v. Earle); (2) where
the act complained of constitutes a fraud on the minority; and (3) where the
action of the majority is illegal. The decisions in Baillie v. Oriental
Telephone and Electric Co. Lte., and Cotter
v. National Union of Seamen, recognised
a fourth exception where a special resolution was required by the articles of
the company and the company obtained the assent of the majority to such special
resolution by a trick, or even where a company authorised to do a particular
thing only by a special resolution does it without a special resolution duly
passed as in such a case to deny a right of suit to the shareholders without
using the name of the company would in effect result in the company doing the
thing by an ordinary resolution. In other words, this means that where a
special resolution was improperly passed, if the rule that the company alone is
the proper plaintiff to institute a suit questioning such resolution were to be
enforced, the shareholders by a bare majority could defeat and prevent the
minority from using the name of the company. The result of such a course would
be indirectly to uphold the validity of a special resolution which was
otherwise invalid. To avoid this result this exception was recognised in the
two decisions. The rule and the exceptions thereto are also stated in Palmer's
Company Law, 17th Ed., at pages 236 and 237 and Halsbury's Laws of England (2nd
Ed.), Vol. 5, page 445, paragraph 728. The appellants' learned advocate placed
before us the authorities bearing on the rule and the exceptions, and the respondents learned advocate did not
challenge the position contended for by the appellant. It is needless to
consider the authorities in detail as the substance of the decisions is as
stated above.
The attempt
of the learned advocate for the appellants is to bring the present case under
the two exceptions, namely, that the acts complained of are illegal acts, and
secondly that if the special resolution was not passed or was passed illegally
the effect of applying the rule in Foss v. Harbottle to this
case would be indirectly to sanction by an ordinary resolution that which the
law requires to be passed only by a special resolution. For reasons given
below, in our judgment the present suit falls within these two exceptions and
that it is maintainable.
It will be
convenient to deal first with the objection that the' special resolution, item
2 in the agenda, was not put to the meeting and was not passed, for this
question goes to the root of the matter. If we find that no special resolution
was passed at the meeting of the 7th November, 1947, the whole proceedings of
that meeting fall to the ground. Section 20 of the Indian Companies Act
requires a special resolution to alter the articles. If there was no special
resolution sanctioning the alteration, the action of the Club in altering the
Articles without authority would be void and the alterations would have no
legal effect. It is unfortunate that in this case notwithstanding the presence
of the solicitor of the Club, Mr. Small, at the proceedings of the meeting and
notwithstanding the fact that the Chairman of the meeting and shareholders were
men of status in life there is no authentic record of the proceedings of the
meeting. This has made our task more difficult. ' According to the plaintiffs
one and only one resolution was put before the meeting on that day, that is,
resolution No. 1 of the special committee in Exhibit P-16, and that it was this
resolution that was passed by 66 voting for, and one remaining neutral out of
the members present. The plaintiffs categorically asserted in the plaint that
the special resolution (items in the agenda) was not put to the meeting and was
not passed. This of course was denied by the defendants. According to the version
of the defendants the special resolution alone was put to the meeting, and it
was in respect of that that the counting of the votes took place and it was
carried by 66 votes, one remaining neutral. According to both versions it would
be clear from the evidence that there was only one counting of the votes at
which it was found that 66 were in favour of the resolution, whether it was the
resolution of the special committee that was put to the meeting or the special
resolution itself. As regard the number of persons; present at that sole count,
there is also conflicting evidence,
[After
discussing the evidence bearing on this question their Lordships concluded.]
We,
therefore, hold agreeing with the contention of the plaintiffs that the special
resolution was not put to the meeting and was not passed.
If the
special resolution was, in: fact, pat to the meeting a passed by 66 voting for,
we have no doubt on the evidence adduced even by the plaintiffs that there were
no more than about 10 or 20, members who did not take part in the voting and
therefore the 66 would constitute the required majority for declaring the
resolution carried. In, view, of the finding that the special resolution was
not passed, the amendment of the Articles and the consequent election of the
members of the Managing Committee are wholly void.
This really
disposes of the suit in favour .of the plaintiffs. In this view it may not be
necessary to consider the other objections to the meeting. However we will deal
with the other objections also, as in our opinion, some of them are well
founded.
We now
proceed to consider them in the order in which they wore enumerated earlier.
The first of the objections is that the meeting was not convened by the proper authority.
The Stewards constitute the, authority under the articles (Article 49) to call
for an extraordinary-general meeting as well as the annual general meetings.
The quorum for the meeting of Stewards is fixed at three. The notice, Exhibit
P-8 was signed by the Secretary. It is common ground that there was no separate
meeting of the Stewards in which "they decided that an extra"
ordinary general meeting should be convened on the 7th November. No minutes of
any such meeting have been placed on record. Of the six Stewards Mr. Lawrence
died some time ago, Mr. Chidambaram Chettiar was out of India and according to
Mr. Small, Mr. Hume was at the time of the notice in Ceylon, though he had no
personal knowledge of it. Mr. Hume was present on the 7th both at the special
committee and also at the extraordinary., general meeting. It may that Mr. Hume
also was not available at the time Exhibit P-8 was issuee. The notice Exhibit
P-8 did not indicate the authority under which the meeting was called. The
extraordinary general, meeting decided on the 21st June, 1947 (Exhibit P-2),
that after the report of the special committee then constituted for revising
the Articles was submitted, a meeting of the general body should be called for
not later than 31st October, 1947, for the consideration of the report. This
authority would not avail, because the time fixed had expired and the meeting
was subsequently convened only 6n the 7th November, 1947. The. defendants
relied on Exhibit P-7 which contains a resolution of the special committee
passed on 15th October., 1947, that an extraordinary general body meeting
should be convened on the 7th November, 1947. This meeting of the special
committee was attended by 9 members of whom 3 were Stewards who were ex ojficio
members of the special Committee. As three of the Stewards who Constituted the
quorum for a meeting of the Stewards and who were the only persons available in
India at that time took part in the special committee meeting, it is urged on
behalf of the defendants that the resolution of that meeting may be deemed to
be a resolution of the Stewards and therefore justified the calling of the
meeting. Alternatively, it is also contended that in any event this is at the
most an irregularity and not an illegality which justifies the setting aside of
the resolution. If a general meeting is convened by the Secretary without
proper authority it is not valid. See Hay craft Gold Reduction and Mining
Company, In re
and State pf Wyoming Syndicate, In re. Where the
directors however met aad decided to convene a general meeting but the meeting
of the directors itself was not properly convened, it was held in Browne v. La
Trinidad,
that by reason of the irregularity of the Board meeting the general Meeting was
not incapacitated from acting. In the case in Harhenv. Phillips a Board
meeting of the directors was held which decided to convene an extraordinary
general meeting. At the Board meeting the plaintiffs who were the directors
were refused admittance to the meeting by the Secretary under the direction of
persons in possession of the Board room. The plaintiffs protested and withdrew.
The persons in possession of the Board room purporting to act as a Board
adjourned their meeting to the next day to a different place, the office of
their solicitor, and on the requisition presented to the meeting on the next
day which was attended by three of the defendants, appointed a special
committee to convene an extraordinary general meeting. At the meeting of the Board
there was unquestionably a person who took part in the meeting and who was not
a director. It was held that the meeting of the Board of Directors on the two
days were unlawful and that everything that was done at those meetings was
invalid. The. consequence was that the appointment of the special committee and
the notice convening the meeting were also invalid. It was pointed put in
answer to an argument that there was a quorum of the directors and therefore
the meeting was lawful and that it was not enough that there was a quorum as
the lawfully constituted directors were prevented from attending the meeting.
The convening of the meeting, according to this decision, was not a mere
ministerial act. The directors have to exercise their discretion and have to
fix the time within which and the place at which the meeting should be held,
and whether a meeting should at ail be held. In the light of these decisions it
is difficult to say that there was a valid meeting of the Stewards. There is no
doubt some force in the argument of the respondents that the proceedings of the
special committee in which three of the Stewards who were available in India
were present may be deemed to be a valid meeting of the Stewards. The objection
of the plaintiffs is technical. The mere presence of the other members of the
special committee at that meeting may not vitiate the resolution to which the
Stewards were a party. We do not however think it necessary to express any
final opinion on this question.
The next question for consideration is whether the notice, Ex. P. 8, posted on the 16th October, 1947, complied with the requirement of Section 81, sub-clause (2), of the Indian Companies Act that there should be a notice of "Not less than 21 days." There were 260 Club members of whom 23 were living outside British India, 51 members were absent members and 59 members lived at places which could be served through post after more than a day had elapsed from the date of posting. 127 members were within one day's reach from the date of posting. The notice of the meeting therefore posted on the 16th at Guindy could have been received by less than half the members only on the 17th. More than a day was required at least in respect of 59 members. Excluding therefore the date of service of notice and the date of the meeting there was only an interval of 20 days in respect of 127 members, and a still less interval in the case of others. Section 81(2) of the Indian Companies Act provides:—
"A
resolution shall be a special resolution when it has been passed by such a
majority as is required for the passing of an extraordinary resolution and at a
general meeting of which not less than twenty-one days' notice specifying the'
intention to propose the resolution as a special resolution has been duly given.
Provided
that, if all the members entitled to attend and vote at any such meeting so
agree, a resolution may be proposed, and passed as a special resolution at a
meeting of which less than twenty-one days' notice has been given."
It is
obligatory to serve notice of the meeting of a company with a statement of the
business to be transacted at the meeting on every member in the manner laid
down for service of notice under the Articles. Article 49 of Table A of the
Indian Companies Act which is the same as Article 50 of the Articles of the
Club lays down;—
"Subject
to the provisions of sub-section (2) of Section 81 of the Indian Companies Act,
1913, relating to special resolutions fourteen days' notice at the least
(exclusive of the day on which the notice is served or deemed to be served, but
inclusive of the day for which notice is given) specifying the place, the day
and the hour of meeting and, in case of special business the general nature of
that business, shall be given in manner hereinafter mentioned, or in such other
manner if any, as may be prescribed by the company in a general meeting to such
persons as are under the Indian Companies Act, 1913, or the regulations of the
company, entitled to receive such notices from the company; but the accidental
omission to give notice to or the non-receipt of notice by any member shall not
invalidate the proceedings at any general meeting."
The manner of
serving notices is provided by Article 112 of Table A which is the same as
Article 73 of Ex. P-29. It states:—
"112. (1) A notice may be
given by the company to any member, either personally or by sending it by post
to him to his registered address or (if he has no registered address in British
India) to the address if any within British India supplied by him to the
company for the giving of notice to him.
(2) Where a notice is sent by post, service of the notice shall be
deemed to be effected by properly addressing, prepaying and posting a letter
containing the notice and, unless the contrary is proved to have been effected
at the time at which the letter would be delivered in the ordinary course of
post."
It is
admitted on behalf of the respondents that if regard be had to the expression
"not less than twenty-one days" occurring in Section 81 (2) there
should be an interval of 21 clear days and indeed this position could not be
disputed as it was established by decisions where similar expressions occurring
in the Companies Act and also other statutes were considered. See Railway
Sleepers Supply Company, In re, and Rex v.
Turner
The argument however that was pressed on behalf of the respondents was that the
section should be construed in the light of Article 49 of Table A which
includes the date of the meeting in cases where only 14 days' notice is
required. It was also argued that it was permissible to refer to the Articles
for the purposes of ascertaining the intention of the legislature in the body
of the Act. In support of this contention the decisions in Barned's Banking
Co., In re, Ex parte The Contract Corporation, Lock v.
Queensland Investment and Land Mortgage Company, and
Halsbury's Laws of England. Vol. 5, Second Edition, Page 292, para. 504 were
referred to. There cattle no dispute that the principle of construction
contended for On behalf of the respondents is correct. As Article 49 is
expressly made subject to the provisions of sub-section (2) of Section 81 it
cannot be inferred that in construing that sub-section the Legislature intended
to include the date of the meeting within the period of 21 days. It cannot be
assumed that because that date was included, in other cases the Legislature
intended to include it also in case of special resolutions covered by
sub-section (2) of Section 81. The very fact that a specific reference is made
in Article 49 to include the date of the meeting within 14 days in cases in
which a notice of 14 days is required is a clear indication that it was not
intended to apply to cases of meetings which require 21 days' notice. Under the
corresponding provisions of the English Companies Act of 1929 the Court of
Chancery had to consider a similar question. Sub-section (2) of Section 117 of
the English Act corresponds to sub-section (2) of Section 81 of the Indian Act,
and Article 42, of the English Act corresponds to our Article 49. In the case
reported in Hector Whaling Limited, In re a notice
convening an extraordinary general meeting of the company on 30th May, 1935,
was dated 8th May, 1935, and was posted on that day. By virtue of the Articles
of Association of the company the notice is deemed to have been served on the
following day, that is, 9th May, 1935. Excluding the date of the meeting it
would be noticed that in that case the interval was only 20 days. Article 138
of the company in question stated:—
"Any
notice or other document if served by post shall be deemed to have been served
on the day following that on which the letter containing the same is put into
the post, and in proving such service it shall be sufficient to prove that the
letter containing the notice or document was properly addressed and put into
the post office as a prepaid letter or prepaid registered letter as the case
may be."
On the
authority of the decisions in Rex v. Turner and
Chambers v Sniiih, Bennett,
J., held that the expression "not less than twenty-one days’ notice"
contained in sub-section (2) of Section 117 meant 21 clear days exclusive of
the day of service and exclusive also of the day on which the meeting was to,
be held. It was also pointed out that It was not open by the Articles of
Association to curtail the length of time which the statute had fixed. No doubt
in that decision, specific reference was not made to the language of Article
42, and the contention now advanced was not raised and considered. It cannot
however be assumed that the counsel who argued the case and the learned Judge
who decided it were not aware of the language of Article 42. In view of the
clear language of the./article the point does; not admit of any doubt, and
perhaps that was the reason why the contention was not raised as of no
substance.
It was next
argued that in any event we should count 21 days from the date of posting, and
that if that was done, there was an interval of clear 21, days even if the date
of the meeting was excluded. The argument, in our opinion, is opposed to the
clear language of Article 112, The Article states that, unless the contrary is
proved the notice must be deemed to have been effected at, the time at which
the letter would -be delivered in the ordinary course of post, and this would
be the 17th in the case of at least half the number of the members. This
extraordinary contention is not supported by any decisions. Form No VIII in
which a special resolution has to be communicated to the; Registrar of Joint
Stock Companies was relied on. In the form one of the columns is "Date of
dispatch of notice specifying the intention to propose the resolution as a
special resolution or extraordinary resolution." We do not think that it
is permissible to rely on the language of the form to interpret the section and
the article. The date of the meeting and the date of service of notice are
therefore to be excluded, and in-between the dates there should be an interval
of 21 days, The notice issued to all the members therefore was inadequate and
did not comply with the statutory requirement and is therefore illegal. The
meeting therefore was not legally convened.
The next branch of argument on behalf of the
respondents in., this part of the case was that as none of the members
including the plaintiffs, who though absent appointed proxies on their behalf,
objected at the time of the, meeting, it must, therefore be deemed that the
members Present either in person or by
proxy had waived the objection was not specifically raised in the, written
statement nor in, the issues. All that was said in paragraph 3 of the written
statement was that the plaintiffs had revived the notice pf the meeting iii due
time arid raised no objection (to the validity of the notice, at, any time or
about, the meeting though they were present by proxy at the meeting. Issue 3
raises, in a general form the question whether the, plaintiffs were entitled to
question the validity of the notice of the meeting, or the proceedings of the
meeting at the general body of the 7th .November, 1947, as stated in paragraph
3 of the written statement. As the. facts have been pleaded in the. written
statement, though the point was not specifically raised in the form of waiver,
we thought that 'the respondents should be allowed to argue the question. The
respondents wanted also to raise a point based on the proviso to sub-section
(2) of Section 81 but as it was nowhere raised we refused to grant them
permission to raise and argue it for the first time in appeal. In 31 Halsbury,
2nd Edition at page 559 it is stated that, "a statutory right which is
granted as a privilege may be waived either altogether or in a particular
case."
If the
plaintiffs had waived their right to question the legality of the notice, it is
urged that they are precluded from maintaining the suit not only on their
behalf but also on behalf of other members. Strong reliance was placed on the
decision in Burt v. British Nation Life Assurance Association, where it
was held that a plaintiff who has a right to complain of an act done to a
numerous society of which he is a member, is entitled to sue on behalf of
himself and all others similarly interested, though no other may wish to sue,
so although there are a hundred who wish and are entitled to sue, still, if
they sue by a plaintiff who is personally precluded from suing, the suit cannot
proceed, although other persons on whose behalf the suit was instituted might
maintain the action as plaintiffs. The question therefore resolves itself into
this, namely, whether in view of the imperative provision regarding the notice
in Section 81 (2) it is open to the plaintiffs to waive their right to object
to an illegality, the right being certainly not their personal right but a
right belonging to them in their corporate character. The proviso to Section
117(2) of the English Act was added for the first time in 1929 in view of the
decision in Oxford Motor Co., in re, which
decided that it was competent for the shareholders of the company acting
together to waive the formalities required by Section 69 of the Companies
(Consolidation) Act, 1908, as to notice of intention to propose a resolution as
an extraordinary resolution. In that case all the shareholders met and passed a
resolution without objection and it was held that the want of notice could be
waived. The Indian Companies (Amending) Act of 1936 introduced a similar
proviso in Section 81 (2). Under this proviso, it would be seen that the
requirement as to 21 days' notice may be dispensed with by an agreement of all
the members entitled to attend and vote and not merely of all the members
entitled to vote and present in person or proxy at the meeting. It requires
therefore an agreement of all the members of the Club in order to dispense with
the requirement of 21 days' notice. The proviso in other words indicates the
intention on the part of the Legislature that the provision in sub-section (2)
is mandatory and that it can be dispensed with only by the agreement of all the
members, It is not enough that the members present at the meeting indicated
either expressly or impliedly that they consented to or acquiesced in
shortening the period of notice. An establishment of all the members to wave
the notice has not been established in this case. Even if the members present
agreed to waive the defect in the notice the meeting would not be valid meeting.
The plaintiffs therefore are not precluded form raising the contention that the
notice contravened the provisions of sub-section (2) of Section 81.
The next objection is that the notice was
insufficient, in that it did not give full particulars of the nature of the
business. Under the articles the notice should indicate the general nature of
the business intended to be transacted at the meeting. The draft proposed
amendments to the Articles of Association did not accompany the notice and were
if fact posted only on the ,21st October, and therefore must have been received
on the 22nd., On this question there is no evidence on record, but it was
agreed before us by the learned advocates appearing for the appellants and the
respondents that the printed draft was posted on the 21st October. It is
therefore urged that the notice did not indicate the general nature of the
business. We are not prepared however to agree with this contention. It was on
the initiative of the general body that a special committee was appointed to
consider the amendments, if any, to the Articles of Association. The notice
clearly stated that a print of the proposed amended Articles of Association
will follow shortly. From the 22nd to 7th of November the members had ample
time to consider the proposed amended Articles. We do not think that the notice
was insufficient and therefore bad on this ground. No useful purpose would be
served by referring to the decisions to which our attention was drawn, as the
decision of the question would invariably rest on the fact's of each case.
In Palmer's Company Precedents, Part I, at page 1002, it is pointed out that:
"Where a large number of alterations have to be
made, it is generally more convenient to adopt a new set of articles
altogether. Where this is course is adopted, a copy of the new regulations
should life for inspection at the office, and the notice convening the meetings
should state the fact; and in some cases it may be deemed expedient to Send
printed copies of the proposed new articles with the notices. According to the
decision of Kekewich, J., in Normandy v. Ind Coope & Co., the
notice should Call attention to any material alterations; and in Baillie v
Oriental Telephone and Electric Co., the Court
of Appeal held that a notice of a proposed resolution to alter articles
involving a large increase in the remuneration of the directors was invalid on
the ground that the proposed increase was not fully and frankly disclosed….
The notice
should state that a copy of the new articles is enclosed, or that a copy of the
proposed new articles may be seen at the company's office."
In this case in
the notice it was stated that the proposed articles would be sent shortly, and
they had been posted within six days from the date of posting of the notice. In
the light of the principles stated above we think that there is substantial
compliance with this requirement of law and that the notice was not bad on this
ground.
Nor is there
any force in the objection that the amendments moved relating to the proxies
were not within the scope and ambit of the original resolution. Notice of the
amendments was given in Exhibit P-13 by Mr. T. T. Krishnamachari and others,
and the Government later pointed out that it would be advisable in the
interests of racing that prbxies should be abolished to make the members take
active interest in racing. The amendments proposed by Mr. Eswara Aiyar cannot
be said to be outside the scope of the original resolution.
The next
objection relates to the election of 12 members of the Managing Committee. If
our view that the special resolution was not at all moved and the amendments were
not passed by a special resolution is correct, the meeting had no authority to
elect 12 members to the Managing Committee, as the old articles continued to be
in force. Apart from this, we think that the election was illegal, as the
notice was not sufficient in the circumstances of the case. Exhibit P-8 was
posted on the 16th October, and it required nominations for election to the
Managing Committee to be submitted to the Secretary 14 clear days before the
date of the meeting. That means, the nominations should be posted by a member
either on the 21st October or on the 22nd to reach the Secretary. The members
were not made aware of the functions and the duties of the Managing Committee,
and in fact they did not receive the proposed alterations earlier than the
22nd, taking the view most favourable to the defendants. It is impossible for
the members to make up their mind with no data before them and to submit
nominations. Practically they had no valid notice of the election and the
election was rushed through at the meeting of the 7th. The election is also
invalid on the further ground that Mr. Natesan presided at the meeting. He was
himself a candidate for the Managing Committee. There were 24 nominations and
19 actually contested the election. Objection was raised at the meeting that
the new rule came into existence only on that day and that nominations were
proposed 14 days before the passing of the rule. The chairman had to give a
ruling on the question, and he decided in favour of the validity of the nominations including his own. The chairman's
ruling may be correct or may be incorrect. Perhaps in view of the
decision in Pacific Coast Coal Mines Ltd. v. Arbuthnot, a notice
for election of the members of the Managing Committee may retrospectively be
validated bypassing a special resolution, but that is not the question. Here is
an instance where the chairman was in the position of a quasi-judicial officer,
and he had to be a judge in his own cause. There was clearly a conflict between
his duty and his interest. In the normal course he should have vacated the
chair and requested another member who was not a candidate to take it, and this
was not done. That a person cannot be a judge in his own cause is an elementary
rule, and if an authority is wanted it is to be found in Rag v. Owens. In Fanagah
v. Kernan,
it is stated:—
"There is no more sacred maxim of our law than
that no man shall be a judge in his own cause, and such force has that maxim
that interest constitutes a legal incapacity to a person being a judge in every
case ... It is impossible for a Court of law to allow him to exercise the
function of presiding at that election of which he could influence the result.
No man can preside at his own election and return
himself. See The Queen v. White. These
principles are well established, and it is unnecessary to deal with them
elaborately. In fact, the respondents' advocate does not dispute the
propositions, but contends that those principles apply to meetings other than
the meetings of a company. Under the articles provision is made for the
appointment of a chairman, and he continues to preside at the meeting whether
the meeting is one for transacting ordinary, business or passing a special
resolution or for the election of members to the Board, and the mere fact that
the chairman is also a candidate for a committee or a Board of Management will
not vitiate the proceedings. So ran the argument. No authority in support of
this distinction was placed before us, and we do not see any reason for making
a distinction between meeting of company and other meetings. The principles
above referred to are elementary and are of universal application. We therefore
hold that the election of the 12 members of the Managing Committee was illegal,
even apart from the question whether the special resolution was put to the
meeting and passed or not.
We therefore hold that the special resolution
"item 2 in the agenda" was not passed, that the meeting of the 7th
November was not legal and that the members of the Managing Committee were not
duly elected. From this it follows that the proceedings of the general meeting
of 18th November, 1947, are void, and, in any event, the exclusion of proxies
at the meeting was not warranted by the articles then in force. Differing
therefore form the learned trial Judge we hold that the plaintiffs are entitled
to the reliefs asked for.
The appeal is
therefore allowed and the decree dismissing the suit is set aside. There will be
decree in favour of the plaintiffs as prayed for. The plaintiffs are entitled
to the costs of this appeal and the costs of suit, payable by the first
defendant. Having regard to the trouble involved and time taken we fix under
rule 12 of Order 6 of the High Court Fees Rules, a fee of Rs. 2500 for the
plaintiffs advocates in the appeal and Rs. 2,500 for them in the suit.
[1951] 21 COMP. CAS. 351 (MAD.)
HIGH COURT OF
MADRAS
S. RM. S.T.
Narayanan Chettiar
v.
Kaleeswarar
Mills Ltd.
SATYANARAYANA RAO AND CHANDRA
REDDI, JJ.
APPEAL NO. 36 OF 1950
SEPTEMBER 7, 1950
V.C. Gopalratnam and L.V.
Krishnaswami Ayyar, for the Appellants.
K. Raja Ayyar, K. Krishnaswami
Ayyangar and K. Parasurama Ayyar, for the Respondent.
Satyanarayana Rao, J.—This appeal relates to a
dispute between two rival groups of shareholders of Kaleeswarar Mills Ltd.,
Coimbatore, each attempting to obtain control over the management of the
company. For this purpose, these two factions have engaged themselves in a
battle of wits for a long time with the result that the business of the company
has been seriously affected. For the purpose of this appeal, it is not
necessary to advert to the incessant quarrels between the two groups since
1931. It would be sufficient to start from 1948. The two factions are led by
Sathappa Chettiar on the one hand who represents the plaintiffs' group and
A.L.A.R. family consisting of three brothers of whom the eldest, Kalairaja
Chettiar, is the leader. The annual meeting of the company, which is the first
defendant in the case, for the year ending 1947 was held on 30th September,
1948. The agenda paper for that meeting contained four subjects:—
(1) to receive and adopt the directors' report and the
audited profit and loss account for the year ended 31st December, 1947, and the
audited balance sheet as at 31st December, 1947;
(2) to elect directors in the place of
the two directors who retired by rotation;
(3) to appoint a n auditor or auditors
and to fix his or their remuneration;
(4) to approve the co-option of Messrs
P.K. Palaniappa Gounder and A.L.A.R. Arunachalam Chettiar.
The company was incorporated
under the Indian Companies Act, 1882, in or about 1906. Its main object was to
manufacture cotton goods. Among the signatories to the memorandum of
association are included the legal luminaries of the Madras Bar at the time,
viz., Sri V. Bhashyam Aiyangar, P.R. Sundaram Aiyar, V. Krishnaswami Aiyar and
S. Srinivasa Ayyangar, besides business magnates. The articles of association
of the company excluded the application of Table A in the first schedule to the
Indian Companies Act; but the regulations framed were modelled more or less on
the regulations contained in Table A. The capital of the company, which then
consisted of nine lakhs of rupees, was divided into 9,000 shares of Rs. 100
each, Sathappa Chettiar's group owned in 1948 as many as 3,450 shares while the
A.L.A.R. group owned only 2,300 shares. Before the general body meeting of
September, 1948, however, the A.L.A.R. group increased their voting capacity by
splitting their shares and transferring single shares to various individuals.
About 450 single shares were registered with that end in view in the name of
450 individuals who were not members before.
The proceedings of the meeting of
the 30th September, 1948, (Ex. A. 2 in A.S. No. 29 of 1949) show that
Palaniappa Gounder, the present fifth defendant, who was the chairman of the
board of directors entitled to preside at every general meeting under Article
73, presided at that meeting and disposed of
the various objections raised at that meeting. Before the subjects on the
agenda were considered, objection was taken on behalf of the A.L.A.R. group
that proxies filed on behalf of the plaintiffs' group were not valid as they
were not given particularly for that meeting but they were general in language.
The objection was answered on behalf of the plaintiffs' group by Mr.
Lakshmanan, the present second plaintiff stating that the proxies were intended
only for that meeting which was made clear from the date given in the proxies.
On this the Chairman ruled that the proxies were valid. Mr. Lakshmanan also
Seems to have objected to the validity of about 49 revocations of proxies filed
by the opponents but the chairman overruled that objection. The most important
objection that had to be considered, however, raised by the second plaintiff
was that shareholders owning less than five shares were not entitled to vote in
view of Article 88 which provided that every shareholder not disqualified shall
have one vote in respect of every five shares. After due consideration, the
chairman overruled this objection. The subjects which were on the agenda were
taken up for consideration and were put to vote one after the other. On a show
of hands, the sense of the meeting was in favour of the resolutions and at each
time a poll was demanded and on a poll, 859 votes were cast in favour of the
resolutions and 703 votes against. At the end of each poll, the plaintiffs'
party demanded a further poll which is styled under the articles, as a
"poll of the whole company" ' but this was rejected. The result,
therefore, of the poll at this meeting was that the A.L.A.R. group was
successful and the plaintiffs-party lost. The two plaintiffs in the present
suit, who were the sitting directors, were unseated and in their place,
defendants 6 and 7 were elected and the co-option of the 4th and 5th defendants
was approved.
Two of the shareholders thereafter filed on the 7th
October, 1948, a representative suit on behalf of themselves and on behalf of
the shareholders of Kaleeswarar Mills Ltd. (O.S. No. 325 of 1948, Sub Court,
Coimbatore) to declare that the resolutions passed at the general body meeting
were illegal and void and that the newly elected and co-opted directors were not
entitled to act. There were various objections to the resolutions passed at
that meeting which were considered by the learned Subordinate Judge who tried
the suit. He dismissed the suit overruling the contentions of the plaintiffs in
that action. There was an appeal to this court against that decision in A.S.
No. 29 of 1949 and in that appeal, the plaintiffs confined their objections to
the resolutions to three grounds: firstly, that persons who owned less than
five shares were allowed to vote when the poll was taken which was contrary to
the provisions of the articles of association; secondly, the demand for a poll
of the whole company should have been allowed by the chairman; thirdly, that
Palaniappa Gounder the present fifth defendant, was not competent to act as
chairman of the meeting as the confirmation of his co-option as a director was
one of the subjects comprised in the agenda for that meeting. On the first of
the three questions there was a difference of opinion between Horwill, J. and
Raghava Rao, J., who heard the appeal in the first instance, the former holding
that every shareholder even if he owned less than five shares was entitled to
vote but if a shareholder owned five or more shares, he would be entitled to
one vote in respect of every five shares. In other words, a shareholder having
between 5 and 9 shares will have only one vote and those having between 10 and
14 shares two votes and so on; but a person holding less than five shares would
be entitled to one vote. This view, however, was not shared by Raghava Rao, J.
As there was a difference of opinion on this point, the case was laid before a
third Judge, Viswanath Sastri, J., who agreed with Horwill, J. On the other two
questions, both the learned Judges concurred. The second poll is no doubt a
unique feature of this company, but according to the learned Judges such a poll
should be taken if demanded in the manner provided by the articles of
association. A poll of the whole company was probably intended, as observed by
Horwill, J., "to afford an opportunity, where a considerable number remain
dissatisfied after the show of hands and polls are taken, for the whole
company, including those not present in person or by proxy at the meeting, to
express their opinion on the matter."
On the third question, also, both the learned Judges were
unanimous in holding that it was an elementary principle of justice that a
person should not preside while the meeting is considering a question which
personally affects him. The result was that the learned Judges directed that
before the decisions on the various resolutions in which a second poll was
demanded can be considered final, there should be another poll at the
registered office of the company at such time as the fifth defendant should
direct and that he should vacate the chair when a resolution relating to his
co-option is to be taken up for consideration. The decree of the High Court
(Ex. A-4) directed, after setting aside the decree of the trial court
dismissing the suit:—
(1) that
before the decisions on the various resolutions in which the second poll was
demanded can be considered final, a fresh poll shall be held at the registered
office of the company at such time as the fourth defendant (the present fifth
defendant) shall direct;
(2) that the fourth defendant (the present fifth defendant)
should not preside when the question of his co-option is in question;
(3) that at the poll to be held in pursuance of clause (1)
supra, each member will be entitled to vote, the number of votes being
calculated according to the provisions of Article 88 of the articles of
association.
The plaintiffs' party were
anxious to know the addresses of some of the shareholders comprised in the
newly added 450 members with a view to canvass their support for the second
poll. Their complaint was that particulars regarding the shareholders so added
were not given in the register as required by Sections 31 and 32 and Form E of
the third schedule to the Indian Companies Act. There was some correspondence
between Sathappa Chettiar and Kaleeswarar Mills Ltd. on this point but there
was no sign of getting the required information. On the 29th August, 1949,
three of the directors of the plaintiffs' party sent notices calling for a
meeting of the directors to be held at the registered office of the company on
the 6th September, 1949, at 10 a.m. to consider the matters on which they
required information and also to waive under Article 94 of the articles, the
rule relating to deposit of proxies for the purpose of poll. On the same day the
fifth defendant published a notice, Ex. A-8, to the shareholders of the company
intimating that the second poll of the annual general body meeting held on the
30th September, 1948, would be taken on Monday, the 5th September, 1949,
commencing from 3 p.m. at the registered office of the said company. The
plaintiffs' party sent a circular to the shareholders newly added, Ex. A-12,
and obtained revocations of the proxies. On the 4th September, 1949, Ex. A-11
was addressed to the fifth defendant, the chairman of the board of directors,
by four people of the plaintiffs' group in which they impeached the bona fides
of the chairman and intimated that they lost their confidence in him to act
impartially as chairman at the meeting for conducting the second poll. They
also anticipated that the chairman had made up his mind to summarily reject all
revocations obtained by the plaintiffs' group. Some of these revocations have
been marked as Ex. B-3 series. It is agreed before us that the total
revocations covered proxies in respect of 230 votes which were obtained by the
plaintiffs and which would have the effect of cancelling the proxies already
obtained and deposited by the defendants' group before the meeting of the 30th
September, 1948. On the 5th September, 1949, at 3 p.m. the shareholders
assembled at the registered office of the company and the revocations forms
were handed over to the chairman. The chairman, the fifth defendant, than
decided that he did not intend to preside at the meeting for two reasons; firstly, because the High Court had
directed that he should not preside at the second poll when the subject of his
co-option would be under consideration and secondly because he had received a
communication from some shareholders, apparently referring to Ex. A-11, in
which advice was given to him as to how he should give his rulings. He
requested the members to choose a chairman to take the poll. The names of two
directors were suggested, Messrs. Alagappa Chettiar, the third defendant and K.
Srinivasa Ayyar. The former belongs to the A.L.A.R. group and the latter to the
plaintiffs' group. The plaintiffs did not then object that the chairman had no
right to decline to preside at the poll. On the contrary, they accepted the
position that the chairman was entitled to decline to preside and to put up a
candidate of their own for the chairmanship. The plaintiffs' candidate
Srinivasa Ayyar was defeated by a large majority and Alagappa Chettiar was
elected chairman by the shareholders. Then the proceedings continued and Arunachala
Ayyar and Narayanan Ghettiar were appointed scrutineers. The revocations
received that day were rejected as unacceptable. The first plaintiff objected
that the revocations filed before 30th September, 1948, numbering 49 should not
be accepted as they were not stamped; but his objection was overruled. At about
10 p.m. one of the scrutineers who belonged to the defendants' group filed a
memo before the chairman of the meeting raising three objections. The second of
it was that the proxies filed by Narayanan Chettiar, Lakshmanan Chettiar and
Ramanathen Chettiar (plaintiffs' group) for the meeting of the 30th September,
1948, were not properly stamped as they were not proxies but were powers of
attorney and should have been stamped as such. The other scrutineer was however
of the view that the objections of Arunachala Aiyar were untenable. The
chairman adjourned this question for decision being given before 10 a.m. the
next day. The poll was than taken on all the resolutions which resulted in
securing 793 votes in favour of the resolutions and 767 against. On the next
day, 6th September, 1948 the chairman gave his ruling that the proxies were
invalid and they should be excluded. Consequently, 661 votes cast against the
resolutions were excluded as a result of which the number of votes against the
resolutions were reduced from 767 to 106. There were therefore 793 votes in
favour of the resolutions and 106 against. The plaintiffs, therefore, lost in
this poll and the election and co-option of directors was upheld and the two
plaintiffs were unseated.
The unseated directors instituted the suit which has given
rise to this appeal objecting to the poll taken on three grounds: firstly
Palaniappa Gounder, the fifth defendant, had no right to decline to preside at
the poll and that the share holders had no right to elect the third defendant
as chairman; secondly, that the revocations should not have been rejected and
thirdly, that the proxies were valid and the votes recorded under those proxies
should not have been excluded. The first defendant to the suit is the company,
the fourth and fifth defendants are the co-opted directors, the sixth and
seventh defendants the newly elected directors, the third defendant is the
chairman who presided at the poll and the second defendant is Kalairaja
Chettiar, the leader of the defendants' group. In the lower court, the parties
did not lead any oral evidence and contented themselves by filing documents.
The trial court rejected the contentions of the plaintiffs and dismissed the suit.
Hence this appeal.
The same questions have again been argued elaborately
before us. The first question for consideration is whether the fifth defendant
was bound to preside at the poll. On this point we have no hesitation in
agreeing with the conclusion of the learned Subordinate Judge that the fifth
defendant cannot be compelled to continue to act as chairman notwithstanding
the fact that his bona fides were questioned earlier by the plaintiffs and this
court directed, at any rate, that so far as one of the subjects was concerned,
he should not preside at the poll. The argument before us on behalf of the
plaintiffs by the learned advocate was that the decision of the High Court
precluded the chairman from declining to preside at the poll. No doubt, the
judgment of the High Court and the decree proceeded on the assumption that the
chairman of the board of directors would continue to preside even at the poll
as the poll was nothing but a continuation of the meeting of the 30th
September, 1948. The decree directed that he should fix the time for the second
poll. This was done by him and there is no other indication in the judgment
preventing him from having the right recognised by Article 78. That article
provides that the chairman of the board of directors should preside only if he
is willing. There is nothing in law to compel a man to do that which he is not
willing to do. Express power is recognised in the article itself to give up the
right if he so chooses. The chairman of the meeting is not entitled to stop the
meeting at his own will and pleasure. If a meeting is called for a particular
purpose of the company, undoubtedly, a person should preside at that meeting
and invariably the constitution of the company provides for the same. It is not
open to the chairman to stop the meeting and dissolve it before the business of
the meeting is finished. It is the privilege and the right of the shareholders
assembled at the meeting to decide whether they should continue the business of
the meeting on that day or adjourn it for a subsequent date. If the chairman
unjustly and without the consent of the shareholders stops the meeting and
declares it dissolved, it is perfectly within the powers of the meeting to
elect a chairman and conduct the business remaining unfinished; but there is no
authority in support of the proposition that a chairman is not entitled to give
up his right to preside at a meeting. There is no direct authority on the
question but Article 78 itself recognises that the chairman of the board of directors
can preside over the meeting only if he is willing. That it is not open to a
chairman of the meeting to stop the meeting or adjourn it at his sweet will and
pleasure has been decided by Chitty, J., in National Dwelling Society v. Sykes.
See also 8 Halsbury, page 61, para. 108 and 5 Halsbury, page 364 para. 592,
Hailsham Edition. Chatesby v. Burnett, is an instance in which also the
chairman of the meeting declared that the business was closed and left the
chair and the hall whereupon the shareholders elected another to the chair and
carried on the business of the meeting. The second poll also is undoubtedly a
part of the meeting and the contention of the appellants that it was not open
to the shareholders to elect another chairman, in our opinion, proceeds on a
wrong hypothesis. In support of the contention, a passage in the judgment of
Curgenven, J., in Srinvasan v. Watrap Subramania Aiyar was relied on by the
appellants where the learned Judge observed: "The original meeting in law
continues until the chairman has carried out the directions given to him by the
shareholders to take a poll. It is a national meeting, not dependent for its
existence and continuity upon the shareholders being actually in session and
business being transacted. The actual process of holding the poll is not a
'meeting' at all. It differs in several of its features from any meeting of
shareholders."
These observations of the learned Judge have to be taken in
relation to the facts of that case. In that case, the chairman of the meeting
directed, when a poll was demanded on a resolution, that it should be taken on
a subsequent day between 4 and 6 p. m. and appointed the company manager, one
Mr. Church, as returning officer for the purpose of taking it. The poll,
however, was not taken on the 20th as for some reason Mr. Church was unable to
attend to the poll. The question that had to be' considered was whether the
process of holding the poll was a detached portion of the general meeting or
was, at any rate, a meeting within the meaning of the articles of association.
This point became material as it was contended that when the Commissioner, Mr.
Church, was absent to take the poll, it was open to the shareholders assembled
to have elected a new chairman for the meeting and as they did not do so, the
meeting was at an end. In answer to these objections, it was pointed out that
the original meeting continued in law until the chairman had carried out the
direction given to him by the shareholders to take a poll. The actual process
of holding the poll was not a meeting at all though the result of the poll
formed part of the meeting at which the poll was demanded. The meeting
therefore did not come to an end until the result of the poll was ascertained
in the manner provided by the articles. The original meeting continued
therefore for the purpose of taking the poll until the poll was closed. For
this position, the decisions in Harben v. Phillips, The Queen v. Wimbledon Local Board, Shaw v.
Tati Concessions Ltd. and Spiller v. Mayo Development Co., Ltd. were relied on.
The decision in Srinivasan v. Watrap
Subramania Aiyar in our opinion, far from supporting the contention of the
appellants, is against them. The meeting of the shareholders on the 5th
September, 1949, was a continuation of the meeting and it was open to the
shareholders to elect a chairman when the fifth defendant declined to preside
at the meeting. The chairman so elected was not like the Commissioner, Mr.
Church, in the case in Srinivasan v. Watrap Subramania Aiyar. His function was
not merely to supervise the recording of the votes. He was entitled to exercise
all the functions of a chairman at the meeting. For these reasons we think that
the objections of the appellants on this point are not well founded and must be
rejected.
The next point that has to be considered is whether the
chairman was justified in rejecting the revocations. Until recently, both in
England and in India, a member had no right to vote by proxy unless the
articles provided for such a right as common law did not recognise voting by
proxy. The articles, however, generally conferred such a right subject to such
conditions and limitations as are prescribed thereunder. This right has now
been recognised by statute both in England from 1947, now enacted as Section
136 of the Act of 1948, and by Section 79 of the Indian Companies Act, as
amended in 1936. As the articles generally recognised a right to vote by proxy,
it is a contractual right as the articles of association undoubtedly
constituted a contract between the company on the one side and the members on
the other. Independently of the contract, therefore, until the statute altered
it there was no right of voting by proxy. The reason why the right to vote by
proxy was not recognised seems to be that "when persons agreed," as
pointed out by Bowen, L.J., in Harben v. Phillips, "to act together in the
conduct of a business, the way in which that business is to be carried on must
depend on each case on the contract, express or implied, which exists between
them as to the way of carrying it on."
The decision on every question relating to the business of
an incorporated company should essentially be that of the shareholders, having
regard to their interest in the company. Unless, therefore, there was a
contract between the company and the shareholders, they could not delegate this
power of expressing their opinion at a meeting of the company to another. These
propositions are so well established as not to require citation of a number of
authorities in support of them. It is summarised in Palmer's Company Law, 19th
Edition, at page 153. A proxy is defined by Lord Hanworth, M.R., in Cousins v.
International Brick Co. as "a person representative of the shareholder who
may be described as his agent to carry out a course which the shareholder
himself has decided upon" and the Lord Justice in the same case defined a
proxy as an agent of the shareholder who, as between himself and the principal,
was not entitled to act contrary to his instructions in the matter. It cannot
therefore be seriously disputed that the relationship brought about between the
shareholder and his proxy is that of a principal and agent. The argument of the
respondents is that unless the power revocation is expressly conferred by the
articles under which a right of voting by proxy is recognised, the power of
revocation does not exist and that the contract creating the agency is
exhaustive of the rights and duties of the proxy. This contention proceeds upon
a wrong view of the incidents of a contract of agency. When once the
relationship of principal and agent is created by contract, the incidents of
that contract of agency are governed and have to be determined by applying the
law of contracts. In India such law is to be found in the Contract Act. The
argument on behalf of the respondents amounts to this that all the rights and
liabilities which flow from a contract by reason of the application of the
general law of contracts do not attach themselves to a contract unless they are
enumerated in the contract itself. In other words, if there is a contract of
sale of goods unless all the rights and liabilities of the seller and buyer
which are to be found in the Sale of Goods Act are specifically enumerated in
the contract itself, they have no application. When once there is a contract
all the legal incidents of such a contract are governed by the law of contracts
whether it is in the form of a statute as in India or is ascertainable from
judicial decisions as in England. It will be an intolerable state of affairs if
one is obliged to embody in every contract the provisions of the Contract Act
or the Sale of Goods Act, as the case may be, relevant to such a contract. When
once the relationship enters the region of contract, the law of contract alone
must determine its incidents. On the argument of the respondents, the
relationship of agent and principal brought about by the execution of the
proxies cannot be terminated even by death though they are forced to concede
that such a termination follows and that even when the principal is present in
person at the meeting, the right of the proxy to exercise his vote on behalf of
the principal must yield to the right of the principal to exercise the vote
personally. If so much is conceded, it is difficult to see why the principal
should be denied-his right to revoke a contract which brought about the
relationship of principal and agent. The articles might make the proxy
irrevocable or impose restrictions or circumscribe the limitations within which
the power of revocation should be exercised. But all these are matters within
the region of contract between the parties and in the absence of anything to
the contrary, there is no reason to exclude the right of revocation which is
recognised under Section 203 of the Contract Act. There are other limitations
imposed by the Contract Act on the exercise of the power of revocation, e.g.,
if the revocation is made after the authority had been partly exercised,
Section 204 of the Act preserves the validity of such acts and obligations and makes
the revocation effective only in respect of future acts. If the agency is
limited to a period of time and without sufficient cause it is revoked before
the expiry of the period, under Section 205 the agent is entitled to
compensation. The principal is bound to give reasonable notice of revocation as
otherwise he would be liable to pay damages to the agent which result from such
act of his. As regards third persons, under Section 208 the termination of
authority of the agent does not take effect before it becomes known to them so
that if third persons are sought to be affected by revocation of the authority
of the agent, the principal must give due notice of the same. Termination of
the authority by death of the principal is recognised under Section 209, On an
examination of the authorities cited at the Bar, it will be seen that the same
principles have been applied for the revocation of proxy by a shareholder.
The subject of revocation of proxy is dealt with by Palmer
in his book on Company Law, 19th Edn., page 154, and he summarises the law on
the subject in these terms:—
"The appointment of a proxy, unless made irrevocable
for valuable consideration, can be revoked. The revocation must, however,
conform to any provisions in the articles.
If the shareholder, after appointing a proxy, himself
attends the meeting, he can vote in person. The right of the shareholder to
vote in person is paramount to the right of the proxy. The presence of the
shareholder does not avoid the instrument of proxy; but if he votes before his
proxy has voted for him, he impliedly revokes the proxy.
The death of a shareholder who has appointed a proxy, in
the absence of the provisions in the articles, revokes the authority of the
proxy."
This summary by the learned author is based on the
decisions in Spiller
v. Mayo Development Co. Ltd., Cousins v. International Brick Co., Knight v. Bulkeley. The subject is also discussed and the
same principles more or less have been recognised in Halsbury's Laws of
England, Vol. 5, pages 364 and 365, where voting by proxy and revocation of
proxy are discussed; 8 Halsbury 61, paragraph 108, discusses the subject of
proxies; Buckley on Companies Acts, 12th Edn., pages 324 and 325; Shackleton on
Law Relating to Meetings, 1934 Edn., at page 62.
In Spiller v. Mayo Development Co., one of the articles
provided that "a vote given in accordance with the terms of an instrument
of proxy or power of attorney shall be valid notwithstanding the previous death
of the principal or revocation of the proxy, or power of attorney, or transfer
of the share in respect of which the vote is given, provided no intimation in
writing of the death, revocation or transfer shall have been received at the
office before the meeting." After a poll for the election of a director
the scrutineers discovered that a proxy was revoked by the principal before the
poll. The votes recorded on the strength of that proxy were excluded from the
poll. If such votes were allowed the plaintiff in the action would have been
successful in the election as a director and the respondent would have been
defeated. The question that had to be decided was whether the exclusion of the
votes from the poll by the chairman was justified. The article clearly provided
that the notice of revocation should be received at the office before the
meeting, i.e., before the commencement of the meeting. The revocation in that
case that had been recived was communicated to the office only before the poll
and not before the meeting. The communication therefore was ineffective to make
the revocation operative. It was therefore held by Russell, J., that the votes
were improperly rejected. In the course of the judgment, the learned Judge
stated the law in these terms:—
"The matter really turned upon article 88, which he
had been told was also in common form, but, if so, in his view it was a
somewhat unfortunate common form. Omitting for the moment the proviso, it
seemed quite clear, upon the construction of that article, that a vote given by
proxy was by contract between the shareholders, to be valid notwithstanding
that the shareholder had died before the vote was taken, and notwithstanding
that the shareholder had revoked the proxy before the vote was given; but that
contractual result, which might in certain instances be somewhat startling,
could be avoided if the proviso was complied with, It could be avoided
apparently if an intimation in writing of the death or revocation was received
at the office 'before the meeting'. Two points had been urged by Mr. Gordon
Brown on behalf of the plaintiff why these votes should not have been objected
to. The first point was there had been in fact no intimation of any revocation
at all. In his Lordship's opinion that could not be sustained. The second point
was in his view a more formidable one, It was said that no intimation of the
revocation was received before the meeting. In his Lordship's opinion, if
English language meant anything, the article required that in order to
invalidate the vote, intimation in writing of the revocation must be received
at the office before the meeting, and in his view that must mean before the
commencement of the meeting.
It was well settled that the taking of a poll was not a
meeting of the company in the strict sense, but was in law a mere continuation
of the meeting at which the poll was directed to be taken. For the particular
purpose in question therefore the meeting must be held to have begun on
December 15 and to have come to an end at the declaration of the poll, a week
later. The intimation of revocation, however, had been received between those
two dates. In his opinion it was impossible to say on the true construction of
the particular article that the proviso has been complied with, namely, that
intimation in writing of the revocation had been received before the meeting. .
In his Lordship's view it was received after the meeting had commenced; it had
been received during the meeting. Accordingly the proviso did not operate, and
the original part of the article must be held to operate, namely, that the vote
given by the proxy was valid notwithstanding the revocation of the proxy during
the meeting."
If the articles lay down the limitations within which a
power to vote by proxy can be exercised, it should be strictly observed. This
follows from the fact that the right to vote by proxy is founded on contract.
For this reason, it was held in Harben v. Phillips that were the articles
requird that the proxy papers should be attested in a particular manner and if
this condition is not satisfied, they should be rejected. McLaren v. Thomson
also illustrates the same principle. The article in that case required that the
instrument appointing a proxy should be deposited at the registered office of
the company not less than two clear days before the day of the meeting. The
proxies were lodged between the dates of the original meeting and its
adjournment. It was held that the adjourned meeting when held was really a
continuation of the meeting at which the adjournment took place and as the
proxies were not deposited before the date for holding the meeting as required
by the article they were invalid and were therefore rejected. Astbury, J., says
at page 46: "There is no inherent or equitable right in any shareholder to
vote by proxy; such right, if it exists, must be found in the contract binding
the shareholders generally, that is in the company's regulations or
constitution, and it then exists only in the form and subject to the
limitations therein appearing. There is no room for contending that an
appointment of a proxy, irregularly made, is within the spirit or equity of any
inchoate right so to vote existing in the shareholder; he has either complied
with the terms of the contract upon which alone the right is based or he has
not. Prima facie a provision that a proxy must be lodged before the day for
holding or before the time for holding a meeting means that it must be lodged
before the beginning and not before the end of the gathering.
These and similar observations in other decisions were
relied on behalf of the respondents as establishing the proposition that unless
the right of revocation is expressly conferred by the articles, there is no
right of revocation. The restrictions on the power to vote by proxy are
undoubtedly absolute but the power of revocation is an incident of the contract
of agency and wherever a power to vote by proxy is conferred, the power of
revocation unless excluded under the articles, exists as the relationship of
principal and agent is governed by the law of contracts. The right to vote by
proxy and the right of revocation are distinct powers. In Cousins v.
International Brick Co , there were two provisions in the articles of
association, one providing that the instrument appointing a proxy should be
deposited at the office not less than 48 hours before the time of holding the
meeting at which it should be used and the other regulation that a vote given
in accordance with the terms of the instrument of proxy will be valid
notwithstanding the previous revocation of the proxy provided no intimation in
writing of the revocation shall have been received at the office before the
meeting. Some shareholders purported by notice in writing to revoke the proxies
given by them previously, while others without giving notice to revoke the
proxies voted personally at the meeting. The revocation of the proxies was not
in accordance with the articles of association as the intimation in writing of
the revocation was not received at the office before the meeting. The case
therefore was directly governed by the decision in Spiller v. Mayo Development
Co. The further question was whether the shareholders were entitled to vote
personally without revoking the proxies given by them. The Court of Appeal
accepted the view of Russell, J., on the question whether the revocation was
effective. On the second question, it was held that the person by giving a
proxy was not thereby deprived of exercising the vote personally before the
proxy had exercised the vote. Lord Hanworth, M.R., pointed out in the course of
his judgment that it is open to provide by articles to exclude the right to
vote personally when a proxy was given; but if this is not done and there are
no clear words taking away the shareholder's personal right to vote after he
has put in force the proxy system the personal right remains and the
shareholder is entitled to attend and give his vote according to his choice.
The proxy is not entitled to prevent him from exercising the vote. Lawrence,
L.J.. and Romer, L.J., put it also on the ground that,
"every proxy is subject to an implied condition that
it should only be used if the shareholder is unable or finds it inconvenient to
attend the meeting. The proxy is merely the agent of the shareholder, and as
between himself and his principal is not entitled to act contrary to the
instructions of the latter."
"A proxy is always subject to an understanding that
the shareholder giving it does not elect to give his vote in person and when he
in fact gives a vote in person he is not revoking the proxy but taking a step
which obviates the necessity of the proxy being used at all." (Per Romer,
L.J., at page 103).
From these observations it follows that the exercise of a
personal vote by the shareholder after he had adopted the proxy system does not
revoke the proxy but only prevents the exercise of the vote by the proxy. The decisions in In re
Haven Gold Mining Co., and Colonial Gold Reef Ltd, v. Free State Rand Ltd.,
also illustrate the same proposition that the
various matters relating to the poll are matters of contract as provided by the
articles. It is unnecessary to deal with those decisions in detail and none of
the decisions, therefore, relied on behalf of the respondents, support the
proposition that the shareholder has no right to revoke a proxy once given
unless such a power is expressly conferred by the articles.
Articles 91 to 97 of the articles of association of the
first defendant company relate to proxies. None of these articles exclude the power
of revocation nor do they lay down any restrictions as to the manner in which
the power of revocation should be exercised as in Spiller v. Mayo Development Co.,
and Cousins v. International Brick Co. The
power of revocation, therefore, is unfettered and if it is communicated in due
time to the company, there is no reason for holding that it does not take effect. The
requirement as to notice to the company of the revocation is to be derived from
the provisions of the Contract Act, Section 208, which enacts that the
termination of the authority of an agent does not take effect so far as third
parties are concerned before it becomes known to them.
The next line of argument adopted
by Mr. Rajah Aiyar learned advocate for the respondents is based on the language
of Article 96 which states, "Any instrument appointing a permanent proxy
or attorney to vote may be registered with the Company once for all and shall
be in force until the same shall be revoked." It was suggested that this
article specifically confers a power of revocation in respect of a permanent
proxy or attorney and an express mention of specific power is made in the case
of a permanent proxy, the power of revocation in the case of specific power
must be deemed to have been excluded on the maxim expressio unius est exclusio
alterius (the express mention of the thing implies the exclusion of anoter)
which has been applied in the construction of written instruments. In the first
place the article does not expressly confer a power of revocation. On the
contrary it assumes that the power was existing and therefore lays down that
the instrument appointing a permanent proxy will hold good untill the same is
revoked. The maxium therefore, has no application at all. Further the subject
matter of Article 96 is a permanent proxy and not a specific proxy. If power of
revocation of a limited nature is recognised in respect of a specific proxy by
any article then it would be possible to contend that by reason of the express
mention of the limited power any other power is excluded. The argument proceeds
on a misconstruction of Article 96 and on a wrong appreciation of the scope of
the maxim.
It is next contended that a proxy
can be revoked only before its use and as in the present case, the proxies were
used to exercise the vote at the first poll of the same meeting, it is too late
to revoke the proxies. In other words, a proxy cannot be revoked between one
poll and another and these two polls at the same meeting should be treated as
one act and not as a series of acts. The power to revoke an authority given to
an agent, after the authority has been partially exercised, has been recognised
by Section 204 of the Contract Act. The revocation cannot have the effect of
invalidating acts and obligations already done in the exercise of that
authority as an agent. The first poll of the meeting at which the proxies were
exercised became final and the effect of revocation of the proxies cannot in
any manner affect the declaration of the result of that poll; but the second
poll which is styled as the whole company's poll is a different act in a series
of acts done at the meeting. There is no
reason nor is there any authority in support of the contention that at that
point of time a proxy could not be revoked or authority of the agent could not
be terminated. On the principle underlying Section 204 of the Contract Act, it
is difficult to accept the contention of the learned advocate for the
respondents.
Lastly, it is urged that there was no notice by the
principal to the agent and therefore the revocation was not valid. There is
undoubtedly notice to the third party, i.e., the company. But it is not
suggested on behalf of the appellants that there was any notice of revocation
to the proxy. The effect of the want of notice to the agent does not invalidate
the revocation or the termination of the authority but makes the principal
liable for any damage that results to the agent by reason of such want of
notice. There is no complaint here by the persons in whose favour the proxies
were given that they had suffered any damage nor is it relevant for the purpose
of this case. The contention, therefore, that the revocation is invalid on this
ground must be rejected.
From the foregoing discussion in follows that the rejection
of the revocations by the chairman was wrong.
The next and the more difficult question for decision is
whether the rejection of the proxies by the chairman was justified. The proxies
were rejected on the ground that they were insufficiently stamped. According to
the respondents, the proxies are in the nature of powers of attorney under
Article 48 of the Indian Stamp Act and should have been stamped as required by
that article and that they were not proxies within the meaning of Article 52 to
justify a stamp of two annas. The first defendant company was incorporated
under the Indian Companies Act, 1882, and the articles of association were
modelled on the articles contained in Table A of that Act. The Indian Act of
1882 was framed on the lines of the English Companies Act, 1862 (25 and 26
Vict. Ch. 89). In Ex. A-2, the articles of association of the defendant
company, the form of the proxy is provided by Article 97. This form word for
word is the same as the form in Article 51 in Table A of the Indian Act of 1882,
and Article 51 of Table A of the English Act of 1862, though there are a few
alterations particularly at the end where the words "or, generally as the
case may be, in the same manner as I myself could vote if personally present
provided he be then a member of the company and be entitled or admitted to
vote" are found. The addition of the expression "generally as the
case may be" at the end of the sentence (or at any meeting of the company
that may be held within the period of……….from the date hereof, or generally as
the case may be) is an innovation. The form also states that the stamp payable
is one anna which was the stamp duty payable at the time as it was only in 1923
by an Amending Act that a duty of two annas was made payable in Article 62 of
the Stamp Act.
The stamp duty fixed under the Articles was presumably on
the footing that it was a proxy within the meaning of Article 52 of the Stamp
Act and not a general power of attorney under Article 48. It must be remembered
in this connection that the question whether it was a proxy of the specific
meeting or it was a general power was specifically raised at the time of the
poll on the 30th September, 1948, (Ex. A-2 in A.S. No. 29 of 1949) by
Arunachala Ayyar and the objection was met by Mr. Lakshmanan on the ground that
the proxy objected to was intended only for the meeting of the 30th September,
1948, as was clear from the date given in the proxies. No doubt this objection
was not based on insufficiency of stamp but if it is held to be a specific
power, it follows that the proxy was properly stamped. The then chairman of the
meeting, the fifth defendant, overruled the objection and allowed the proxies
as valid. Under the above circumstances, the question that naturally arises is
whether the chairman of the meeting of the 5th September, 1949, was entitled to
reopen the question.
As pointed out by Earl of Selborne, L.C., in In re Indian
Zoedone Go. the duties of the chairman who presides at the meeting are:—
"has to received the poll and declare its result, has
prima facie authority to decide all emergent questions which necessarily
require decision at the time, his decision of those questions will naturally
govern, and properly govern, the entry of the minute in the books; and, though
in no sense conclusive, it throws the burden of proof upon the other side, who
may say, contrary to the entry in the minute book, following the decision of
the chairman, that the result of the poll was different from that there
recorded."
If the chairman in the exercise of his powers comes to a
decision whether the votes which are in question shall be disallowed or not and
if that decision is not vitiated by fraud or misconduct on the part of the
chairman that decision is binding: see the observations of Pollock, M.R., in Wall v. Exchange
Investment Corporation Ltd. There is no
decided case, however, how far and to what extent a ruling or a decision given
by a chairman on a question raised at one stage of the meeting would bind
himself or his successor at a later stage of the same meeting. Article 82 of
Ex. A-2 no doubt provides in the case of resolutions that a declaration given
by a chairman at meeting that a resolution has been carried thereat is
conclusive. But there is no provision in the articles giving finality to the
rulings of the chairman at a meeting. There is no reason, however, to hold that
the ruling of a chairman given at one stage of a meeting is not final and
binding on the chairman or his successor at a later stage. If such a finality
is not recognised, the proceedings of the meeting cannot be conducted in an
orderly manner and will very often end in confusion and disorder. The chairman
is expected to act impartially uninfluenced by party politics. He has to hold
the scales even between the majority and the minority parties and his decision
on all the questions must be unbiassed and impartial. It is not suggested that
the ruling of the fifth defendant on the 30th September, 1948, was vitiated by
fraud or misconduct and there is no reason to hold it as not being final. What
would have happened if the objection on the ground of insufficiency of stamp
was raised in a court of law and the court decided at one stage of the suit
that the. disputed instrument was properly stamped? Under Section 36 of the
Stamp Act if the instrument is admitted in evidence overruling the objection
concerning stamp duty, such admission cannot be called in question at any stage
of the same suit or proceeding on the ground that the instrument has not been
duly stamped. No doubt, a chairman is not a person authorised by law or consent
of parties to receive evidence within the meaning of Section 35 of the Stamp
Act. But there is no reason for not applying the same principle of finality to
the ruling of the chairman on the nature of the instrument in dispute.
There is another aspect from which the matter may be
considered. The articles of association prescribe the form of the proxy by
Article 97 and on the footing that it is a proxy within the meaning of Article
52 stated that the stamp duty payable was one anna under the law as it then
stood and these articles we are told, were drafted by eminent lawyers of the
Madras bar. If a shareholder complies with the requirements of that article and
pays stamp duty of two annas under the law as altered on the footing that it is
a proxy and not a general power of attorney, the chairman has no option but to
accept the proxy even if he comes to a conclusion that the stamp duty was not
proper. If the proxies conform to the articles in all respects they cannot be
rejected by the chairman (see Shackleton, Law of Meetings, page 98). The
articles constitute a contract binding on the company and the members in all
matters. The chairman, therefore, was not entitled to go behind the articles
and to reject the proxies on the ground that they were not duly stamped.
Insufficiency of stamp does not affect the validity of the instrument but makes
it inadmissible, (See Joyma Bewa v. Easin Sarkar) except in the case of
instruments requiring one anna stamp. The policy underlying the provisions of
the Stamp Act is as far as possible to give an opportunity to the person
concerned to make good the stamp except in the case of instruments required to
be stamped with one anna. Under Section 35 in the case of instruments
insufficiently stamped, the instrument may be admitted in evidence on payment
of penalty and the deficit stamp duty. If an instrument is impounded under
Section 33 of the Act, the Collector gives an opportunity to the person
concerned to make good the deficit stamp duty and also pay penalty—Section 41.
The final authority under the Act to decide the questions relating to stamp
duty is the. Collector, (See Section 31), who however has the right in case of
doubt to refer the matter for the opinion of the chief controlling revenue authority
and the chief controlling revenue authority in his turn has the right under
Section 57 to refer the matter to the High Court for opinion. All these
provisions clearly indicate that the instrument could always be validated by
paying the deficit stamp duty at a later stage together with penalty and the
sole authority vested with the power of finally deciding the question of stamp
duty is the Collector acting under Section 31 of the Act. If a person votes or
attempts to vote under any proxy not duly stamped he is liable for punishment
with a fine which may extend to Rs. 500 under Section 62(1)(c) of the Act. But
as indicated in the proviso to Section 43, the intention must be one of evading
payment of the proper duty. In the present case, it is difficult if not
impossible, to hold that there was an intention on the part of persons holding
the proxies to evade the stamp duty as they had acted bona fide and followed
the articles of association and paid two annas stamp on each proxy. The fifth
defendant gave his ruling at the meeting of the 30th September, 1948, that it
was a specific power. On the 6th September, 1949, when the chairman, the third
defendant, gave his ruling that the proxies should be rejected as in, valid,
the plaintiff's party filed a memo, Ex. A-13 dated 6th September, 1949, in
which it was pointed out that the form used by them was the exact one
prescribed by Article 97 and the stamp duty paid was two annas instead of one
anna under the altered law. They also offered that if the objection is to be
sustained, it would only involve payment of extra stamp duty with penalty which
may be fixed by the Collector and that they were prepared to pay it if and when
it is decided that it is payable in the present case. Even at that stage, if
the chairman acted fairly and in a judicial manner, it was open to him to have
referred the matter to the Collector for decision under Section 31 of the Stamp
Act particularly as the plaintiffs' party offered to pay the stamp duty and
penalty if so decided by the Collector. The chairman could have postponed the
declaration of the result of the poll until the decision of the Collector was
obtained if he really was acting in an impartial manner. The objection itself
was taken at a very late stage at about 10 p.m. in the night when the votes
were being scrutinised by the scrutineers and there was hardly any time for the
plaintiffs' party to ascertain the opinion of the Collector and to make good
the deficit stamp duty if really such stamp duty was required. The chairman, in
our opinion, acted very unfairly to the minority and was wrong in rejecting the
proxies without giving an opportunity to the plaintiffs to make good the
deficient stamp duty after ascertaining the opinion of the Collector in the
matter.
The argument most strenuously pressed before us on behalf
of the respondents is that a person in the position of a chairman was not bound
to accept a document which was insufficiently stamped. In support of this
proposition, reliance was strongly placed on the decision ,of the Court of
Appeal in England in Maynard v. The Consolidated Kent Collieries Corporation
Ltd., which related to a transfer of shares in a company. The instrument of
transfer in that case was stamped in accordance with the consideration stated
in the face of the document but it was discovered that the consideration
appearing on the face of the document was far less than what it really was. The
directors thereupon refused to register the transfer. An action was brought to
recover damages for wrongful refusal of the registration of the transfer. It
was decided by the Court of Appeal that it was the bounden duty of the
plaintiff in the. action who claimed the right to register the transfer to
tender a transfer which was right in all respects and which would be available
to the directors of the company in a court of law if it became necessary to
enforce the rights under the document against the transferee or if they were
called upon to defend themselves against a hostile attack levelled against the
transfer on the faith of which they acted. Similarly, if a vendor offers to the
purchaser a sale deed not duly stamped, it is argued that he was not bound to
accept it. This position regarding the right of a person whould be entitled to
claim rights under an instrument cannot be questioned as he is entitled to get
from the other party a deed valid in all respects and enforceable in a court of
law. But does that apply to a proxy under which a person is entitled to vote?
The company, and much less the chairman of the meeting, claims no rights of
property under the instrument. All that he is entitled to do under the
instrument is to exercise the vote. No question of establishing rights in a
court of law under the document or defending the rights on the basis of the document
ever arises under the proxy. So long as a shareholder complies with the
formalities laid down by the articles regarding stamp duty on the basis enacted
in the articles, it is the bounden duty of the chairman to accept the proxy and
he is not entitled to reject it. We are not now concerned with a situation
similar to the one that came up for consideration in In re Tata Iron Steel Co.
Ltd., where the proxies were unstamped. The contention, therefore, that the
chairman was entitled to reject the proxies in the circumstances, on the ground
that they were not duly stamped, cannnot be accepted.
We may dispose of a contention urged on behalf of the
appellants based upon the decision of the House of Lords in the well known case
of Kenneth Matheson
v. Alexander Ross. The argument was based upon
the assumption that the proxy contains two powers one a specific power to vote
at the meeting of the 30th September, 1948, and the other a general power to
vote at any other meeting. It is argued that the two can be separated and that
the chairman should have allowed the proxies as valid to the extent of voting
at the specific meeting of the 30th September, 1948, which was adjourned to 5th
September, 1949. There was a judicial conflict of opinion regarding the
applicability of the principle of that decision under the Indian Stamp Act
having regard to the language of Section 35 of the Act. Under Section 35, no
instrument chargeable with duty shall be admitted in evidence for any purpose
by any person having by law or consent of parties authority to receive
evidence, or shall be acted upon, registered or authenticated by any such
person or by any public officer unless such instrument is duly stamped.
Notwithstanding the clear language that the instrument shall not be admitted in
evidence for any purpose whatever, some decisions have taken the view that the
instrument could be used for what is styled as a collateral purpose. This
conflict, however, has now been set at rest by the Judicial Committee in Ram
Rattan v. Parma Nand. Sir John Beaumont observed at page 296 as follows:—
"As already noted, Section 35 of the Indian Stamp Act
enacts that no instrument chargeable with duty shall be admitted in evidence
for any purpose. Mr. Rewcastle as part of his argument, for the respondent adopted
the note on the words 'for any purpose' in Section 35 contained in the 4th
edition of Sir Dinshaw Mullah's book on the Indian Stamp Act, 1899. He pointed
out that the words 'for any purpose' first appeared in India in the Stamp Act
of 1879, and in England in the Stamp Act of 1891, and that under the earlier
Acts there were decisions in both countries that an unstamped document might be
admitted in evidence for a collateral purpose, that is, to prove some matter
other than the transaction recorded in the instrument, and he submitted that
these cases applied even under the later Acts. Their Lordships do not take this
view. A document admitted in proof of some collateral matter is admitted in
evidence for that purpose, and the statute enacts that is shall not be admitted
in evidence for any purpose. Their Lordships see no reason why the words 'for
any purpose' in the Indian Act of 1879 should not be given their natural
meaning and effect. Such words may well have been inserted by the Legislature
in order to get rid of the difficulties surrounding the question of what
amounted to a collateral purpose."
It must be remembered that the decision of the House of
Lords was pronounced before the English Stamp Act of 1891. It is, therefore,
impossible for the appellants to maintain that the document could be split up
in the manner contended for. Especially in a court of law it Would not have
been permissible to so dissect the instrument into two parts and use the
unobjectionable part in evidence. Under Section 5 of the Stamp Act an
instrument which comprises or relates to several distinct matters is chargeable
with the aggregate amount of the duties with which separate instruments, each
comprising or relating to one of such matters, would be chargeable under this Act.
If therefore the proxy contains the specific power as well as the general
power, it would be admissible only if the aggregate amount of the duties in
respect of two such separate instruments is paid, as under the charging
section, Section 3, the instrument should be charged with the duty indicated in
the schedule. Of course, the schedule must be taken along with the sections in
order to determine the proper stamp duty. Under Section 6 if an instrument
falls within the several descriptions of schedule I and the duties are
different, it should be chargeable only with the highest of such duties.
Whether the proxies are general powers of attorney within
the meaning of Article 48 of the Stamp Act or specific powers under Article 52
is a difficult question and does not seem to us as easy to decide as the
chairman, the third defendant, thought. One specimen form of proxy seems to
have been marked for identification; but as we did not find it in the records
sent to this court, we called for the proxy forms and we find that they are
similar in language as in Article 97 of Ex. A-2 For easy reference the language
in the form is quoted herein.
"Every proxy shall be in the following form, or shall
contain words to the following effect,
(stamp 1 anna)
"The Kaleeswarar Mills Limited,"
I of being a member of "The
Kaleeswarar Mills Ltd.", and entitled to vote, do hereby appoint of as my attorney or substitute to vote for me and on my
behalf at the (Ordinary or extraordinary, as the case may be) General Meeting
of the company to be held on the
day of and at any adjournment
thereof (or at any meeting of the company, that may be held within the period
of from the date hereof, or generally as the case may be) in the same manner as
I myself could vote if personally present provided he be then a member of the
company and be entitled or admitted to vote.
As witness my hand this day of "signed by the said in the presence of "
It consists of two parts: "do hereby appoint as my attorney or
substitute to vote for me and on my behalf at the (Ordinary or Extraordinary,
as the case may be) General Meeting of the company to be held on the 30th
September, 1948, and at any adjournment thereof." The second part is
"(or at any meeting of the company, that may be held within the period of
one year from the date hereof, or generally as the case may be)". It is
not disputed that so far as the first part is concerned, notwithstanding the
words, "Ordinary or Extraordinary" within brackets, it authorises the
person only to vote at the meeting of the 30th September, 1948, or at any
adjournment thereof. The words "as the case may be" clearly indicate
that the word "or" in the expression, "Ordinary or Extraordinary"
is disjunctive and if the instrument had stopped with this clause, it is not
disputed that the instrument was duly stamped. The trouble arises by the
existence of the second clause. It is argued that the word "or"
occurring at the beginning of the expression "or at any meeting of the
company'' is not disjunctive but is used as meaning " and ". Having
regard to the context, we are not inclined to accept the interpretation that
the word "or" in the context means " and ". It is a
co-ordinating article indicating an alternative.
The question then is even if "or" is disjunctive,
whether the expression "at any meeting of the company that may be held
within the period of one year from the date hereof, or generally as the case
may be" means only at any one meeting of the company or at all the
meetings of the company that may be held within a period of one year. There is
also the question as to the meaning to be given to the expression
"generally as the case may be," The construction suggested on behalf of
the respondents is that it means at any meeting of the company within a period
of one year or generally without any limitation as to time. The meaning of the
expression, to our mind, is clear and it cannot be said that the oontention
urged on behalf of the respondents is unreasonable.
Even then does the word "any" mean all the
meetings or any one meeting of the company? of the latter, the object of the
instrument is undoubtedly to give an option to the person concerned to vote either
at the meeting of the 30th or at any other one meeting of the company. If the
former, it means the person is entitled to vote either at the meeting of the
30th or its adjournment or at his option at all the meetings of the company to
be held within one year or without any limitation as to time. If the latter
construction is to be adopted, undoubtedly as it gives a power in the
alternative, in the first instance specifically and in the second instance, in
the alternative generally, it would fall within Section 5 of the Stamp Act and
require to be stamped in accordance with it or at any rate under Section 6 and
stamp duty will be one rupee in the latter case. If, one the other hand, it is
confined to any one meeting of the company, the stamp duty paid is proper. The
decisions under the English Act are of no assistance as the language is not
similar. Section 80 of the English Stamp Act, 1891, (54-55 Vic, c. 39) requires
that every letter or power of attorney for the purpose of appointing a proxy to
vote at a meeting, and every voting paper, hereby respectively charged with the
duty of one penny, is to specify the day upon which the meeting at which it is
intended to be used is to be held, and is to be available only at the meeting
so specified, and any adjournment thereof and the first schedule to that Act
referring to letter or power of attorney and commission, factory, mandate or
other instrument in the nature thereof for the sole purpose of appointing or
authorising a proxy to vote at any one meeting at which votes may be given by
proxy, whether the number of persons named in such instrument be one or more,
the duty payable is one penny. In other cases, it is ten shillings. The Act
both in the section and in the schedule requires that it should be for the sole
purpose of voting at any one meeting and the day upon which the meeting is to
be held is also to be specified. The language of Article 52 of the Indian Act
is ''proxy empowering any person to vote at any one election of the members of
a district or local board, or of a body of municipal commissioners, or at any
one meeting of (a) members of an incorporated company or other body corporate
whose stock or funds is or are divided into shares and transferable." (The
rest of it is omitted as being irrelevant). It need not be for the sole purpose
of voting at one meeting, but it must be sufficiently clear that the proxy is
intended to exercise the vote at any one meeting of the company. If, therefore,
on a fair reading of the instrument, it is possible to come to the conclusion
that it is intended to authorise the person to vote at any one meeting, though the power is
given in the alternative as "at the meeting of the 30th September or at
any other meeting," the stamp duty payable would be two annas. That there
is some indication that the parties intended that the sole object of the proxy
is to enable the person to vote at any one meeting may be inferred to some
extent from the fact that they fixed the stamp duty as one anna in the articles
of association and the proxy holders also sent a covering letter (dated 25th
September, 1948) along with the proxies that they were intended to be used at
the meeting of 30th September, 1948. The word "any" as pointed out in
Webster's Dictionary has also the meaning of one of three or more, and in the
Oxford Dictionary, its meaning is given as "an indeterminate derivative of
one, or rather of its weakened adjectival form, a, an, in which the idea of
unity is subordinated to that of in difference as to the particular one or ones
that may be selected" (Vol. I page 378); so that on a fair reading of the
instrument, we have come to the conclusion, though with hesitation, that the
instrument is a proxy within the meaning of Article 52 and the proper stamp
duty payable is two annas. No doubt, as pointed by learned counsel for the
respondents, in some context "any" may be read as "or" as in the case of The Isle of Wight Railway
Co. v. Tahourdin, relied on in Stroud's Judicial Dictionary, Vol. I, page 92.
We have to consider the context in which the word is used and interpret it and
no invariable rule can be laid down. We felt some difficulty in deciding
whether assuming that the proxy is a general power of attorney, the clauses in
Article 48 of the Stamp Act apply to the present case. The clauses which have
to be considered are. clauses (d), (e) and (g) of Article 48. As pointed out in
Donough's Indian Stamp Law, 9th Edn. at page 707, clause (g) has to be read
with clause (e). When so read, it means that if there are more than ten persons
authorised to act jointly or severally in more than one transaction or
generally, then stamp duty payable is according to the number of persons and it
is one rupee to each person authorised. Clause (d) applies when the authority
is given to not more than five persons and relates to more then one transaction
or generally. In Referred Case No. 75 of 1905 cited in the Stamp Manual, this
court decided that a document of the present description would fall under
clause (g). We do not see any reason to differ from that view as otherwise a
power of attorney in favour of one person in respect of more than one
transaction would escape stamp duty altogether.
Lastly, Mr. Gopalaratnam, learned counsel for the
appellants argued that in any event the direction of the lower court that the
plaintiffs should pay separate sets of costs to the first defendant, second
defendant, third defendant, fifth defendant and defendants 4 and 7 is not
justifiable. The learned Judge did not give any reasons in his judgment for
allowing separate sets of costs to each of the defendants. They had no separate
interest in the suit and the questions that were considered were common
questions. Merely because the defendants chose to engage separate advocates,
that will not justify the course adopted by the learned Subordinate Judge. We
think that this direction regarding costs is not justified.
Our conclusion in the result is that the rejection of the
revocations affecting 230 votes and of the proxies relating to 661 votes was
not justified. The defendants' party, according to the chairman, after these
exclusions obtained 793 votes in favour of the resolutions while the
plaintiffs' party obtained only 106. If the excluded proxies are added, the
votes in favour of the plaintiffs' party will be 767, i.e., 106 plus 661, while
the votes obtained in favour of the resolution by the defendants' party would
be 793 minus 230 leaving a balance of 563. The resolutions therefore must be
taken to have been defeated. It follows from this result that the plaintiffs are
entitled to the declarations asked for and they are also entitled to a
permanent injunction restraining the first defendant company from giving effect
to the said resolutions and defendants 4 to 7 from acting as directors of the
first defendant company. The appeal therefore must be allowed and the decree of
the learned Subordinate Judge dismissing the suit must be set aside and there
should be a decree in favour of the plaintiffs as prayed for with costs here
and in the Court below.
[1988] 63 COMP. CAS. 709 (DEL)
HIGH COURT OF DELHI
Swadeshi Polytex Limited, In re
M.K. CHAWLA, J.
I.A. NO. 2269 OF 1986 IN S. NO. 736 OF 1986
MAY 8, 1986
K.
Venugopal and Anil Sharma for the Plaintiff.
Soli
Sorabji, G.J,. Sanghi and C.M. Oberoi for the Defendant.
M.K.
Chawla, J.—The
registered office of Swadeshi Polytex Ltd., hereinafter to be referred as
"the defendant company", is situated at New Kavi Nagar, Ghaziabad
(U.P.). This company is also having its head office and carrying on business
from 6th Floor, Samrat Hotel, Chanakya Puri, New Delhi. On January 23, 1986,
the secretary of the company issued notices for the holding of 16th annual
general meeting on March 15, 1986, at its registered office. Shri Raghu Raj was
appointed as the chairman of the annual general meeting of the company. It
appears that the shareholders of the company were sharply divided and in order
to have the control of the company started collecting proxies from their
supporters.
Some
of the disgruntled elements from both sides also filed suits for an injunction
from holding the annual general meeting in different courts in India, and
obtained stay of giving effect to the resolutions which may be passed in the
said meeting or giving effect to them until the disposal of the injunction
applications. The matter was ultimately brought to the notice of the Supreme
Court in Civil Appeals Nos. 940-941 of 1986 in Special Leave Petitions (Civil)
No. 3634 and 3633 of 1986. On hearing the parties at length, their Lordships of
the Supreme Court were pleased to set aside the ad interim injunctions issued
by the courts and directed that the meeting or the adjourned meeting of the
company shall go on notwithstanding any order, direction or injunction to be
passed by any court in India and the resolutions may be given effect subject to
any order of any court having jurisdiction that may be passed after considering
the resolutions which may be passed in the light of the challenge to the same
on merits. This order was passed on March 14, 1986. As a result of the above
said order, the 16th annual general meeting of the company was held on March
15, 1986. The result of the poll was declared by Shri Raghu Raj, as the
chairman of the said annual general meeting. The result was announced by
handing over the same to the secretary of the
company at Ghaziabad on April 14, 1986. This result was put upon the notice
board at the registered office of the company at 10 a.m. on April 5, 1986, and
was also notified to the shareholders and was given wide publicity in the
newspapers all over India.
Shri Virendra Kumar Goel is
one of the registered shareholders of 50 equity shares of Rs. 10 each of the
company. It appears that he was not satisfied with the result of the poll and
immediately moved in the matter by filing the present suit seeking a
declaration that the instruments of proxy executed last by the members of the
company should prevail over those executed earlier regardless of the date
mentioned on the instruments of proxy, and an injunction restraining the
defendants from permitting any person declared elected as members of the board
of directors of the company to act as directors of the said company. The
plaintiff also desired that defendant No. 2 be directed to make an
enquiry/investigation into the execution and/or revocation of the various
instruments of proxy lodged with the company in accordance with article 91 of
the articles of association of the company. Along with this suit, the plaintiff
also filed an application I. A. No. 2269 of 1986 under Order 39, rules 1 and 2,
Civil Procedure Code, 1908, seeking ad interim relief during the pendency of
his suit. This very application is under consideration.
In order to appreciate the
scope of the plaintiff's suit and his application, a few salient features of
the controversy have to be kept in mind. As per the averments, the plaintiff in
his capacity as the shareholder of defendant No. 2 company is vitally and
substantially interested in its affairs. On March 12, 1986, he served the
company with a notice under section 176(7) of the Companies Act, 1956,
expressing his intention to inspect the proxies lodged with it in respect of
the annual general meeting. On the same day, the secretary of the company
informed the plaintiff that the proxies can be inspected from March 14, 1986, onwards
during the office hours. In response to the said offer, the plaintiff carried
out the inspection and pointed out the various irregularities in the instrument
of proxies in his letter dated March 14, 1986. On the very next day, the
plaintiff deposited another letter with the chairman alleging that from the
perusal of the instruments of proxies, it was apparent that the proxies in
favour of one Dr. Raja Ram Jaipuria were all dated March 13, 1986, and on the
said proxies dating has been done, not at the time of execution of the form by
the member, but by the proxy (holder) at the time of submission of proxy forms
with the company, with the object of making those forms the last proxy of the
member submitted to the company. By the same letter, the plaintiff requested
defendant No. 2 to make an investigation and to ascertain from the shareholders
as to which proxy was executed by him last, since the same shareholder had also
issued proxies in favour of Shri Mahendra Swarup, failing him Shri K. S. Mehta
and failing him Shri Nimesh Kampani. Till date, his objections have not been
investigated by the defendants.
It is the case of the
plaintiff that from a newspaper report appearing in the 1st April issue of the
Financial Express, the plaintiff has come to know that the defendants are
proposing to declare the results of the poll taken at the said annual general
meeting on April 5, 1986. If the results as aforesaid are declared by the
defendants without making the investigation, there is every likelihood that illegal,
invalid and/or duly revoked instruments of proxies will be taken into
consideration, and it would not only be contrary to the wishes of the
shareholders of the company but would also be in gross contravention of the
provisions of the said Act and/or the articles of association of the defendant
company. The said result will not represent the true and correct picture and
persons who are not entitled to be elected as members of the board of directors
of the defendant company will stand elected. Immediately on reading the
newspaper report, the plaintiff on April 2, 1986, deposited another letter of
the same date with the company pointing out that on the inspection of the
proxies on March 14, 1986, he had discovered that:
(i) Several proxies received from shareholders all over India for
appointing Shri Raja Ram Jaipuria, failing him Shri Sita Ram Singhania and
failing him Shri J. Chaudhary which had been deposited at the registered office
of the company, were all dated March 13, 1986.
(ii)Several shareholders who
had given their proxies to Dr. Raja Ram Jaipuria, failing him Shri Sita Ram
Singhania and failing him Shri J. Chaudhary and which were dated March 13,
1986, had also given proxies to Shri Mahendra Swarup failing him Shri K. S.
Mehta and failing him Shri Nimesh Kampani. These later proxies were accompanied
by revocation letters revoking all proxies, if any, given by them to any other
person.
It was also pointed out
that the proxies which were dated March 13, 1986, could not at all have been
physically delivered to Dr. Raja Ram Jaipuria/Shri Sita Ram Singhania/Shri J.
Chaudhary on the same date before 11.30 a.m. since the shareholders who signed
the said proxies reside all over India and/or in remote parts of the country.
Furthermore, the mere fact that a later date appears on a proxy form, i.e.,
March 13, 1986, cannot by itself mean that such proxy would prevail over a
proxy bearing an earlier date, for, the one bearing the earlier date may, in
fact, be the last proxy signed by the shareholder concerned. It is not the date
which a proxy bears that would determine which proxy would prevail over the
other but the actual time and date when such proxies are signed by the
shareholders concerned. In this letter, the plaintiff requested that there
exist valid, reasonable and bona fide grounds for the chairman and/or the
company to investigate into the validity of the said proxies. The defendants
have not cared to investigate into the validity of these proxies, nor any
orders on his letters/objections have been passed by the chairman, and thus
left with no other option, the plaintiff has filed the present suit and the
application.
Notice of the suit as well
as the application was issued to the defendants for April 7, 1986, and in the
meantime, the defendants were directed to deposit the proxies in the court by
that time. Immediately on the service of the summons of the suit and notice of
the application, the defendants filed the reply to the plaintiff's application,
raising therein a number of preliminary objections, inter alia, alleging that
the plainiff's suit/application is misconceived, incompetent and untenable in
view of the order dated March 14, 1986, of the Hon'ble Supreme Court of India;
that the alleged cause of action in its entirety, of plaintiff's own showing
arose, if at all, at Ghaziabad, outside the limit of the territorial
jurisdiction of this court and as such this court has no jurisdiction to
entertain and try the present suit, that the matters complained of in the
plaint relate to the internal management of the defendant company and this
court has no jurisdiction to interfere with the same ; that the articles of
association of the defendant company contain a complete code, inter alia, for
determination of the objections to the validity of acts; that even otherwise
the objections contained in the plaintiff's letter were duly taken into
consideration by the scrutinisers and the first defendant as chairman of the
annual general meeting and its result was duly communicated to the plaintiff.
On merits, the defendants
took up the stand that the plaintiff is a shareholder, holding 50 equity shares
of Rs. 10 each out of 39 lakh equity shares of Rs. 10 each. The plaintiff was
allowed the inspection of the proxies as per his wishes but as the inspection
of the register of proxies was not asked for, its inspection was not carried
out, even though the same was available. The objections of the plaintiff
contained in his letters dated March 15, 1986, and April 2, 1986, were duly
considered by the scrutinisers and by the first defendant chairman, and were
found to be wholly misconceived and untenable in law before the result of the
poll was finalised/declared on April 4, 1986, and put up on the notice board at
the registered office of the company at 10 a.m. on April 5, 1986.
The plaintiff has made
certain vague and general references to the instruments of proxies in his
letters in detail and tried to draw inferences which are totally misconceived. The plaintiff, in fact, has
no cause of action for the reliefs claimed in the suit/application and the same
are liable to be dismissed.
The
plaintiff in his rejoinder to the application has denied the
allegations/grounds taken in the reply by the defendant and has reiterated the
facts as stated in the plaint.
I
have heard learned counsel for the parties and with their help gone through the
record carefully.
Learned
counsel for the plaintiff has laid much stress on the following grounds. Their
answer will prima facie determine the fate of the plaintiff's application (I.A.
No. 2269 of 1986):
"1. Whether the proxies bearing the date March
13, 1986, were validly executed by the shareholders and could have been
physically delivered to Dr. Raja Ram Jaipuria/Sita Ram Singhania/J. Chaudhary
on the same day before 11.30 a.m. for being deposited at the registered office
of the company, if not to what effect ?
2. Whether the proxy form bearing the date
given by the share holders, will prevail over the proxy with a later date
mentioned by the nominee ?
3. Whether the chairman of the annual general
meeting considered and disposed of the objections of the plaintiff contained in
his letters dated March 15, 1986, and April 2, 1986, if not to what
effect?"
These
questions can easily be disposed of by referring to the pleadings and the
various documents on which the parties have placed reliance. However, at the
outset, the principles relevant for the grant of the temporary injunction have
to be kept in mind. In order to obtain the interim relief, the plaintiff must
show—(i) that he has a prima facie case; (ii) that he is likely to suffer
irreparable injury if the injunction is not granted ; and (iii) that the
balance of convenience lies in his favour.
The
term "prima facie" has not been defined in any statute and although
no attempt has been made to encase this term within the confines of the
judicially evolved definition or to evolve an inflexible formula for universal
application, the term has been judicially interpreted to mean a case which is
not bound to fail on account of any technical defect and needs investigation.
It means that the case at first sight or on the face of it is so probable that
it needs consideration, investigation and determination; a bona fide dispute
requiring determination without further examining the question or anticipating a
final decision. At this stage, the plaintiff is not required to make out a
complete legal right but has to satisfy the court that he has a prima facie
case to raise and a mere existence of a doubt
as to the plaintiff's right does not itself constitute sufficient ground for
refusing the injunction. Normally, the court does not pre-judge the case by
judicial scrutiny of facts pleaded. The proper stage for it is at the
conclusion of the trial when the totality of the circumstances comes before the
court. As far as the irreparable injury is concerned, the plaintiff is not
required to show that the injury is not physically capable of being remedied,
but the inadequacy of remedy by damages for the legal injury would be
sufficient to constitute an irreparable injury. As regards the balance of
convenience, the plaintiff has to show that the inconvenience resulting to him
in the event of withholding of relief of temporary injunction is likely to
exceed the inconvenience to the defendant which he would suffer by the grant of
injunction.
In this background, let us
scrutinise the rival contentions of the parties. There is no common law right
on the part of a member to vote by proxy, but, by statute, any member of a
company entitled to attend and vote at a meeting, including a meeting of any
class of members, is entitled to appoint another person (whether a member or
not) as his proxy to attend and vote instead of him, and a proxy appointed to
attend and vote instead of a member of a private company will also have the same
right as the member to speak at the meeting. Unless the articles provide to the
contrary, however, this provision does not apply to a company not having a
share capital, nor can a member of a private company appoint more than one
proxy to attend on the same occasion. Section 176 of the Companies Act is the
relevant provision relating to proxies. It lays down that any member of a
company entitled to attend and vote at a meeting of the company shall be
entitled to appoint another person (whether a member or not) as his proxy to
attend and vote instead of himself; but a proxy so appointed shall not have any
right to speak at the meeting.
The instrument appointing a
proxy shall—(a) be in writing;, and (b) be signed by the appointer or his
attorney duly authorised in writing or if the appointer is a body incorporate,
be under its seal or be signed by an officer or an attorney duly authorised by
it. The relationship between a shareholder and his proxy is that of principal
and agent. As a rule, a proxy is not revoked unless written notice of the
revocation by death, insanity, transfer of shares or act of revocation has been
received by the company before the meeting or adjourned meeting. A proxy signed
in blank as to the name of the appointee, or as to the date of the meeting and
delivered with authority to fill up the blank, is not open to objection if,
when deposited with the company, the blank has been duly filled up. It is not a
deed and there is, therefore, no objection to the blank being filled up by the
agent of the appointee, even though appointed by parole. The instrument in such
circumstances is not complete until it is filled up, and when filled up, the
only question is whether it is duly stamped.
It is a normal practice
amongst the shareholders of a particular company, who are interested in the
elections to the office of the said company, to solicit the support of their
relations, friends and admirers. Generally, the shareholders do attend the
annual general meetings/other meetings personally. In the case of other persons
who are residing at places far away from the registered office of the company
or are unable to attend on one ground or the other and are desirous of being
represented, they execute proxies in favour of their friends, whether
shareholders or not, so that they may have the satisfaction of having
participated in the meeting. The interested parties do collect such proxies
from such like persons, well in advance of the holding of the meetings. They
obtain the blank proxies and deposit the same after filling up the blanks,
before the holding of the meeting. There is nothing wrong in this practice nor
can the plaintiff have any grievance. It is not disputed that the plaintiff was
interested and in fact voted for Sh. Mahender Swarup and his nominees. This
group had also collected much more proxies for their candidates in a similar
fashion. They have utilised those very proxies in the same manner as the
defendant's group have exercised their right. The plaintiff now cannot come
round and raise any objection to the proxies collected by the defendants. If
the defendants have committed any irregularity in collecting the proxies, the
same argument will destroy the case of the plaintiff and his group. There is no
necessity for each shareholder to be personally present, at the place of the
meeting and sign the proxy forms in blank. To determine the validity of these
proxies, appropriate safeguards have already been taken. In view of these
circumstances, there is no force in the first contention of the plaintiff.
The next issue should not
detain the court any further. It is a settled proposition that if there are two
or more proxies given by the same shareholder in respect of the same shares,
the proxy bearing the latest date will supersede the earlier ones. If the
proxies bear no date or bear the same date, both the proxies would be
ineffective. It is not disputed that the proxies which have been entertained
were complete in all respects. The submission of learned counsel for the
plaintiff that the date of the signatures of the shareholder on the proxy be
considered as the date of the filing of the same in the registered office of
the company is not convincing. Once the blank proxy without date has reached
the hand of the appointee, it can safely be presumed that an authority was
given to him to fill up the blanks with his own name or the name of any other
person with date and to use the proxy, for the purpose of voting at the
meeting. The very object of sending of the proxies by interested persons to
their friends and acquaintances is to obtain the friendly votes. If a
shareholder signs the proxy in blank, it is his own fault, and he should be
careful enough not to do so. Once the proxy has been properly filled up on a
particular date by the person to whom it is entrusted, the later date-has to be
taken as the date of the signing of the proxy by the shareholder, even though
another appointee may also be in possession of a blank proxy of the same
shareholder, of a prior date. Learned counsel for the plaintiff has neither
drawn my attention to any such rule nor has cited any authority in support of
this submission which prima facie has no substance.
Furthermore, the grievance
in this behalf can only be raised by the person who had executed a blank proxy.
There is no complaint from any one of them that their proxies have wrongly been
utilised. How and under what circumstances the plaintiff can come forward and
champion the cause of other shareholders is not explained. Such an objection,
to my mind, cannot be entertained.
The last challenge is to
the non-exercise of the powers by the chairman under article 91 of the
memorandum and articles of association of the company. It is no doubt true that
the plaintiff had written the letters dated March 15, 1986, and April 2, 1986,
to the defendant company pointing out the various defects appearing in the
proxies and reminding the chairman that there exist valid, reasonable and bona
fide grounds for investigation into the validity of the said proxies. The stand
of the plaintiff is that these objections were not considered and if
considered, he was not afforded a reasonable opportunity of proving the same by
leading evidence. His further submission is that the chairman has not applied
his mind as per the requirement of article 91 of the memorandum and articles of
association of the defendant company.
Even this argument has no
substance. The letter of the chairman dated April 4, 1986, to the plaintiff, to
my mind, is a complete answer to this argument. By this letter, the plaintiff
was informed that his above-said letters were handed over to the scrutinisers
and after having personally discussed the matter with the scrutinisers and
looking into the matter, he was fully satisfied that all the points raised by
the plaintiff have been taken into account. Defendant No. 1 has filed his
affidavit in support of the reply to the plaintiff's application in which he
has further alleged that the letter dated March 15, 1986, was read over by the
answering defendant and was given to the scrutinisers at the time the poll was
being conducted. While examining the proxies, the scrutinisers considered the
said letter and gave their report to the chairman on April 4, 1986, when the
chairman considered the letters dated March 15, 1986, and April 2, 1986, and
finalised the result after fully satisfying himself as well. By virtue of the
provision of article 95, the decision of the chairman shall be deemed to be
valid and binding for all purposes. It is not a case of non-application of mind
by the chairman as alleged by the plaintiff. In a case reported as Wall v.
Exchange Investment Corporation Ltd. [1926] 1 Ch p. 143, a similar situation
arose and was disposed of by Pollock M.R. The relevant portion of his judgment
reads as under (at page 145) :
"In my opinion, this
appeal must be dismissed. It raises a short but interesting point as to the
powers of the chairman under one of the articles of association of the
defendant company. [His Lordship stated the facts and the provisions of article
58 and continued : ] It has been said on behalf of Mr. Wall in a succinct and
good argument that article 58 does not prevent the matter from being
reconsidered by the court, and that Mr. Okell was wrong in the decision at
which he arrived. It may perhaps be of service to note that the word 'deemed'
seems to be necessary, because, if the chairman's discretion or powers are to
be wide enough for him to determine the matter, and he does not disallow the
votes, they are to stand and to be valid for all purposes whatsoever"
In this case, the chairman
has come to the conclusion that the objections to the proxies have no substance
with the consequence that they are deemed to be valid. This decision of the
chairman cannot be set aside because the article makes his decision binding
upon the parties who were attending the meeting.
The result of the election
has since been declared. The new board of directors have taken charge of the
office. They are required to fulfil the obligations of the company which may arise
in its day to day working. Besides the elected representatives, there are four
nominees of the financial institutions who have to play an active part in
looking after the interest of the company and its shareholders. There is no
allegation that any of the representatives of the financial institutions has a
bias against the plaintiff or his group or that they are not likely to watch
the financial or other interest of the company. As at present advised, the
court will not go behind the wild allegations of the plaintiffs of frittering
away the property or jeopardising the interest of the shareholders of the
defendant company. This apprehension of the plaintiff and his group prima facie
has no substance. It is expected that the newly elected board members will do
their utmost to conduct the affairs of the company in a legal manner and would
safeguard the interest of all concerned.
The proxies which have been
utilised for the election are in the proper custody of a competent court at
Meerut. During the course of the disposal of the present suit, those very
proxies will be scrutinised by the court keeping in view the objections of the
plaintiff. It is, however, a question of evidence and at this stage no opinion
can be expressed. However, for the present, it can safely be said that the
plaintiff has not been able to make out a prima facie case for the grant of the
injunction restraining the newly elected board from exercising their rights and
obligations under the memorandum and articles of association of the defendant
company. The plaintiff will also not suffer an irreparable injury as all the
decisions of the board will be taken by adopting a regular procedure, for which
the company is required to maintain the minutes of the meeting. All decisions
are to be ratified before any action is taken. On the other hand, if an
injunction as prayed for is granted, the business/affairs of the company will
come to a stop, which will result in a colossal loss to the company as well as
the shareholders. The balance of convenience also lies in favour of the
defendants and in allowing them to perform their duties in managing the affairs
of the company. No other point has been urged nor requires going into.
As a result of the above
discussion, I see no force in the application. The same is hereby dismissed.
Any observation made in this order will have no bearing on the merits of the
case.
[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.
The
question still remains as to whether in the case of appointment as sole selling
agents of the private company for a further term, a special resolution was
necessary. The answer to this question depends upon the true construction to be
placed upon the Explanation to sub-section (1). This Explanation was introduced
by the Amendment Act of 1960. Under that Explanation, a special resolution
would be required for every appointment in the first instance to an office ot
place of profit. It is also required in the case of "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 ". On behalf of the
plaintiffs it was submitted that the only "subsequent appointment"
contemplated by the latter part of the Explanation was where the special
resolution according consent to the appointment in the first instance provided
for a -subsequent appointment on the same terms as to remuneration or for a
subsequent appointment on a higher remuneration, and if there was no provision
in the original appointment for a subsequent appointment or for a subsequent
appointment on a higher remuneration, then the subsequent appointment would
require a special resolution. In reply it was submitted that what the original
special resolution was required to cover was not a subsequent appointment on
the same remuneration or lower remuneration but a subsequent appointment on a
higher remuneration only and that if a subsequent appointment was made on the
same remuneration or on a lower remuneration, then even though the original
agreement or the special resolution in the first instance did not contemplate a
further appointment, none-the-less such appointment would be made and the
consent of the company accorded to it by an ordinary resolution.
Now,
bearing in mind the object sought to be attained by the enactment of section
314, the better construction appears to me to be the one advanced by the
plaintiffs. To accept the contention of the contesting defendants would be to
hold that where once an appointment to an office or place of profit is made
with the consent of the company by a special resolution for the initial maximum
period of five years, such appointment could be renewed indefinitely by repeated
subsequent appointments for the same maximum period by merely a bare majority
without such appointments being contemplated at the time of the original
appointment. Such a construction would
militate against the object underlying section 314. As mentioned before, the
object is to prevent directors from putting into their pocket, either directly
or indirectly, more remuneration, whether by way of salaries, fees, commission,
perquisites, etc., other than the remuneration to which they are entitled as such
directors. Where three-fourths of the members of the company have agreed to a
director so obtaining profit from the company, for a period of five years only,
it cannot be that they should be deemed to have given their consent to the
directors doing so for all times by repeated subsequent appointments consented
to by merely a bare majority of the members. The ordinary rule of construction
is that the one which harmonises best with the intention of the legislature and
the object sought to be attained by the enactment should be adopted, and
applying these principles of construction the view which I am inclined to take
today is that unless the appointment in the first instance, to which the
consent of the company has been accorded by a special resolution, provides for
a subsequent appointment, the subsequent appointment would also require the
consent of the company to be accorded by a special resolution irrespective of
the fact whether the remuneration to be received is the same or lower (sic
higher).
So far as the present case
is concerned, the appointment in the first instance under the agreement, dated
September 24, 1963, to which the previous consent of the company was obtained
by a special resolution passed at the general meeting held on September 23, 1963,
did not contain any provision for a renewal, reappointment or continuance of
the term of the sole selling agency and therefore an the construction I am
inclined to adopt the consent of the company required to be accorded to the
further appointment was by a special resolution. The resolution passed at the
extraordinary general meeting on April 28, 1969, was an ordinary resolution.
Even the number of votes required for passing the resolution as a special
resolution were not cast in favour of the resolution. After this meeting, not
taking into account the extraordinary general meeting held on April 29, 1969,
the annual general meeting of the company was held on August 28, 1969. Under
section 294(2), an appointment is to be approved by the company in the first
general meeting held after the date on which the appointment was made. If the
meeting of April 28, 1969, were held to be invalid as contended for by the
plaintiffs and not even taking into account the requisitioned meeting held on
April 29, 1969, the meeting at which such special resolution was required to be
passed would be the annual general meeting held on August 28, 1969, which not
having been done, the appointment ceased to be valid.
It was next submitted on
behalf of the plaintiffs that, even assuming that in the case of a subsequent
appointment a special resolution was required only if such appointment were on
a higher remuneration, not covered by the special resolution according consent
to the appointment in the first instance, in the present case the further
appointment was in fact on a higher remuneration. In support of this submission
reliance was placed upon the said letter dated February 18, 1969, from the
private company to the company stating that the clarification contained in its
letter dated April 4, 1968, would continue to remain in force. Under the letter
of April 4, 1968, the private company agreed to accept as from 1st April, 1968,
commission at the rate of 2 per cent, on the net selling price of the company's
products as prevailing on November 5, 1967. According to the plaintiffs, even
though the intention at the date when the letter of April 4, 1968, was written
or even on February 18, 1969, may have been that the private company should
receive commission at a lower rate than what it would otherwise have been
entitled to, the possibility of the private company receiving higher
remuneration cannot be ruled out, for there is always the possibility of the
selling prices in the future being lower than those prevailing on November 5,
1967. It is said that in fact such a situation has already arisen. It is
alleged by the plaintiffs in their affidavit in rejoinder to the company's
affidavit in reply in the notice of motion in Suit No. 522 of 1969 that in June
1969 the Government of India fixed prices of synthetic rubber at rates lower
than those prevailing on November 5, 1967. In support of these allegations a
copy of a letter dated June 4, 1969, addressed by the Government of India to
the company is annexed to the said affidavit. In that letter it is stated that
with effect from June 8, 1969, the plaintiffs should market their products at
the prices not exceeding those specified in the said letter. The prices so
specified are lower than those prevailing on November 5, 1967. The reason for
the revision as stated in the said letter is that the selling prices fixed on
April 2, 1968, were on the assumption that 25 per cent, of the company's
requirements of alcohol would be met from domestic soui.:es, while the balance
of 75 per cent, would have to be met from imports, but it was found that the
actual proportion of indigenous alcohol to imported alcohol used by the
plaintiffs worked out to 40 per cent, for indigenous alcohol and 60 per cent,
for imported alcohol and that for the next 12 months the proportion would be 70
per cent, for indigenous alcohol and 30 per cent, for imported alcohol. The
answer to this is to be found in paragraph 12 of the affidavit dated July 15,
1969, of J.B. Shukla, the secretary of the private company. In that affidavit
he has not admitted that the Government of India is proposing a reduction in
the selling prices. He has further stated that:
"Assuming
while denying that there is a possibility of the prices of synthetic rubber
being reduced by Govt. below those prevailing on 5th November, 1967, I deny
that the 2nd defendants could not claim commission at the rate of 2% on the
basis of the prices prevailing as alleged".
After
making this denial he sets out to state that the intention of the private
company was that it would forgo commission on the excess if the price was
higher than that prevailing on November 5, 1967, and to claim commission at the
rate of 2 per cent, of the price actually prevailing on the date of sale or on
the price prevailing prior to November 5, 1967, whichever is lower. It is
somewhat difficult to understand these contradictory averments. By these
averments the private company is in any event denying that it cannot claim
commission at the rate of 2 per cent, on the basis of the prices prevailing on
November 5, 1967. If, therefore, the contention of the private company is that
it is in any event entitled to commission on the prices prevailing on November
5, 1967, its intention becomes irrelevant. If the intention was as alleged in
the said affidavit of Shukla, there was nothing simpler than "to have had
an express provision to that effect either in the agreement dated February 18,
1969, or in the said letter dated February 18, 1969. It was, however, contended
that this intention was shown by the use in the said letter of the words
"clarification" and "ad-hoc arrangement". I do not find it
possible to construe these words as meaning that the private company would be
entitled to commission at the rate of 2 per cent, on the prices actually prevailing
at the date of the sale or those prevailing on November 5, 1967, whichever is
lower. It is obvious that the prices of the company's products vary from time
to time. These prices are fixed by the Government and they have varied in the
past and they may well vary in the future. There is no binding obligation on
the private company either under the said agreement dated February 18, 1969, or
under the said letter of the same date to accept commission on the basis of the
prices prevailing on the date of sale or on November 5, 1967, whichever are
lower. In fact, under clause 13 of the agreement the terms of the agreements
with respect to the rate of commission provided in clause 12 cannot be modified
by mutual agreement of the board of directors of the company and the private
company though other terms can be. Any revision in the rate of commission will,
therefore, require the mutual consent of the company at a general meeting and
the private company. To accept the submission of the contesting defendants that
the words "higher remuneration" in the Explanation to section 314(1)
cannot cover the case of the possibility of a higher remuneration would be to
defeat the object of the section. If there is possibility in the variation of
the amount of remuneration receivable by the holder of the office or place of
profit under which such holder could receive a higher remuneration than what
was provided at the time of the appointment in the first instance, it cannot be
said that the subsequent appointment was on the same terms as to remuneration
or on lower remuneration. In this view of the matter also the consent of the
company to the appointment of the private company for a further term was
required to be accorded by a special resolution.
It
was then submitted on behalf of the plaintiffs that this was not a subsequent
appointment within the meaning of the Explanation to section 314(1), as this
was an appointment made with retrospective effect. The first appointment of the
private company expired on September 30,1968. In fact, the private company by
its letter dated August 31, 1968, pointed this out to the company and requested
it to renew the agreement on the same terms and conditions for a further period
of five years. Nothing was done thereafter until the question of the further
appointment was brought before the board of directors on November 14, 1968.
Realising that between October 1, 1968, and November 14, 1968, the private
company was acting as sole selling agents without having been appointed as
such, the resolution of the board passed at that meeting expressly provided
"that the acts and deeds of Messrs, Kilachand Devchand and Co. P. 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".
Now, I have not been shown any power in the board of directors of the company
to make an appointment with retrospective effect. Sub-section (2) of section
294 which speaks of the appointment of a sole selling agent by a board of
directors of a company does not provide for any such appointment to be made
with retrospective effect. It was submitted that even if the directors had such
powers, the words "subsequent appointment" in the Explanation to
section 314(1) imply continuity. It was not disputed by the contesting
defendants that, if between the original appointment and the further
appointment the appointment of another person had intervened, it would not have
been a "subsequent appointment". The question is whether an
appointment made after the expiry of the period of the first appointment is a
subsequent appointment. The dictionary meaning of the word "subsequent
"as given in the Shorter Oxford English Dictionary, volume II, page
2062(1), is "following in order or succession; coming or placed after,
esp., immediately after; following or succeeding in time; existing or occurring
after, esp., immediately after something expressed or implied…….". It was
argued that such a construction would entail great hardship, for a board may
not be able to meet by reason of the circumstances beyond its control, such as
illness of directors. I am not able' to see any such hardship as; envisaged. I
fail to see why a subsequent appointment should be deferred till the last
moment. Even in the present case the private company asked for further
appointment to be made one month before the expiry of the original term. The
board could have met within that month and passed the necessary resolution. Section
204(4) expressly makes it permissible for re-appointment, re-employment or
extension of the term of office or place of profit within two years preceding
the date on which it is to come into force" Even otherwise, the only
"hardship" is that a special resolution would be required, in my
opinion, bearing in mind the object for which the section was enacted. The word
"subsequent "implies a continuity without a break, and an appointment
for a further term not made before or on the expiry of the earlier appointment
but thereafter would not be a "subsequent appointment". I also fail
to see how the board of directors of the company acquired the power to make
this appointment and that too with retrospective effect. The Companies Act does
not confer any power upon the board of directors to appoint sole selling
agents. The effect of section 294(2) is to lay restrictions on the power of the
board to make appointments of sole selling agents provided they have such power
under the articles. Assuming the board of directors of the company had the
power to appoint sole selling agents, under article 183 of the articles of
association of the company no director or other persons mentioned in section
314 is, without the previous consent of the company accorded by a special resolution,
to hold an office or place of profit under the company or any of its
subsidiaries except as provided in the said section. Thus, except in cases
where section 314 does not require a special resolution, the board of directors
of the company would have no power to make the appointment but the appointment
would have to be made by the company itself and that too by a special
resolution. Though the requirement as to previous consent of the company under
section 314(1) was deleted by the Companies (Amendment) Act, 1965, a
corresponding amendment has not been made in article 183 though several other
articles in the articles of association of the company were amended in view of
the amendments made by the Amending Act of 1965. Thus, in cases where a special
resolution would be required under article 183 the board would have no power to
make the appointment.
The
next question to be considered is, assuming the board of directors has the
power to make this appointment and that too with retrospective effect whether
this action of the board has been approved or ratified by the general meeting
held on April 28, 1969. The notice convening the meeting and the resolution set
out therein which was required to be passed does not set out that part of the
resolution of the board under which the acts and deeds of the private company
done on or after October 1, 1968, were ratified and confirmed and it was
further resolved to pay them commission in respect of services rendered for the
said period as provided in the said agreement of September 24, 1963, clarified
by the said letter of April 4, 1968. The shareholders were never informed that
for this intervening period the sole selling agents had acted without any
authority and that they were not entitled to any commission unless the same was
provided for expressly. The explanatory statement to the notice convening the
extraordinary general meeting for April 28, 1969, also does not point this fact
out to the shareholders. In these circumstances, I am doubtful whether it can
be said that any appointment with retrospective effect was ratified or approved
by the shareholders. It was conceded that an appointment for five years from
October 1, 1968, cannot be read as an appointment for five years from the date
of the resolution of the board or as an appointment for a period from November
14, 1968, to September 30, 1973. Under section 294(2) the approval of the
company must be of an appointment made by the board. The appointment made by
the board included ratification of the acts and deeds of the private company
for the period October 1, 1968, to November 14, 1968. If this was not approved,
then I very much doubt whether it can be said that there was an approval under
section 294(2) to the further appointment of the private company.
The
next point relates to the validity of the two notices dated March 27, 1969,
convening the extraordinary general meetings on April 28, 1969, and April 29,
1969. The arguments here are based on the provisions of section 173(2) of the
Companies Act, 1956. The relevant provisions of that sub-section are:
"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"
According
to the plaintiffs the said notices ought to have set out the nature of the
concern or interest of the solicitor-director in the matter of the appointment
of the private company for a further term as the sole selling agents of the
company and the correspondence which took place between the company and the
Company Law Board during 1965 and 1966, particularly the said letter dated July
28, 1965, and June 15, 1966, from the Company Law Board to the company. It was
submitted that these were material facts concerning the item of business to be transacted
at the said meetings and the non-disclosure, therefore, in the explanatory
statement to the said notices invalidates the said notices. That the item of
business to be transacted at the said meetings was special business is not
disputed. The questions to be considered are whether the above facts were
material facts and if either of them was a material fact, the consequence of
the non-disclosure thereof in the explanatory statement. If the
solicitor-director was an interested or a concerned director, the nature of his
concern or interest in the further appointment of the sole selling agents was a
material fact which was required to be disclosed in the explanatory statement,
and this position is not disputed. The contention of the contesting defendants,
however, is that the solicitor-director was not a concerned or an interested
director. This point has already been considered by me in connection with the
resolution of the board of directors at its meeting on November 14, 1968, and I
have already expressed the prima facie conclusion reached by me that he had a
concern or an interest in this matter. The only question, therefore, which
remains to be considered in this connection is the consequence of such
non-disclosure. First, however, I will deal with the question whether the
correspondence with the Company Law Board can be said to be a material fact
concerning the business to be transacted at the said meetings. Now, the first
meeting was for approving the private company's appointment as sole selling agents
for a further term. The second meeting, namely, the meeting requisitioned by
the plaintiffs, was for not approving the said appointment. Any fact which
would have a relevance or bearing upon the approval or a non-approval of the
said appointment would, in my opinion, be a material fact concerning the said
items of business. The facts relating to this correspondence may be briefly
recapitulated from this angle. The said letter dated July 28, 1965, was a show
cause notice issued by the Company Law Board under section 294(5) on the ground
that it appeared to the Company Law Board that the terms of appointment of the
private company were prejudicial to the interests of the company. By this
letter the company was required to show cause why under section 295(5)(c) the
terms and conditions of the appointment of the private company should not be
varied. This matter was at that time considered so important that a
sub-committee of the directors was formed to consider it. Ultimately, by its
said letter dated June 15, 1966, the Company Law Board decided not to take any
further action in the matter at that stage. The said communication, however,
expressly stated 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 in their letter of even
number dated the 28th July, 1965, read with their letter of even number dated
the 18th September, 1965".
It
was submitted by the contesting defendants that this was merely a suggestion
and not a directive or an order and that the proceedings commenced by the
show-cause notice under section 294(5) having terminated, there was no
obligation to disclose this correspondence in the explanatory statement. This
argument cannot be accepted. Under section 294(5) the Central Government has
the power to require such information regarding the terms and conditions of the
appointment of the sole selling agent as it considers necessary for the purpose
of determining whether or not such terms and conditions are prejudicial to the
interests of the company. There after, if it is of the opinion that they are
prejudicial to the interests of the company, it has the power to make such
variations in those terms and conditions as would in its opinion make them no
longer prejudicial to the interests of the company. If a company refuses to
furnish such information, the Central Government has the power to appoint a
suitable person to investigate and report on the terms and conditions of the
appointment of the sole selling agents. Thus, the Central Government is
conferred wide and extensive statutory powers of control over the sole selling
agencies of companies and is constituted the statutory authority to determine
whether the terms and conditions of a sole selling agency are prejudicial to
the interests of the company or not. Under section 10E these powers of the
Central Government have been delegated to the Company Law Board. Where,
therefore, a statutory authority empowered to decide whether the terms and
conditions of the appointment of a sole selling agent are prejudicial to the
interests of the company or not, had already opined that certain provisions of
the said agreement dated September 24, 1963, were prejudicial to the interests
of the company and had expressly required the company to bear its views in mind
at the time of the renewal of the agency, it cannot be said that the disclosure
of the views of the Company Law Board to the shareholders at the time of
further appointment on terms which contained the very features objected to by
the Company Law Board was not material. The object underlying section 1 73(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, influence them in making up their minds, one way or the
other, would be a material fact under section 173(2) and had to be set out in
the explanatory statement to the notice of the meeting. The views expressed by
the Company Law Board would have certainly played a part, and perhaps an
important part, in enabling the company's shareholders to make up their minds
whether to vote for approval of the further appointment or not.
The
contention that the matter was closed by the said letter dated June 15, 1966,
is too naive and is belied by subsequent events. By its letter dated April 9,
1969, headed "Sole selling agents ; terms and conditions of appointment
under section 294(5) of the Companies Act, 1956", the Company Law Board
called upon the company to clarify how the renewed agreement was proposed for
approval of the shareholders without reference to the views of the Board
communicated to the company earlier. The concluding paragraph of that letter
stated:
"From
the perusal of the renewed agreement, it appears, prima facie, that the terms
are prejudicial to the interests of your company and this Board will have to
examine to what extent the terms and conditions require modification or
abrogation. You are, therefore, hereby informed that if any such variation is
ultimately made by the Company Law Board, the terms of the said agreement would
be effective from 1st October, 1968".
There
was further correspondence pursuant to this letter to which I will refer later.
In
Shelh Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. it was held
that section 173 enacted a provision which was mandatory and not directory.
Bhagwati J., as he then was, observed in that case:
"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 nature of the concern or interest of the management in such 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 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 nullification of the action taken. If, therefore,
there was any contravention of the provisions of section 173, the meeting of
the company held on 5th September, 1961, would be invalid and so also would the
resolution passed at that meeting be invalid".
The
same view was taken by a Division Bench of the Calcutta High Court in Shalagram
Jhajharia v. National Co. Ltd That was a
case of a resolution to approve under section 294 the appointment of sole
selling agents. In that case Mitter J. observed :
"It
is well known that if a company can sell its products without the employment of
agents its profits would be substantially higher than in case where the selling
was done through agents. On the other hand it cannot be ignored that selling is
best done through an organization of experts and specially when sales have to
be made to overseas customers the employment of an overseas agent is almost a
necessity. 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 the 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 situated here".
Section
71 of the Companies Clauses Consolidation Act, 1845, required every notice of
an extraordinary meeting or of an ordinary meeting to specify the purpose for
which the meeting was called. In Kaye v. Croydon Tramways Company the
defendant company entered into an agreement to sell its undertaking to another
company under which the purchasing company agreed to pay, in addition to the
sum payable to the selling company, a substantial sum to the directors of the
selling company as compensation for loss of office, and the agreement was made
conditional upon its adoption by the shareholders of the selling company. The
resolution approving the agreement was passed by a large majority
notwithstanding the plaintiff's opposition. Thereupon the plaintiff commenced
an action and served a notice of motion for an injunction to restrain the selling
company from carrying the agreement into effect. The notice calling the meeting
stated that the meeting was convened for the purpose of considering the
agreement for the sale of the undertaking of the selling company to the
purchasing company. It further stated that the directors and the secretary had
agreed to retire on being paid a lump sum as compensation for their loss of
office. The Court of Appeal held that the notice had been "most artfully
framed to mislead the shareholders "since a very considerable portion of
that, which was part of the consideration for the purchase, was not to be paid
to the vendors but was to be paid to the directors and officers of the selling
company. Lindley M.R. said at pages 369-370 :
"It
is a tricky notice, and it is to my mind playing with words to tell
shareholders that they are convened for the purpose of considering a contract
for the sale of their undertaking, and to conceal from them that a large
portion of that purchase-money is not to be paid to the vendors who sell that
undertaking………….. I do not think that this notice discloses the purpose for
which the meeting is convened. It is not a notice disclosing that purpose
fairly, and in a sense not to mislead those to whom it is addressed".
The
Court of Appeal, accordingly, granted the injunction prayed for subject to this
that it left the selling company free upon a proper notice to sanction the
agreement. It is pertinent to note that section 71 of the Companies Clauses
Consolidation Act was similar to section 172(1) of the Companies Act, 1956,
which requires every notice of a company to contain, inter alia, a statement of
the business to be transacted thereat and that there was no provision in the
Companies Clauses Consolidation Act similar to the mandatory provision of
section 173(2).
It
is alleged in the affidavits in reply filed on behalf of the company and
Tulsidas that the explanatory statements to the notices of the meeting held on
April 28, 1968, and April 29, 1968, respectively, were placed and generally
approved at the board meeting held on March 27, 1969, at which Reighley was
also present, the suggestion being that Reighley and through him the plaintiffs
had approved both the said explanatory statements. It was submitted that even
in their requisition dated March 17, 1969, for calling an extraordinary
meeting, in the explanatory statement which the plaintiffs required to be
included in the notice convening such meeting, they had not required the fact
either of the interest or concern of the solicitor-director or the said
correspondence with the Company Law Board to be set out. Now, when one turns to
the minutes of the board meeting held on March 27, 1969, it is apparent that
the only discussion about the explanatory statements was with respect to the
requisitionists' meeting, when the solicitor-director pointed out that the
statement of facts set out in the requisition should be sent to the
shareholders with the notice of the requisitioned meeting and, as the said
statement was silent regarding the directors' interests in the resolution, the
same should be added. There is no mention in the minutes of the explanatory
statement in respect of both the said meetings being placed before or generally
approved by the board as alleged. Further, by their said requisition dated
March 17, 1969, the plaintiffs did not set out the whole of the explanatory
statement to be incorporated in the notice. What they did was to make a request
that in the explanatory statement which would be annexed to the notice the
statement set out by them should be included. They were thus anxious that
certain facts should be included and not that they did not want other material
or relevant facts to be excluded. It is the duty of the company acting through
its board to incorporate in the explanatory statement all material facts
concerning the item of special business to be transacted at a meeting. At the
said board meeting held on March 27, 1969, one of the resolutions passed was
that the secretary of the company should send out notices of the said two
meetings together with the explanatory statements in consultation with the
solicitors of the company. This shows that neither the explanatory statements
nor their drafts thereof were placed before the board meeting, much less
approved.
It
was next sought to be contended that the plaintiffs had knowledge of the
correspondence and of the interest and concern of the solicitor-director and,
therefore, they could not. complain about the same and that it is only a
shareholder who was ignorant of these facts who could make such a complaint. In
support of this contention reliance was placed first upon Parashuram Detaram
Shamdasani v. Tata Industrial Bank Ltd. In that
case the Tata Industrial Bank decided to amalgamate with the Central Bank of
India Ltd. and an agreement of amalgamation was entered into. A meeting of the
shareholders was called for approving the scheme. The plaintiff who had in the
past adopted a hostile attitude towards the bank, which attitude was known to
the shareholders, opposed the scheme. On a poll being demanded, there were
5,25,249 votes in favour of the resolution, while only 369 votes were cast
against, and out of these 369 votes 100 votes being of the plaintiff and 10 of
his brother. The plaintiff and his brother filed a suit challenging the
resolution. The plaintiff's suit and appeal were dismissed and he filed an
appeal to the Privy Council which too failed. The Privy Council observed that
the fact that the action was personal to the appellant was unfortunate for him
as he knew before the first meeting everything about the scheme that was to be
known and that he had written open letters to the shareholders and no possible
complaint of the notice or circular on the ground of insufficiency was,
therefore, open to him. On a perusal of the notice their Lordships came to the
conclusion that it was in no way questionable. Another of the plaintiff's
complaint was that he was denied a hearing at the general meeting. The court
held that on the evidence it appeared that "there was no organised
opposition ; there was a very clearly expressed indication by the shareholders
that they did not desire further to hear the appellant, and what really
happened was that the appellant desisted from any further effort to make
himself heard because even he realised that no further speech from him would be
of any avail ". Reliance was also placed upon Maharani Lalita Rajya
Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. in which
the Privy Council decision in Shamdasani's case was
followed, and upon Kalinga Tubes Ltd. v. Shanti Prasad Jain, which was
affirmed by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. Relying
upon these authorities it was sought to be contended that the plaintiffs,
having full knowledge of the facts which according to them were not disclosed
in the explanatory statements, had no right to challenge the validity of the
notices on this ground and were estopped from doing so. There is, however, no
such plea in any of the affidavits in reply, and this question really does not
arise for my consideration, but as this question was argued at some length and
as the contesting defendants insisted that they could spell out such a plea
from their affidavit in reply—which they have not been able to do—I will
shortly deal with the same. In my opinion, none of these authorities support
the contesting defendants. Each turns upon its own facts. The Privy Council
decision in Shutndasani's case was under
the Indian Companies Act, 1913, which did not contain any section corresponding
to section 173(2) of the 1956 Act. Regulation 49 of Table A of Schedule 1 of
the 1913 Act, intel alia, required that, in case of special business, the
general nature of that business should be set out in the notice. This
regulation corresponds to section 172(1) of the 1956 Act which requires every
notice of a meeting to contain a statement of the business to be transacted
thereat. The Privy Council did not have to decide the question of a mandatory
statutory provision, non-compliance with which would invalidate the notice. The
Privy Council held that there was nothing questionable about the notice. The
plaintiff who had a long history of dispute with the bank was in a hopeless
minority. The shareholders did not appear to have put any faith in any
statement made by him. They did not even desire to hear him further. The
action, therefore, was, on the face of it, personal only to him and his
brother, who held between them 110 out of 5,25,618 votes, but of which 5,25,249
votes were cast in favour of the resolution. The Calcutta case was of an
application under section 397 of the 1956 Act, and what was contended was that
failure to comply with section 173(2) made it a case of oppression in
conducting the affairs of the company. The court held that it could not be
oppression because breach of section 173(2) could make the meeting called
invalid and no more, and if such a meeting was invalid, the Companies Act
provided procedure for calling valid or regular meetings or for regularising
irregular proceedings, a right which was open to every shareholder. The case of
Kalinga Tubes Ltd. v. Shanti Prasad Jain was also a
case under sections 397 and 398 of the Companies Act. There was no plea as to
the invalidity of the notice taken in the petition or in the affidavits, but at
a late stage of the case oral submissions were made challenging the validity of
the notice on the ground of non-compliance with section 173(2). As the High
Court expressly pointed out, no question arose about the disclosure of any
interest of, any director and the only contention on this aspect of the case
was that the notice was invalid for want of necessary particulars in the
explanatory statement. On examining the explanatory statement the High Court
came to the conclusion that it was comprehensive enough and was in compliance
with the statutory requirements. The court further pointed out that had any
objection been taken in the petition at the earliest instance, the appellant
company could have shown that no such material fact was relevant or could have
been given. The court observed at page 215 :
"In
particular cases, the omission to state the material facts may invalidate the
notice and consequently may hit the relative resolution passed in a meeting of
the shareholders who might be completely misled by the terms of the
notice".
In
this case also the plaintiff was in a hopeless minority, and the court held
that in that view of the matter, any amount of elucidation in the explanatory
statement would not have been of any avail. The court also observed that,
assuming only material facts had been omitted from the notice, the mere
omission of such facts would not per se invalidate the notice and the
resolution passed in the meeting. It further held that what are material facts
and what is the nature and extent of interest under section 173(2) are
questions of fact depending on the facts of each case and the party who knew
the real nature of the transaction could not complain of the insufficiency of
the notice. The court held that, in the facts of that particular case, they were
not concerned to look to the interest of absentee shareholders. Before the
Supreme Court, however, the appellant, Shanti Prasad Jain, was not allowed to
urge this point inasmuch as the objection was not taken in the petition, and as
the point was a mixed question of fact and law, the court further added:
"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.
This attack on the validity of what happened on March 29, 1958, must thus
fail"
Now,
what Das J. in the High Court really held was that the explanatory statement
was comprehensive and that there was no non-compliance with section 173(2) and
that what are material facts including the nature or concern of a director were
questions of fact depending on the facts and circumstances of each case. The rest
of what Das J. observed was really in the nature of an obiter. Even, on the
facts, the present case stands on a wholly different footing. There is no
question of the plaintiffs being in a hopeless minority. They have secured,
even as declared by Tulsidas himself, about 48 per cent, of the votes cast.
Admittedly, the Life Insurance Corporation of India which, along with its
subsidiaries held about 13,000 shares, had voted against the resolution.
Looking to the slight difference between the respective shareholdings of the
plaintiffs and the Kilachand group, in this case what really counted were the
votes of the independent shareholders. It is with reference to the effect on
them and the consequent result of the plaintiffs not being able to secure their
votes that the case must be considered. It was urged that in the statements
issued by the plaintiffs, both by way of circulars to the shareholders and by
advertisements in the newspapers asking for support, they had not only pointed
out that the solicitor-director was interested and concerned but had also
referred to the letter of the Company Law Board of July 28, 1965, read with the
letter of September 18, 1965, and the letter of June 15, 1966, and, therefore,
the shareholders had a correct picture before them and could not be said to be
misled by any omission in the explanatory statements. This is not correct and
the argument does not present a true picture. The various circulars and
advertisements have been put in by consent as exhibits. Exhibit A is a statement
issued by Ruia, Kirloskar and the solicitor-director, while exhibit B is an
advertisement containing the statement of the private company. All the three
directors in their statements have asserted that they were the only independent
directors. If the correct position with respect to the solicitor-director is as
I have opined above, this was itself a misleading statement. The circulars and
advertisements of the plaintiffs were in reply to the statements of the
directors, and the advertisement given by the private company followed upon
this. In the private company's statement it is stated that:
"The
Company Law Board had gone into this appointment in 1965, and, after a careful
examination, overruled the objections raised by Firestone in a full-fledged
memorandum and cleared the terms. The Company Law Board had, however, remarked
that ' at the time of the renewal of the agreement with the sole selling agents
in 1968……..', thus visualising the renewal of the agreement in 1968".
This
again is a misleading statement, for the relevant and important words in the
Company Law Board's communication, namely, that "your company should bear
in mind the views of the Board which were communicated to you in their letter
of even number dated 28th July, 1965, read with their letter of even number
dated 28th September, 1965", were omitted and substituted by dots, thus
suggesting that the Company Law Board had no objection to the renewal of the
agreement in the same form in 1968. In my opinion, this omission is deliberate
and made with the intention to mislead, particularly in view of the letter
dated April 9, 1969, from the Company Law Board to which I have already
referred above, which letter was certainly known to Tulsidas but most certainly
not known to the other shareholders of the company. This statement of the
private company appeared in the newspaper "Indian Express" of April
15, 1969, and in the newspaper "Financial Express" of April 16, 1969,
that is, after the receipt of the said letter of April 9, 1969. Secondly, in the
light of what was stated in the said communication from the Company Law Board
of June 15, 1966, the statement that the Company Law Board had cleared the
terms of the sole selling agency was hardly a fair or a true statement. All
that the Company Law Board did was to say that it had decided not to take any
further action under section 294(5) at that stage but had clearly indicated
that unless the objections raised by the Company Law Board were taken into
account at the time of the renewal of the agreement, further action would be
taken. The shareholders had thus before them a conflicting picture and at least
with respect to the relevant facts a misleading picture as presented by the
Kilachand group and those supporting it. The plaintiffs' objection to the validity
of the notice, therefore, cannot be dismissed so lightly on the ground of their
own knowledge of its infirmity as contended by the contesting defendants. On
the contrary, in my opinion, the plaintiffs' objections are well-founded and,
consequently, the said notices and meetings, particularly the notice for the
meeting of the 28th April and the meeting held on that day, and the resolution
passed at that meeting are invalid. Closely connected with this point is the
objection of the plaintiffs with reference to the non-disclosure of the Company
Law Board's said letter of April 9, 1969, to the shareholders at the meeting of
the 28th April. Tulsidas as the chairman of the board of directors took the
chair at the said meeting of the 28th April. It was submitted on behalf of the
plaintiffs that, since Tulsidas was vitally interested in the said resolution,
he deliberately suppressed from the shareholders the receipt of the said letter
so as to keep back from them the knowledge that the Company Law Board was
objecting to the said further appointment. Tulsidas's answer is to be found in
paragraph 15 of his affidavit-in-reply affirmed on August 14, 1969. The
relevant portion is:
"I
say that by the said letter, the Company Law Board only sought clarification
from the 1st defendant company which was given by the 1st defendant company by
its letter dated 22nd April, 1969. I say that there was no necessity for the
said letter dated the 9th April, 1969, being circulated to the board of
directors of the 1st defendant company as the same had been adequately dealt
with and, as no further communication had been received from the Company Law
Board, the said letter dated the 9th April, 1969, was dealt with in the
ordinary course after consulting the solicitors of the 1st defendant company. I
deny that the said letters dated the 9th April, 1969, and 22nd April, 1969,
were wrongfully or with mala fide intention suppressed as alleged. I say that
the said letter and the reply was placed at the first board meeting of the 1st
defendant company held thereafter".
Very
much the same statements are made in the affidavit-in-reply filed by Dabke, the
secretary of the company, on behalf of the company. The board meeting referred
to in Tulsidas's affidavit was held on June 25, 1969. At least one thing is
obvious on Tulsidas's own statement, that it was necessary to place the said
letter before the board. Bearing this in mind let us examine the bona fides of
Tulsidas. By his letters of April 9, 1969, and April 22, 1969, Reighley called
upon Tulsidas as the chairman of the company to call a meeting of the board of
directors immediately. Copies of these letters were sent to all the directors.
It appears that these letters were written as Reighley desired
that the procedure to be followed at the said extraordinary general meetings
should be discussed and agreed upon at a board meeting. No meeting was,
however, called until June 25, 1969. Now, if any such board meeting were
called, obviously Tulsidas would have had to place this letter from the Company
Law Board before the board of directors and Reighley would have come to know
about it. Reighley learnt about this letter only when in the newspaper of April
30, 1969, it was reported that Mr. Fakhruddin Ali Ahmed, the Minister for
Industrial Development and Company Affairs, had stated in the Lok Sabha on
April 29, 1969, that the Company Law Board had recently asked the company for
an explanation as to why the recommendations of the Company Law Board were not
included in the agreement of February 18, 1969. Thereupon, Reighly by his
letter dated April 30, 1969, called upon the secretary of the company to
immediately let him have a copy of the said communication and any
correspondence relating thereto and further stated that no reply should be sent
thereafter unless he had an opportunity of seeing the draft thereof.
Thereafter, Reighley was given inspection of the said letter dated April 9,
1969, and the company's reply dated April 22, 1969. The reply of April 22,
1969, is signed by Dabke. The astonishing thing about this reply is that
according to the affidavits-in-reply of Tulsidas and Dabke, Tulsidas by himself
dealt with the letter "in the ordinary course "after consulting the
solicitors of the company, namely, the firm of Messrs. Daphtary, Ferreira and
Diwan. Now, was Tulsidas a proper party to deal with this letter and keep the
knowledge of both the letter and the reply to himself until the fact that there
was such a communication came out by reason of the statement made by the
Minister in the Lok Sabha ? Tulsidas was the person vitally interested in the
further appointment of the private company as sole selling agents. As will be
shown later, while dealing with another aspect of the case, but for the sole
selling agency commission received by the private company its actual working
for the year ended September 30, 1968, would have shown a loss. On the previous
occasion when communication was received from the Company Law Board, that is,
in 1965, the matter was considered so important that a sub-committee of
directors was appointed to deal with it. Why were the objections of the Company
La Board to the further appointment dealt with in this fashion by Tulsidas
alone ? Tulsidas's explanation that it was not necessary to circulate the
letter as no further communication had been received from the Company Law Board
after the company's reply of April 22, 1969, is untenable on the face of it.
What was required to be circulated to the directors was the letter of the
Company Law Board before any reply was sent thereto. According to Tulsidas, the
matter was important enough to require consultation with the solicitors of the
company but not important enough to place before the board of directors. The
plaintiffs' contention that a board meeting was not called in April, 1969,
though repeatedly requested by Reighley because, otherwise, this correspondence
would have come to the knowledge of Reighley and through him to the knowledge
of the shareholders appears, therefore, to be well founded. No one can be naive
enough to believe, as Tulsidas expects it to be believed, that because no
further communication had been received to the company's reply dated April 22,
1969, between April 22, 1969, and April 28, 1969, the Company Law Board had
dropped the matter and it was, therefore; not necessary to apprise the
shareholders about this correspondence. The contention in the
affidavits-in-reply of Dabke and Tulsidas that it was for this reason that the
said correspondence was not disclosed at the said extraordinary general meeting
does not reflect credit upon them, and in this connection what transpired
subsequently is instructive. By the letter dated August 29, 1969, a copy of
which is put in by consent and marked as exhibit No. 1, the Company Law Board
called upon the company under section 294(5)(a) of the Companies Act to furnish
certain information regarding the terms and conditions of appointment of the
private company as selling agents of the company for a further term. There are
in all 16 items in respect of which such information is required to be
furnished. The margin of difference between the votes for and against the
impugned resolution was very narrow, and, in my opinion, this correspondence
may have well influenced the necessary number of shareholders to vote against
the resolution even assuming the result of the poll as declared by Tulsidas was
correct.
It
was also submitted on behalf of the contesting defendants that the Company Law
Board's letter of April 9, 1969, showed non-application of mind, that it was
addressed by some under-secretary and the facts on which it was based were not
existing facts, and for the said reason also it was not required to be
communicated to the shareholders. It is not necessary to go into the rival
contentions as to the validity or otherwise of the objections raised by the
Company Law Board and whether some of the facts which existed at the time of
the Company Law Board's objections in 1965 continued to exist in 1969, for one
thing is clear that Tulsidas, the person most vitally interested and concerned,
cannot be the sole judge of this. It was his duty to place these letters before
the meeting of the shareholders. Whatever had to be pointed out to the
shareholders could have been mentioned by Tulsidas at the meeting and it would
have been then for the shareholders to consider the Company Law Board's
objections and Tulsidas's explanation thereto. The submission that the letter
was signed by Some under-secretary is hardly worthy of mention. It is true that
the letter is signed by the under-secretary to the Company Law Board in the
same way as the earlier communications from the Board, but it is clear from the
letter itself that it is a communication from the Company Law Board. In fact,
the said letters dated July 28, 1965, and September 18, 1965, were also signed
by the under-secretary to the Company Law Board. These were, however, not
treated as letters from some under-secretary and not from the Company Law
Board. This letter of April 9, 1969, and the company's reply remained in the
exclusive knowledge of Tulsidas, Dabke and the company's solicitors and were,
in my opinion, deliberately kept back from the knowledge of all other
shareholders and directors with a view to see that the said resolution of
further appointment of the private company as sole selling agents should be got
passed. In Tiessen v. Henderson Kekewich J.
pointed out 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".
To
repeat the words of Mitter J. in Shalagram Jhajharia v. National Co. Ltd.:
"As
the legislature has though 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".
In
the present case it cannot be held that the shareholders were given a full and
complete opportunity or that there was a full, and frank disclosure, and I am
inclined to accept the plaintiffs' case that the resolution, said to be passed
at the meeting of April 28, 1969, falls in the well-known category of
resolutions obtained by trick.
I
will now deal with the other objections of the plaintiffs to the meeting of
April 28, 1969. The main amongst these are that Tulsidas was not entitled to
take the chair at the said extraordinary general meeting, that he had ho right
to give any decision as to the validity of any proxy or letter of revocation
after the votes were cast and that the decisions he has given with respect to
such objections are bad in law and are prompted by a mala fide motive of
invalidating as many votes in favour of the plaintiffs as possible in order to
secure a majority for the resolution approving the appointment of the private
company for a further term. It was submitted on behalf of the contesting
defendants that under article 92 of the articles of association of the company
the chairman of the directors, if present and willing to take the chair at -any
general meeting, whether annual or Extraordinary, was entitled to do so. It was
further submitted that, in order to show his fairness, Tulsidas had expressed
his willingness to vacate the chair in favour of any person who was unanimously
agreed upon to take the chair in his place and had even suggested the name of
another director of the company, Pratap Bhogilal,
but Reighley had objected thereto and so Tulsidas continued to act as chairman.
This gesture was to my mind a meaningless one, because from the nature of
things no one could have expected at the said meeting any agreement, upon any
subject at the said meeting. It was further stated that since article 92 authorises
the chairman of the directors to take the chair at a general meeting and as the
articles of association of a company form a contract between the company and
the members and between the members inter se, the members had agreed to an
interested person being the chairman of every general meeting inasmuch as the
majority of the business which comes up before a general meeting relates to the
acts of directors. This argument does not appear to me to have any relevance.
What was before the meeting was not the act of Tulsidas as a director in which
he was concerned or interested as a director to see that the same should be
upheld by the meeting. What was before the meeting was the approval of an
agreement entered into between the company and the private company controlled
by Tulsidas under which the private company and, therefore, indirectly,
Tulsidas, were to receive considerable amounts by way of remuneration and
profit. In this matter Tulsidas, in his capacity as a director, had not taken
any part in the resolution of the board passed at its meeting held on November
14, 1968. His interest in the item of business before the meeting was,
therefore, not in his capacity as director of the company but in his capacity
as director and member of the private company and as the person controlling the
private company, and it was his personal interest which would be vitally
affected if the resolution was not passed. I was referred to certain
authorities in this connection, but I do not propose to discuss them or to go further
into this question inasmuch as for the purposes of these notices of motion, I
am prepared to assume that Tulsidas was entitled to take the chair.
Nonetheless, I am of the opinion that any presumption of bona fides which may
attach to the acts of an independent chairman cannot be applicable to
Tulsidas's acts, in the present case. Similarly, I do not propose to consider
the elaborate arguments advanced and the number of authorities and passages
from text books cited before me as to when a poll is said to be completed. I
will also assume for the purposes of the present notices of motion that
Tulsidas was entitled to give his decision on the validity of the proxies and
of the letters of revocation at the time when he did. So far as the question of
directions or decisions given by Tulsidas on the validity of the proxies and
letters of revocation is concerned, it was submitted on behalf of the
contesting defendants that the defendants would fail if such directions or
decisions were bad in law. It was further submitted that short of fraud in the
conduct of the meeting or in the declaration of results or manifest error of
law in the directions and decisions given upon questions of validity of proxies and revocations, the
decisions and directions of the chairman cannot be challenged. For the
purposes of these notices of motion I will accept this proposition
without going into the authorities and the rival submissions in that behalf.
Even then, in my opinion, the result as regards these notices of motion must be
the same. Even assuming that any presumption of bona fides would attach
to the action of Tulsidas as the chairman of the meeting, such presumption is
rebutted by the conduct of Tulsidas in deliberately suppressing from the
meeting the said letter of April 9, 1969, from the Company Law Board to the
company and the company's reply dated April 22, 1969, thereto as also the other
circumstances to which I will presently refer. Further, as will be pointed out,
several decisions or directions given by Tulsidas cannot be supported in law
nor was any attempt made to justify them as being correct in law. If so, the
result declared by Tulsidas cannot be
said to be the true result of the meeting. I may also point out that while
article 97(2) of the articles of association of the company makes the
declaration of the chairman, whether on a show of hands a resolution has or has
not been carried, or has or has not been carried either unanimously or by a particular majority, conclusive evidence of that
fact, without proof of the number or proportion of the votes cast in favour of
or against such resolution, there is no such provision with respect to the
declaration of the result of a poll. Under article 98(6) it is only the
decision of the chairman on any difference between the scrutineers appointed by
the chairman to scrutinise the votes given on the poll and report to him which
is made conclusive and not his declaration of the result of the poll.
Before
I deal with the decisions or directions given by Tulsidas, a few further facts
which are important on this aspect of the case require to be set out. In the
plaint in Suit No. 681 of 1969 the plaintiffs have made a grievance that the
company through its secretary got some data fed into the computers maintained
by the Tata Consultancy Services, Bombay, and that the proxies lodged at the
registered office of the company were wrongfully caused to be removed to the
Tata Consultancy Services on April 26, 1969, and thereafter and that when such
data was fed, neither the scrutineers nor the plaintiffs were on the scene and
the fact that on that date the scrutineers were not even appointed and
the data was fed into the computers was known only to Tulsidas and Dabke and
that till today no one else knows the nature of such data or the accuracy or
sufficiency thereof or the sufficiency or accuracy with which answers or
results were obtained from the computers. The plaintiffs have submitted that
for this reason the result, purported to be declared from the alleged result
obtained from the said computers, is not valid and binding. Now, the position
with respect to the appointment of Tata Consultancy Services is as astonishing
as that relating to the Company Law Board's said letter of April 9, 1969. Just
as in the latter case Tulsidas on his own purported to deal with the said
letter and to reply thereto, so here Dabke, the secretary of the company, on
his own, without consulting the board of directors and without any authority
from the board of directors, engaged the services of the Tata Consultancy
Services. The services to be performed by the Tata Consultancy Services are set
out in their letter of April 15, 1969. They agreed to transcribe the names of
shareholders and joint shareholders along with their holdings into cards and
transfer them on to a magnetic tape provided this data was supplied to them by
April 19, 1969. This master tape was then to be sorted in dictionary order in
order to produce alphabetical index which would be used by the company's share
department to identify the shareholders giving the proxies. Further,
information regarding proxies and the revocations was to be punched into cards
and a proxy register was to be printed showing separately for the Kilachand
group and for the plaintiffs the following particulars, namely, (a) name of the
shareholder, (b) the total number of shares held, (c) proxy number, (d) the
date of proxy, (e) number of shares against the proxy, (f) date of revocation,
if any, (g) revocation number, and (h) number of shares against the revocation.
After the polling had taken place, information from the polling papers were to
be picked up and a fresh register showing the latest position of the polled
proxies was to be prepared. The register would flag those cases where the
proxies could be disputed, helping to avoid, as stated in the said letter,
"unnecessary screening of valid proxies". It appears that the Tata
Consultancy Services were paid a sum of Rs. 20,000 for this work. There is no
resolution of the board meeting authorising the engagement of the Tata Consultancy
Services or the payment of such amount to them, except that the fact that such
payment had been made was intimated to the board of directors at its meeting
held on June 25, 1969. In justification of his action Dabke sought to rely in
his affidavit-in-reply upon a previous instance when similar assistance was
taken from the International Business Machines Corporation. According to him,
in 1960, when the company's shares were oversubscribed to about 60 times the
face value of the shares offered to the public, assistance of the International
Business Machines Corporation was similarly taken for processing allotment
letters and refund orders, etc., and at that time also no resolution of the
board of directors was passed sanctioning such procedure, and it was the
secretary and the office staff who attended thereto. Now, I fail to see what
analogy there is between the two cases. Processing of allotment letters and
refund orders was not a contested matter, while here there was a hotly disputed
question on which the directors and shareholders were sharply divided. It is
also alleged that Dabke had informed the directors of the company, including
Reighley, about this arrangement. That Reighley gave
his consent to it does not seem to be borne out by the record. Why this was not
put before and resolved upon at a meeting of the board of directors, even
though the plaintiffs were insisting that such a meeting should be called, is a
question which has not been answered in the affidavits-in-reply. According to
the affidavit-in-reply made by Dabke, he got prepared a list of shareholders on
the register of the company together with the folio number, number of shares
held by them, the names of the joint holders, if any, and their adresses and
sent it to the Tata Consultancy Services for preparing the master tape. This
appears to have been done prior to April 26, 1969. On the basis of this data
the master tape was prepared by the Tata Consultancy Services and ari
alphabetical index in the dictionary order was made and submitted by them to
the company. After receipt of the proxies, a rubber stamp was put on each proxy
indicating by means of the letters 'F', ' K' and ' G ' whether such proxy was
in favour of the plaintiffs or the Kilachand group or was' in favour of an independent
party, the letters 'F', 'K' and 'G' standing respectively for
"Firestone", "Kilachand" and "General". To these
proxies was given a register folio number, serially numbered. Different serial
numbers were given to the proxies lodged in favour of Reighley and Tulsidas.
The proxies which were serially numbered were grouped according to the letters
of the English alphabet and folio numbers were put thereon with the help of the
staff of the company. It is alleged that at the said time many of the proxies in
favour of Reighley and two others did not state the name of the shareholder but
merely stated "I, the undersigned "and bore at the bottom the
signature "purporting to be that of the shareholder "and that in many
of such cases it was not possible to decipher the name of the shareholder from
the signature or to relate the name of the purported shareholder "as
appearing on the proxy register of members" in spite of diligent efforts
by the staff of the company. Folio numbers were, therefore, not given to such
proxies and such proxies are referred to as "untraceable "in the
affidavit-in-reply. After the remaining proxies were arranged as aforesaid and
numbered and stamped with the relevant letter, they were sent under armed
escort to the Tata Consultancy Services in the company of two representatives
of the plaintiffs, two of the private company and two of the company for
preparation of proxy analysis which accordingly was done by them. It is alleged
that the said arrangement of taking and bringing back proxies to and from the
Tata Consultancy Services was arrived at on April 26, 1969, in consultation
with Ramdas, Reighley, Warner and their solicitor and the solicitor-director.
The said proxies were removed on 26th and 27th April, 1969, from the' company's
office to the office of the Tata Consultancy Services. It is alleged that the
plaintiffs had deputed their own representatives to accompany the said proxies
as well as deputed their representatives to supervise the return of the said
proxies. It is said that there could be no question of consulting the
scrutineers when data was fed into the computers prior to April 28, 1969, since
on that date no scrutineers were appointed. Prior to the date of the said
meeting held on April 28, 1969, after the master tape had been so prepared from
the data supplied as aforesaid, the data with respect to the proxies was fed
into the computers for processing on the 26th and 27th April, 1969. After the
date of the said meeting the data relating to the revocation letters received was
further fed into the computers "in order that the 1st defendant company
and/or the scrutineers may have a complete picture and/or a register of the
proxies and revocation letters lodged with the 1st defendant company". It
is further alleged that the scrutineers were present at the time the data
relating to revocation letters was fed into the computers. Paragraph 42 of the
said affidavit further alleges :
"As a result of the
feeding of this data the scrutineers and the 1st defendant company had before
them a register showing the names of shareholders, number of shares held by
them, the proxies and the revocations, if any, given by them. The validity of
the proxies and the revocations was thereafter subsequently determined by the
chairman and/or under his directions in accordance with his decisions and
directions given in his letter dated 26th June, 1969, to me. As the scrutineers
were not concerned and/or were not entitled to determine the validity or
invalidity of the proxies they were not informed of the further data regarding
the validity of the proxies which was fed to the computers subsequent to the
said letter……..I say that even the 2nd defendant was not aware of the actual
data fed into the computers at the time the same was fed into the computers. I further
say that the scrutineers had themselves checked the register of proxies
obtained from the Tata Consultancy Services on 14th May, 1969, as also the work
done by the office of the 1st defendant company."
In his affidavit-in-reply
Tulsidas has supported what Dabke has alleged, stating that Dabke informed him
about the said facts. Certain averments made by Tulsidas in paragraph 20 of the
said affidavit-in-reply are important and require to be quoted :
"I say that I was not
aware of the actual data which was fed into the computers at the time the same
was fed into the computers. I say that necessary data was fed into the computer
by the secretary of the 1st defendant company in consultation with the Tata
Consultancy Services. I say that the further data that was fed into the said
computer after 26th June, 1969, was based upon my decisions on the validity or
otherwise of various proxies and letters of revocations…….I say that, as
explained above, the scrutineers know the nature of the data fed except the data
which was fed after I had given my decisions aforesaid." The plaintiffs
have denied any prior
knowledge, consent or approval of Reighley, Warner or the plaintiffs to what
was done. Even according to the contesting defendants, there was no prior
knowledge or approval or consent of either Reighley, Warner or the plaintiffs.
It also seems consistent with the other facts to believe that Reighley
protested against the proxies being removed as he alleges, and that the
plaintiffs' representatives accompanied the said proxies along with others
"to supervise the return of the said proxies as stated and alleged by
Dabke himself in his affidavit-in-reply". In any event, it is not the case
of the contesting defendants that anybody except Dabke knew what the complete
data was which was fed into the computers.
At
the hearing three registers were produced. Two of them were proxy registers,
one prepared before and the other prepared after June 26, 1969. These were referred
to at the hearing as the old proxy register and the new proxy register. The old
proxy register was produced by the company, while the new proxy register was
forwarded by the company to the scrutineers and produced by them. The third was
a printed register consisting of sheets headed "Register of defective
proxies and/or revocations". Admittedly, however, it is a register
relating to proxies only prepared or got prepared by Dabke in the company's
office. Each sheet has several columns headed "(1) Reference folio number,
(2) Number of shares held, (3) Serial number, this being the serial number
given to the proxy, (4) Duplicate, (5) Without date or signature, (6) Date or
signature filled by rubber stamp or typed, (7) Differs from specimen signature,
(8) Sig. or P/A or B/Reso. not Regd., that is, signature of power-of-attorney
or board resolution not registered with the company, (9) Without the common
seal of the company, (10) Stamps not cancelled, (11) Stamps adjudicated, (12)
Party out of Maharashtra and stamp of Maharashtra, (13) Without date of
meeting, (14) With dates of two meetings and (15) Unsigned ". This
register was forwarded by the company to the scrutineers and was produced by
the scrutineers.
One
of the charges levelled by the plaintiffs is that Tulsidas
deliberately deferred giving his decisions or directions on the
objections raised to the proxies and revocations until a complete
picture of proxies was before him, so that he may know how any decision
given by him would affect the voting, and give his decisions from
that point of view, not fairly and honestly but with the mala fide object of
invalidating the proxies in favour of Reighley, so that the resolution could be
got passed. The first objection relates to the late lodging of proxies. Under
article 110 of the articles of association of the company, no instrument of
proxy is to be treated as valid and no person is to be allowed to vote or act
as proxy under an instrument of proxy unless such instrument of proxy has been
deposited at the registered office of the company at least 48 hours before the
time appointed for holding the meeting. This is in conformity with the
provisions of section 176(3) of the Companies Act, 1956. Thus, the last minute
for lodging proxies at the registered office of the company was by 4 p.m. of
April 26, 1969. According to the plaintiffs, 1017 proxies in favour of Tulsidas
and three others were deposited by Shukla, the secretary of the private
company, after 4 p.m. on April 26, 1969, and after the bell announcing the
expiration of time allowed for depositing proxies had been rung. At that time
Reighley, Karode, one P.K. Nambia, also a shareholder of the company, and the
third defendant were present. Karode and Reighley objected to such proxies
being deposited. Such objection was recorded by Karode on the same day and
confirmed by Reighley and the letter of objection was signed by Karode and
Reighley in the presence of the third defendant who has attested their
signature. These 1017 proxies were in 12 unopened packets. These packets were
opened and numbered and a note has been put on the said letter of Objection to
the effect that "after numbering as above, receipt has been given to
Kilachand Devchand and Company Private Ltd. by Synthetics and Chemicals Ltd. at
5-55 p.m. on 26-4-69". According to the affidavits-in-reply, at about
12-30 p.m. on the 26th April, the company received from the private company
several packets containing all the proxies in favour of Tulsidas and three
others, each packet containing several files of proxies. For the purposes of
facilitating the passing of receipts after the counting of proxies by the
company's staff the private company had attached to each file a typed list in
duplicate showing the names of shareholders purporting to have issued proxies
in favour of Tulsidas and others with the folio number and the number of shares
held by each shareholder. All the said packets were brought by Shukla, the
secretary of the private company, along with two or three other representatives
of the private company and deposited with the company. The physical counting of
the said proxies took a considerable time and receipts were granted in respect
of the proxies contained in each file after the proxies in each file were
counted as of the time when the packets were received. Arrangements had been
made to receive the proxies in the open landing space opposite the lift. After
counting the proxies, they were removed inside the office of the company.
Exactly at 4 p.m. Dabke asked the staff of the company to stop counting the
proxies lodged by the private company on the landing and to remove the
uncounted proxies contained in the packets inside the office of the company for
the purpose of counting and issuing receipts. It is further stated that the
proxies lodged by the plaintiffs which were pinned together in lots of 100 each
generally (that is, not classified in the manner in which proxies lodged by the
private company) were lodged between 2-30 p.m. and 3-30 p.m. and the counting
of such proxies finished by 4 p.m. It is further alleged that it was pointed
out to Karode and others that the said packets brought by the private company
had been deposited at 12-30 p m. Now, whether these 1017 proxies were lodged at
12-30 p.m. as alleged by the contesting defendants or after 4 p.m. as alleged
by the plaintiffs is a question of fact which will fall to be decided at the
hearing, but one or two circumstances are significant. The total number of
proxies in favour of Reighley and others was about 11,732. These were on Dabke's
own showing in lots of 100 each generally and not classified as proxies lodged
by the private company were. These could, however, be counted within a period
of about one hour on Dabke's own admission. The total number of proxies lodged
on behalf of the Kilachand group was about 7,789 including the 1,017 disputed
proxies. It is thus difficult to understand why, when these 7,789 proxies were
lodged at 12-30 p.m., they could not have been counted till 2-30 p.m. or till
5-55 p.m. It is also difficult to understand why a receipt was not given in
respect of the said packets to the effect that so many packets said to contain
so many proxies were received. In fact, on April 28, 1969, Reighley had
deposited approximately 11,730 revocations contained in two trunks and in
respect of these trunks receipts were issued showing that trunk of a particular
colour said to contain revocation letters was received at the registered office
of the company on April 28, 1969, at 2-50 p.m. It is also significant that,
prior to the affidavits in-reply, the story now set up about all these proxies
being brought at 12-30 p.m. has not been set up in the correspondence.
At
the said meeting of April 28,1969, written objections were raised by a
shareholder, Kishore K. Koticha, to several proxies in favour of Reighley and
others. It appears that a similar letter of objection was written by Koticha
with respect to the proxies lodged for the meeting of April 29, 1969. By his
letter of April 30, 1969, Koticha stated that the objections which he had.
raised about the proxies in his letters of 28th and 29th April would also apply
to the letters of revocation lodged by the plaintiffs. Copies of the letters of
April 28, 1989, and April 30, 1969, have been exhibited by consent and the copy
of the letter of April 30, 1969, bears an endorsement that three letters were
received by the company on May 2, 1969. By their attorney's letter of June 10,
1969, the plaintiffs raised several objections to the proxies in favour of
Tulsidas and three others. A reminder was written on June 23, 1969. The reply
to this letter was only given by Tulsidas on July 2, 1969, after he declared
the result of the meeting held on April 28, 1969. It is contended by the
contesting defendants that the plaintiffs' attorney's letter cannot be treated
as objections raised by a shareholder to the said proxies. It is not necessary
to decide this question also as, on Tulsidas's own showing, whatever objections
were raised were equally applied to proxies both in favour of Reighley and in favour
of himself. Apart from that, when we come to consider these objections it will
be obvious that some of them are of such a nature that whether actually taken
or not, the proxies to which they applied could never have been treated as
valid. It is, however, alleged in paragraph 66 of Dabke's affidavit-in-reply
that, as the only objections were to the proxies in favour of Reighley,
tabulations were made, that is, the register of defective proxies was prepared
only with respect to such proxies and not with respect to the proxies in favour
of Tulsidas. This again is not true. The register of defective proxies produced
in court includes two sheets, on which in the left hand corner at the top is
written in ink "Kilachand P.", that is, the proxies in favour of Tulsidas.
These two sheets are in respect of shareholders in ledger folio "N".
From this an inference must arise that similar sheets must have been prepared
with respect to other shareholders who gave or purported to give proxies in
favour of Tulsidas but the same have not been produced. In the register of
defective proxies, in the case of Reighley and others as also in those two
sheets the entries in the columns are in ink but the totals of the columns are
in pencil arid on several sheets there is an analysis of the different types of
proxies worked out at the back. This is more than sufficient to convey to any
one what the effect on the voting "would be if a particular class of
proxies were held to be valid or invalid. It is difficult to believe that a
similar analysis was not done in respect of proxies in favour of Tulsidas, if a
register in respect thereof was prepared. At the hearing various statements
were sought to be handed over to me and facts and figures were given to me of
the various heads under which the proxies in favour of both parties would fall.
I was also handed over by learned counsel for the company a specimen page, said
to be a copy of one of the sheets in one of the proxy registers. I have
returned this document and not kept it on the file. Based on the contents of
the said specimen copy, detailed arguments were advanced to me by the
contesting defendants. When this specimen copy was compared with the original
sheet, of which it purported to be a copy, it was found that not only the headings
of the columns differed but what was filled in under the columns had no
relation to the original sheet. I may mention in fairness to the attorneys of
the company that this specimen copy was prepared not in their office but in the
office of the company. There were also other statements made under instructions
from those representing the company present in court which also did not turn
out to be correct. For this reason I have refused to accept or attach any
weight to any statement made from the bar which does not find a place on the
record.
On
the sixth day of the hearing, in order to answer the plaintiffs' charge that
the giving of directions by Tulsidas was deliberately delayed until he could
see for himself a complete picture of the proxies and revocations so as to
bring about a result favourable to himself, Mr. C.K. Daphtary, learned counsel
for Tulsidas, applied in Suit No. 681 of 1969 for leave to put in a further
affidavit explaining why the directions were not given by Tulsidas in writing
till June 26, 1969, and to show that they were given orally on June 19, 1969.
The plaintiffs objected to any such further affidavit being filed at this late
stage and I rejected the said application for several reasons. There is no
warrant whatsoever for saying that any directions as to the objections were
given by Tulsidas prior to June 26, 1969. The passages from the
affidavits-in-reply of Dabke and Tulsidas which I have set out above make this
amply clear. These passages further make it amply clear that Tulsidas gave his
directions only after a complete picture was presented to him. It is also
abundantly clear from the said affidavits that the validity of the proxies and
revocations was determined by Tulsidas and/or in accordance with his directions
given in his letter of June 26, 1969. For this reason as also for the reason
that this application was made at too late a stage, I rejected the said
application. Immediately thereafter Mr. Sen, learned counsel for the company,
called upon Mr. Daphtary to produce the opinion of counsel obtained by Tulsidas
on the objections to proxies for the meeting of April 28, 1969, and to the
letters of revocation This was also objected to by Mr, Nariman on behalf of the
plaintiffs. I upheld the objection because nowhere is there any suggestion in
any of the affidavits-in-reply that any opinion of counsel was taken. In fact,
Tulsidas expressly avers that these various registers were got prepared, so
that he may have a complete picture before him, and it was thereafter that he
gave his decisions and directions which are contained in his said letter of
June 26, 1969. Secondly, whatever counsel may have opined as to the validity in
law of any objection is immaterial. The matter is to be decided by the court
itself and not in accordance with the opinion given by counsel. For these
reasons I did not permit Mr. Daphtary to produce any such opinion.
I
will now examine the validity of the objections to the proxies. Though the
plaintiffs are challenging the validity of most of these decisions, at the
hearing of these notices of motion Mr. Nariman, learned counsel for the
plaintiffs, has confined himself to only some of them. The decisions or
directions of Tulsidas are contained in his said letter of June 26, 1969. That
letter is addressed to Dabke and begins this way:
"Now
that the papers relating to the extraordinary general meeting held on 28th
April, 1969, have been tabulated I am giving the following directions."
The
opening words of this letter also make it abundantly clear that these
directions have been given after the papers relating to proxies, etc., had been
tabulated and on the basis of such tabulations, that is, after Tulsidas had
before him a clear picture as to the proxies to which a particular infirmity
applied. The first decision objected to at the hearing of these notices of
motion is that contained in direction 1(c) under which a proxy by a company not
bearing the company's seal was to be rejected. Under section 176(5)(b) of the
Companies Act, 1956, an instrument of a proxy where the appointer is a body
corporate, is to be under its seal or is to be signed by an officer or an
attorney duly authorised by it. Article 109 of the articles of association of
the company contains a similar provision. This direction is, therefore,
contrary to law. It was submitted on behalf of the contesting defendants that
the result of a wrong direction is a mixed question of fact and law and such
direction cannot be held to be wholly bad. I am unable to follow this
submission. Rejection, therefore, of proxies given by a company not under its
seal but signed by one of its officers or an attorney duly authorised by it
would be a wrongful rejection contrary to law and such proxies must be held to
be valid.
The
third group of directions relates to stamps on proxies. Direction 3(a) provides
that a proxy which bears no revenue stamp should be rejected. There is no
direction as to what is to be done if a proxy bears a revenue stamp which has
not been cancelled. Admittedly, there were proxies in favour of Reighley as also
Tulsidas on which the stamps remained uncancelled. In paragraph 40 of the
affidavit-in-reply of Dabke and paragraph 18 of the affidavit-in-reply of
Tulsidas it is stated that the proxies, the stamps on which were not cancelled
were not rejected, whether the same were in favour of one group or the other.
This direction cannot be supported in law. Under section 10 of the Indian Stamp
Act, 1899, read with rule 13(f) of the Indian Stamp Rules, 1935, a proxy is to
bear an adhesive stamp. Section 12 of the Indian Stamp Act provides as follows;
"12.Cancellation of adhesive stamps.—(1)(a) Whoever
affixes any adhesive stamp to any instrument chargeable with duty which has
been executed by any person shall, when affixing such stamp, cancel the same so
that it cannot be used again ;
(b) whoever executes any instrument on any paper bearing an
adhesive stamp shall, at the time of execution, unless such stamp has been
already cancelled in manner aforesaid, cancel the same so that it cannot be
used again.
(2) Any instrument
bearing an adhesive stamp which has not been cancelled so that it cannot be
used again, shall, so far as such stamp is concerned, be deemed to be
unstamped.
(3) The person
required by sub-section (1) to cancel an adhesive stamp may cancel it by writing
on or across the stamp his name or initials or the name or initials of his firm
with the true date of his so writing, or in any other effectual manner. "
Thus,
under section 12(2) any proxy on which the stamp is not cancelled must be
treated as an unstamped proxy and ought to have been rejected. In In re Tata
Iron and Steel Co. Ltd Crump J.
has also held that the proxies which are unstamped or upon which the stamps
have not been cancelled must be excluded and any votes recorded on the
authority of such proxies should equally be excluded. No attempt has been made
to support the legal validity of this direction but it was suggested that this
was a favour to the plaintiffs inasmuch as several proxies in their favour bore
stamps which were not cancelled. This overlooks the fact that on the admission
of both Dabke and Tulsidas, there were proxies also in favour of Tulsidas on
which the stamps were not cancelled.
Direction
3(b) requires proxies against which objections have been raised and which are
signed by shareholders described as residing outside Maharashtra State and
which do not bear the stamp of the State where the shareholder is said to
reside to be rejected. This direction again cannot be supported in law. Under
section 2(11) of the Indian Stamp Act, an instrument is said to be duly stamped
when it bears an adhesive or impressed stamp of not less than the proper amount
and when such stamp has been affixed or used in accordance with the law for the
time being in force in India. Under section 10(1), all duties with which any
instruments are chargeable are to be paid and such payment is indicated on such
instruments by means of stamps, (a) according to the provisions contained in
the said section, or (b) when no such provision is applicable thereto as the
State Government may by rule direct. There is no provision in the Indian Stamp
Act with respect to an instrument executed in one State which is required to be
used in another State. Rule 3(1) (i) of the Bombay Stamp. Rules, 1939, made in
exercise of the powers conferred, inter alia, by section 10, provides that all
duties with which any instrument is chargeable shall be paid, and such payment
shall be indicated on such instruments, by means of stamps issued by the
Provincial Government for the purposes of the Act. Under rule 18, except as
otherwise provided by the said rules, adhesive stamps used to denote duty are
to be the requisite number of stamps bearing, inter alia, the words "India
Revenue" or "Bombay Revenue" The words "Provincial
Government" and "Bombay Government" are now to be read as the
"State Government" and the "Maharashtra Government".
Proxies, therefore, executed by shareholders in another State and bearing the
stamps of the Maharashtra State could not have been validly rejected and ought
to have been treated as valid. I may mention that no attempt was made to
support the validity of this direction.
Direction
3(c) requires that proxies by shareholders described as residing outside
Maharashtra State which bear a certificate of the stamp office to be shown to
Tulsidas. This again is surprising. Section 32 of the Indian Stamp Act provides
for a certificate to be granted by the Collector by endorsement on the
instrument in question to the effect that the full duty with which it is
chargeable has been paid. Under sub-section (3) of section 32, any instrument
upon which an endorsement has been made under section 32 is to be deemed to be
duly stamped and, if chargeable with duty, is to be receivable in evidence or
otherwise, and may be acted upon and registered as if it had been originally
duly stamped. There was, therefore, no question of Tulsidas or anybody sitting
in judgment upon the certificate of the stamp officer. All such proxies,
therefore, ought to have been held to be valid. Here again no attempt was made
to justify the validity of this direction.
Direction
5 requires that where there is a difference between the specimen signature of
the shareholder giving the proxy and the signature on the proxy, the proxy
should not be rejected by Dabke but the proxy and the specimen signature should
be shown to Tulsidas for his decision. It nowhere appears that any such
signatures were ever shown to Tulsidas. None of the affidavits-in-reply mention
that any such signature was ever shown to Tulsidas. On the contrary, the
affidavits-in-reply show that this work was done by the staff of the company.
This is also clear from the correspondence with the scrutineers. In their
letter of June 27, 1969, the scrutineers have stated that they had deleted from
the proxy registers those proxies on which specimen signatures differed from
that on the records of the company and all the duplicate proxies on the basis
of tabulations prepared by the company and test checked by them. Further, in
paragraph 50 of the affidavit-in-reply of Dabke and paragraph 31 of the
affidavit-in-reply of Tulsidas there is an express admission that the
signatures were verified by the staff of the company and test checked by the scrutineers.
There is, therefore, no question of any such signature being shown to Tulsidas.
It is the case of the contesting defendants that on a proper construction of
the relevant articles in the articles of association of the company and a
proper demarcation of the respective functions of the chairman of the meeting
and the scrutineers, Tulsidas as the chairman of the meeting had to decide upon
all questions of validity of proxies. If this submission is correct, then it
was for Tulsidas alone to have compared the signatures in question. Whether the
signature on a proxy differs from the specimen signature or not was not a
ministerial matter but a matter involving judgment, which matter could not have
been delegated either to the secretary or the staff of the company.
Direction
6 provides that where the name of the shareholder cannot be ascertained either
from the information given on the proxy or the signature the proxy must be
rejected. As appears from paragraph 42 of the affidavit-in-reply
of Dabke, a large number of proxies in favour of Reighley, namely, those
referred to as "untraceable", were rejected and no folio number given
thereto on the ground that it was not possible from the signature to decipher
the name of the shareholder or to relate the name of the purported shareholder
with any name appearing on the register of member's and that this was done
immediately .after April 26, 1969, or thereabouts. No identification letters
were given to these proxies arid they did not feature in any of the proxy registers
and were, therefore, not taken into account. It certainly was not for the
company's staff to reject such proxies. Tulsidas admittedly never had a look at
any one of these proxies. By their letter of May 21, 1969, the scrutineers
stated that there were approximately 5,000 revocations and 1,000 proxies in
favour of Reighley, which were reported "untraceable", and that
similarly about 700 revocations in favour of Tulsidas and others were also
reported "untraceable". It appears that such proxies and revocations
lodged by the plaintiffs, bore on the reverse certain reference numbers. By the
said letter the scrutineers requested that the company's office should be
instructed to trace the said proxies and revocations with the help of reference
on the back of the documents and suggested that the assistance of the
respective parties may be taken for that purpose. In the progress report which
the scrutineers made on May 22, 1969, they have referred to their letter of May
21, 1969, and requested that the same should be attended to. By their
attorneys' said letter of June 10,1969, addressed to Tulsidas, the plaintiffs
pointed out that the staff of the company had not mentioned folio numbers on
approximately 1,450 proxies and 5,000 odd revocations in favour of Reighley,
while they had given folio numbers to all proxies and revocations in favour of
Tulsidas. They have further recorded that on May 5, 1969, Reighley and Karode
were in the office of the company and had offered to assist in putting the
folio numbers by a reference to the plaintiffs' internal records, but this
offer was not availed of. By the said letter they requested that the assistance
of Reighley and Tulsidas in placing the correct folio numbers on the said
proxies and revocations should be taken. The plaintiffs by their attorneys'
letter of June 23, 1969, sent a reminder to Tulsidas. By their attorneys'
another letter of the same date the plaintiffs pointed out these facts to the
scrutineers and requested them to do the needful. A copy of this letter was
forwarded by the scrutineers to Tulsidas. The plaintiffs sent a reminder to the
scrutineers by their attorneys' letter of June 27, 1969. It appears that
Reighley also handed over to the scrutineers in the presence of Dabke four
files containing the information which would be useful for processing the
proxies and letters of revocation in question. Along with their another letter
dated June 27, 1969, addressed to Tulsidas the scrutineers enclosed a copy of
the said letter
dated June 27, 1969, addressed by the plaintiffs' attorneys to the scrutineers
and also recorded the fact that the said four files had been handed over to
them by Reighley in the presence of Dabke. They also pointed out that they had
so far not received any reply from Tulsidas to their letter of June 23, 1969.
By his letter of June 28, 1969, Tulsidas stated that it was no part of their
duty as scrutineers to have accepted papers from Reighley and that he had given
to the secretary the directions relating to the work of the secretary and as
soon as" the secretary finished his work, the scrutineers would take in
hand the scrutiny of the voting papers and counting of the votes and report to
him. It is thus clear that a large number of proxies and revocation letters in
favour of Reighley were not taken into account merely on the ground that the
company's office could not make out from the signature or the other information
contained in the proxies the name of the shareholder giving the proxies. This
work was left to Tulsidas who claiming to be the sole judge of the validity of
proxies and revocation letters to be done by the secretary and the staff of the
company and even when assistance was offered on the basis of information
appearing on the proxies and revocation letters themselves, namely, the
reference numbers on the back thereof, to help the company's staff "trace
these proxies and revocations", such offer was rejected. This attitude on
the part of Tulsidas militates against his claim of bona fides, fairness and impartiality.
Direction
7 requires that wherever there is a difference between the specimen signature
and the signature on the revocation letter, the revocation letter should be
shown to Tulsidas for decision. As is clear from what is stated with respect to
direction 6, no such revocation letter was ever shown to Tulsidas, but such
revocation letters were dealt with only by Dabke and the office staff.
Direction
8(a) requires undated revocation letters to be ignored. The plaintiffs had
lodged about 11,000 revocation letters obtained by them. The position appears
to be that a large number of revocation letters in favour of Rgjghley and
others were undated, while those in favour of Tulsidas were dated. In In re
Tata Iron and Steel Co Ltd., Crump J.
said that such an objection with respect to proxies hardly required discussion.
He observed:
"The
proxy was lodged within the time allowed and before the date of the meeting. I
can understand that an omission to state the date of the meeting may be a
serious defect, but as for the date of execution 1 can only say de minimis. No
authority has been cited for questioning a proxy on such grounds."
I
fail to see why the same principle should not apply to revocation letters.
Under article 113 of the articles of association of the company, a vote given
in pursuance of a proxy is to be valid notwithstanding, inter alia, the
revocation of the proxy provided no intimation in writing of such revocation
has been received at the registered office of the company before the vote is
given. All that is, therefore, required to revoke a proxy validly lodged is the
receipt of a revocation letter before the vote is given; No form of revocation
letter is prescribed and this insistence on date appears to be incapable of
explanation except that a larger number of undated revocation letters were
those of proxies in favour of Tulsidas and others. Actually in the proxy
register prepared by the Tata Consultancy Services most revocation letters have
been bearing the date April 28, 1969. It was said at the hearing that this date
is a mistake and as appears on the record, a large number of the revocation
letters in favour of Reighley were undated. There is no mention in the affidavit-in-reply
that such a mistake was made or as to who made this mistake or how such a
mistake came to be made. It was said at the hearing that this direction applied
only where there were cross revocation letters in favour of both parties, one
of which' was dated and the other undated. There is no warrant for this
statement either in the said letter of June 26, 1969, or in any of the
affidavits in reply and this statement, therefore, cannot be accepted. The
direction unequivocally applies to all undated revocation letters and, in fact,
as the record shows, all undated revocation letters, whether they were cross
revocation letters or otherwise, have not been taken into account. This
direction, therefore, does not appear to have been given bona fide.
Direction
8(b) states that the letters of revocation filed by Firestone and Kilachand in
the form annexed to the said letter of June 26, 1969, were not revocation
letters and should be ignored. The form of revocations filed by the plaintiffs
and objected to, show that such revocation letters are addressed to the
company, signed by the shareholders and headed "Extraordinary General Meeting on 28th April, 1969, and 29th April 1969 "and are in these
terms:
"I
have signed forms of proxy and forms of revocation in favour of Mr. Tulsidas
Kilachand and others. I have subsequently revoked the said forms of proxy and
revocation and executed fresh forms of proxy and revocation in favour of Mr.
F.J. Reighley and others. Kindly note the aforesaid position in your register
and acknowledge receipt of this letter."
Now,
I fail to see what can be objected to in this form. All that was said was that
this form referred to revocation as having been done earlier and did not by itself
revoke the proxies. The form of letter of revocation in favour of Tulsidas is
more elaborate and it states that the executant had executed the final proxies
in favour of Tulsidas and others and had on that day revoked all proxies
executed in favour of Reighley and others. Now, I fail to see why either of
these two forms of revocation should be rejected. A proxy holder is merely an
agent of a shareholder to vote at a particular meeting. Under section 203 of
the Indian Contract Act, 1872, except where an agent has an interest in the
subject-matter of the agency, the principal may revoke the authority given to
his agent at any time before the authority has been exercised so as to bind the
principal, and under section 207, revocation may either be expressed or
implied, and under section 208, so far as regards third persons, termination of
the authority takes effect when it becomes known to them. No particular form of
revocation is provided for by the articles. Article 113 only requires an
intimation in writing of revocation to be received at the registered office of
the company before the vote is given. In the forms of revocation rejected by
Tulsidas it is made expressly clear that the proxies given by the shareholder
in favour of a particular individual have been revoked by him and they ought,
therefore, to have been held to be valid.
Direction
8(c) says that where the name of the shareholder cannot be ascertained either
from the information given on the revocation letter or the signature, the
revocation letter should be rejected. A large number of revocation letters
obtained by Reighley and others have been rejected on this ground. Here the
position is the same as in the case of "untraceable "proxies and what
I have said with regard thereto while considering direction 6 must also apply
to direction 8(c).
Direction
8(d) provides that if there are two or more revocation letters given by the
same shareholder in favour of different parties and they all bear the same
date, they will cancel out. This direction is wholly untenable in law. I fail
to see why the revocation letters would cancel each other out. They would on
the contrary cancel the proxies in respect of which they have been lodged. The
effect of this direction would be that if proxies were given by a shareholder
in favour of both the parties and one bears a later date than the other, the
cancelling out of the cross letters of revocation in respect thereof would make
valid or revive the proxy of the later date. I am unable to see on what
principle of law this can be. The effect of such revocation letters must be
taken as cancelling the proxies in respect of which these letters have been
lodged.
Direction
9(a) states that a proxy given by a shareholder will revoke an earlier proxy
given by him, whether in favour of the same persons or other persons unless the
later proxy is validly revoked, in which case the earlier proxy will stand. The
later proxy would of course revoke an earlier proxy, but I fail to see how,
when a later proxy which has revoked an earlier proxy is itself revoked, the
earlier proxy can be resuscitated. The result of a later proxy being revoked
would be that the later proxy would also fall and not that the earlier proxy
would revive. This direction too must, therefore, be said to be bad in law.
Direction
9(c), inter alia, provides that where a shareholder has given proxies in favour
of both Reighley and others as also Tulsidas and others, than if both the
proxies are undated or both bears the same date, they will be treated as
cancelling each other unless one of the proxies is validly revoked. Here also
to my mind the result would be that two cross proxies bearing the same date or
both undated would cancel each other out irrespective of whether one of them is
thereafter revoked or not because revocation of one of such proxies cannot lead
to the revival of the other proxy. This direction also, therefore, does not
seem to me to be justified in law.
So
far as the bona fides of Tulsidas are concerned, it may also be mentioned that
after the result was declared, Reighley, in his capacity as director,
repeatedly requested Tulsidas as well as Dabke as the secretary of the company
to give him inspection of various papers. Copies of that correspondence are
annexed to the plaint in Suit No. 681 of 1969. It is not necessary to refer to
that correspondence in any great detail, but it cannot be disputed that several
of the documents, of which Reighley required inspection in his capacity as
director, were those of which he was entitled to inspection under section
209(4)(a) of the Companies Act, 1956. Nonetheless inspection was denied to him.
It was said at the hearing that it was obvious that the plaintiffs were
contemplating filing suits and this inspection was asked for by Reighley for
the purposes of such suits. If a director is entitled to take inspection, his
motive in doing so is irrelevant. In fact, among the documents, of which
inspection was not given to Reighley, was the said letter of June 26, 1969,
which came to the knowledge of the plaintiffs and Reighley for the first time
when a copy of it was annexed to the affidavit-in-reply of Dabke as also of
Tulsidas. This fact also militates against the claim of bona fides put forward
by Tulsidas.
Thus
several directions given by Tulsidas are bad in law and some others are not
given. Apart from this, admittedly the results prepared by the Tata Consultancy
Services contain several mistakes. The result was communicated by the Tata
Consultancy Services to the company by their letter of June 30, 1969, signed by
one Y.P. Sahni. Along with that letter a new proxy register was forwarded to
the company together with a list of what is referred to as "additional
changes which were not incorporated in the main register as they had been
missed by the company". It further appears from the said letter that due
to two punching errors, the total shares shown against the plaintiff group from
page No. 347 onwards of the register had to be amended, which was to be done by
ignoring the lakh position, and as a result thereof, the total shares shown on
the last page No. 465 was required to be read at 70,698 and not 8,70,698. A
mistake of eight lakhs in the total and in the punching of figures can hardly
be said to be a negligible error. The letter farther states that due to changes
which were pointed out to the Tata Consultancy
Services by the company, the final figures had to be further amended as set out
in the said letter. These corrections are as follows:
|
|
Firestone |
Kilachand |
|||||
|
|
Proxies |
|
Shares |
|
Proxies |
|
Shares |
|
Total number of proxies
received and the number of shares against these proxies (as shown in the
register and rectified as mentioned in) |
|
...... |
|
...... |
|
...... |
|
|
(1) .. |
6,798 |
|
70,698 |
|
6,396 |
|
2,54,642 |
|
Minus : deletions as per list
'A' attached. |
182 |
|
2,972 |
|
53 |
|
8,171 |
|
|
6,616 |
|
67,726 |
|
6,283 |
|
2,46,471 |
|
Plus: as per additions
mentioned in list 'B'…. attached… |
1 |
|
6 |
|
3 |
|
161 |
|
|
6,617 |
|
67,732 |
|
6,286 |
|
2,46,632 |
Along with the said letter
the Tata Consultancy Services also returned the old proxy register in which the
said changes were marked. This letter was sent to the company in duplicate and was
delivered by hand. One signed original was retained by the company and the
other sent to the scrutineers. In both the original letters, after the portion
reproduced above, further corrections have been made in ink under the heading
"Firestone" in the first three columns. These corrections are :
'"Delete (see
Statement 'A') .. ...
Thus, the total proxies in
favour of Reighley and the number of shares which such proxies represent are reduced
by 1 proxy and 6 shares respectively. I am informed by Mr. Sen, learned counsel
for the company, that the initials "D.V" are the initials of the man
from the Tata Consultancy Services who delivered these letters to the company
and that these corrections were made by him when these further mistakes were
pointed out to him by the company when the said letters of June 30, 1969, were
delivered to it. Both the signed originals of the said letters have been
exhibited by consent.
From this, it is obvious that
no reliance can be placed even upon the accuracy of the result obtained through
the services of the punching cards and the computer. Thus, the result obtained
was based on decisions erroneous in law, not given bona fide and containing,
for aught one knows, further arithmetical errors as yet undetected. The
decision so arrived at cannot be said to be valid and cannot stand. It was
submitted on behalf of the contesting defendants that on this position what the
court should do would be to give correct directions and direct a fresh count on
the basis thereof, and that in fact the plaintiffs have made an alternative prayer to
this effect in Suit No. 681 of 1969. I do not propose to decide at this stage
what the effect of these wrong decisions and arithmetical mistake is, whether
it renders invalid the said meeting and the resolution passed thereat or
whether the court has the power in such a case to give proper directions and
direct a re-count. This will have to be decided at the hearing of the suit, but
one thing cannot be disputed. Today there is no resolution of the company
approving the appointment of the private company for a further term, and in
view of the large number of proxies and revocation letters in favour of
Tulsidas and others which appear to have been rejected and proxies and
revocation letters in favour of Tulsidas and others which appear to have been
treated as valid by reason of these erroneous decisions, and bearing in mind
that the majority in favour of the resolutions as shown in the result of the
poll declared by Tulsidas is only of 20,171 votes, and having regard to the
fact that the one proxy in favour of Reighley and others averages about 10
votes or more, while that in favour of Tulsidas and others averages about 13 to
14 votes, it may well be that if a recount as submitted were ordered, the
resolution would be lost.
There
are a number of objections taken by the plaintiffs in connection with this
aspect of the case. In view of the conclusion which I have already reached, I
do not consider it necessary to deal with these objections and they may well be
decided at the hearing of the suit.
The
question that remains is what order to make in this case. It was submitted by
Mr. Nariman, learned counsel for the plaintiffs, that since the conclusions I
have arrived at are that the resolution passed at the meeting of the board held
on November 14, 1968, and the notice convening the said meeting of April 28,
1969, and what was transacted at the said meeting are all invalid, the court
must restrain the continuance of an ultra vires and an illegal act and grant an
injunction as prayed for. On the other hand, the contesting defendants
submitted that the conclusions to which I have arrived at on these notices of
motion can only be prima facie and on such prima facie conclusions the court
ought not to grant an injunction. I have at this stage held in favour of the
plaintiffs on almost all points. Even though the conclusions I may have reached
are prima facie and not final conclusions, I would have been inclined to grant
an injunction as prayed for, but for the fact that all parties are agreed that
the hearing of both these suits should be expedited and they should be heard
and disposed of as early as possible, a view which in the interests of the
parties, I am also inclined to take. I accordingly do not think it necessary at
this stage to disturb the status quo ante. But what is the status quo ante?
Admittedly, right from October 1, 1968, the private company has voluntarily not
taken any amount for its commission. It may have done this either because the
private company may have apprehended that the opposition of the plaintiffs to
this appointment for a further term may prove successful or because it may have
feared action by the Company Law Board. In fact, in its letter of April 9,
1969, the Company Law Board had made it expressly clear that any action taken
by it would be effective as from October 1, 1968. If, therefore, the private
company is to allow to continue to function as it has been doing, it can only
be upon terms. It was submitted that the financial condition of the private
company is so sound that no condition need be imposed and no security taken as
the private company is solvent enough to refund any moneys which it may
receive. In support of this submission a copy of the balance-sheet of the
private company for the year ending September 30, 1968, has been put in by
consent and marked exhibit No. 8. This balance-sheet, however, does not quite
bear out this claim, for certain items shown on the assets side cannot be taken
at the value shown therein. In the summary of investments, out of a total
investment of Rs. 1,23,39,296, investments of the value of Rs. 59,65,133 are in
shares of subsidiary companies which are, however, not quoted on the market, and
investment of the value of Rs. 13,19,532 in shares of subsidiary companies
quoted on the market. Further, on the assets side are shown two sums of Rs.
2,31,130 and of Rs. 27,25,818 aggregating to Rs. 29,56,948 due from the
Digvijay Spinning and Weaving Company Ltd., which are stated as
"considered good ". The Digvijay Spinning and Weaving Company Ltd. is
a company under the same management as the private company and it is
interesting to know its fate. By a notification No. BRU 21690-LAB. I, dated
July 9, 1969, of the Government of Maharashtra, Industries and Labour
Department, published in Part I-L of the Maharashtra Government Gazette,
Extraordinary, of July 9, 1969, the Government of Maharashtra in exercise of
the powers conferred by section 3 and clause (a)(iv) of sub-section (1) of
section 4 of the Bombay Relief Undertakings (Special Provisions) Act, 1958,
declared that the said Digvijay Spinning and Weaving Company Ltd. should be
conducted for a period of one year commencing on July 9, 1969, and ending on
July 9, 1970, to serve as a measure of unemployment relief, and has further
directed that during the said period any right, privilege, obligation or
liability accrued or incurred before July 9, 1969, and any remedy for the
enforcement thereof should be suspended. A copy of the relevant gazette has
been put in by consent and marked exhibit C. Thus, this debt is today not
recoverable, assuming that a company which had to be declared as a relief
undertaking is capable of meeting its debts. Further, the auditors' notes
appended to the said balance-sheet show that the sales tax assessments of the
company have been finalised up to March 31, 1967, only and that there are
pending assessments in respect of which the private company does not expect any
liability to be imposed. How far this expectation is true can only be known
when the assessments are finalised, but we should
bear in mind that the expectation of the private company in respect of the
debts due from the Digvijay Spinning and Weaving Company Ltd. was certainly not
justified. The auditors' notes also show that the bonus is paid and accounted
for on cash basis and, therefore, no provision has been made in respect thereof
during the year and that no depreciation is provided on land and godown and on
building other than the portion used for business which aggregated to Rs.
87,827, under section 205 of the Companies Act, 1956. Further, on the assets
side is shown a sum of Rs. 39,76,604 for advances and other income-tax payments
and the note to it runs, "completed assessments up to Asstt. Year 1963-64,
but under appeals; not adjusted therefrom". Note (B) of the company
auditors' report to the shareholders states that the auditors could not, in the
absence of availability of tax assessment records, ascertain the adequacy or
otherwise of the liability for taxation and provision thereof. This provision
is in the sum of Rs. 22,82,770. The secured loans aggregate to Rs. 82,01,245,
while the unsecured loans aggregate to Rs. 16,09,817. As the profit and loss
account shows, the actual working of the company has resulted in a profit of
Rs. 3,76,429, though the final figure of profit shown in the profit and loss
account which is taken to the balance-sheet is Rs. 7,32,273 arrived at by
taking into account certain other items, such as balance as per last
balance-sheet and income-tax refunds of previous years. In the
affidavit-in-reply of J.B. Shukla, the secretary of the private company,
commission in the sum of Rs. 21,03,300 is stated to have been earned from the
sole selling agency for the year ending September 30, 1968. According to the
said affidavit, the private company incurred expenses in respect of the sole
selling agency in the sum of Rs. 17,11,300. Thus, according to the said
affidavit, the profits earned from the sole selling agency are Rs. 3,92,000.
If, therefore, the profits from the sole selling agency were not there, then
for the year ending September 30, 1968, the actual working of the private
company would have shown a loss. The financial position of the private company
cannot, therefore, be said to be so sound as to justify dispensing with
security.
It was then submitted by
the contesting defendants that in respect of the working of the sole selling
agency, the private company has to incur expenses which, under the terms of the
agreement, are to be borne by it and, therefore, at least the amount of such
expenses should be allowed to be received unconditionally by it. In the said
affidavit-in-reply of Shukla it is said that the expenses incurred for the year
ending September 30, 1968, were in the sum of Rs. 17,11,300 and a summary of
such expenses is annexed as exhibit A to the said affidavit. After this
affidavit was filed, the plaintiffs by their attorneys' letter of September 8,
1969, called upon the private company to give them inspection of documents from
which the correctness of such expenses could be ascertained as also inspection
of the balance-sheet for the year ending September 30, 1968, and the documents
required by law to be annexed or attached thereto, including the profit and
loss account and the auditors' and the directors' report, which balance-sheet
was referred to in the said affidavit. By its attorneys' letter of September 9,
1969, the private company refused to give inspection. The plaintiffs have
denied that the expenses could be in the sum alleged by the private company. No
supporting material is placed before me to show how the figures in the summary
of expenses annexed to the said affidavit have been arrived at. In view of
several incorrect statements made in the affidavits-in-reply, not much reliance
can be placed on these figures unsupported by any other material. It is also
alleged in the said affidavit that the cost of the company of setting up a
separate sales organisation would be over Rs. 25,00,000 and a statement thereof
is annexed as exhibit B to the said affidavit of Shukla. This exhibit B refers
to an estimate as contemplated by an expert committee sent by the plaintiffs in
1965. After this affidavit was filed, by their letter dated September 10, 1969,
the plaintiffs asked for inspection of the report of such estimate. No such
inspection was given to the plaintiffs nor has any such report been produced
before me and it is not possible at this stage to place reliance upon this
estimate without a detailed picture thereof being presented. The plaintiffs in
their affidavit-in-reply have pointed out that 85 per cent, of the synthetic
rubber produced by the company is bought by the 7 tyre companies and about 50
consumers borne on the list of the Director-General of Technical Development
and that no particular sales organization or special sales effort is necessary
for selling the company's products in view of this fact and the fact that the
company is the only company in India which makes synthetic rubber. There
appears to be considerable force in this. In any event, no sufficient cause has
been made out why in this case the normal rule as to taking of security should
be departed from. It was also submitted that, as in order to set up its sales
organisation the company would have to incur expenses, in the interest of the
company, therefore, instead of making the company incur such expenses the court
should permit the private company to continue as sole selling agents pending
the suits and direct a certain amount to be paid to it towards expenses, and
not by way of commission to be retained by it irrespective of the result of the
suits. In view of the provisions of the Companies Act, this is an astonishing
submission to make. Under the sole selling agency agreement the private company
has to set up and maintain at its own expense an adequate organisation for sale
of the company's products within the agency territories and is to bear and pay
all expenses relating to such organisation. Such expenses are, therefore, to be
met by the private company out of the amount of commission received by it.
Under section 294(2A), if the appointment of a sole selling agent is
disapproved by the company in general meeting, it ceases to be valid with effect from the date
of the general meeting, and section 294A(l)(a) provides that
"A
company shall not pay or be liable to pay to its sole selling agent any
compensation for the loss of his office in the following cases :—
(a) where the appointment of the sole selling agent
ceases to be valid by virtue of sub-section (2A) of section 294."
Under
sub-section (2) of section 314, if any office or place of profit is held in
contravention of the provisions of sub-section (1), not only is such office or
place vacated on and from the date next following the date of the general
meeting of the company at which a special resolution according the consent was
required to be passed, but the holder of such office or place also becomes
liable to refund to the company any remuneration received by him for the period
immediately preceding such date in respect of such office or place of profit.
Thus, in law, if the plaintiffs were to succeed, the private company would not
only be not entitled to receive any commission but would also be bound to
refund moneys, if any, received by it by way of commission. The submission of
the contesting defendants, therefore, amounts to asking the court to ignore and
circumvent the mandatory provisions of the Companies Act enacted in public
interest and to seek to perpetuate an illegal payment by means of a court
order. This the court consistently with the law ought not to do. Since the
private company has rested content with not taking any commission for a period
over eight months prior to the filing of the first suit, there is no reason why
it should be permitted to take any amount for the period preceding the hearing
of these notices of motion. At the highest it can only be permitted to take a
reasonable amount towards expenses from October 1, 1968, upon giving security
and upon condition of repayment or refund and the necessary direction in that
behalf will be given in the order which I will pass.
So
far as the other prayers in the notice of motion in Suit No. 681 of 1969, are
concerned, as mentioned before, the contesting defendants do not oppose the
granting of an injunction to restrain Tulsidas and the scrutineers from acting
as such in respect of the said extraordinary general meeting held on April 29,
1969. The parties had also agreed upon proper custody of all the papers and
documents in connection with polls taken at the meeting held on the 28th and
the 29th April, 1969. They are also agreed that inspection may be taken under
proper safeguard of all such papers forthwith without waiting for formal discovery.
As
mentioned before, the parties wanted to take a consent order with respect to
this prayer, but no consent order can be passed inasmuch as the form of the
order was not agreed to. This was because the plaintiffs have prayed for a
receiver of all the papers and documents in connection with both the meetings
including those set out in exhibit 29 to the plaint.
According
to the company, some of the documents mentioned in exhibit 29 do not exist. I
am not today determining which document exists and which does not. An ad
interim injunction was given by me, as mentioned before, restraining each of
the defendants from disposing of or in any manner dealing with any of the said
papers and documents including those mentioned in exhibit 29. In spite of this,
in none of the affidavits-in-reply is the existence of any of these documents
denied. Since for whatever reason a consent order cannot be passed, it is not
possible to appoint any private individual to be the custodian of these papers
and the normal rule must prevail.
All
parties are agreed that the hearing of both these suits should be expedited,
but according to the contesting defendants, Suit No. 522 of 1969 ought to be
heard first and Suit No. 681 of 1969 to be heard one month thereafter. It was
submitted that Suit No. 522 of 1969 was filed as a short cause, the pleadings
in that suit are complete and when the suit came on board for directions as a
short cause, it has been ordered to be tried as a contested short cause on
December 1, 1969, while Suit No. 681 of 1969 is filed as a long cause and
written statements have not yet been filed therein. The last date for filing
written statements in Suit No. 681 of 1969 was August 23, 1969. If the
defendants have chosen not to file their written statements, the blame for this
lies only on them. The date for hearing which is given in respect of Suit No.
522 of 1969, is however, not a peremptory date and experience shows that the
suit is not likely to come on board on December 1, 1969, or for a considerable
time thereafter. These notices of motion have been argued as if the hearing
thereof were the hearing of the suits, and apart from formal discovery in both
suits and the written statements in Suit No. 681 of 1969, substantially what
remains to be done is only inspection of the papers and documents in connection
with the polls. Thereis also neither convenience nor merit in hearing Suit No.
681 of 1969 one month after Suit No. 522 of 1969. On the contrary, it is in
public interest for saving public time as also in the interest of the parties
that these suits should be heard one after the other and by the same judge.
Accordingly,
I grant, pending the hearing and final disposal of both Suit No. 522 of 1969
and Suit No. 681 of 1969, an injunction restraining the Synthetics and Chemicals
Ltd., the first defendants in both the suits, and its officers, servants and
agents from paying to Kilachand Devchand and Company Private Ltd., the second
defendants in Suit No. 522 of 1969 and the fifth defendants in Suit No. 681 of
1969, any payment by way of commission or otherwise in pursuance of the said
resolution dated November 14, 1968, of the board of directors of Synthetics and
Chemicals Ltd. or under the said agreement dated February 18, 1969, and/or the
said letter dated February 18, 1969, as also restraining Kilachand Devchand and
Company Private Ltd., its officers, servants and agents from receiving from
Synthetics and Chemicals Ltd. any amount by
way of such commission or otherwise in pursuance of the said resolution or the
said agreement and/or the said letter. I further order and direct that, pending
the hearing and final disposal of both the said suits, Synthetics and Chemicals
Ltd. shall deposit in court for the period commencing from October 1, 1969, the
amount which would have been payable by it as commission to Kilachand Devchand
and Company Private Ltd. under the said agreement dated February 18, 1969, read
with the said letter dated February 18, 1969, were the said sole selling agency
agreement held to be valid. The amount for the month of October, 1969, shall be
deposited on or before November 30, 1969, and the amounts for the subsequent
months on or before the thirtieth day of each succeeding month.
Kilachand Devachand and
Company Private Ltd. will be at liberty to withdraw one-half of the amount of
each such deposit upon furnishing a bank guarantee or security to the
satisfaction of the prothonotary and senior master of this court and on
condition that in the event of the plaintiffs succeeding in either of the said
two suits, Kilachand Devchand and Company Private Ltd. will forthwith deposit
into the court the amounts so withdrawn by it for the purpose of being refunded
.to Synthetics and Chemical Ltd.
I also grant, pending the
hearing and final disposal of this suit, an iujunction restraining Tulsidas
Kilachand, the second defendant in Suit No. 681 of 1969, from in any manner
exercising any power or function as chairman of the extraordinary general
meeting of Synthetics and Chemicals Ltd. held on April 29, 1969, as also restraining
defendants Nos. 3 and 4 in Suit No. 681 of 1969 and each of them from
exercising any power or function as scrutineers appointed at the said
extraordinary general meeting.
I also appoint, pending the
hearing and final disposal of this suit, the court receiver to be the receiver
of all the papers and documents in connection with the polls taken at the
extraordinary general meetings of Synthetics and Chemicals Ltd. held on April
28, 1969, and April 29, 1969, respectively, including the papers and documents
specified in exhibit 29 to the plaint in Suit No. 681 of 1969, except such of
them as may have been marked as exhibits at the hearing of these notices of
motion, but including the registers produced in court at the said hearing. The
registers produced in court will be tied up in packets; sealed by the office of
the prothonotary and senior master of this court and forwarded to the court
receiver. The court receiver will take charge of all the other papers and
documents in the presence of the attorneys of the plaintiffs and of the
defendants in Suit No. 681 of 1969. Defendants Nos. 1 to 5 or defendants Nos.
1, 2, and 5 in Suit No. 681 of 1969 will be at liberty to nominate the
attorneys or anyone of them to attend on their behalf for this purpose. All the
papers and documents taken charge of by the court receiver will be tied up in
packets and sealed with
the seal of the court receiver and of the attorneys of the plaintiffs and of
;the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos. 1
to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at liberty
to nominate the attorneys of any one of them to affix the seal on their behalf.
The parties will be entitled forthwith to take inspection of all the papers and
documents of which receiver has been appointed, in the court receiver's office
during office hours every working day. Such inspection will be taken in the
presence of a responsible representative of the attorneys of the plaintiffs and
of the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos.
1 to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at
liberty to nominate the representative of the attorneys or any one of
them to attend on their behalf for this purpose. The seal of the packets will
be opened only in the presence of such representatives of attorneys and after
inspection is over on each day, the papers and documents will be again tied up
in packets and sealed as aforesaid by the court receiver and such
representatives of attorneys. The attorneys of the parties will be at liberty
to initial all such papers and documents.
I
direct the defendants in Suit No. 681 of 1969 to file their written statement
on or before November 30, 1969.
The
affidavits of documents in each of the said suits shall be made on or before
December 15, 1969, and inspection of the documents disclosed therein shall be
given forthwith after such discovery is made.
I
direct that Suit No. 522 of 1969 shall be placed peremptorily on board for
hearing and final disposal, subject to a part-heard matter, on February 2,
1970, and that Suit No. 681 of 1969 be placed on board for hearing and final
disposal on the same date immediately after Suit No. 522 of 1969.
So
far as the costs of these notices of motion arc concerned, the hearing has
lasted nearly 63 hours. Looking to the length of the hearing, the heavy record,
the elaborate preparation and arguments and the complexity and importance of
the question involved and the fact that each side is represented by three, and
in some cases more than three, counsel, except defendants Nos. 3 and 4, who are
represented by two counsel only, I direct that the costs of these notices of
motion be taxed on the long cause scale with two counsel being allowed and
shall be costs in the cause.
v.
Hormasji
PAGE, C.J.
AND MYA BU, J.
MISCELLANEOUS APPEAL NOS. 19
& 25 OF 1932
CIVIL MISCELLANEOUS NO. 180
OF 1931
FEBRUARY 1, 1932
Mcdonnell and Leach, for the Creditors.
Lambert, for the Liquidators.
Page, C.J.— On the 15th of December, 1931,
Messrs. Stuart, Smith and Allan, Chartered Accountants, who had been appointed
scrutineers by the court to assist the Chairman of a statutory meeting of
creditors held under s. 153 of the Indian Companies Act (VII of 1913), filed a
petition for directions as to the validity of certain proxies which had been
used at the statutory meeting.
My learned brother Das, J., heard the petition and
held that as "the contravention of r. 145 is fatal to the proxy form all
the proxy forms used in this matter must be rejected; so the result is that
another meeting of the creditors must be held."
Appeals against the order of Das, J., have been
preferred by the liquidators, by certain gentlemen who have been elected to
form a committee of the. creditors, and by certain other creditors.
A preliminary objection has been raised on behalf of
certain of the creditors that no appeal lies from this order. In my opinion the
preliminary objection fails. Under the provisions of s. 153, creditors casting
their votes at a duly convened and conducted meeting of creditors for or
against a scheme of arrangement are entitled to have the result of the poll
recorded. The decision of the creditors at such a meeting has an important
bearing upon the future of the company, and the interests of those connected
with it; it may in effect determine whether the company is to continue as a
business undertaking or not. If the votes duly cast in favour of the scheme are
less than the statutory majority prescribed under s. 153 (2), the result will
be that the scheme of arrangement cannot be presented to the court for
sanction. E contra, if as the result of the poll the statutory majority of
creditors in favour of the scheme is obtained, the creditors who voted in
favour of the scheme of arrangement have a right to have the scheme presented
to the court for sanction. The effect of the order of the learned trial Judge
that another statutory meeting for ascertaining the wishes of the creditors
with respect to the proposed scheme is to be held was finally to determine that
the decision of the creditors who had duly voted for and against the scheme at
the meeting of the nth December, 1931, should not be ascertained or recorded;
and to render inoperative the poll that had been taken at the statutory meeting
held on that day. In my opinion the order of Das, J., as made was a
"judgment" within cl. 13 of the Letters Patent, and as such was
appealable: [See Levy Brothers and
Knowles, Ltd. v. Subodh Kumar Day (1031.0.659; 31C.W.N. 894; A.I.R. 1927
Cal. 689)]. It is necessary, therefore, to consider the case on the merits, and
in my opinion the appeals should be allowed, and the order of Das, J., set
aside. The petition appears to me to be wholly misconceived. The function of
the applicants as scrutineers, pursuant to the order of Sen, J., was merely to
assist the Chairman. If, and in so far as, the Chairman required them to assist
him with their experience and advice in connection with the poll it was the
duty of the scrutineers to comply with his request. It was not the duty of the
scrutineers, and they had no right, to decide whether any proxy was good or
bad. The persona designata to determine that question was the Chairman of the
meeting. Upon that matter nothing could be clearer than the order of Sen, J.,
of the 2nd December, 1931, "I also direct that the decision of the
Chairman as to the admissibility of any proxy shall be final for the purpose of
this meeting, subject to the court's power of revision."
These words connote that, unless and until the
Chairman of the meeting has given his decision as to the admissibility of the
proxies tendered at the meeting, and his decision has been impugned and duly
brought before the court by way of revision, the court ought not to consider or
determine whether any proxy was valid or not. In my opinion, the Court was not
justified in embarking upon a consideration of the matters raised in the
petition for two reasons, (1) that the petitioners had no locus standi to
present the petition; and (2) that, having regard to the order of Sen, J., the
court ought not to exercise its powers of revision unless and until the
Chairman of the meeting has given his decision as to the admissibility of the
proxies that have been tendered. I do not propose, and for the purpose of
deciding these appeals it is unnecessary, to consider whether any of the
proxies tendered at the meeting were admissible or not. At this stage of the
proceedings it is premature for the court to consider or determine that
question.
We have decided that the court is entitled to
entertain the appeals, and that being so, all parties to the appeals consent to
the appeals being allowed, and the order from which the appeals are brought set
aside.
The costs of the liquidators will be defrayed out of
the funds of the Bank, five gold mohurs.
Mya Bu, J.—I agree.
[1989] 65 COMP. CAS. 121
(SC)
v.
Dr. Shantaram Kale
S.L.P. (Civil) No. 7508 of 1988
JULY
29, 1988
S.N. Kacker, U.R. Lalit,
V.D. Joshi, B.D. Joshi, S.C. Bora and Kailash Vasdev for the petitioner.
Dr. Y.S. Chitale, V.A.
Bobde, V.J. Francis, N.M. Popli and Miss Almjit Chauhan for the respondents.
Sen, J.—This special leave petition is directed against the
judgment and order of the High Court of Bombay dated June 28, 1988, upholding
the election of respondents Nos. 1 and 2, Dr. Shantaram Kale and Takiqui
Hassan, as Mayor and Deputy Mayor, respectively and respondents Nos. 3 to 8 as
members of the standing committee at the first meeting of the Aurangabad
Municipal Corporation at the Alankar Hall, held on May 6, 1988, at 2 p.m. The
issue involved is whether the first meeting of the corporation called for that
day at 2.45 p.m. by the Municipal Commissioner, respondent No. 9, who presided
over the meeting, was adjourned for the day or adjourned sine die and,
therefore, had to be called on some subsequent date to be fixed by him and thus
necessitated the giving of seven days' clear notice as required by rule 1(h),
Chapter II of the Rules framed under section 453 of the Bombay Provincial
Municipal Corporation Act, 1949.
Since the question involved
was a matter of moment and the affidavits filed by the petitioner, Chandrakant
Khaire, the leader of the Shiv Sena party which is the largest single group in
the corporation consisting of 18 councillors, and by some of the councillors as
well as their supporters, and the affidavits-in-opposition filed by the
party-in-power, Congress-I, which has formed a coalition with the splinter
groups commanding a majority of 32 councillors in a House of 60, raise
controverted facts as to whether the proceedings of the meeting had been
adjourned sine die or merely suspended, we thought it better to have the
minutes of the proceedings before us. Shri Vinod Bobde, learned counsel
appearing for the Municipal Commissioner, has placed the minutes book written
in Marathi along with a translation thereof in English. On the last occasion,
we were left with the impression that the word used by the Municipal
Commissioner was "tahkub "while adjourning the meeting at 2.45 pm.
amidst unprecedented scenes of complete disorder, commotion and pandemonium. We
now find the word used in the minutes is "sthagit" but in the
translation furnished, the word used is "adjourned"
The facts revealed in the
counter-affidavits filed by the Municipal Commissioner, Collector and the
Superintendent of Police show that a serious law and order situation had arisen
due to which both the Collector and the Superintendent of Police had to rush to
the venue of the meeting. They both have sworn to the fact that not only the
councillors but many outsiders (also) were present in the hall where the
meeting was being held. There were also a large number of supporters of the
rival parties, spectators and journalists. The Municipal Commissioner was
surrounded by some 20-25 persons apart from the councillors, one group insisting
upon the meeting being adjourned for the day, i.e., the councillors belonging
to the majority Shiv Sena party while the other group consisting of the
Congress-I party and the splinter groups forming the coalition demanding that
the meeting be continued. The Collector has sworn to the fact that there was
"total confusion and bedlam inside the hall apart from the fact that the
entire atmosphere was surcharged with commotion" and no business could be
transacted. He has further sworn to the fact that respondent No. 9, the
Municipal Commissioner, the presiding officer, appeared to be "in a very
agitated state of mind" and told him that he could not hold the meeting in
the unruly and disorderly situation prevailing and complained that despite his
repeated requests to the councillors to maintain peace, it had no effect and
they kept on shouting, raising slogans and fighting amongst themselves and
thereby making it impossible for him to transact any business. The meeting was
scheduled to be held at 2. p.m. and respondent No. 9 announced that the polling
for the offices of Mayor, Deputy Mayor and members of the standing committee
would commence from 2.30 p. m.
What happened thereafter
reveals a very disturbing feature which unfortunately has become too common these
days and shows the strain through which our democratic system is passing. At
about 2.30 p.m., some of the councillors belonging to the Shiv Sena party sat
on the ballot boxes and others belonging to that party and its supporters
surrounded the Municipal Commissioner demanding that the meeting be adjourned
to a subsequent date. Thereupon, the councillors belonging to the
party-in-power, i.e., Congress-I, started shouting at him and saying that the
meeting be held later on that day, being apprehensive that if the meeting were
to be adjourned, they might lose the contest. There followed shouting of
slogans, hurling of abuses and thumping of tables. The councillors belonging to
the rival groups then started throwing chairs at each other leading to a pandemonium.
The fact that not only councillors but also many outsiders were present in the
hall where the meeting was being held who really had no business to be there,
is clearly brought out in the affidavits sworn by the Municipal Commissioner,
Collector and the Superintendent of Police. They also reveal a large number of
persons freely entering and leaving the hall. It is apparent from the affidavit
of the Superintendent of Police that during the time when all this happened,
Viswasrao Deshmukh, Revenue Minister, Government of Maharashtra, came into his
office and left the premises while he was actually busy in supervising the
bandobust. We have been shown photographs showing the presence of a large
number of policemen wielding lathis inside the hall. The Collector's affidavit
reveals that the Superintendent of Police personally requested Chagan Bhujbal,
a sitting member of the State Legislative Assembly belonging to the Shiv Sena
party, to keep himself away from the premises of the meeting hall. Be that as
it may, it appears that both the officers asked the outsiders to clear out of
the hall, requested the councillors to take their places so as to permit the
Municipal Commissioner to transact the business for the day and brought the
situation under control. They have sworn to the fact that after the councillors
had calmed down and order was restored, both 6f them left the hall. Thereafter,
the Municipal Commissioner apparently announced on the mike that the meeting
would continue and the elections would be held at 4.30 p.m. The petitioner,
Chandrakant Khaire, being the leader of the Shiv Sena party, filed a written
protest at 4.15 p.m. stating that the meeting had been adjourned by the
Municipal Commissioner for the day and that, therefore, the holding of the meeting
later on that day would be improper and illegal. After this, the councillors
belonging to the opposition group abstained from participating in the meeting
held at 4.30 p.m. at which respondents Nos. 1 and 2, Dr. Shantaram Kale and
Takiqui Hassan, were declared elected as Mayor and Deputy Mayor respectively
and respondents Nos. 3 to 8 as members of the standing committee, each of them
having polled 32 votes.
We had the benefit of
hearing Shri S.N. Kacker, learned counsel for the petitioner. Dr. Y.S. Chitale,
learned counsel appearing for respondents Nos. 1 to 8 and Shri Vinod Bobde,
learned counsel appearing for respondent No. 9, the Municipal Commissioner.
After a protracted hearing, we, at the end of the day, reserved orders. Having
given the matter our anxious consideration, we find it difficult to interfere
with the judgment of the High Court.
In view of the conflicting
affidavits, the petitioner and his supporters asserting that the Municipal
Commissioner had adjourned the meeting for the day and respondent No. 2
reiterating the version of the Municipal Commissioner that he had only
suspended the proceedings so that the meeting could be held later on the same
day and the business for the day, namely, election of the Mayor, Deputy Mayor
and members of the standing committee, could be transacted, the High Court,
relying on the 'preponderance of probabilities', has come to the conclusion
that in the facts and circumstances, the affidavit of the Municipal
Commissioner, respondent No. 9, appeared to be 'more impressive, probable and
convincing' and therefore, they were inclined to accept it as one inspiring
confidence. Acting upon the affidavit sworn by respondent No. 9, the Municipal
Commissioner, the High Court has found as a fact that the meeting was not adjourned
for the day or sine die but it was to be held as soon as peace was restored on
the very same day, i.e., the meeting had only been postponed. This is an
inference drawn from affidavits and we find no just and compelling reasons to
upset the same.
Shri S.N. Kacker, learned
counsel for the petitioner, contends that the High Court erred in proceeding on
probabilities in deciding the present matter which has far-reaching
ramifications affecting democratic principles. It is said that the High Court
having found that because of the unruly and provocative atmosphere prevailing
in the meeting hall, the Municipal Commissioner was required to adjourn the
meeting in order to restore peace and to re-arrange the furniture which
was thrown helter-skelter as the councillors, it is stated, threw chairs at
each other, erred in taking the view that the meeting was not adjourned for the
day or sine die but had merely been suspended when in fact, the business for
the day, namely, elections to the offices of Mayor, Deputy Mayor and members of
the standing committee, could not obviously be transacted. He further contended
that when the Municipal Commissioner, on his own showing, had to adjourn the
proceedings in view of the prevailing atmosphere and
since he felt it was impossible to continue the election process in that
situation, it was wrongly held by the High Court that the meeting was not
adjourned sine die when the Municipal Commissioner unequivocally admits that
such adjournment was necessary to enable him to decide and announce the time
for the resumption of further proceedings. In substance, the contention is that
the meeting was not adjourned to a definite point of time and must therefore be
regarded as adjourned for the day or adjourned sine die. Learned counsel referred
to several law dictionaries to bring out the meaning of the expression '
adjourned sine die' and relied upon the decision of the Calcutta High Court in
Smt. Menaka Bala Dasi v. Hiralal Govindlal [1933] 37 CWN 583; AIR 1933 Cal 816
and that of the Madhya Pradesh High Court in Sheokumar Shashtri v. Municipal
Committee, AIR 1964 MP 195 and also to a passage from Shackleton on the Law and
Practice of Meetings, Seventh Edition, at page 44, for the submission that in
the case of adjournment sine die, the meeting stands adjourned to an
unspecified date and as such a fresh notice calling for the meeting is
necessary.
Dr. Y.S. Chitale, appearing
for respondents Nos. 1 to 8, and Shri Vinod Bobde, for respondent No. 9, on the
other hand, contended that the meeting had not been adjourned sine die but that
the proceedings had merely been suspended at 2.45 p.m. and the adjourned
meeting at 4.30 p.m. was only a continuation of the original meeting and no new
notice of an adjourned meeting had to be given. It was contended further that
there was no warrant for interference under article 136 of the Constitution
since a finding of fact has been reached by the High Court on a consideration
of the material on record. It was also contended that the petitioner having
failed to make good the averment in the writ petition that the meeting had been
"adjourned for the day", the High Court was justified in declining to
interfere.
In order to appreciate the
point in controversy, it is necessary to set out the relevant statutory provision
bearing on the question. It is need less to stress that a Municipal Corporation
cannot function without the Mayor, Deputy Mayor and Members of the standing
committee who are entrusted with certain functions and duties under the Act.
Sub-section (1) of section 19 of the Act provides that "the corporation
shall, at its first meeting after the general elections........., elect from
amongst the councillors, one of its members to be the Mayor and another to be
the Deputy Mayor", their term of office being one year. Sub-section (2) of
section 20 enacts that "the corporation shall, at its first meeting after
the general elections, appoint 12 persons out of its own body to be members of
the standing committee". The term of office of the elected councillors, as
provided by section 6(1), is a period of five years which, in terms of
sub-section (2) is deemed to commence on the date of the first meeting called
by the Municipal Commissioner. The relevant rules framed under section 453 of
the Act relating to the proceedings of the corporation are as follows:
"1(b)The
first meeting of the corporation after general elections shall be held as early
as conveniently may be on a day and at a time and place to be fixed by the
Commissioner, and if not held on that day, shall be held on some subsequent
date to be fixed by the Commissioner"
"l(h)
At least seven clear days' notice shall ordinarily be given of every meeting,
other than any adjourned meeting…….."
"l(m)Any
meeting may, with the consent of a majority of the councillors present, be
adjourned from time to time to a later hour on the same day or to any other,
but no business shall be transacted and, except as is hereinafter provided, no
proposition shall be discussed at any adjourned meeting other than the business
or proposition remaining undisposed of at the meeting from which the
adjournment took place."
"2(3).The
Presiding Officer may, in case of grave disorder, suspend the meeting for a
period not exceeding three days"
It is, therefore, quite
obvious that the first meeting of the corporation is of prime importance.
Learned counsel for the parties have agreed that clause (m) may not govern the
first meeting of the corporation but relates to subsequent meetings. The
question before us is whether the first meeting "could not be held on that
day" within the meaning of clause (b) of rule 1 and, therefore, had to be
held "on some subsequent date to be fixed by the Municipal
Commissioner" The affidavits on record clearly show that the Municipal
Commissioner, who presided over the meeting, was constrained to adjourn the
meeting at 2.45 p.m. when some of the councillors belonging to the Shiv Sena
party, of which the petitioner is the leader, went inside the booth and
forcibly removed the ballot boxes and sat upon them to prevent casting of any
votes, giving rise to commotion and pandemonium. What actually happened is best
stated by the Municipal Commissioner in his affidavit:
"As a result, there
was tremendous confusion, chaos and uproar in the house and there was
tremendous noise and nothing could be heard clearly.
I say that there was
tremendous tension and the situation was going out of control and it was not
possible to conduct the election at that moment of time and, therefore, I
announced that the meeting is adjourned and that the councillors should restore
peace. I also said that I shall soon announce the time of meeting.
I say that I did not leave
the house and remained in the chair of the presiding authority hoping that
peace would be restored and that I would be able to announce the time of the
meeting. Thereafter, Shri Man Mohan Singh Oberoi raised a point of order that
the meeting should not be adjourned and that he along with another councillor,
Dr. Sancheti, insisted that the meeting should continue. At this stage, the
situation in the house worsened and in fact there was hot exchange of words and
shouting between different groups of councillors. An attempt was made to throw
chairs at each other and in fact the furniture in the house was scattered and
several councillors surrounded me and some spoke in favour of adjournment and
some spoke in favour of continuation. My efforts to restore peace and order
were futile, and there was a serious law and order situation.
In the circumstances
aforesaid, there was no alternative and I felt that it was my duty to seek
police help and I called the police to restore order. Thereupon, some of the
councillors objected and actually resisted the entry of the police. Thereafter,
on my directive, the police soon left. Some of the Shiv Sena councillors were
in an aggressive mood and they came to my table and violently thumped the table
and shouted that they would not allow this meeting to take place. During this
period, I even suggested that the councillors should go out. This was necessary
as I felt that without that the furniture cannot be rearranged and further
steps for resuming the meeting will not be possible. In the meantime, the
District Magistrate, Shri R.R. Sinha, and Superintendent of Police, Shri T.C.
Wankhede, entered the hall. The Superintendent of Police, Shri Wankhede
appealed to the councillors on the mike to restore peace. I say that
discussions took place between myself and the District Magistrate with a view
to restore peace. The District Magistrate, Shri Sinha, also appealed for
restoration of peace. Thereafter, the councillors were calmed down and order
was restored. On peace being restored, both the District Magistrate and the
Superintendent of Police left the house at 3.45 p.m. I announced on the mike
that the meeting would continue and that the election would be held at 4.30
p.m"
"…..in effect, the
adjournment declared by me as aforesaid amounts to suspension of the meeting
because of the grave disorder"
"I also said that I
shall soon make an announcement about the time for resuming the meeting"
"I had to adjourn the
proceedings in view of the prevailing circumstances set out hereinabove and
since I felt that it was impossible to continue the election process in that
situation. It was also necessary to enable myself to decide and announce the
time for the resumption of the further proceedings of the meeting"
While setting out the
facts, we have already adverted to the facts sworn by the Collector and the
Superintendent of Police. There is no reason for not acting on these affidavits.
The Collector says that there was total confusion and bedlam inside the hall
apart from the fact that "the entire atmosphere was surcharged with
commotion" and that "the Municipal Commissioner was in a very
agitated state of mind and said that he could not hold the meeting in. the
unruly and disorderly situation prevailing". There can be no doubt that
such unruly scenes, witnessed on that day gave rise to a serious law and order
situation but both the Collector and the Superintendent of Police were able to
restore order in the House and prevailed upon the outsiders to vacate the
meeting hall in order that the proceedings could be resumed. The fact that the
Municipal Commissioner did not leave the House or vacate the seat does lend
support to the version that he had merely suspended the proceedings till order
was restored. There is no reason to doubt the affidavit sworn to by the
Municipal Commissioner that he announced on the mike at 3 45 p.m. that the
proceedings would be resumed at 4 30 p.m. for transacting the business for the
day.
It is quite obvious that
the meeting was not "adjourned for the day" or "adjourned sine
die". Shri Kacker, learned counsel for the petitioner, contended that when
the affidavits of the three officers showed that utter confusion prevailed and
that there was pandemonium all around with strangers moving about in the
meeting hall, it must necessarily follow that no business could be transacted
on that day. The contention is that the meeting was not adjourned to a definite
point of time and must, therefore, be regarded as "adjourned for the
day" or "adjourned sine die". He referred to the decisions in
Menaka Bala Dasi [1933] 37 CWN 583; AIR 1933 Cal 816 and Sheokumar Shashtri,
AIR 1964 MP 195, as also to various law dictionaries, besides a passage from Shackleton on the Law and
Practice of Meetings, seventh edition, at page
44. On the strength of these authorities, it was submitted that the meeting was
adjourned not to a definite point of time and must, therefore, be regarded as
"adjourned for the day "or "adjourned sine die". He,
accordingly, submitted that the Municipal Commissioner should have fixed
another date for the meeting and issued fresh notice therefor. We are afraid we
cannot accept this line of reasoning.
According to the ordinary
meaning, the expression "sine die" as given in the Shorter Oxford
Dictionary, third edition, volume II, at page 2000, means:
"Without any day being
specified (for reassembling, resumption of business, etc.); indefinitely"
Similarly, in Webster's
Comprehensive Dictionary, International edition, the meaning given is more or
less the same:
"Without a day;
indefinitely: an adjournment sine die (that is, without setting a day for
reassembling)"
The same is the legal
meaning. In Black's Law Dictionary, Deluxe fourth edition, at page 1556, the
meaning of the expression sine die is:
"Without a day;
without assigning a day for a further meeting or hearing"
The
legal meaning given in Jowitt's Dictionary of English Law, second edition, volume II, at page 1663 reads:
"Without a day being
fixed. The consideration of a matter is said to be adjourned sine die when it
is adjourned without a day being fixed for its resumption"
The passage in Shackleton
at page 44, on which learned counsel relies, reads:
"Adjourned meetings :
Notice. An adjournment, if bona fide, is only a continuation of the meeting and
the notice that was given for the first meeting holds good for and includes all
the other meetings following it up. If, however, the meeting is adjourned sine
die, a fresh notice must be given.
No new business can be
introduced unless notice of such new business is given"
There can be no dispute
with the proposition but the difficulty is about the applicability of that principle
to the facts of the case. Literally, there is nothing on record to substantiate
the petitioner's submission that the first meeting scheduled to be held on May
6, 1988, at 2 p.m. was "adjourned for the day" or "adjourned
sine die" without transacting any business, i.e., without consideration of
the agenda for the day. On the contrary, it is not in dispute that the business
for the day was partly transacted when the councillors met at 2 p.m. as
scheduled and the Municipal Commissioner declared that the polling would
commence from 2.30 p.m. onwards. The trouble started at 2.30 p.m. when the
councillors belonging to the petitioner's Shiv Sena party prevented the casting
of votes by snatching away the ballot boxes from the polling booths and sitting
upon them. There was a pre-determined plan on their part not to allow the first
meeting to be held on that day. But the Municipal Commissioner did not give way
to the commotion and pandemonium and he did not put off the meeting to another
day. In the prevailing situation, the Municipal Commissioner had no other
alternative but to adjourn the meeting. Under the scheme of the Act, when the
term of the elected councillors is a period of five years which in terms of
sub-section (2) of section 6 of the Act is deemed to commence on the date of
the first meeting, the Municipal Commissioner obviously could not adjourn the
meeting for another day or adjourn it sine die. If the contention that the
meeting having been adjourned without specifying a definite point of time were
to prevail, it would give rise to a serious anamoly. The effect of adjourning
the first meeting to another day would imply the coming into existence of
another deemed date under section 6(2) of the Act for commencement of the term
of the councillors. The Municipal Commissioner has unequivocally asserted that
he only suspended the proceedings in order that they could be resumed for
transaction of the business for the day, and the business for the day had to be
transacted on May 6, 1988, the date of the first meeting, as fixed by him.
Admittedly, the Municipal Commissioner did not leave the meeting hall nor
vacate his seat. He showed exemplary courage in not yielding to the threats of
violence wielded by the party in opposition, because he knew that, in law, the
first meeting had to be held on that day and could not be adjourned to another
day. There is no reason to disbelieve the Municipal Commissioner that when he
adjourned the meeting, he simultaneously made an announcement that he would
later announce the time when the meeting was to be resumed. He is candid enough
to say that he had to adjourn the proceedings in view of the prevailing
situation when he felt that it was impossible to continue the election process
hoping that peace would soon be restored and that he would be able to announce
the time of the meeting. One of the reasons given for the adjournment was that
he adjourned the meeting to enable him to decide and announce the time for
resumption of further proceedings of the meeting.
Rankin C.J. in Menaka Bala
Dasi's case [1933] 37 CWN 583; AIR 1933 Cal 816, in repelling the contention
that adjournment sine die of an application for making a decree in a mortgage
suit final, was a discontinuance of it, observed (at page 817 of AIR 1933
(Cal)):
"…..whatever may be
the old authorities on that point, I have no doubt myself that with us today
'adjournment sine die' differs altogether from discontinuance. It is after all
an adjournment, an adjournment to a date that is not at the moment fixed"
The decision of the Madhya
Pradesh High Court in Sheokumar Shashtri's case, AIR 1964 MP 195, relied upon
by learned counsel for the petitioner, is clearly distinguishable. In that
case, it was admitted that the meeting of the Municipal Committee summoned for
January 17, 1962, at which the motion of no confidence was to have been moved
was adjourned sine die for want of quorum and the High Court held, relying upon
the proviso to section 32 of the Madhya Pradesh Municipalities Act, 1961, that
a meeting convened for consideration of a no confidence motion could not be
adjourned sine die, but had to be adjourned to "some other day" for
which a fresh notice was necessary. P.V. Dixit C.J., speaking for himself and
K.L. Pandey J., observed at page 196:
"It is settled law
that where there is a power of adjournment and a meeting is adjourned, then the
adjourned meeting is a continuation of the original meeting and no new notice
of an adjourned meeting need be given unless the relevant statutory provisions
or rules so require. But in the case of an adjournment sine die, a fresh notice
is necessary (See Scadding v. Lorant [1851] 3 HLC 418 and Wills v. Murray
[1850] 4 Ex 843. The proviso to section 32 of the C.P. and Berar Municipalities
Act, 1922, laid down that:
'if at any ordinary or
special meeting of the committee a quorum is not present, the chairman shall
adjourn the meeting to such other day as he may think fit…….'
Under this proviso, a
meeting could be adjourned to some fixed date and not sine die"
The decision in Sheokumar Shasktri's
case, AIR 1964 MP 195, is, therefore, of no avail.
Shackleton
on the Law and Practice of Meetings, seventh edition, apart from the passage at page 44, already quoted, gives
different shades of meaning of adjournment as understood in legal parlance, in
the following words:
"Adjournment is the
act in postponing a meeting of any private or public body or any business until
another time, or indefinitely, in which case it is an adjournment sine die. The
word applies also to the period during which the meeting or business stands
adjourned. An adjournment may be :
1 For an interval
expiring on the day of the adjournment.
2 For an interval
expiring on some later date.
3 For an indefinite
time (i.e., sine die).
4 Until a fixed
time and date.
5 To another
place."
The learned author then
sets out the different causes giving rise to an adjournment which may be by (1)
resolution at the meeting, (2) action of the chairman, and (3) failure to
achieve or maintain a quorum.
A properly convened meeting
cannot be postponed. The proper course to adopt is to hold the meeting as
originally intended, and then and there adjourn it to a more suitable date. If
this course be not adopted, members will be entitled to ignore the notice of
postponement, and, if sufficient to form a quorum, hold the meeting as
originally convened and validly transact the business thereat. Even if the
relevant rules do not give the chairman power to adjourn the meeting, he may do
so in the event of disorder. Such an adjournment must be for no longer than the
chairman considers necessary and the chairman must as far as possible,
communicate his decision to those present.
The law relating to
adjournment has been put succinctly in Horsley's Meetings Procedure, Law and Practice, second edition,
edited by W. John Taggart, at page 84, para
1002 :
"The word
'adjournment' tends to be used loosely in connection with meetings. Indeed, as
a result, the word is possibly in process of acquiring a further, derived
meaning of 'close, conclude or finish', whereas a meeting or a debate is
adjourned when its further proceedings are postponed to some subsequent time or
to enable it to reassemble at some other place; to a later hour in the same
day, to some future date, or indefinitely, i.e., sine die (without a day being
named). The business (of the whole meeting or the debate respectively) is
indeed suspended, but with an intention of deferring it until resumption at a
later time"
The learned author goes on
to say that the word "adjourn" has been in use for almost five
centuries in connection with meetings, with an early meaning of "to put
off or defer proceedings to another day", and adds:
"This in due course
gave rise to the added meaning ' to break off for later resumption'."
On an overall view of the
facts and circumstances, we have no hesitation in upholding the finding that
the first meeting of the Municipal Corporation fixed by the Municipal
Commissioner for May 6, 1988, was not "adjourned for the day" or
"adjourned sine di" but had only been put off to a later hour, i.e.,
the proceedings had only been suspended, to be re-commenced when peace and
order were restored.
In the result, the special
leave petition must fail and is dismissed. No costs.
[1977]
47 COMP. CAS. 689 (CAL)
HIGH COURT OF CALCUTTA
v.
United India Credit &
Development Co. Ltd.
SALIL K. ROY CHOWDHURY J.
COMPANY PETITION NO. 261 OF 1970 (COMPANY APPLICATION NO. 256 OF 1972).
JUNE 18, 1973
Salil K.
Roy Chowdhury J.—This is an application
under sections 391, 392, 393 and 394 of the Companies Act, 1956, for sanction
of a scheme of amalgamation and other consequential orders and directions.
The facts of
the case shortly are: That the petitioner, United Bank of India Ltd. (hereinafter
referred to as the "petitioner-bank") was incorporated in the year
1918 and carried on banking business in the Eastern region of India. Three
other banking companies, Comilla Banking Corporation Ltd., Comilla Union Bank
Ltd., and Hooghly Bank Ltd. were amalgamated and/or merged with the
p3titioner-bank with effect from 18th December, 1950, under the provisions of
section 44A of the Banking Companies Act, 1949. The registered office of the
petitioner-bank is situate at No. 24, Park Street, Calcutta. The authorised
capital of the petitioner-bank is Rs. 4,00,00,000 divided into 5,00,000
ordinary shares of Rs. 20 each and 30,00,000 shares of Rs. 10 each. The amount
of capital of the petitioner-bank paid up or credited as paid up is Rs.
2,68,77,119.
The objects
of the petitioner-bank for which it was incorporated as appears from the
memorandum of association of the company was mainly for carrying on banking
business. The petitioner-bank commenced its business since its incorporation
and was carrying on banking business until 18th of July, 1969, when the
undertaking of the petitioner-bank was taken over under the provisions of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
The
petitioner No. 2, United India Credit and Development Company Ltd.,
(hereinafter referred to as the "petitioner-company") was
incorporated on the 28th July, 1970, under the Companies Act, 1956. The
registered office of the petitioner-company is situate at No. 41, Free School
Street, Calcutta. The authorised capital of the petitioner-company is Rs.
5,00,000 divided into 1,00,000 equity shares of Rs. 5 each. The amount of
capital of the petitioner-company paid up or credited as paid up is Rs. 6,600.
The objects
of the petitioner-company for which it has been incorporated, as appears from
the memorandum of association of the petitioner-company, are, inter alia, to
carry on the business of merchant-cum-development banking in all its aspects
provided that the petitioner-company shall not carry on the business of banking
as denned in the Banking Regulation Act, 1949, and also to carry on business of
assisting industrial enterprises in general, etc. The memorandum of association
of both the said companies, viz., the petitioner-bank and the
petitioner-company, are annexed to the petition being annexures A & B
thereof. It is alleged that the petitioner-company intends to carry on business
of preparing schemes for diversification by existing traditional industries
such as tea, sugar and jute industries, such schemes being financed by funds
raised against mortgage of existing assets and issue of capital to be raised by
the petitioner-company from the market; studying cases of various companies in
the Eastern region which are closed and not functioning well, etc., as stated
in paragraph 11 of the petition. It is alleged that the directors of both the
companies consider that it is in the best interest of the petitioner-bank and
the petitioner-company and their respective shareholders that the
petitioner-bank be merged or amalgamated with the petitioner-company and that
the petitioner-bank be dissolved without winding up under sections 391 and 394
of the Companies Act, 1956. It is alleged that proposed amalgamation has become
necessary and will be beneficial for, inter alia, the following reasons:
(a) petitioner-bank was one of the foremost
banking concerns of the Eastern region in India and banking business being
nationalised with effect from 10th of July, 1969, under the provisions of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the
undertaking of the petitioner-bank became vested in the corresponding new bank,
viz., United Bank of India.
(b) Under the said Acquisition Act of 1970 the
petitioner-bank is entitled to a compensation of Rs. 4,20,00,000. The
petitioner-bank having applied for payment of compensation in 5½% Banks
(Acquisition and Transfer) Compensation Bonds, 1999, payment has been made to
the petitioner-bank by the Government of India. The entire undertaking of the
petitioner-bank including all assets, rights, powers, authorities and
privileges and all property movable and immovable, cash balances, reserve
funds, investments and all other rights and interests in or arising out of such
property as were immediately before the commencement of the said Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970, under the
ownership, possession, power or control of the petitioner-bank in relation to
the undertaking, whether within or without India and all books of accounts,
registers and records and all other documents of whatever nature relating
thereto including all borrowings, liabilities and obligations have been taken
over and/or acquired under the said Acquisition Act.
(c) In the circumstances, the petitioner-bank started
new books on and from July 19, 1969, and has prepared its balance-sheets for
the years ended 31st December, 1969, 31st December, 1970, and 31st December,
1971. The said balance-sheets and profit and loss accounts for the said years
have been approved and adopted by the shareholders of the petitioner-bank in
its annual meetings.
(d) The petitioner-bank by reason of the
nationalisation of the banking business has either to diversify its business
and change its name to carry on other business or to send itself in voluntary
liquidation and arrange for distribution of its assets in specie among its
contributories.
(e) The board of directors of the petitioner-bank
are alleged to have carefully considered the situation and are of the opinion
that if the petitioner No. 1 is amalgamated or merged with the petitioner No. 2
it will be benefit for the petitioner No. 1 and its shareholders. The said
compensation money can be utilised for commencing business of
merchant-cum-development banking business.
(f) The shareholders of the petitioner-bank as
shareholders of the petitioner-company in the event of the amalgamation coming
through would get adequate returns for their investments and be provided with
the continuous source of income instead of just receiving lump sum payment in
the form of Government securities out of the said compensation money.
(g) Although the amalgamated unit or the
petitioner-company will not be carrying on commercial banking business, there
is ample scope and prospect of carrying on business as financial institutions
and the large sum of money available by way of compensation can be properly
utilised. The amalgamated unit if it comes to an existence will primarily
function as a merchant-cum-development bank.
(h) In view of the competitive conditions and
recession prevailing in the country, the amalgamated unit will be in a more
advantageous position to commence and continue its business and the combined
resources can be utilised more profitably.
(i) The proposed amalgamation will bring
about considerable economies in secretarial expenses and the same would enable
the registered office to deal with one company instead of two companies. The
proposed amalgamation will mean that lesser number of returns will have to be
filed and Jesser clerical work will have to be done. The said amalgamation will
reduce overhead expenses, clerical expenses, etc., to a considerable extent,
and, lastly,
(j) The proposed amalgamation is
beneficial and would enable the proposed business to be carried on more
efficiently and conveniently.
The said
reasons are set out in paragraph 13 of the petition.
Therefore, it
is alleged that the scheme of amalgamation has accordingly been proposed in
which the existing assets and liabilities of the petitioner-bank will be
transferred to and/or vested in and/or acquired by the petitioner company. The
initially proposed scheme of amalgamation, a copy of which is annexed to the
petition and marked with the letter "C", provided, inter alia:
(1) The transferee-company shall take
over the assets and liabilities of the transferor-company as per the
balance-sheet of the transferor-company as at 31st of December, 1969. The
reserves and surplus as shown in the balance-sheet of the transferor-company as
at 31st of December, 1969, amounting to Rs. 1,51,22,881 is proposed to be.
reallocated as specified below prior to the scheme of amalgamation coming up
for consideration by the shareholders:
|
|
|
Rs. |
|
(i) To
dividend fund (1969) |
... |
20,10,889.50 |
|
(ii) To
deferred annual distribution reserve for payment to shareholders in
proportion to the share held for the years 1970-1975 in six equal
instalments. |
... |
60,32,668.50 |
|
(iii) To
general reserve, subject to payment of capital gains tax or any other tax the
receipt of compensation may attract |
... |
70,79,323.00 |
Such
reallocation as aforesaid being approved by the shareholders of the
transferor-company the same shall form part of this scheme.
(2) (i) The
transferee-company shall allot to the shareholders of the transferor-company
for every Rs. 10 paid up in the capital of the transferor company:
(a) One
fully paid up equity share of Rs. 5, and
(b) One fully subscribed debenture of Rs. 5
carrying interest from 1st January, 1970, at such rate as the Central
Government may approve but not exceeding 9% per annum payable annually.
(ii) As regards such shares of the
transferor-company as are paid up to the extent of Rs. 9 only and carrying a
liability for the balance sum of Re. 1 as calls-in-arrear the
transferee-company shall allot to the holders of each such share of the
transferor-company:
(a) One equity share of Rs. 5 credited as
paid-up to the extent of Rs. 4 and carrying a liability for the balance sum of
Re. 1 as call in arrear, and
(b) One
fully subscribed debenture of Rs. 5 carrying interest as aforesaid.
(iii) The transferee-company shall issue fully
subscribed debentures of the value of Rs. 225 each to the shareholders of the
transferor-company carrying interest from 1st January, 1970, at such rate as
the Central Government may approve but not exceeding 41% per annum payable
annually in lieu of the claim of the shareholders of the transferor-company for
payments out of the deferred annual distribution reserve mentioned above. The
debentures will rank in priority over the debentures of Rs. 5 mentioned above
and l/6th of the principal sum of Rs. 2.25 secured by each such debenture will
be repaid by the transferee-company together with interest due thereon every
year commencing from 1970.
(iv) All the aforesaid debentures will rank next
to the loans, deposits and other liabilities of the transferee-company.
(3) The debentures of Rs. 5 each referred
to above shall be convertible into fully paid up equity shares of Rs. 5 each of
the transferee-company at the option of the holders of such debentures to be
exercised by them after the 12th year from the date of the issue of the said
debentures and before the expiry of the 15th year from the date of such issue
and upon their complying with the conditions mentioned in the said debentures.
Such debentures or so much thereof as may not have been converted into shares
as aforesaid will be redeemed by the transferee-company on payment of the
principal moneys and interest thereon then outstanding on the 1st day of the
30th year from the date of issue of the said debentures.
(4) For the purpose of giving effect to
the provisions of clause 2 above, the transferee-company will increase its
authorised share capital and obtain the necessary sanction of the Controller of
Capital Issues as also of the Central Government. Allotment of the shares and
debentures as mentioned above will be made by the transferee-company within six
months from the date of transfer without any further application from the
shareholders of the transferor-company.
The basis of
amalgamation is that the shareholders of the petitioner No. 1 will get for
every share of Rs. 10 each held by them in the capital of the petitioner No. 1:
—
I. One
fully paid-up share of Rs. 5 in the capital of the petitioner No. 2, and
II. One unsecured debenture of Rs. 5
carrying interest at such rate as the Central Government may approve but not
exceeding 9% per annum payable annually. These debentures are convertible to
equity shares of the petitioner No. 1 at the option of the debenture-holders
after the 12th year and before 15 years from the date of issue of debentures
and such of the said debentures as might not be so converted into equity shares
of the petitioner No. 1 will be redeemed by the petitioner No. 2 on the 1st
date of the 30th year after the date of issue of the said debentures. Further,
the said debentures will be transferable free from any equity between
the transferee and the person to whom the same shall be issued and will rank
next to the loan deposits and other liabilities of the transferee. I have set
out the statements in paragraph 14 of the said petition.
It is alleged that as the directors and auditors of
both the petitioner-bank and the petitioner-company (sic) that the basis of
exchange is reasonable and fair, and the proposed scheme of amalgamation is
fair, reasonable and practicable. The directors of the petitioner-bank's
shareholding have been set out in paragraph 17 of the petition and the
directors of the petitioner-company's shareholding have been set out in
paragraph 18. It appears that Shri K.C. Das is a common director of both the
companies. It is also alleged that the petitioner-company has acquired 2 lakhs
ordinary shares of Rs. 10 each paid-up in the share capital of the
petitioner-bank and such shares would stand cancelled upon amalgamation of the
said two companies. The petitioner-bank and the petitioner-company have not
issued any debentures. The said scheme of amalgamation is a scheme between the
petitioner-bank and the petitioner-company and their respective members. It is
alleged that the assets of the petitioner-bank and the petitioner-company are
more than sufficient to meet the liabilities of the said two companies and the
scheme will not affect the rights or interests of the creditors of the
petitioner-companies. In fact, the petitioner-companies do not have any
creditors at the present moment. The latest audited balance-sheet and profit
and loss account of the petitioner has been annexed to the petition and marked
with the letter "D". It is alleged that the petitioner-company was
incorporated only on the 28th of July, 1970, and it has issued 11,200 equity
shares of Rs. 5 each and it has not yet acquired any fixed assets and has no
outstanding liabilities. A copy of the latest balance-sheet and profit and loss
account of the petitioner-company has been annexed to the petition and marked
with the letter "e". There is the usual averment that no
investigation proceedings are pending against the petitioners under the
provisions of sections 235 to 251 of the Companies Act, 1956, or any other
provisions thereof. It is further alleged that the proposed amalgamation is not
within the mischief of the Monopolies and Restrictive Trade Practices Act,
1969.
By an order made on the 28th of August, 1970, in the
said Company Application No. 256 of 1970, meeting of the shareholders of the
petitioner-bank was directed to be held on 29th September, 1970, under the
chairman as provided in the said order. The said order also provided for a
separate meeting of the shareholders of the petitioner-company to be held on
29th September, 1970, under the chairman as provided in the said order. It is
alleged that notices of the said meetings were sent individually to each
shareholder concerned as required by the said order together with the copy of
the scheme and the statement required under section 393 of the Companies Act,
1956, and the proxy form. Notices of the said meetings were duly advertised in
the newspapers as directed by the said order dated the 28th of August, 1970. It
is alleged that the meeting on the 29th of September, 1970, was duly held but a
pandemonium was created at the said meeting and as such the same was adjourned
by the chairman without transacting any business thereat. Copies of the reports
of the said meeting by the chairman, appointed under the said order dated the
28th of August, 1970, are annexed to the petition being annexures I and K. It
appears that the petitioner-bank on the 17th of October, 1970, caused an
announcement to be published in The Statesman and other newspapers, inter alia,
to the effect that certain modifications will be proposed at the meeting of the
shareholders of the petitioner-bank to be held for considering the scheme of
amalgamation. The proposed modification also made provision with regard to
provision being made for payment to the dissentient shareholders and it was
also announced that, in the event of the scheme being approved, the proposed
board of directors of the petitioner-company would include eminent persons
named therein. Thereafter, directions were sought from the court for holding
the said meeting and/or fresh meeting of the companies and ultimately the
matter came up before me and by an order dated the 7th of January, 1972, the
adjourned meeting of the said petitioner-bank was directed to be held on 30th
of March, 1972. It is alleged that the notices of the said meeting which was to
be held on the 30th of March, 1972, pursuant to the order dated the 7th of
January, 1972, were sent individually to each shareholder concerned and were
also advertised in The Statesman, Jugantar and Dainik Viswamitra. The meetings
of the companies were held on the 30th of March, 1972, but the same were
adjourned till 8th of May, 1972, and, thereafter, on the 8th of May, 1972, the
adjourned meetings were held and it is alleged that the said scheme of
amalgamation was passed by the requisite majority with certain modification.
The chairman of the meetings of the said two companies have filed their reports
and are marked as O and Q to the petition. Thereafter, on the 23rd of June,
1972, the present application for confirmation of the said scheme of
amalgamation has been made and after directions being given for filing of
affidavits the matter has come up before me for disposal.
Mr. R. Chowdhury with Mr. S.C. Sen and Mr. S.B.
Mukherjee appeared for the petitioners. Mr. S.B. Mukherjee who started the
arguments on behalf of the petitioners submitted that the opposing shareholders
of the petitioner-bank (sic) ground of challenge of the said scheme of
amalgamation mainly are :
(1) no notice of the said meeting has
been served on the Pakistani shareholders;
(2) the petitioner No. 2, that is, the petitioner-company, is a worthless company;
(3) the shareholders of the petitioner-bank are now entitled to the compensation money payable under the said Banking Company Acquisition Act, 1970;
(4) the ratio of exchange is unfair;
(5) the explanatory statements under section 393 of the Companies Act, 1956, are tricky and untrue;
(6) the petitioner-bank has no power under its memorandum of association to amalgamate with other companies; and lastly
(7) the application is not bona fide.
Regarding the question raised by the opposing
shareholders as to the notice to the Pakistani shareholders which is alleged by
them to be about 25% of the shareholding of the petitioner-bank, Mr. Mukherjee
submitted that notices of the meetings were duly served on the shareholders of
the petitioner-bank at their respective addresses when the meeting was
originally convened to be held on the 28th of September, 1970, and he referred
to the affidavit of service and certificate of posting filed in court in
respect of such service. Mr. Mukherjee, thereafter, submitted that
correspondence was exchanged between the Custodian of Enemy Property and the
petitioner-bank by which the Custodian insisted on notice being served on him
and dividend being paid to him in respect of the shares held by Pakistani
nationals inasmuch as the shares have been vested in the Custodian of Enemy
Property under the Enemy Properties Act of 1968. It is contended by Mr.
Mukherjee that when the adjourned meeting was called notices were sent to the Custodian
of Enemy Property in respect of shares held by the Pakistani nationals now in
Bangladesh. Mr. Mukherjee referred to the provisions of the Enemy Properties
Act, 1968, sections 5, 7, 8, 10, 12, 13, 20 and 22, and he submitted, if
necessary, that the petitioner may be given liberty to file affidavit to put
the said facts on record. He further submitted that, according to the
petitioner-bank, only about 3.7% of the shareholders of the petitioner-bank are
Bangaladesh nationals whereas according to the opposing group of shareholders
it is about 25% of the shareholding of the petitioner-bank. Mr. Mukherjee also
referred to section 53 of the Companies Act, 1956, wherein the mode of service
of documents on members of a company has been provided. He submitted that,
according to the said provisions, if a member has no registered address in
India, such notice may be served if any address within India has been supplied
by such member. He referred to sub-section (3) of section 53 of the Companies
Act, 1956, which provides that a document advertised in the newspaper in the
neighborhood of the registered office of the company shall be deemed to be due
service, on the date on which such advertisement appears, on every shareholder
of the company who have not registered address in India and has not supplied
any address in India. la that view of the matter Mr. Mukherjee rightly
submitted that the decision cited by Mr. Prabir Sen and Mr. Bachawat on the
question of service to the Pakistani nationals has no application in the facts
of this case.
Regarding the question that the petitioner-company,
being the petitioner No. 2, is a worthless company, Mr. Mukherjee submitted
that the directors of the petitioner-company are not permanent directors and a
new board will be elected after the amalgamation takes place by the
shareholders of the petitioner-bank who will become the shareholders of the
petitioner-company if the scheme of amalgamation is sanctioned. There is no
question of producing the letters of consent of the proposed directors of the
petitioner-company; if necessary, such letters of consent can be produced as
Mr. Mukherjee alleged. Mr. Mukherjee submitted that there are various
procedures of amalgamation: one of them is by the method which is sought to be
adopted in this case, that is, by floating a new company and amalgamating the
old company with the new company. Mr. Mukherjee submitted that the procedure
adopted in this case has a good deal of justification, because, by following
such procedure, several objects can be attained at once, viz. (a) alteration of
name, (b) alteration of memorandum and articles, and (c) alteration of capital
structure. Further, Mr. Mukherjee submitted that if the same thing can be done
by several methods, the fact that the parties have chosen a particular method
is no reason why it should be construed as a factor against the petitioners.
There is no secret about the fact that the petitioner-company is only a new
company which has beer; incorporated solely for the purpose of taking over the
shares of the petitioner-bank under the said scheme of amalgamation. Mr.
Mukherjee further referred to In re
Mackinnon Mackenzie & Co. Pvt. Ltd. [1967] 37 Comp. Cas. 516 (Cal) for the
proposition that the court should not speculate about the future working of the
amalgamated company but only see whether it is feasible and. practicable. He
further submitted that for the proposed scheme of amalgamation, no sanction of
the Central Government under the Capital Issues Control Act as provided under
section 81(3) of the Companies Act, 1936, is required. He referred to Form No.
35 at page 1086 of A. Ramaiya, A Guide to The Companies Act, sixth edition. Mr.
Mukherjee also contended that the scheme may be sanctioned by the court subject
to conditions. As such, the question of obtaining the sanction of the Central
Government at this stage or negotiating for such sanction does not arise
because if the scheme is not sanctioned it may not be necessary to issue
further capital by the petitioner-company. Similarly, Mr. Mukherjee rightly
submitted that the question of obtaining sanction under section 81(3) of the
Companies Act. 1956, with regard to the issue of debentures is premature unless
and until the scheme has been sanctioned. Mr. Mukherjee referred to an order by
S.C. Ghose J. in the Company Petition No. 343 of 1968 connected with Company
Application No. 286 of 1968 (Associated
Electrical Industries (India) Ltd. and the General Electric Company of India
Ltd.) decided on the 7th of February, 1969. He also submitted that for the
said scheme of amalgamation no sanction of the Reserve Bank is required and as
such the question of obtaining the sanction of the Reserve Bank does not arise
as the business intended to be started is merchant banking business which does
not come under the purview of the Reserve Bank sanction. It is further alleged
that the petitioner No. 2, that is, the petitioner-company has not obtained its
certificate of commencement of business which Mr. Mukherjee submitted is not
correct as the certificate of commencement of business was obtained on the 28th
of August, 1970, under section 49(3) of the Companies Act, 1956. The said
certificate is conclusive evidence and can be produced if necessary. Regarding
the contention that the petitioner No. 2, that is, the petitioner-company, in
purchasing shares of the petitioner-bank of the face value of Rs. 25 lakhs has
violated the provisions of section 372 of the Companies Act, 1956, Mr.
Mukherjee submitted that the said provision of section 372 does not apply in
the instant case and the purchase of shares of Rs. 2 lakhs by the petitioner
No. 2 of petitioner No. 1 is not within the mischief of section 372 and in any
event it is within the exception mentioned in section 372(13) and (14) of the
Companies Act, 1956. In short, Mr. Mukherjee submitted that the petitioner No.
2, that is, the petitioner-company, with whom the petitioner-bank is sought to
be amalgamated being a new company floated for the said purpose of taking over
the petitioner-bank, cannot be said to be a worthless company because it will
depend entirely on the future working of the company after it is amalgamated—an
entirely speculative aspect which cannot be gone into by the court at this
stage. Regarding the question that the shareholders of the petitioner-bank are
entitled to the compensation money as the banking business which was the only
business of the petitioner-bank before it was acquired by the Central
Government under the said Banking Company Acquisition Act, 1970 (Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970) and there is no
other business which the petitioner-bank used to carry on before such
acquisition, Mr. Mukherjee rightly submitted that by such acquisition of the
undertaking of the petitioner-bank, the company, that is, the petitioner No. 1,
did not cease to exist but it is very much in existence under the Companies
Act, 1956, being entitled to receive the compensation money in terms of the
said Banking Company Acquisition Act, 1970. Mr. Mukherjee referred to the
provisions of the said Banking Company Acquisition Act, 1970, and submitted
that the corporate existence of the petitioner-bank is clearly maintained and
it is only the undertaking, that is, the banking business together with all its
assets and liabilities of the petitioner-bank, has been taken over on payment
of compensation to the petitioner-bank as a company. He referred to the
decision in the matter of Central Bank of India and Tata Locomotive Co.
reported in [1972] 42 Comp. Cas. 72 (Bom). As such, Mr. Mukherjee submitted
rightly that there is no substance in such contention that the shareholders are
entitled to the compensation money paid to the petitioner-bank under the said
Banking Company Acquisition Act, 1970. Had that been so, Mr. Mukherjee rightly
contended then it would not have been paid to the petitioner-bank but would
have been directed to be paid to the shareholders individually under the
Banking Company Acquisition Act, 1970, itself. It is only on the winding-up of
the petitioner-bank by sending it into voluntary liquidation that the
shareholders can have any right to the compensation money pro rata according to
the provisions of the Companies Act, 1956, and rules made thereunder in respect
of voluntary winding-up of the companies. Mr. Mukherjee, therefore, rightly
submitted that there is no substance in the contention of the opposing
shareholders that they are entitled to the compensation money and the company
is existing only for the purpose of the said distribution of the compensation
money of the shares to them.
Regarding the question of the ratio of exchange being
unfair Mr. Mukherjee submitted that shareholders of the petitioner-bank would
be allotted one ordinary share of Rs. 5 fully paid up or Rs. 4 each partly paid
up, as the case may be, and one debenture of Rs. 5 which will carry interest.
The debenture of Rs. 5 will ensure interest being paid every year and if the
amalgamated company does good business, then there is no reason why dividend
should not also be paid on the shares. He rightly submitted that it is not
possible in any event to demonstrate the future working of a company in a court
of law. He referred to In re Mackinnon Mackenzie & Co. Pvt. Ltd.'s case
[1967] 37 Comp. Cas. 516 (Cal), again on this aspect of the matter. He further
submitted that the idea that unless a company has vast resources, it cannot act
as a financial institution is misleading and unreal and is not the proper
approach to the problem. He submitted that apart from financing, the merchant-banking
organisations render various types of advice to their constituents which are
very paying propositions. He further submitted that, in any event, the charge
that surplus funds will evaporate is absolutely baseless because, according to
Mr. Mukherjee, the surplus funds would stand transferred to the
transferee-company. The shareholders of the petitioner-bank will become
shareholders of the new company and they will be the persons who will elect the
directors to conduct the business of the new company to be formed after such
scheme of amalgamation is sanctioned. Mr. Mukherjee submitted that the terms
"the debentures will rank after the loans of the transferee-company"
obviously means the existing loans as on the date of the sanction of the scheme
or the court can modify the scheme to specify the loans as on a particular date
and to this the petitioner-companies have no objection. Mr. Mukherjee submitted
that assets and liabilities of one company have been transferred to the
corresponding new company and the other company is still in its nascent stage
and has yet to commence business on a large scale. Therefore, according to Mr.
Mukherjee, the normal tests applied in arriving at the ratio of exchange of two
existing companies of the same stature or two running companies cannot be
applied in the instant case. Mr. Mukherjee submitted in answer to the
allegation that no provision for payment to the dissentient shareholders has
been made in the scheme that the petitioner-company has no objection to such
provision being made with regard to the payment made to the dissentient
shareholders. Mr. Mukherjee submitted that in fact this offer was made right at
the beginning that the court should fix a date on which a deadline should be
drawn for the purpose of finding out who are the real dissentient shareholders
and they may be directed to sell their shares at a price to be fixed by an
independent valuer or at a price to be mutually agreed upon. Therefore, Mr.
Mukherjee rightly submitted that there is no question of any unfair ratio of
exchange of the shares of the said company as it is entirely a question of
future working of the petitioner-company which has been formed for the purpose
of taking over the shares of the petitioner bank under the said scheme of
amalgamation.
Regarding the question of explanatory statement under
section 393 of the Companies Act it has not disclosed material facts and in
particular the interest of Mr. S.N. Sen; as such the explanatory statement
being tricky and misleading, Mr. Mukherjee submitted that the explanatory
statement under section 393 has been settled by the Assistant Registrar of
Companies of this court. He submitted that all material facts have been placed
in the explanatory statement, that is to say, facts material for the purpose of
considering the scheme and which are likely to affect the scheme has been
stated. The principles applicable to an explanatory statement under section 173
of the Companies Act, 1956, are not the same as that applicable to an
explanatory statement under section 393 of the Companies Act, 1956, is the
submission of Mr. Mukherjee. He further submitted that the interest of all the
directors also has been disclosed and in any event it is not shown as to any of
the shareholders who have been misled or prejudiced. Further, if the fact
relating to the pandemonium created in the first meeting has been stated in the
explanatory statement, that would have been a factor deterring the shareholders
from attending the meeting. Mr. Mukherjee also contended that one who is aware
of the business to be transacted at the meeting and is aware of the material
facts cannot complain about the notice or the explanatory statement. For the
said proposition he referred to the decision
in Parashuram Detarm Shamdasani v. Tata Industrial Bank Ltd. AIR 1928 PC
180, head-note, b. Therefore, Mr. Mukherjee submitted that there is no
substance in the said contention that the explanatory statement is tricky and
misleading and not true.
Mr. Mukherjee, therefore, submitted that the scheme
should be sanctioned as all the requirements of the statute have been complied
with and it has been sanctioned and approved by requisite majority of the
shareholders of the petitioner and the court should grant the relief as asked
for and sanction the scheme with or without modification as the court thinks
fit and proper.
Mr. R.C. Deb with Mr. B.K. Bachawat and Mr. H.K. Mitter appearing for one of the respondents opposing the application for sanction of the scheme contended that the purchase of shares on deferred payment basis cannot be sanctioned by the court. Mr. Deb submitted that the transferee-company is a mushroom company having no business experience, capacity or standing and the present application has been made with lack of candour and suppression of material facts as no information to shareholders opposing about the nature of the business and the standing of the transferee-company and the application is not made in good faith. Mr. Deb submitted that about 25% of the shareholders are Pakistanis, now Bangladesh citizens, as alleged in paragraph 4 of the affidavit-in-opposition of Rajaram Sharma and others and para. 107 of affidavit-in-reply affirmed by Mr. K.C. Das on behalf of the petitioner. Mr. Deb submitted that the notice of the Custodian of Enemy Properties has not been stated either in the petition or in the affidavit-in-reply and, as such, such submission should not be taken into account. Thereafter, Mr. Deb submitted that only 17% to 25% of the shareholders of the petitioner-bank have voted in the meeting. For that purpose he analysed the shareholding and the number of shareholders casting their votes at the meeting. Mr. Deb also submitted that the Custodian of the Enemy Properties has not been served with the notice of this application; at least nothing has been stated in the petition. I may record here that Mr. Mukherjee appearing for the petitioner produced documents to show that in fact notice has been served on the Custodian of the Enemy Properties representing the Bangladesh shareholders and submitted that if necessary a supplementary affidavit incorporating the said documents may be filed if required by court. Thereafter, Mr. Bachawat continued and submitted that the scheme is unfair and should not. be sanctioned. He pointed out that the memorandum of association of the petitioner No. 2 makes it clear that it did not carry on any business and it is a new mushroom company and as such no intelligent and honest shareholders would approve the said scheme of amalgamation of the said petitioner-company. He submitted that the scheme is highly speculative and the prospects of the business of the petitioner-company is dubious. He referred to Alabama's case [1891] 1 Ch D 213 (CA), In re Hindustan General Electric Corporation [1959] 29 Comp. Cas. 46 (Cal), In the matter of Patiala Starch and Chemical Works Ltd. [1958] 28 Comp. Cas. 111 (Punj) and In re Sidhpur Mills Co. Ltd. AIR 1962 Guj 305. Relying on those decisions he submitted that applying the principles deduced from the said decisions to the facts of this case, the scheme cannot he approved by the court and should be rejected. Mr. Bachawat referred to paragraph 13 of Rajaram Sharma's affidavit-in-opposition and also paragraphs 24, 25 and 32 of the petition and affidavit-in-opposition of Rajaram, paragraphs 4, 7,14, 18, 19 and affidavit-in-reply, paragraph 56(1) and paragraph 134 in support of his contention. Mr. Bachawat thereafter submitted that the ratio of exchange is not fair and he referred to paragraph 14 of the petition and Rajaram Sharma's affidavit-in-opposition, paragraphs 23 to 25, para. 29(b), 34 and 47. He also referred once again to the passage at pages 239 and 247 of Lindley J., in Alabama's case [1891] 1 Ch D 213 (CA) on the question, to decide as to what is fair and reasonable. Mr. Bachawat has drawn my attention once again to the said decision in Patiala Starch & Chemical Works, In re [1958] 28 Comp. Cas. 111 (Punj), Palmer's Company Law, 21st edition, page 704, section 81 of the Companies Act, 1956, and statement required to be made under section 393 of the Companies Act, 1956. He also submitted that the said scheme of amalgamation is subject to sanction of the Capital Controller under the Capital Issues (Control) Act, 1974, sections 2, 3, 5 and 13 to which Mr. Bachawat referred me. Mr. Bachawat submitted that the scheme is illegal under section 81(3)(a) as it would appear from para. 14 of the petition and it is admitted that no sanction of the Central Government has been obtained and he referred to paragraph 13(d) of the petition. Mr. Bachawat has drawn my attention to Pennington's Company Law, second edition, page 438, as to alternative remedy and also referred to Buckley on the Companies Acts, 13th edition, page 404, and submitted that the scheme of amalgamation is ultra vires the company. Mr. Bachawat has drawn my attention to clause (k) of the memorandum of association of the petitioner-bank giving power to the company to take over another company but does not give power to be taken over by another company and as such the said scheme of amalgamation cannot be sanctioned being ultra vires the petitioner-bank. Mr. Bachawat cited the decision in In re Crown Bank [1890] 44 Ch D 634 at 644 (Ch D). That was a case of a banking business. He also cited In re Oceanic Steam Navigation Co. Ltd. [1939] 9 Comp. Cas. 229 (Ch D) and Palmer's Company Law, 21st edition, page 698, Halsbury's Laws of England, sixth edition, page 415, Carron Tea Co. Ltd. [1966] 2 Comp. LJ 278 (Cal), Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd. AIR 1928 PC 180 in support of his contention that the scheme of amalgamation is ultra vires the company and cannot be sanctioned. Mr. Bachawat also submitted that under the Companies Act, 1956, section 17(1)(g) read with section 391(1) refers to power to amalgamate. He also referred to Palmer's Company Law, 21st edition, page 24. Thereafter, Mr. Bachawat submitted that the meeting of the shareholders is not properly held for reasons: (a) pandemonium on 30th March, 1972, as referred to in the report of the chairman, para. (1)(a)(i) and affidavit-in-opposition of Rajaram Sharma and others, para. 51; (b) order for police help was not circulated and as such a proper notice was not served to the shareholders who were scared away by the rowdy and unruly elements in the infructuous meeting dated the 30th of March, 1972. Thereafter, Mr. Bachawat submitted that the scheme cannot be sanctioned as there was no valid and proper meeting of the shareholders sanctioning the scheme of amalgamation according to the provisions of the statute. Mr. Bachawat thereafter submitted that the original scheme framed in 1970 is unfair and resolution for modification of the said scheme clearly showed that the original scheme is unfair. Relying on those contentions, Mr. Bachawat submitted on behalf of Rajaram Sharma and others that the scheme cannot be sanctioned by the court. Thereafter, Mr. Bachawat submitted written notes on the arguments put forward by him at my request by which he contended, firstly, that the scheme is unfair and no intelligent and honest man can support the scheme. Analysing the said contentions he pointed out that the petitioner-bank received compensation in 5½% bonds of the value of Rs. 4,19,83,100 as would appear from the balance-sheet of the bank for the year ending 31st December, 1971. The said bonds are readily saleable and convertible in money and the petitioner-bank has no liability whatsoever. Thereafter, he submitted that the transferee-company has been incorporated only for the purpose of taking over the assets of the petitioner-bank. As such the transferee-company has not commenced any business. He referred to the balance-sheet of the transferee-company for the year ending 30th of September, 1971. He thereafter pointed out that the transferee-company has not only no asset but it has a huge liability of more than Rs. 25 lakhs; that is expressly stated in paragraph 35 of the affidavit-in-opposition of Rajaram Sharma and others affirmed on the 28th of August, 1972, and according to Mr. Bachawat that has not been denied in paragraph 31 of the affidavit-in-reply. Mr. Bachawat also submitted that there was complete suppression of material fact relating to liability of the transferee-company not only in the petition and in the balance-sheet annexed to the petition but also in the affidavit-in-reply and as such there is a complete lack of candour. Mr. Bachawat submitted that the transferee-company has no business experience and the company has not commenced its business and the business possibility of the transferee-company is wholly untested in India. He submitted that no material has been produced to show the possibility of commercial success of the main object of the transferee-company. He submitted that it is inconceivable that a business organisation would earn profit by reviving sick industries. There are various statutory organisations controlled by the Government, as for example, Industrial Reconstruction Corporation of India, Financial Corporation of India, State Financial Corporation of West Bengal and others with the object similar to those of the transferee-company. Mr. Bachawat submitted that the Finance Corporation and organisation has not been able to make any profit and does not aim in making any profit, and, as such, the business of the transferee-company cannot be successfully carried out in competition with the said statutory organisations. Mr. Bachawat referred to paragraphs 24 and 25 of the affidavit of Rajaram Sharma and others. Mr. Bachawat submitted that the object of the transferee-company is of multifarious and varied nature and it can carry on all kinds of conceivable business. The object clause of the transferee-company is extravagant. Unless the members can ascertain the precise nature of the business of the transferee-company it should not be called upon to invest their money in it. Mr. Bachawat also submitted that the proposed directors of the transferee-company has no business experience whatsoever. A number of respectable persons have been named as proposed directors of the transferee-company but materials have not been produced in spite of challenge in that behalf to show that they would have been ready and willing to act as directors of the transferee-company. He referred to paragraphs 32 and 47 of the petition and paragraph 134 of the affidavit-in-reply. Mr. Bachawat submitted that no reason whatsoever has been shown in the petition for the proposed scheme of amalgamation and the grounds put forward for amalgamation are all spurious and unreal. He referred to paragraphs 13, 15, 16 and 22 of the petition. He analysed the said reasons set out in paragraph 13 and its sub-paragraphs as merely imaginary and he referred to the affidavit-in-opposition of Rajaram Sharma in support, of his contention. He submitted that the other banks which have been nationalised have been amalgamated with well-established and reputed companies, as for example, Central Bank of India with Tata Engineering and Locomotive Company and Bank of India with Calico Mills Ltd. and Union Bank of India with Mahindra and Mahindra Ltd. He referred to paragraph 56(f) of the affidavit-in-opposition of Rajaram Sharma and others in support of his contention. Lastly, he submitted that the scheme must be such that an intelligent and honest man must support the same as otherwise the court would not sanction the scheme. For this principle he cited Alabama Railway Company's case [1891] 1 Ch D 213 to 247 (CA).
Next, on the question of ratio of exchange being
unfair, Mr. Bachawat submitted that if the petitioner-bank is wound up and its
capital is distributed in specie, in that event, each member would be entitled
to Rs. 15.61 per share being the break-up of the compensation money among the
shareholders. But by the scheme it is proposed to allot a share of Rs. 5 and an
unsecured debenture of Rs. 5 in a mushroom company with no proved prospects.
Members completely lose Rs. 561 per share of Rs. 50 immediately and with a fair
possibility of losing everything in future. Mr. Bachawat, lastly, submitted on
this question of ratio of exchange that it is not a sound business proposition.
No investors of any intelligence would be agreeable to receive papers worth Rs.
10 only in lieu of cash of Rs. 15.61. Next point urged by Mr. Bachawat is that
the shareholders of the amalgamated company would not get a fair return if the
scheme is sanctioned as the transferee-company does not propose to make any
profit for at least a period of 5 years and payment of dividend has been
proposed out of the capital of the petitioner-bank and the said dividend when
calculated amounts to 3% but a higher return can be obtained from any other
investment. He referred to paragraph 14(1) of the petition. He submitted that
in any event the shareholders of the petitioner have a present right to the
reserve' fund out of which the dividend is proposed to be paid. . In fact no
dividends are paid. Shareholders of the petitioner-bank are proposed to be paid
back an insignificant part of their own money in the garb of dividend proposed
to be declared by the transferee-company. The proposal to pay dividend is merely
an eye-wash to have the scheme sanctioned by the court. Mr. Bachawat submitted
that as the business possibility of the transferee-company is unreasonable, it
cannot be predicatable at all if the transferee-company would earn any profit
in future. On the materials placed before the court it is apparent that the
transferee-company have no prospect to earn profit at all in future. Mr.
Bachawat submitted that the debentures proposed to be issued are unsecured and
no fixed rate of interest is being proposed to be paid. The company may not
grant any interest at all. The scheme proposes that an interest not exceeding
9% per annum would be paid. He referred to the petition, paragraph 14(2)(i) and
(g). According to the scheme the debenture-holders would take only after the
creditors of the transferee-company which, as mentioned above, is more than Rs.
25 lakhs and the debenture is redeemable after 12 years. Therefore, the
debenture-holders would not get anything if the transferee-company is wound up,
of which there is every possibility in the meantime. Mr. Bachawat also
submitted that the members of the petitioner-bank would be compelled to invest
their money in a mushroom company which has not commenced any business and has
no business prospect. As such no reasonable and intelligent investors would
invest their money in such a company. He referred to In re Alabama Railway
Company [1891] 1 Ch D 213 at pages 238 to 239 and 247 (CA) and In the matter of
Patiala Starch and Chemical Works [1958] 28 Comp. Cas. 111 (Punj) and In the
matter of Canon Tea Co. Ltd. [1966] 2 Comp. LJ 278 (Cal). Thereafter, Mr.
Bachawat submitted that the scheme of amalgamation is provisional as the same
depends upon the sanction of the Controller of Capital Issues and the Central
Bank. He referred to the petition, paragraph 14 and statements under section
393 of the Companies Act, 1956, para. 8 and the scheme of amalgamation, para.
5. He referred to sections 3 and 5 of the Capital Issues (Control) Act, 1947,
whereunder there is a complete prohibition of issues of shares without
permission of the Controller of Capital Issues and the Central Bank may impose
conditions therefor. Mr. Bachawat submitted that if the Central Bank does not
grant permission, then the scheme becomes infructuous. But assuming the Central
Government grants permission, the same may be conditional and which may render
the sanction of the scheme wholly infructuous or materially different from the
one sanctioned by the court. Mr. Bachawat further submitted that the issue of
debenture which is convertible into shares of the company requires sanction of
the Central Government under section 81(3) of the Companies Act, 1956. He
submitted that no materials have been placed before the court to show what
steps, if any, have been taken to obtain the permission of the Controller of
Capital Issues under the Capital Issues (Control) Act, 1947, or section 81 of
the Companies Act, 1956.
Mr. Bachawat next submitted that there has been no
proper representation at the meeting held on the 8th of May, 1972, to find out
what happened at the meeting held on the 8th of May, 1972. He submitted that
one has to look to the events which happened at the infructuous meeting dated
the 30th of March, 1972. He thereafter has drawn my attention to the report of
the chairman for the meeting held on the 30th of March, 1972, which forms part
of the report of the chairman for the meeting held on 8th of May, 1972. He
submitted that from the said report it clearly demonstrates that there is also
intrinsic evidence in the report of the chairman to show that pandemonium was
caused by the persons interested in the petitioner. The said pandemonium and
disturbance at the meeting held on 30th of March, 1972, was widely reported in
the press. He submitted that by the order dated the 3rd of May, 1972, the court
directed the directors of the bank to obtain police protection at the said
meeting. The said order was not communicated to the members or advertised in
the press and in view of the violence and pandemonium in the meeting held on
30th of March, 1972, a very small percentage of the members attended the
meeting held on 8th of May, 1972. A very large number of persons opposing the
scheme stayed away. Only 6 lakhs and odd shares out of 35 lakhs issued shares
voted, thus representing only about 16% to 18% of the total shareholding of the
petitioner-bank. He referred to paragraphs 51 and 52 of the
affidavit-in-opposition of Rajaram Sharma and others. He submitted that there
is a complete lack of candour and suppression of material fact on the part of
the petitioner-bank and the proposed scheme of amalgamation is not bona fide.
Mr. Bachawat lastly submitted that the scheme of
amalgamation is not bona fide as there has been a complete lack of candour and
suppression of materials on behalf of the petitioner as the facts relating to
purchase of shares by the transferee-company and its liability to the tune of
about Rs. 25 lakhs has been suppressed. Mr. Bachawat also alleged that the
financial position of the petitioners has not been disclosed but has been
deliberately suppressed. He referred to the auditors' report attached to the
balance-sheet of 1he transferee-company. Thereafter, Mr. Bachawat submitted
that in the first statement under section 393 of the Companies Act, 1956, Rs.
70,79,325 has been earmarked for capital gains tax. Though the amount of tax,
if any, payable on the compensation money would remain the same in the
balance-sheet of the petitioner-bank for the year ending 31st of December,
1971, and in the scheme of amalgamation finally proposed Rs. 1,31,11,999.50 has
been shown thereby showing an increase of about a sum of Rs. 60 lakhs for which
no reason has been given anywhere. Mr. Bachawat also contended that although
the petitioners had two years to ascertain as to whether or not capital gains
tax is payable on the compensation money the same has not yet been ascertained
and no reason has also been put forward.
Thereafter, Mr. Bachawat submitted that the proposed
scheme is ultra vires the petitioner-bank and as such the same cannot be
sanctioned. He submitted that the main object of the petitioner-bank was to
carry on banking business and he referred to sub-clauses 3(c), (d) and (e) of
the memorandum of association of the petitioner-bank. He submitted that the
other clauses of the petitioner-bank are merely ancillary to the said main
object. He referred to the decision of Crown Bank [1890] 44 Ch D 634 (Ch D). He
submitted that the name of the bank also formed part of the memorandum of
association "Bank" has been used in the name of the bank as name is
material to ascertain the paramount object of a company. Mr. Bachawat then
submitted that the only relevant clause under the object clauses is sub-clause
3(k) of the memorandum of association of the petitioner-bank. According to Mr.
Bachawat this clause postulates that the petitioner-bank would continue to be a
going concern and would cease to exist by virtue of any amalgamation. That
sub-clause, therefore, does not authorise the petitioner-bank to effect the
proposed amalgamation. The proposed amalgamation involves dissolution of the
petitioner-bank. Thereafter, Mr. Bachawat referred to the decisions in
Parashwam Detaram Shamdasani v. Tata
Industrial Bank Ltd. AIR 1928 PC 180, Nagaisuree Tea Company Ltd. v.
Ramachandra Karnani [1966] 2 Comp. LJ 208 (Cal), In the matter of Carton Tea
Co. Ltd. [1966] 2 Comp. LJ 278 (Cal), Associated Hotels of India Ltd., In re
[1968] 2 Comp. LJ 292 (Cal), Hari Krishna Lohia v. Hoolungooree Tea Co. Ltd.
[1970] 40 Comp. Cas. 458 (Cal), Oceanic Steam Navigation Co. Ltd. [1938] 3 All
ER 740; [1939] 9 Comp. Cas. 229 (Ch D).
Relying on
those decisions Mr. Bachawat submitted that the scheme of amalgamation in the
present application cannot be sanctioned as the same is not authorised by the
object clause of the petitioner-bank.
Making those
submissions Mr. Bachawat contended that the present application must be
dismissed.
Mr. S.B.
Chakraborty, appearing for Mr. Niranjan Das Mohan and others, opposing the
application for sanction of the scheme of amalgamation submitted, firstly, that
the chairman of the meeting had no power of adjournment and he referred to
regulation 53A of Table A to the Companies Act, 1956, and regulation 91 of the
articles of association of the petitioner-bank and also drew my attention to Buckley
on the Companies Acts, 13th edition, page 334, wherein a decision in Cates by
v. Burnett [1916] 2 Ch 325 (Ch D)has been referred. Mr. Chakraborty submitted
that in the instant case the meeting was held on the 29th of September, 1970,
under an order of this court and the said meeting is alleged to have been
adjourned by the chairman as it was not possible to conduct the meeting due to
pandemonium created in the said meeting. Mr. Chakraborty referred to the
chairman's report dated the 11th of November, 1970, and affidavit of Kamal
Saminathe Rangaswami, Junior, affirmed on the 5th of December, 1970, paragraphs
5, 6, 7, 9 and 11 and the said adjournment was an adjournment sine die by the
chairman. Mr. Chakraborty submitted that the chairman had no authority to
adjourn the said meeting sine, die as the order of the court dated the 29th of
August, 1970, did not contain any power to adjourn the meeting conferred on the
chairman. He referred to a decision of John v. Rees [1969] 2 WLR 1294; [1969] 2
All ER 274 (Ch D) in support of his proposition. He, therefore, submitted that
this court had no jurisdiction to direct the adjourned meeting of both the
petitioners to be held and as such the subsequent order was void and of no
effect as the meeting held pursuant to the subsequent order of this court is
illegal. Therefore, no scheme can be sanctioned on the basis of the said
meeting. The second point urged by Mr. Chakraborty was that United Bank of
India Ltd. is not a company which can be wound up under the Companies Act,
1956, and, therefore, cannot come within the scope of sections 391, 393 and 394
of the Companies Act, 1956, his contention being that the United Bank of India
Led. carried on banking business till the 18th of July, 1969, and as and from
the said date the petitioner-bank denuded of its everything leaving the
company in name only. According to Mr. Chakraborty, United Bank of India Ltd.
completely vested in United Bank of India under sections 4 and 5 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970. The
"undertaking" of the bank has been denned in section 36AE and
sub-clause (3) of the Banking Regulation Act, 1949. Therefore, Mr. Chakraborty
submitted that the United Bank of India Ltd. was completely denuded and was paid
the compensation money for being so denuded. He submitted, therefore, that the
United Bank of India Ltd. has been completely wound up statutorily by the
statute of the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970, except it was not dissolved. In the premises, Mr. Chakraborty
submitted that on or after 19th July, 1969, the United Bank of India Ltd. had
two alternatives (a), to liquidate or dissolve the company by payment to the
shareholders of the sum of Rs. 4,20,00,000 which works out at Rs. 15.61 per
share, or (b) to commence business agreed to by shareholders after alteration
of the object in its memorandum of association and after changing its name
suitably to the altered business with the consent of the shareholders. This
would mean commencement of a business by a new company. The petitioner-bank in
clause 3 of the statement issued under section 393 of the Companies Act, 1956,
along with the notice dated the 31st of August, 1970, has admitted the said
alternatives. Mr. Chakraborty submitted that the petitioner-bank has not done
either of the two alternatives up to date. It has not engaged itself in any
business since 19th of July, 1969; yet it has shown annual report with
balance-sheet and profit and loss account declaring dividends for the years
1969-70 and 1970-71. Mr. Chakraborty submitted that the said annual reports of
the petitioner-bank are illusory and should be rejected as a document of no
validity. He submitted that the petitioner-bank is now seeking to amalgamate
with the petitioner No. 2 company which is mala fide and unconscionable.
Thereafter, Mr. Chakraborty submitted that the petitioner-bank has no power of
amalgamation in its object clause and he adopted the arguments of Mr. Deb and
Mr. Bachawat on this point. Mr. Chakraborty also submitted that the exchange
ratio is unfair and unreasonable and he also adopted the arguments of Mr.
Bachawat, Mr. Prabir Sen and Mr. Gupta. Lastly, Mr. Chakraborty submitted that
the meeting held on the 8th of May, 1972, is invalid on the ground, (1) no
notice to shareholders in Bangladesh was given as required under section 172 of
the Companies Act, 1956; (2) in view of the alleged pandemonium and violence at
the first meeting, the said adjourned meeting could not be attended by members
who wished to attend as they were scared away; (3) alleged notice to Custodian
of Enemy Property is not a notice under section 172 of the Companies Act, 1956;
(4) no list of shareholders is prepared who were Pakistanis or foreigners for
whom excuse is sought to be made out that no notices were necessary to be given
to them, and, lastly, (5) the existence of foreign shareholders of the United
Bank of India Ltd., if any, has been throughout the prior proceedings, even in
the proceedings taken by the bank for directions to hold the alleged adjourned
meeting and order obtained. Relying on those submissions Mr. Chakraborty
submitted that the present application should be dismissed.
Mr. Prabir Sen appearing for some of the opposing
creditors of the petitioner-bank submitted that the scheme of amalgamation
should be rejected and no sanction should be accorded by this court as
requirements of the statute have not been complied with. He submitted that
under section 391, sub-section (2), of the Companies Act, 1956, it is obligatory
to disclose all material facts relating to the company such as the latest
financial position of the company and the latest auditors' report on the
accounts of the company. If there is a failure of compliance of the said
requirements of the statute the court has no jurisdiction to sanction the
scheme. He submitted that there is no allegation in the petition even
disclosing the latest financial position of the company or auditors' report on
the accounts of the petitioner-bank. Profit and loss account of 31st December,
1971, has been annexed and so far as the United Credit and Development Company
Ltd. is concerned the balance-sheet as at 30th September, 1971, has been
annexed. He pointed out that in the balance-sheet there is a remark of the
auditor "in terms of our attached report of even date". The said
report has not been annexed to the petition and no reference has been made. Mr.
Sen submitted that in any event the said balance-sheet does not disclose the
latest financial position of the company as there is no auditors' report at all
on the accounts of the petitioner No. 2 company. Therefore, ex facie, the
scheme cannot be sanctioned. Secondly, Mr. Sen submitted that section 393 of
the Companies Act, 1956, enjoins that with every notice calling the meeting
there shall be sent also a statement setting forth in particular any material
interests of the directors, managing directors or managers of the company. He
submitted that Mr. S.N. Sen is a director of the petitioner No. 2 and he is
also a solicitor of the petitioner-bank; as such he is materially interested
both professionally and financially and that has not been disclosed in the
explanatory statement and by failing to disclose the same the meeting has been
vitiated and a mandatory provision of section 393 of the Companies Act, 1956,
has been clearly violated. He submitted whether such non-disclosure will have
any effect on the scheme of amalgation or not, is not the question but the
requirements under section 393, sub-section (1)(a) is quite specific and should
have been complied with. Thereafter, Mr. Sen submitted that assuming but not
admitting that the requirements of the statute have been complied with,
sanctioning of the scheme is in the discretion of the court and, in the facts
and circumstances of this case, the court should not sanction the scheme as the
scheme is unfair, unconscionable and no reasonable person will approve the
scheme. He submitted that on the face of it the petitioner No. 2 company having
subscribed capital of Rs. 5,600 only is wrongfully purporting to amalgamate
with a company having assets of over more than Rs. 4 crores. The new company
has not even started business and no proposal has been disclosed as to the
manner in which it will carry on the business. The prospective liability or
profitability of the business has not at all been disclosed and to force the
scheme upon the dissentient shareholders by taking shares and debentures in the
new company in the manner proposed would be highly prejudicial and injurious to
the dissentient shareholders. Mr. Sen submitted that the petitioner admits that
the new company has been formed only for the purpose of taking over the
petitioner-bank under the present scheme. Mr. Sen submitted that there are
efficacious and simpler methods by changing the name of the company and
altering the memorandum and articles of the company under section 17 of the
Companies Act, 1956. The petitioners are, without following the course,
surreptitiously trying to get the scheme passed through this hon'ble court. Mr.
Sen thereafter submitted that the court should not exercise its discretion in
passing the scheme inasmuch as the purported majority at the meeting was not
truly representative of class for which they voted. Thereafter, he analysed the
votes cast in the said meeting and submitted that the majority was acting not
for the benefit or the interest of the class they were representing but for the
personal interest and aggrandisement of the delinquent management. Thereafter,
Mr. Sen submitted that the scheme admittedly purports to bind the shareholders
all over the country as well as the shareholders residing outside India. He
submitted that Bangladesh shareholders have not been served either by
advertisement or otherwise according to law. He referred to rules 76 and 78 of
the Companies (Court) Rules, 1959. Mr. Sen submitted that the application for
the scheme is based on the chairman's report which is conclusive on the point
of service of notice. He contended that from the chairman's report nothing
appears which shows any notice has been served on the Bangladesh shareholders
or to the Custodian of Enemy Property or by advertisement. He submitted that
notice to the Custodian of Enemy Property is illusory and would not afford
protection to the numerous shareholders in Bangladesh. Thereafter Mr. Sen
submitted that the ratio of exchange is extremely inequitable and unfair and
there is no auditors' report or a report of the valuer recommending that the
exchange ratio is fair. He submitted that the new company proposed to carry on
business of merchant-cum-development bank. For the said business sanction of
the Reserve Bank is a condition precedent to such scheme and this court should
not sanction the scheme as there is no such sanction from the Reserve Bank. He submitted that the grounds
on which the scheme should be rejected have been set out in paragraph 9 and
several sub-paragraphs thereunder of the joint affidavit of Sarat Chandra Seal
and 67 other shareholders dated the 20th of August, 1972. Mr. Sen referred to
the decisions reported in Calcutta Industrial Bank Ltd., In re [1948] 18 Comp.
Cas. 144; 52 CWN 425, 429 and at pages 432 and 439 (Cal), Bengal Bank Ltd. v.
Suresh Chakrawarthy [1951] 21 Comp. Cas. 315; 55 CWN 206 at pages 209-210 and
215 (Cal), Sovereign Life Assurance Co. v. Dodd [1982] 2 QB 573 at pages 582
and 583 (CA), Carron Tea Co. Ltd., In re [1966] 2 Comp. LJ 278 (Cal), and
Indian Crescent Bank Ltd., In re [1949] 53 CWN 183 (Cal) and submitted that the
present scheme should not be sanctioned by the court.
Mr. R.C. Nag,
appearing for Mr. M.D. Jalan and Smt. Sarala jalan, shareholders of the
petitioner-bank, submitted that there is no substance in the contention on the
opposing group that the scheme of amalgamation is ultra vices the power of the
United Bank of India Ltd., that is, the petitioner-bank. He submitted that in
most of the cases there is an amalgamation of the two running companies,
whereas in this case the petitioner-bank is not a company within the meaning of
sections 391, 393 and 394. He referred to the distinction between powers and
objects and cited Cotman v. Brougham [1918] AC 514 (HL), where it has been held
that amalgamation is a power to amalgamate and not an object of a company. Mr.
Nag referred to the decision in Tata Bank AIR 1928 PC 180 at 184, where it was
held that so far as the transferor-company (Tata Bank) was concerned, power to
amalgamate was derived from status under sections 208 and 215 of the old
Companies Act, 1913, and absence of power in the memorandum was held to be irrelevant
and so far as the transferee-company, that is, the Central Bank, was concerned,
it had power to amalgamate in its memorandum. Mr. Nag, thereafter, cited the
decision in In re Oceanic Steam Navigativn Co. Ltd. [1938] 3 All ER 740 at 743;
[1939] 9 Comp. Cas. 229 (Ch D), where the ratio of the said decision was not
the absence of power to amalgamate but absence of power in the company's
memorandum to sell and dispose of its whole undertaking whereas in the instant
case Mr. Nag rightly pointed out that the object, clauses (j), (k), (i) of the
memorandum of the United Bank of India clearly empowers the company to do so.
Then he referred to Crown Bank, In re [1890] 44 Ch D 634 at. 664 (Ch D) and
submitted that the same was a case for winding up of a company on the
shareholders' application that the company carried on ultra vires business. The
present case is not a case where winding-up petition being presented. Mr. Nag
submitted that even then the court has jurisdiction. Merchant-cum-development
business is authorised by sub-clauses (f) and (m) of the United Bank of India
Ltd.'s memorandum of association. Referring to the decision in Carron Tea Co.
[1966] 2 Comp. LJ 278 at 296-297 (Cal) Mr. Nag submitted that in that case the
transferee-company had no power to amalgamate whereas in the present case it is
not so. That is the transferee-company has power to amalgamate. He submitted
that the observation of the learned judge at page 296 of the said report
regarding Tata decision in AIR J928 PC 180 was per incuriam. Mr. Nag,
thereafter, referred to Nagaisuree Tea Company's case in [1966] 2 Comp. LJ 208
at 218 (Cal) and submitted that reference to Tata Bank's case of the Privy
Council in AIR 1928 PC 180 was per incuriam and he has also drawn my attention
to page 212 of the said report where it has been held that mala fide opposition
to section 17 application to have high purchase value of shares not permissible
(sic). Thereafter he referred to Associated Hotels of India Ltd., In re [1968]
2 Comp. LJ 292 at 300, last paragraph, and submitted that it was a correct
reading of the Privy Council decision in Tata's case AIR 1928 PC 180. Mr. Nag,
thereafter, referred to Halsbury (Halsbury's Laws of England), volume 6, page
415, footnote (m), and submitted that the said decision in European Society
Arbitration Acts, In re [1878] 8 Ch D 679 (CA) is distinguishable from the
present case on the ground that there is power in the memorandum of the United
Bank of India Ltd. to sell its undertaking and here the transaction relating to
purchase of shares has been approved by the shareholders of the purchasing
company. Mr. Nag referring to Palmer's Company Law, page 698, and Buckley
(Buckley on the Companies Acts), page 40, submitted that the authority for
ultra vires proposition is based on Oceanic Steam Navigation Co. Ltd., In re
[1938] 3 All ER 740 at 743; [1939] 9 Comp. Cas. 229 (Ch D) which Mr. Nag has
already dealt with. Mr. Nag submitted that even on basis of allegation of
contesting shareholders in this application that the substratum of the
petitioner-bank has disappeared, the said bank is still a company within the
meaning of section 390 of the Companies Act, 1956, having shareholders,
creditors, assets and liabilities. He submitted that Telco's case (Union of
India v. Tata Engg. and Locomotive Co. Ltd.) reported in [1972] 42 Comp. Cas.
72 (Bom) is inapplicable in the present case as here the transferee-company has
been openly floated to take over the transferor-company. He referred to
Hoolungooree AIR 1969 Cal 312 at page 314, para. 7; [1970] 40 Comp. Cas. 458,
461 (Cal). Mr. Nag, thereafter, referred to Wienburg on Takeover and
Amalgamation, at pages 1 and 2, where it has been stated that incorporation of
a new company to effect amalgamation is permissible. He also referred to Chapter
7, page 7, article 701 of the said book where a new company was initially
formed even as a private company with very small capital has been referred. Mr.
Nag thereafter cited Moon's Business Mergers and Take-over Bids, at page 173,
where it has been stated that a new company may be formed for amalgamation and
take over of an old company. Mr. Nag thereafter dealt with the contention of
the contesting shareholders that the notice and explanatory statement under
section 393 of the Companies Act, 1956, are defective. He submitted that
complaint as to invalidity of the notice cannot be taken at the hearing unless
the objection is taken at the meeting. He referred to the decision in In re
Rivers Steam Navigation Co. Ltd. [1967] 71 CWN 854, 889, 890 (Cal). He also
referred to rule 69 of the Companies (Court) Rules and Form 35 and also rule 73
and Form 36 and submitted that the notices are settled by the court under the
provisions of the said rule. He, thereafter, referred to Palmer's Company Law,
21st edition, pages 705-706 and footnote 12 at page 706 and rightly submitted
that the dual capacity of Mr. S.N. Sen, the solicitor of the petitioner-bank,
is immaterial having no effect on the scheme. He submitted that section 391(1)
provides that only "material interests" of directors are required to
be disclosed. He referred to Buckley on the Companies Acts, 13th edition, page
332, where meaning directors' interests advantage by reason of fiduciary
position (sic). Referring to the decision in Sidhpur Mills Co. Ltd., In re AIR
1962 Guj 305, headnote (e), at page 306, last paragraph and paragraph 26 at
page 315, Mr. Nag submitted that it is necessary to disclose under section 303
material interests of directors, etc., in the scheme and effect on the scheme
of those interests if different from material interests of other persons
interested in the same scheme. He rightly submitted that according to the
decision in Rivers Steam Navigation Co. Ltd., In re [1967] 71 CWN 854 at 889
(Cal), paragraph 91, objection as to separate meeting or conduct of meeting
cannot be taken at the hearing unless taken at the meeting. The said decision
was affirmed by the appeal court in Inland Steam Navigation Worker's Union v.
Rivers Steam Navigation Company Ltd. [1967] 71 CWN 897; [1968] 38 Comp. Cas. 99
(Cal). Mr. Nag later rightly submitted that particulars of admitted pandemonium
in the previous meeting were not relevant fact but could have been relevant for
a criminal court. He thereafter referred to the Privy Council decision in
Tata's case (Parashuram Detaram Shamda-sani v. Tata Industrial Bank Ltd.) AIR
1928 PC 180 at 185, where it has been held that elaborate detail in explanatory
circular could not be informative to shareholders but might be detrimental to
company's interest and if the complainant has knowledge of the matters
complained of, non-disclosure of such matters are not fatal. He also referred
to the decision in In re Carton Tea Co. Ltd. [1966] 2 Comp. LJ 278 at 297 and
298 (Cal) for the proposition that it is section 393 and not section 173 of the
Companies Act, 1956, that governs the explanatory statement. In that decision
the contention that the Registrar did not apply his mind in settling the notice
and explanatory statement under section 393 failed. Regarding the contention that
no notice was served on Bangladesh shareholders, Mr. Nag rightly submitted that
notice on Custodian of Enemy Property was sufficient under the Enemy Property
Act, section 2(c), section 7(3), section 8(1) and section 2(i). Thereafter, he
dealt with the decision cited by the contesting shareholders on the question of non-service of notice on
the Pakistani shareholders, now Bangladesh shareholders, being In the matter of
Calcutta Industrial Bank Ltd. [1948] 18 Comp. Cas. 144; 52 CWN 425 at 430
(Cal), In re Indian Crescent Bank Ltd. [1949] 53 CWN 183 (Cal), Bengal Bank
Ltd. v. Suresh Chakravarthy [1951] 21 Comp. Cas. 315; 55 CWN 206 (Cal) and
submitted that those are all distinguishable on the facts and not applicable to
the instant case.
Regarding the
contention of the opposing creditors that there was no fair representation of
"class" of shareholders after excluding interested votes and as such
no statutory majority, he rightly submitted, on analysing the votes cast, that
there is no substance in such contention. The total votes cast is 6,75,836 from
which deducting the interested votes being 2,90,397, the total comes to
4,75,439 from which the votes cast against the scheme being 13,381 being
deducted, the balance votes in favour of the scheme is 4,02,058 which is more
than 75% of the votes cast. He rightly submitted that persons supporting the
scheme cannot and do not constitute a different class from those opposing the
scheme. He referred to the meaning of "class" in Sarkar and Sen
Companies Act, page 397, and United Provident Assurance Co. Ltd., In re [1910]
2 Ch 477, 480 (Ch D). He referred to the passage "shareholders who have
separate and distinct rights", viz., fully paid up shareholders as opposed
to partly paid up shareholders. He also referred to Sovereign Life Assurance
Co. v. Dodd [1892] 2 QB 573 at 582 (CA) which case is clearly distinguishable
where in fact two different classes were referred to. Thereafter, he referred
to Palmer's Company Law, 21st edition, page 705, where he stated that statutory
majority is an indication that the scheme is a fair one. Regarding the
discretion of the court and the court not being a rubber stamp he referred to
Gower's Company Law (The Principles of Modern Company Law), 3rd edition, page
640-642. He submitted that the order of this court directing adjourned meeting
to be held is not appealed from as the court has inherent power to pass further
interlocutory orders. He also referred to Buckley on the Companies Acts, 13th
edition, page 334, and submitted that there is an implied power of adjournment
of a meeting. He also referred to Crew, The Conduct of and Procedure at Public,
Company and Local Government Meetings, Chapter 18, page 155 and also Frank
Shacketon's The Law and Practice of Meeting, 5th edition, page 58 and Palmer's
Company Law, 21st edition, page 486, for the proposition that power to hold a
meeting implied a power to adjourn a meeting. Thereafter, Mr. Nag referred to
the decision in Dorman Long & Co., In re [1934] Ch 635 at 637; [1935] 5
Comp. Cas. 30 (Ch D), where it has been held that a complicated scheme requires
careful scrutiny by court. Mr. Nag rightly submitted that the present scheme as
such is not complicated. It is also held in the said decision that the main
fact is required to be stated hi the explanatory statement. Referring to the decision
in English, Scottish and Australian Chartered Bank, In re [1893] 3 Ch 385 at
414 and 415 (CA) and the observation of Lopez LJ., Mr. Nag submitted that
proper statutory majority can bind the minority. Reasonableness of a scheme is
to be judged in the light of the alternative. Referring to London Chartered
Bank of Australia, In re [1893] 3 Ch 540 at 545 (Ch D), Mr. Nag submitted that
a scheme should be sanctioned unless there is something ex facie wrong about it
or material over-sight or miscarriage of justice. Thereafter, referring to the
decision in Alabama, New Orleans and Texas Railway Co., In re [1891] 1 Ch 213
(CA), Mr. Nag submitted that objection to scheme must be reasonable and not
hypothetical or problematical. The whole test is whether a scheme in a
commercial sense is extremely advantageous to the majority approving the
scheme.
He thereafter referred to the decision in Carruth v.
Imperial Chemical Industries Ltd. [1937] 2 All ER 422 to 423, 460; [1938] 8
Comp. Cas. 181 (HL), where it has been held that there could be waiver of
irregularity at meeting. Relying on the said decision Mr. Nag rightly submitted
that it is always open to the shareholders of the company to waive the
irregularities at a meeting. If it is held that there was any irregularity in
holding the said meeting that has been clearly and unequivocally waived.
Regarding the contention that the scheme is unfair on
merits, impracticable, conditional, hypothetical, illegal in violation of sections
149 and 372 of the Companies Act, 1956, Mr. Nag rightly submitted that it is
for the businessmen to judge the said scheme and they are the best judges. He
referred to Palmer's Company Law, 21st edition, page 705. He submitted that the
merchant-cum-development banking is not radically different from the United
Bank of India's, i.e. , the petitioner-bank's, actual business at the date of
acquisition and nationalisation of its undertaking. This is a recognised mode
of business. He submitted that Mr. S.N. Sen is a well-known economist being Ph.
D in economics with special contribution to money and banking. He further
submitted that consent of all proposed new directors of the transferee-company
is available. Test of reasonable man is not the test of dialetic. Mr. Nag
rightly pointed out that the opposing shareholders in the past never alleged
about mismanagement of the United Bank of India Ltd. by the directors. He
submitted that some of the dissentient shareholders have purchased the shares
from the market during the pendency of this application.
Thereafter, he contended that there is no question of
violation of section 372 as the instant case is covered by the exception under
section 372 (14)(c). He submitted that sections 372 and 373 of the Companies
Act, 1956, indicate that the bar of section 372 is only for purchase of
investment. Mr. Nag thereafter submitted that a scheme can be sanctioned
conditionally as there is express power to the court under section 392(1)(b)
and also in scheme to impose
conditions. He referred to section 394 of the Companies Act, 1956, and rules,
Form No. 36. He also drew my attention to Gower's Company Law 3rd edition, page
641, footnote 87, for the said proposition. He submitted that liabilities of
the petitioner-company as on the date of the application is the question which
has been disclosed with no uncertainty. He thereafter referring to the said
decision in Carruth v. Imperial Chemical Industries Ltd. [1937] 2 All ER 422,
462; [1937] AC 707; [1938] 8 Comp. Cas. 181 (HL) rightly submitted that the
onus is on the dissentient to show the scheme is unfair. Fairness or unfairness
of the scheme is not for the court's discretion in a technical sense but is a
matter to be decided on evidence —Test being whether it is for the interest of
future commercial interest of the company, court cannot substitute its own
views for the directors and experts. Unanimous opinion of directors is a
relevant factor. He rightly submitted that predominant combined holdings of
shares by directors are irrelevant consideration for the court. He also
referred to Hindustan General Electric Corporation, In re [1959] 29 Comp. Cas.
46; AIR 1959 Cal 679 on the same proposition that onus is on persons opposing
the scheme to show that the scheme is unfair. Mr. Nag contended that the court
will not judge commercial merits of a scheme. He referred to Palmer's Company
Law, 21st edition, page 705. He contended that the initial onus on the
petitioners is discharged by obtaining directions from court for holding the
statutory meetings after placing all material facts and if the scheme is
sanctioned at the meeting held under the directions of the court under section
391(1) of the Companies Act, 1956, and is sanctioned by statutory majority, the
onus that the scheme is not fair shifts on to the dissentient shareholders and
creditors. He referred to the decision in Sewa Singh v. Tata Chand AIR 1956
Punjab 30 at pages 34-35, where scheme of amalgamation was sanctioned after a
fresh meeting with modification of exchange ratio in view of obvious defect in
evaluation of shares. The decision in Mohanlal Saraf v. Cuttack Electric Supply
Co. Ltd. AIR 1964 Orissa 191, head-note (a), was referred to by Mr. Nag, where
it has been held that the substratum of the company did not disappear merely
because the entire undertaking was sold. Mr. Nag also rightly submitted that if
there are alternative modes of achievement of the same object there is no bar
if the petitioners have chosen one of them. He referred to Penningtons Company
Law, second edition, page 338, and also Carruth v. Imperial Chemical Industries
Ltd. [1937] 2 All ER 422 at pages 438 and 439; [1938] 8 Comp. Cas. 181 (HL) and
In re National Bank Ltd. [1966] 1 All ER 1006; [1966] 1 WLR 819; [1966] 36
Comp. Cas. 626 (Ch D).
Lastly, Mr. Nag
submitted that the contention of the opposing shareholders of suppression of
material facts as to Bangladesh shareholders being interested, source of funds
and terms of purchase of shares by the transferee-company in the
petitioner-bank and Mr. S.N. Sen's dual capacity, that he is
director-cum-solicitor of United Bank of India, the petitioner-bank, in the
explanatory statement, Mr. Nag contended that the facts must be material in
facts and in law having regard to the effect of suppression. He cited Jagannath
Gupta & Co. P. Ltd. v. Mulchand Gupta [1968] 72 CWN 872 at paragraph 27;
[1969] 39 Comp. Cas. 262, 273; AIR 1969 Cal 363, 369.
Mr. Nag after his elaborate arguments which I have
noted above submitted that the scheme should be sanctioned with or without
modification as the court thinks fit.
Mr. S.C. Sen in reinforcement of the arguments on
behalf of the petitioners submitted that it is for the industrial and economic
growth and advancement of the State of West Bengal the scheme should be
sanctioned in the present set up. He submitted that court must take a practical
view prevailing at the date of making the order whether the scheme envisages to
carry out the aim and object of the country as a whole. He referred to a
Government of India publication 1972 being the Report of the Banking Commission
at page 396 under Chapter 16, "The need for specialised financial
institutions". He read out articles 16.3 at page 395 of the said report,
16.6 at page 397 and 16.10 at page 398 which are as follows:
"16.3Merchant banking type
of institutions in foreign countries are financial intermediaries which offer
varied services like the promotion and syndication of industrial projects,
investment management and advisory services. In the U.K. they also undertake
acceptance business to enable the bills of their clients to be discounted at
low rates of interest. The questions which required examination are whether
such institutions are required in India and if so, what should be their
functions and the best form of their organisation.
16.6These institutions which
should give their services to Indian Companies and to Indian joint ventures
abroad would be required to perform the following functions. On the basis of
examination of a project, the institutions should design and negotiate a
financial package which would meet the specific type and terms of financing
needed by the client. In appropriate cases, they may also agree to guarantee
the loans obtained by a company. They should also offer various services
involved in the syndication of projects like assisting in the reorganisation of
companies, negotiation about mergers, making feasibility studies of a project
and giving advice on the rules and regulations of stock exchanges. The proposed
institutions will be particularly useful to medium-sized business which finds
it very difficult to float an issue in the market. In such cases merchant
banking institutions can help by placing issues privately with financial
institutions at reasonable terms.
16.10 Once the need for setting
up merchant-banking institutions is accepted the questions of their structure
and administration arise. In the Commission's view, initially there could be
four merchant banking institutions located in Bombay, Calcutta, Madras and New
Delhi, set up by commercial banks and specialised financial institutions; later
branches can be set up by these institutions at other important centres also.
Subject to proper safeguards to ensure the integrity of operations and
depending on investment expertise and management standards, other agencies may
also be allowed to set up merchant banking institutions. It may be emphasised
that for the successful working of the proposed merchant banking institutions
it will be necessary to organise a training programme for their staff because
the major resources for these institutions will have to be their skill and
expertise".
The said report in its introduction in Chapter 1 has
given a genesis of the Banking Commission and has reviewed the growth and development
of banking business in India and the previous report in 1931. It has been
observed :
"The various changes in the banking system and
in the Government policy affecting banks reflect, in a large measure, the
changing political and economic climate of the country. The adoption by the
country of a specialistic ideology gave rise to a change in the public attitude
towards banks and in the expectations of the public regarding services which
the banks could render to the community at large".
Relying on the said report and special reference to
the merchant banking type of institutions which has been noted in the said
report, Mr. Sen rightly submitted that the present scheme envisages the
progressive and current trend of industrial and economic advancement of the
country having a socialistic ideology and should be sanctioned. He also quite
rightly submitted that most of the shareholders who are objecting to the
sanction of the scheme are mere speculators who have acquired the shares from
the market at a low price and trying to get a higher amount by way of
compensation and thereby earn a huge profit, if possible. He rightly submitted
that the objections are not bona fide and neither tenable in law or in fact.
The scheme should be sanctioned as it is in conformity with the statute and the
policy of our country in the present set up.
Mr. D. P. Gupta with Mrs. Ruma Pal appearing for the
State of West Bengal has also supported the said application for sanction of
the scheme. Various other shareholders also supported the said application for
sanction of the scheme and appeared through Mr. Sankardas Banerjee, Mr. M.A.
Latif, Mr. Somnath Chatterjee with Mr. Dipankar Ghosh and Mr. S.K. Acharya with
Mr. J.N. Haldar.
Various other shareholders appeared through their respective
counsel and opposed the application for sanction of the scheme and adopted the
arguments of Mr. Bachawat, Mr. Prabir Sen and Mr. R.C. Deb.
I have set out before the arguments in support of the
petitioners and also arguments of the opposing group as and when through their
respective counsels.
Considering the matter very carefully and without
going into the details of the mass of the decisions cited by both the groups
before me, I am of the view that the court in this application is only to
consider before sanctioning the scheme whether the three conditions are
satisfied. Firstly, statutory requirements under section 391 of the Companies
Act, 1956, have been complied with; secondly, there is a fair and free
representative voting at the statutory meeting held under the directions of the
court and, lastly, whether the scheme is such which an intelligent and honest
man of business would reasonably approve.
On the first question whether the statutory
requirements have been complied with or not, a contention was raised by Mr.
S.B. Chakraborty that the chairman of the meeting had no power to adjourn the
meeting directed to be held by him under the first order dated the 29th August,
1970, and a meeting held on 29th of September, 1970. The decision in John v. Rees
[1969] 2 All ER 274 (Ch D) cited by Mr. Chakraborty in support of his
contention that the chairman had no power to adjourn the meeting sine die, is
really against this proposition as Megarry J. in dealing with a question of
validity of a meeting and the adjournment of the same of an unincorporated body
according to its rules where there was a disorder in the meeting which was
adjourned by the chairman, it was observed at page 290 of the said report (See
[1969] 2 All ER 274; [1969] 2 WLR 1314) as follows:
"........ I have to consider the question of law
whether the chairman of a meeting has an inherent power to adjourn it for
disorder. Counsel for the plaintiff contends that there is such a power, though
he accepts that if it is improperly exercised, the adjournment is ineffective.
Counsel for the defendants primarily contends that the chairman has no such
inherent power. However, if that submission is wrong, he has a battery of
alternative submissions".
And after discussing the respective contentions and the
large number of decisions cited, Megarry J. quoted with approval a passage from
a book, A Practical Arrangement of
Ecclesiastical Law, F.N. Rogers Q.C. at page 292 of the said report (See
[1969] 2 All ER 274; [1969] 2 WLR 1316) as follows:
"by no means interferes with the right which
every chairman has to make a bona fide adjournment, whilst a poll or other
business is proceeding, if circumstances of violent interruption make it
unsafe, or seriously difficult for the voters to tender their votes; nor of
adjourning the place of polling, if the ordinary place used for that purpose be
insufficient, or greatly inconvenient. In most of such cases, the question will
turn upon the intention and effect of the adjournment, if the intention and
effect were to interrupt and procrastinate the business, such an adjournment
would be illegal; if, on the contrary, the intention and effect were to forward
or facilitate it, and no injurious effect were produced, such an adjournment
would, it is conceived, be generally supported".
And then again in page 293 it is observed as follows
(See [1969] 2 All ER 274; [1969] 2 WLR1317):
"The first duty of the chairman of a meeting is
to keep order if he can. If there is disorder, his duty, I think, is to make
earnest and sustained efforts to restore order, and for this purpose to summon
to his aid any officers or others whose assistance is available. If all his
efforts are in vain, he should endeavour to put . into operation whatever
provisions for adjournment there are in the rules, as by obtaining a resolution
to adjourn. If this proves impossible, he should exercise his inherent power to
adjourn the meeting for a short while, such as 15 minutes, taking due steps to
ensure so far as possible that all present know of this adjournment. If instead
of mere disorder there is violence, I think that he should take similar steps,
save that the greater the violence the less prolonged should be his efforts to
restore order before adjourning. In my judgment, he has not merely a power but
a duty to adjourn in this way, in. the interests of those who fear for their
safety. I am not suggesting that there is a power and a duty to adjourn if the
violence consists of no more than a few technical assaults and batteries. Mere
pushing and jostling is one thing; it is another when people are put in fear,
where there is heavy punching, or the knives are out, so that blood may flow,
and there are prospects, or more, of grievous bodily harm. In the latter case,
the sooner the chairman adjourns the meeting the better. At meetings, as
elsewhere, the Queen's Peace must be kept.
If, then, the chairman has this inherent power and
duty, what limitations, if any, are there upon its exercise ? First, I think
that the power and duty must be exercised bona fide for the purpose of
forwarding and facilitating the meeting, and not for the purpose of
interruption or procrastination. Second, I think that the adjournment must be
for no longer than the necessities appear to dictate. If the adjournment is
merely for such period as the chairman considers to be reasonably necessary for
the restoration of order, it would be within his power and his duty; a longer
adjournment would not. One must remember that to attend a meeting may for some
mean travelling far and giving up much leisure. An adjournment to another day
when a mere 15 minutes might suffice to restore order may well impose an
unjustifiable burden on many; for they must either once more travel far and
give up their leisure, or else remain away and lose their chance to speak and
vote at the meeting".
Thereafter, on the facts of that case, the learned
judge held that the adjournment fell far short of what the law required.
In my view, from the chairman's report dated the 11th
of November, 1970, and the affidavit of the said Rangaswami, junior, affirmed
on the 5th of December, 1970, makes it quite clear that the adjournment of the
said meeting was not only necessary but the only course left open to the
chairman and he was right in doing so and as that was a statutory meeting to be
held under an order of the court, a fresh order was required or at least
thought to be proper for holding the adjourned meetings. In fact in such an
application being made by the petitioners, which was opposed by Mr. S. B.
Chakraborty, I have made an order on the 7th of January, 1972, overruling the
identical contention of Mr. Chakraborty. Regarding the power of adjournment by
the chairman and court's jurisdiction to direct fresh meetings or the adjourned
meetings to be held, I am not setting out the reasonings again which I have
given for the said order in my judgment dated the 7th of January, 1972,
directing the adjourned meeting to be held. And pursuant to which the meetings
have been finally held on the 8th of May, 1972, where the scheme of amalgamation
has been passed by requisite majority with certain modifications and the
chairmen have duly filed their reports.
Therefore, I have no hesitation in holding that the
chairman had implied power to adjourn the meetings and, in any event, the order
dated the 7th of January, 1972, gave clear mandate to the chairman by the court
in terms of section 391(1) of the Companies Act, 1956, to hold the statutory
meeting which was finally held on the 5th of May, 1972, pursuant to the said
order. There is no substance in the contention of Mr. S.B. Chakraborty that the
chairman had no power to adjourn the meetings and held the same pursuant to the
order of the court.
Regarding the next contention of Mr. Chakraborty that
from the appointed day under the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970, the banking company, viz., United Bank of India Ltd.,
ceased to exist as its entire undertaking being the banking business was taken
over by the Central Bank under the said Act, I also find no substance in the
same. Mr. Chakraborty's further contention was that the company after the
acquisition under the said Act existed only for the purpose of distribution of
the compensation to be paid under the said Act and for no other purpose. Such a
construction is not only absurd but unwarranted and unknown in any principle of
law. The Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970, has not made any provision for dissolution of the United Bank of India
Ltd. and winding up of the same. On the other hand, in the definition in
section 2(f) "existing bank" is defined as meaning a banking company
specified in column 1 of the First Schedule being a company, the deposits of
which, as shown in the return as on the last Friday in June, 1969, furnished to
the Reserve Bank under section 11 of the Banking Regulation Act, 1949, were not
less than Rs. 50 crores. The said definition makes it perfectly clear that the
banking company being the United Bank of India Ltd., which is the seventh name
in column 1 of the First Schedule to the said Act, is clearly kept alive as a
company under the Companies Act, and its banking business and assets is the
undertaking taken over by the Central Bank under the said Act on payment of
compensation. The said word "existing bank", that is, the United Bank
of India Ltd., is given the right to get compensation under section 6 of the
said Act in the manner provided therein. There is nothing in the said Act to
show that the existing bank was dissolved whereas it is just the contrary and
indicates that the company continued its corporate existence under the company
law and its banking business and its assets is only substituted by the
compensation money. That seems to me the only effect of the said Act taking
over the banking companies mentioned in column 1 of the First Schedule of the
said Act. Further, the decision in the case of Central Bank of India Ltd. and
United Bank of India Ltd. regarding amalgamation with existing companies of the
Bombay High Court which has been referred to at the bar by both the parties
clearly indicates that there is no question of the United Bank of India Ltd.
ceasing to exist as a company under the Companies Act, 1956. On the other hand,
from the said decisions it is quite clear that those existing banks continued
to be governed by the Companies Act, 1956, as existing companies being the
existing banks under the said Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970. Therefore, in my view, there is no substance in the
said contention of Mr. Chakraborty that the United Bank of India Ltd. ceased to
exist as a company on and from the appointed day, i.e , 19th July, 1969.
The other question seriously argued was whether the
United Bank of India Ltd. had power to amalgamate under the object clauses of
its memorandum of association as, if there was no such power, the scheme of
amalgamation cannot be sanctioned without the amendment of the object clause
incorporating a clause giving power to amalgamate with the petitioner-bank.
Firstly, in my view, the combined effect of clauses (j), (k), (m) and (n) of
the memorandum of association of the United Bank of India Ltd. clearly gives a
power to the company to amalgamate. It is true that in the said two clauses the
word "amalgamate" has not been used and whether the company can be
taken over, to take over other company is not specifically mentioned. But if
the said four clauses are read as a whole, in substance it gives a power to the
company to amalgamate with another company. I cannot accept the contention of
Mr. Bachawat that those four clauses
only give power to the company to take over another company and not to be taken
over by another company, or it can only amalgamate with another company having
similar object:, that is, banking business. Further, in my view, the net result
o£ the decisions in Tata Industrial Bank's case AIR 1928 PC 180, Nagaisuree Tea
Co.'s case [1966] 2 Comp. LJ 208, Associated Hotels of India Ltd., In re [1968]
2 Comp. LJ 292 (Cal) and Hari Krishna Lohia v. Hoolungooree Tea Co. Ltd, [3
970] 40 Comp. Cas. 458; AIR 1969 Cal 312 clearly lays down that even if there,
is no express power in the memorandum of a company to amalgamate with another
company, by virtue of a statutory power under section 391 of the Companies Act,
1956, a court can always sanction a scheme of amalgamation if the statutory
requirements are complied with. In view of the specific provisions in the
statute being Companies Act, 1956, passages in Buckley on the Companies Acts,
13th edition, page 404, Palmer's Company Law, 21st edition, page 698, and
Halsbury's Laws of England, 3rd edition, volume 6, page 614, and Pennington's
Company Law 2nd edition, page 438, have no application to India and the
decision in Crown Bank, In re [1890] 44 Ch D 634 (Ch D) arid Carron Tea [1966]
2 Com LJ 278 (Cal) seems to me to be contrary to the decision of the Division
Bench of this court in Hari Krishna Lohia v. Hoolungooree Tea Co. Ltd. [1970]
40 Comp. Cas. 458; AIR 1969 Cal 312. In any event, the said Division Bench
decision is binding on me and I respectfully agree with the same.
It was
contended that the observation in the said Division Bench was obiter, but, in
my view, assuming it is so, even then it has a binding force, if not, certainly
a guiding principle for other courts to follow. Therefore, I hold that both the
petitioner-companies have power to amalgamate and if the statutory requirements
are fulfilled; the court will have no difficulty in sanctioning the scheme of
amalgamation in this application.
On the
question whether the procedure followed in this case is unwarranted as the
object could have been achieved by the United Bank of India Ltd. changing its
name and altering its memorandum and articles and commencing new business, I
also find no substance in the said contention that where there are several
legitimate alternatives, means and procedure for attaining the same object
there is no bar in choosing any one of them, according to the views of the
directors and shareholders of a particular company. The method of floating a.
new company with the power to carry on a desired business and then amalgamating
the existing company with the new company is a well-known procedure of the
take-over or an amalgamation. The passage of Wiendur on Takeovers and Moon on
Business Mergers and Take-over Bids referred to by Mr. Nag and Mr. S.C. Sen
clearly set out the said method by which the object of amalgamation is
attained. In my view, there is nothing wrong in the petitioner incorporating
the petitioner No. 2 solely for the purpose of taking over the petitioner-bank.
Therefore, I cannot accept the contention that the petitioner-bank
should have followed the other method of changing its name and objects clause
in the memorandum for the purpose of attaining the same objects as it is sought
to be attained by the present scheme of amalgamation with the newly formed
company being the petitioner No. 2.
Then, on the question of sufficiency or adequacy of
explanatory statement under section 393 of the Companies Act, 1956, I am of the
view that there is nothing wrong in the said explanatory statement. As such
notice is settled by the officer of the court und«r the rules, I accept the
contention of Mr. Nag that the explanatory statements in the notice are not at
ail defective. No objection was taken in the meeting, nor is there any material
suppression of any relevant facts in the said notice. Further, the shareholders
had knowledge of the relevant facts in view of the meeting previously adjourned
due to pandemonium and it cannot be said that anything material was not known
to them. In any event, in my view, the notice and the explanatory statements
were not defective and in substantial compliance with the statutory provisions
and the rules made thereunder. There, is material distinction between explanatory
statement under sections 173 and 393 of the Companies Act, 1956. In this
particular case the notice has been settled by the Registrar under the relevant
company rules and it is in substantial compliance with the provisions of the
Act. Therefore, I hold that there is no substance in the said contention of the
opposing shareholders that the explanatory statements were misleading or
insufficient. In any event, none of the shareholders, in fact, has been misled
and raised any objection regarding the said notice at the meeting which has
been duly held and convened pursuant to the order of the court made under
section 391(1) of the Companies Act, 1956.
Next the question was raised regarding the
non-service of notice on the Bangladesh shareholders. In my view, there is no
substance in it and, in any event, notice to the Custodian of the Enemy
Property under the Enemy Property Act—section 2(c), section 7(3), section
8(1)—are sufficient notice and in due compliance with the provisions of the
Act. In my view, the decisions cited by the opposing group of shareholders have
no application to the facts of this case. Further, even assuming that the
Bangladesh shareholders have not been served with the notice, it constitutes
only a negligible portion of the shareholders.
On the next question regarding the conduct of the
meeting resulting in no fair representation of class and as such no statutory
majority, in my view, the analysis of the members present and actually voted
even excluding the interested voters gives a clear majority and the statutory
requirements are duly complied with. I accept the contention of Mr. Nag and his
analysis of the votes cast in the said meeting and hold that the scheme was
sanctioned by reasonable and statutory majority. I need not discuss in detail
the law on the subject as that is well settled, the whole question in fact in
each case. Mr. Nag has referred to the relevant principles in his usual
thoroughness and erudition. Further, in my view, most of the opposing
shareholders are mere speculators who have purchased the shares of the
petitioner-bank either from the market or from weak-holders at a lower price
and are trying to get the scheme approved by the shareholders set aside so as
to realise the higher compensation money, if possible.
Regarding the question of the scheme being unfair on
merits, hypothetical, conditional, etc., I do not find any substance in the
same save and except such contentions as have been raised relying on various
decisions which are entirely on different background and different facts having
no relevancy whatsoever in the facts and circumstances of the case. All of the
said decisions relate to taking over or amalgamation of a company with an
existing company, whereas, here, a new company has been incorporated for the purpose
of the said amalgamation. As such, the principles relied on by the opposing
group of shareholders cannot have any application whatsoever in the facts of
the case, as, admittedly, the new company has not commenced its business but
has only been incorporated for the purpose of taking over the petitioner-bank.
Further, the court cannot speculate at this stage as to the possibility,
potentiality of the amalgamated-company in future and its working. It is true
that the court is not a mere rubber-stamp but, in sound exercise of its
discretionary power to sanction a scheme, must consider the scheme as a whole
having regard to the general conditions, background, and object of the scheme
and the present day conditions, and atmosphere in the State where the companies
are going to function. Court cannot take a pedantic and strict view of each and
every clause in the scheme and speculate as to its future, feasibility and
possibility at this stage. It is for the collective wisdom of the shareholders
who are primarily businessmen and investors guided by the directors of a
company to determine the course of business they choose. The principles are so
well-known and even repeated by all the counsels appearing for both the parties
that I need not discuss the same threadbare and it will be sufficient for me to
hold that I accept the arguments and contentions of Mr. S.C. Sen, Mr. R.C. Nag
and Mr. S.B. Mukherjee on this question which I have set out before. It is
premature for the court to judge now whether the business envisaged by the
scheme of amalgamation to be carried on in future would become profitable and a
success. The court is only to see whether it is feasible having potentiality in
the facts and circumstances of this case. In my view, prima facie, I am
satisfied that in the present set up and conditions, particularly as it appears
from the Report of the Banking Commission, the relevant articles of which I
have quoted before, that there is nothing wrong or objectionable in the scheme
of amalgamation being put through. In fact, the State of West 'Bengal appearing
before me through Mr. D.P. Gupta is supporting the said scheme so also the Life
Insurance Corporation of India and other statutory bodies. I have no hesitation
in holding that the business of the amalgamated company is highly potential and
conducive to the economy and development of the State of West Bengal in the
present set up, when funds are urgently needed for the growth and development
of existing and new enterprises. Further, the shareholders of the petitioner-bank
never complained of the management of their company by its directors so far and
suddenly they cannot have any reasonable and bona fide grievances against the
said management and the scheme. It is true that names of eminent, well-known
industrialists and respectable persons of integrity and honesty have been
referred as prospective directors of the amalgamated company and they have not
yet signified their consent of acceptance of such office but that in my view is
not required at this stage, being premature. But the suggestion and intention
as shown by the petitioners to appoint respectable, reliable and honest persons
of high reputation as directors is enough for me at this stage to take into
consideration the bona fide intention and object of the petitioner-companies.
Regarding the exchange ratio being unfair I hold that
there is no substance in it as, firstly, the shareholders have approved by
overwhelming majority the said exchange ratio and I accept the contention of
Mr. S.B. Mukherjee and Mr. Nag who analysed the exchange ratio elaborately in
their arguments as being fair and reasonable in the facts and circumstances of
this case. It is well settled that the onus of showing the unreasonableness and
unfairness of the exchange ratio and the scheme of amalgamation is entirely on
the dissentient shareholders who, in my view, in this case, have utterly
failed, except raising some technical, frivolous speculative and untenable
contentions.
On the question whether the balance-sheet of the
petitioner-bank shows its latest financial position, in my view, there is
substantial compliance with the provisions of the statute and the same is
sufficiently disclosed in this case. Regarding the question of obtaining the
sanction of the Reserve Bank for carrying on the merchant-cum-banking business,
Mr. Mukherjee rightly contended which I accept that no such sanction is
required. I also find that the contention of. the opposing shareholders that
the petitioner No. 2 has not obtained its certificate of commencement of
business is not correct as the same has been obtained on the 28th of August,
1970, and the original certificate was produced before me in court and as such
the same is conclusive under section 149(3) of the Companies Act, 1956.
Regarding the contention on behalf of the opposing
shareholders that purchase of shares of the face value of Rs. 25 lakhs by the
petitioner No. 2 from the petitioner No. 1 is in violation of the provisions of
section 372 of the. Companies Act, 1956, has no substance. As the said provision
has no application in this case the purchase of the said shares is not within
the mischief of the section and, in any event, it comes within the exception
under section 372(13) and (14) of the Companies Act, 1956,
Regarding the service of the notice on shareholders
Mr. Mukherjee rightly contended with reference to section 53 of the Companies
Act, 1956, wherein the modes of service of documents on the members of the
company are provided. In cases where a member has no registered address in
India such notice may be served, if any address within India was supplied by
him. Sub-section (3) of section 53 also provides that a document advertised in
the newspaper in the neighborhood of the registered office shall be deemed to
be duly served on the date on which the advertisement appeared on every
shareholder of the company who has no registered address in India and Las not
supplied any address in India. On that ground also the service of the notice on
the Bangladesh shareholders should be deemed to be in due compliance with the
Act as there is no dispute that the advertisement has been duly issued by the
chairman of the said meeting.
After careful consideration of the entire matter and
after considering decisions and authorities cited both on behalf of the petitioners
and their supporters and also on behalf of the opposing shareholders, 1 agree
with the contentions of Mr. S.B. Mukherjee, Mr. R.C. Nag and also Mr.
Samarendra Chandra Sen, who reinforced the arguments of Mr. S.B. Mukherjee
which I have noted before. In my view, the present application must be judged
in the light of prevailing circumstances in our country particularly in the
State of West Bengal where the business of the amalgamated company is sought to
be carried on after sanction is accorded to the said scheme of amalgamation,
the subject-matter of this application. As I have already held the scheme of
amalgamation has been approved by the requisite majority of the shareholders
present and voted at the statutory meeting convened and held under the order of
this court dated the 7th January, 1972, as would appear from the reports of the
chairman annexed to the petition. Examining the scheme of amalgamation I am
satisfied that the statutory majority are acting bona fide and the scheme of
amalgamation is such that an intelligent and honest shareholder of the
petitioners might reasonably approve. I have no doubt in my mind that the
scheme of amalgamation is fair and reasonable and made in good faith and it
will be conducive to the interest of the shareholders of the petitioners. On
the other hand, I am also satisfied that some of the opposing shareholders are
mere speculators who have purchased the shares of the petitioner-bank at a
lower price and trying to take advantage of the higher compensation money paid
if possible. They have no interest whatsoever in the benefit or advantage to be
derived by the shareholders by the said scheme of amalgamation under the
present condition and atmosphere of the State. The said opposition do not seem
to me to be bona fide and for the interest of the shareholders or the
petitioners as a whole. However, the said resolution has been passed by the
statutory majority and the scheme of amalgamation appears to me to be
reasonable, feasible and conducive to the interest of the shareholders present
and voting in the meeting and there is substantial compliance with the
statutory requirements of serving notice on the shareholders and setting out
the statements as required under section 393 of the Companies Act, 1956, in the
said notice which has been settled by the Registrar of this court under the
Companies (Court) Rules.
I may note here that the decisions cited on behalf of
the opposing group of shareholders are not applicable to the facts of the
present case which seems to me a case, in substance, of reconstruction of a
company following the procedure of scheme of amalgamation by incorporating a
new company specifically for the said purpose. This is a well-recognised method
of reorganisation and reconstruction of a company and I do not find there is
anything wrong in the said scheme of shareholders approving the said scheme and
the directors are actuated by any sinister motive as sought to be imputed by
the opposing group of shareholders. On the other hand, some of the objecting group
of shareholders are mere speculators and based their objections on mere
speculation and conjecture as to what would happen in future and so on. This is
not a case of two existing companies amalgamating and as such the principle
applicable to such cases has no bearing in the instant case. And after careful
consideration of the scheme. I cannot find anything wrong with the same; on the
other hand, it may prove very beneficial to the shareholders having regard to
the present business climate in our country and particularly in the State of
West Bengal. As ali the requirements have been duly complied with I accept the
contention of Mr, Samareiidra Chandra Sen, Mr. S.B. Mukherjee and Mr. R.C. Nag
in support of the sanction of the scheme of amalgamation approved by the
requisite majority of the shareholders in the duly held statutory meetings
pursuant to an order of this court, and I reject the contention raised by Mr.
R.C. Deb, Mr. B.S. Bachawat and Mr. Prahir Sen on behalf of the opposing group
of shareholders as they have no application to the facts of this case.
Therefore, I am making the following order:
There will be an order in terms of prayer (a) subject
to further modification that all the dissenting shareholders of the petitioner
No. 1 should be paid for their shares by the petitioner No. 2 at the prevailing
rate, that is, the last quoted price in the Calcutta Stock Exhange Daily
Quotation Report if they tender their shares together with relative share
scrips and transfer deeds duly executed within 31st of August, 1973.
There will be orders in terms of prayer (b), (c),
(d), (e) and (f) subject to this that the transferee-company do, within 30 days
of the receipt of the sanction and approval for issue of shares and allotment
of shares by the Central Bank of India, Controller of Capital Issues and
Reserve Bank of India and entering into contract of employment with the
employees of the said transferee-company, cause a certified copy of this order
to be delivered to the Registrar of Companies, West Bengal, for registering the
same on such copy being so delivered, the transferor-company be dissolved with
effect from the date of the said delivery to the said Registrar of Companies,
West Bengal, and the said Registrar of Companies, West Bengal, do place all
documents relating to the said transferor-company and registered with him on
the file to be kept by him in relation to the said transferee-company and the
files relating to the said transferee and transferor companies be consolidated
accordingly.
Parties, to bear and pay their own costs.
[1953] 23 Comp Cas 29
(MAD)
v.
Tiffin's Barytes
Asbestos & Paints Ltd.
Rajamannar C.J. and
Venkatarama Aiyar J.
Original Side Appeal
No. 56 of 1952
October 16, 1952
K. Rajah Ayyar, R. Swaminatha Ayyar, K.S. Ramamurthy and P.S. Seshadri for the Appellants.
O.
Radhakrishnan, G. Vasanta Pai, S. Mohan Kumaramangalam, V. Venkatraman, for the
Respondents.
Venkatarama Ayyar J. — The question that arises for determination in this appeal is the validity of the election of the respondents as directors of a company called Tiffin's Barytes, Asbestos and Paints Ltd. at a meeting of the general body held on February 26, 1951. The facts are not in dispute. The company was incorporated in 1945 and its first directors were five persons named in article 49. One Veeramani was co-opted as a director and the strength of the directorate was thus raised to six. At the first annual meeting which was held on June 24, 1946, all the directors retired as provided in article 53 and were re-elected. Before the next general body meeting which was held on August 27, 1947, three of the directors had resigned and a fourth resigned at that meeting with the result that the strength of the directorate became reduced to two. The next general body meeting was held on December 30, 1948, and thereafter no annual meeting was called. It was in this state of affairs that one of the shareholders, Mrs. Ananthalakshmi Ammal, filed Appln. No. 3898 of 1950 under Section 79(3) of the Indian Companies Act for a direction that a general body meeting might be convened by a commissioner and that an independent chairman might be appointed to preside over the meeting. On November 27, 1950, Krishnaswami Nayudu J. passed an order that the annual general body meeting be held on January 28, 1951, in accordance with the articles of association of the company, Exhibit P. 1. He, however, refused the prayer for the appointment of an independent chairman to preside over the meeting and against this portion of the order Mrs. Ananthalakshmi Ammal preferred O.S.A. No. 118 of 1950. By the order which was passed in the said appeal on January 11, 1951, an advocate, Mr. Sanjeevi Naidu, was appointed as chairman of the meeting with power to scrutinise the proxies. The company then took out an application, Appln. No. 139 of 1951, for postponing the meeting which had been fixed for January 28, 1951, to a later date on the ground that the accounts were not ready. On January 16, 1951, Krishnaswami Nayudu J. passed an order directing the meeting to be held on February 18, 1951. On that date the commissioner proceeded to the premises of the company for the purpose of holding the meeting. The 1st plaintiff moved that the meeting be adjourned. The register of members, the share transfer books of the company and the proxies were in the possession of Veeramani who had been functioning as a director and he refused to hand them over to the chairman with the result that it became impossible for the chairman to proceed with the meeting. He accordingly adjourned it to February 26, 1951, and applied to the court for directions in the matter. On February 22, 1951, Mack J. passed an order directing the company to produce all the books at the meeting on February 26, 1951. On that date the books of the company were produced ; the meeting was actually held and at that meeting defendants 2 to 7 were elected as directors. The plaintiffs then filed Appln. No. 1135 of 1951 for setting aside the election on various grounds. On March 27,1951, Krishnaswami Nayudu J. dismissed this application and referred the petitioners to a suit. The present suit has accordingly been filed by the plaintiffs who are two shareholders of the company on behalf of themselves and other shareholders of the company for a declaration that the election of defendants 2 to 7 as directors at the meeting held on February 26, 1951, was void on the several grounds set out in the plaint.
Balakrishna Aiyar J. who heard the suit disagreed with the contentions put forward on behalf of the plaintiffs and dismissed the suit with costs. Against that decision the plaintiffs have preferred this appeal.
Several contentions were urged by Mr. K. Rajah Ayyar in support of this appeal. It was firstly argued that the power which the general body has under the articles of the company is only to appoint directors in place of those who retire at the annual meeting; only one director actually retired at the meeting held on February 26, 1951, and that therefore the election of six directors was beyond the competence of the meeting; that there was no proper notice that six directors were to be elected at the meeting and that there was not even a resolution to that effect. Hence, it is urged, the election of defendants 2 to 7 is void. The complaint that there was not clear notice to the members that six directors were going to be elected is without substance. Exhibit P. 6 is the notice of the meeting to be held on February 18, 1951, and item 2 therein is as follows:—"To elect directors. Mr. A.S. Padmanabhan retires at the meeting." It was argued that read as a whole Exhibit P. 6 would mean that a director is to be appointed in place of A.S. Padmanabhan who was to retire and that it would not convey the meaning that six directors were to be elected. We are unable to agree with this contention. The retirement of A.S. Padmanabhan is stated as a fact and the notice does not state as is usual "to elect a director in place of Padmanabhan who retires." The business to be transacted under item No. 2 is generally to elect directors and not to elect a director. This objection is, therefore, overruled.
A more substantial objection to the validity of the election of the defendants is that the power of the general body is limited to electing a director in the place of one who retires at the annual meeting under article 53 that the power to appoint other directors vests under article 58 exclusively with the board of directors and that in consequence the general body could appoint only one director in the place of A.S. Padmanabhan who retired at the meeting. The articles of the company material for the purpose of this contention are 47, 53 and 58. They are as follows:
Article 47:—"The number of directors inclusive of the director (ex-officio) shall not exceed 10 nor be less than 3. The quorum for a directors' meeting is 3. The quorum of a committee meeting shall be determined by the directors."
Article 53:—"The directors nominated by the agents and secretaries shall be ex-officio directors of the company and shall not be subject to retirement by rotation nor shall the clause relating to directors' share qualifications be applicable to him. The first directors of the company (except the ex-officio directors) shall hold office till the annual general meeting in 1946 when the whole of the directors shall retire from office and is every subsequent year one-third of the directors for the time being or if their number is not three or a multiple of three, then the number nearest to one-third shall retire from office. The directors to retire in every year shall be those who have been longest in office since their last election but as between persons who became directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by lot. A retiring director shall be eligible for re-election."
Article 58:—" If there be any vacancy in the directorate or if it is found necessary to increase the directorate so as not to exceed the maximum number the board may from time to time fill such vacancies by co-opting others as directors."
On these articles it is argued for the appellants that the power to appoint directors had been delegated to the board of directors under article 58 subject only to article 53 and that the exercise of that power by the general body was in contravention of the articles and was therefore void. Reliance is placed on the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart. In that case, at an extraordinary meeting of the company, resolutions were passed increasing the number of directors and electing two additional directors. The company filed a suit for a declaration that under the articles of association the general body had no power to appoint the two additional directors, and that the election of the defendants was, therefore, illegal. Article 82 of the company's articles provided that the number of directors shall not be less than two or more than seven. Article 85 provided that at the ordinary meeting every year one director shall retire and the meeting at which any director shall retire shall fill up his place. Article 93 provided "Any casual vacancy in the office of director may at all times be filled up by the board by the appointment of a director. The directors may from time to time appoint additional directors but so that the total number of directors shall not exceed the prescribed maximum." On a construction of these articles it was held that the company had delegated its power of appointment of directors to the board and that it could not itself exercise it. The ground for the decision is thus stated by Eve J.:—
"I think the express power contained in article 93 excludes the possibility of implying a concurrent power under article 82 and in my opinion the company has by its constitution delegated to those of its members who for the moment constitute the board the sole right of appointing additional directors and that is so whether such additional directors are necessary to make up the number to the maximum number fixed by the original article or to any other number which the company may from time to time determine on as the maximum. As a matter of construction, therefore, I think that the plaintiffs are right and that it was not within the power of the company to do that which it purports to have done at the meeting of the 14th March and on this ground alone the relief sought on the motion must, in my opinion, be granted."
Articles 82, 85 and 93 which were construed in Blair Open Hearth Furnace Company Ltd. v. Reigart are substantially identical with articles 47, 53 and 58 in the present case and the appellants accordingly argued that the reasoning and the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart would directly apply to the instant case.
Now it is doubtful how far the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart can still be considered to be good law. Its correctness was doubted in Worscester Corsetry v. Witting in which the articles were similar to those in Blair Open Hearth Furnace Company Ltd. v. Reigart with the difference that the company had also adopted articles 83 and 85 in Table A in the Companies Act of 1908. Article 83 runs as follows:—
"The company may
from time to time in general meeting increase or reduce the number of directors,
and may also determine in what rotation the increased or reduced number is to
go out of office."
Article 85 provided that "the directors shall have power at any time, and from time to time, to appoint a person as an additional director who shall retire from office at the next following ordinary general meeting, but shall be eligible for election by the company at that meeting as an additional director." On these articles the question arose whether the appointment of two more directors at an extraordinary meeting of the general body was ultra vires of the powers of the general body. Farwell J. held, following the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart, that the general body had no power to appoint the additional directors. On appeal this decision was reversed on the ground that in Blair Open Hearth Furnace Company Ltd. v. Reigart, there was nothing in the articles corresponding to article 83 in Table A and that that article conferred on the general a general power to elect additional directors. In this view it became necessary to pronounce on the correctness of the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart. But Lord Hanworth M.R, remarked: "I am bound to say that I find some little difficulty in seeing that the power must be either in the one or in the other; but be that as it may, we have to interpret the articles of association as we find them." Lawrence L.J. observed: "This court is not concerned upon the present occasion to say whether the construction put upon the articles in the Blair case by Eve J. was right or not; we have here to see what is the true meaning of the articles of the plaintiff company."
In Ram Kissendas v. Satya Charan the general body passed a resolution appointing seven new directors in addition to the existing four. The validity of this resolution was disputed in an action by the shareholders. Articles 109, 111 and 128 of the company were in substance similar to articles 82 and 93 which were considered in the Blair case. There was also an additional article 126 corresponding to article 83 in Table A which had been adopted by the company in Worcester Corsetry v. Witting. The Privy Council held on a construction of the articles that the election of new directors by the general body was valid. The decision in Blair Open Hearth Furnace Company Ltd. v. Reigart does not appear to have been cited before the Board but in view of the fact that the articles in Ram Kissendas v. Satya Charan are similar to those in Worcester Corsetry v. Witting and that Blair Open Hearth Furnace Company Ltd. v. Reigart differed from both in not having anything corresponding to article 83 of Table A in Worcester Corsetry v. Witting or article 126 in Ram Kissendas v. Satya Charan it is not possible to hold that Blair Open Hearth Furnace Company Ltd. v. Reigart is opposed to the decision in Ram Kissendas v. Satya Charan.
In Palmer's Company Precedents (16th edn., p. 573) it is stated that "the articles may, however, be so expressed as to delegate the power of appointing new directors to the directors to the exclusion of a general meeting." And the Blair case is quoted as authority for this position with a note that the correctness of the decision had been doubted in Worcester Corsetry v. Witting. In Buckley on Companies Acts (12th edn., p. 885) the position is thus stated:—"It has been held that an article in similar form amounts (in the absence of an article corresponding to article 84 ante,) to such a delegation to the directors of the power of appointing additional directors as to preclude the company in general meeting from appointing such directors." The authority quoted again is the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart but the decision in Worcester Corsetry v. Witting is noted against it. Article 94 referred to in the above quotation corresponds to article 83 in Table A. The position, therefore, is that the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart is of doubtful authority though it has not been overruled.
In this case it has to be noted that the articles of the company provide that "the regulations of Table A of Schedule I of the Indian Companies Act of 1913 shall apply to this company except in so far as otherwise provided for hereunder." Regulation 83 in Table A of Schedule I runs as follows:—"Subject to the provisions of Sections 83-A and 83-B of the Indian Companies Act, 1913, the company may from time to time in general meeting increase or reduce the number of directors and may also determine in what rotation the increased or reduced number is to go out of office." This regulation, must, therefore, be read as part of the articles of the company. In Worcester Corsetry v. Witting it was the existence of this article which was held to distinguish it from the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart where there was no such article. In Ram Kissendas v. Satya Charan also there was an article 126 corresponding to regulation 83 and the power of the general body to elect additional directors was confirmed. The decisions in Worcester Corsetry v. Witting and Ram Kissendas v. Satya Charan rather than the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart will apply to the present case.
It was further argued by Mr. Vasantha Pai on behalf of the respondents that even if the power to appoint additional directors is exclusively vested in the board of directors under Regulation 58 the resolution of the general body appointing defendants 2 to 7 as directors should be upheld because there was at the time of the meeting no board of directors which could validity function under the article and the general body had inherent power, which it could then exercise, to appoint directors for enabling the company to function. In support of this contention he cited the decisions in Isle of Wight Railway Co. v. Tahourdin, Barron v. Potter, Foster v. Foster and Munster v. Cammell Company. In Isle of Wight Railway Co. v. Tahourdin the shareholders of a company sent a requisition for the convening of a general body meeting to remove the directors and to appoint fresh directors in the vacancies. The 89th section corresponding to article 68 in the present case conferred on the directors the power to fill up vacancies in the directorate. The question was whether this power could be exercised by the members of the company at its general meeting. In answering it in the affirmative Cotton L.J. observed:—"Then it is said that there is no power in the meeting of shareholders to elect new directors for that under the 89th section the power would be in the remaining directors. The remaining directors would, no doubt, have that power if there was a quorum left. But suppose the meeting were to remove so many directors that a quorum was not left, what then follows ? It has been argued that in that case, there being no board which could act, there would be no power of filling up the board so as to enable it to work. In my opinion that is utterly wrong. A power is given by the 89th section to the remaining directors 'if they think proper so to do, to elect persons to fill up the vacancies.' I do not see how it is possible for a non-existent body to think proper to fill up vacancies. In such a case a general meeting duly summoned for the purpose must have power to elect a new board so as not to let the business of the company be at a deadlock." With this opinion Lindley L.J. agreed Fry L.J. observed:—
"In my judgment it is quite impossible to read the 89th section as the only section relating to the filling up of vacancies in the office of directors. That applies only where there are remaining directors, and those remaining directors think proper to exercise their powers. That does not in my judgment deprive the general meeting of the power to elect directors, where there are no directors or where the directors do not think fit to exercise their powers."
In Barron v. Potter, Potter v. Berry, the facts were that the board, of directors of a company consisted of two persons, Mr. Potter and, Mr. Barron. Owing to their differences no meeting of the board could be held and nothing transacted. Then at an extraordinary meeting of the shareholders two additional directors were appointed. The question was whether this was valid. The articles of the company provided that the number of directors should be not less than two and not more than ten and that the directors should have the power to appoint additional directors but there was no article corresponding to article 83 conferring on the company a power to increase or decrease the number of directors. In this respect the articles of this company were similar to those in Blair Open Hearth Furnace Company Ltd. v. Reigart. It was, accordingly contended on the strength of that decision that the general body had no authority to appoint additional directors. This contention was overruled and it was held that as there was a dead-lock in the administration resulting from the fact that the directors were unwilling to exercise their powers the company had the inherent power to take necessary steps to ensure the working of the company and to appoint additional directors for that purpose. Warringtgn J. observed: "The argument against the validity of the appointment is that the articles of association of the company gave to the board of directors the power of appointing additional directors, that the company has accordingly surrendered the power, and that the directors alone can exercise it. It is true that the general point was so decided by Eve J. in Blair Open Hearth Furnace Co. Ltd. v. Reigart and I am not concerned to say that in ordinary cases where there is a board ready and willing to act it would be competent for the company to override the power conferred on the directors by the articles except by way of special resolution for the purpose of altering the articles. But the case which I have to deal with is a different one. For practical purposes there is no board of directors at all. The only directors are two persons, one of whom refuses to act with the other and the question is, what is to be done under these circumstances. . . If directors having certain powers are unable or unwilling to exercise them—are in fact a non-existent body for the purpose—there must be some power in the company to do itself that which under other circumstances would be otherwise done. The directors in the present case being unwilling to appoint additional directors under the power conferred on them by the articles, in my opinion, the company in general meeting has power to make the appointment. The company has passed a resolution for that purpose." This decision was followed in Foster v. Foster where the general body had appointed a managing director which power was vested under article 99 in the board of directors. The court found that there were only two persons who could be appointed as managing directors and owing to disagreement between them the board had been "reduced to the position that it was unable owing to internal friction and faction to appoint anybody as managing director." Following the decision in Barron v. Potter, Potter v. Berry the court held that the question relating to the appointment of the managing director was one with which the general meeting of the company could deal and that having regard to the circumstances recourse must be had to the general meeting and the appointment by the general body must accordingly be upheld. In Munster v. Cammell Company certain vacancies which had occurred in the directorate before the annual general meeting were filled by the directors after that meeting and this appointment was attacked as illegal on the ground that the power of the board to fill vacancies could be exercised only before the next annual meeting and if not so exercised it lapsed and became incapable of exercise thereafter. Article 80 of the company corresponding to article 53 in the present case provided that the general meeting should have the power to fill vacancies arising by reason of the annual retirement of directors and article 84 conferred on the board power to fill vacancies. On a construction of these articles it was held that the appointment of directors by the general body was valid. The decision by itself, therefore, has no bearing on this point. But the following observations of Fry J. are relied on in support of the position that the company has a general and inherent power to appoint directors. He observed: "I am far from saying that a general meeting might not have filled up the casual vacancy, although, as I have pointed out the 80th clause only requires the general meeting to fill up the vacancies created by the retirement in rotation but nevertheless the general power of a general meeting are so large that I certainly do not mean to determine that if they had been so minded, they might not have filled up the casual vacancy." In this connection the following observations of Lawrence L.J. in Worcester Corsetry Ltd. v. Witting might also be quoted: "The company has an inherent power to nominate and appoint its own directors unless that is in any way restricted by the contract confined in the articles of association. Unless you can find that that inherent power has been handed over by the company to the directors, I think they retain that power as a natural result of their having the power to increase their board of directors." According to Buckley on Companies Act, p. 885, the result of the authorities is that the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart will not apply "if owing to a deadlock or otherwise there is no board capable of making the necessary appointment."
In Palmer's Company Precedents (p. 673) it is stated that the company has the power to appoint additional directors "where owing to differences between the directors no board meeting could be held for the purpose." The principles laid down in the authorities discussed above may be summed up thus :—A company has inherent power to take all steps to ensure its proper working and that, of course, includes the power to appoint directors. It can delegate this power to appoint directors to the board of directors and such delegation will be binding upon it but if there is no legally constituted board which could function or if there is a board but that is unable or unwilling to act then the authority delegated to the board lapses and the members can exercise the right inherent in them of appointing directors.
In this view the question arises whether at the time of the annual meeting there was legally in existence a board of directors who could act. The appellants contend that there was, while the respondents deny it. The facts material for this contention may now be stated. It has already been mentioned that the first directors of the company were five persons named in article 49 which number was raised to six by the co-option of Veeramani under that article, that all of them retired at the annual meeting held on June 24, 1946, and were re-elected. Under article 53 a third of the directors had to retire at every annual meeting. Before the next annual meeting which was held on August 27, 1947, three of them had resigned. Of the remaining three, two directors Padmanabhan and Veeramani retired at the meeting and were re-elected. The third director resigned at that meeting and thus the strength of the directorate became reduced to two. Section 83-A of the Companies Act is as follows:—
"Every company
shall have at least three directors."
Article 47 provides that the number of directors inclusive of the director (ex-officio) shall not be less than three and that was also the number prescribed as quorum for a meeting of the directors. Thus after August 27, 1947, there was no board which could act except for the purpose of filling up vacancies under article 62. Admittedly no directors were co-opted in 1948 and the position on December 30, 1948, when the last annual meeting was held was that there were only two directors; both of them had been elected at the annual meeting held on August 27, 1947, and one of them had to retire at that meeting. Veeramani retired at that meeting and was re-elected. Thereafter there was no annual meeting.
The plaintiffs contended that on December 30, 1949, one Dekshinamurthy was co-opted as a director, Exhibit P-9, that he resigned on June 18, 1950, Exhibit P-10, and that on August 12, 1950, one Murugappa Chettiar was co-opted in his place, Exhibit P-11, and that there were thus three directors, Padmanabhan, Veeramani and Murugappa Chettiar who could act at the time of the annual meeting in 1951. But if the annual meeting had been convened in 1949 as it should have been Padmanabhan would have been bound to retire under article 53. But it is argued on behalf of the appellants firstly that article 53 contemplates the existence of at least three directors and it could not apply when their number fell below that minimum. The decision in David Moseley and Sons Ltd., In re was quoted in support of this position. There article 94 provided that "at every succeeding ordinary general meeting one-third of the directors or if their number is not a multiple of three, then the number nearest to but not exceeding one-third, shall retire from office." The strength of the directorate became reduced to two and the question was whether either of them ceased to be a director under this article. In holding that neither of them vacated the office Simonds J. observed: "The article in my judgment does not provide for the retirement of a director unless one of two conditions is satisfied: either there must be a number which is one-third of the directors, or there must be a number which is nearest to but does not exceed one-third. Here it is clear that neither of those conditions is satisfied. There are two directors and, therefore, you cannot find a number which is one-third. There are two directors and, therefore, you cannot find a number which is nearest to but does not exceed one-third."
It will be seen that this decision was based on the words "but not exceeding one-third" and in the absence of similar language in article 53 it must be held that even one of the two directors should have retired at the meeting. It is next argued that as no meeting was actually held in 1949 article 53 would not apply and Padmanabhan would continue to be a director. The respondents contend on the other hand that the directors could not take advantage of their own default and continue in office beyond the period when they would have retired, if they had done their duty and called for a meeting in accordance with article 29. This contention is supported by the decisions in In re Consolidated Nickel Mines Ltd.; Srinivasan v. Watrap Subramania Iyer; Kanssen v. Rialto and Morris v. Kanssen. These decisions were followed by this court in O.S.A. Nos. 120 of 1951 and 15 of 1952: Ananthalakshmi Animal v. The Indian Trades and Investments. It must accordingly be held that Padmanabhan ceased to be a director at the end of 1949. On the same reasoning it must also be held that Veeramani ceased to be a director by the end of 1950. This conclusion furnishes also the answer to a contention of the appellants that at least Veeramani was in office as director on February 26, 1951, and there could have been an election at the most of only five directors.
Then there is the case of Murugappa Chettiar who is put forward as the third director. It is stated that Dakshinamurthy was co-opted on December 30, 1949, but it does not appear in whose place he was co-opted and as four directors who retired in 1946 and 1947 had all been elected at the annual meeting held on June 24, 1946, their term of office would have expired under article 53 during the year 1949 and Dakshinamurthy whose co-option must have been in their place could not hold office beyond 1949. At any rate as he resigned on June 18, 1950, his rights do not merit any further consideration. It would follow from this that the co-option of Murugappa Chettiar in the place of Dakshinamurthy on August 12, 1950, must be held to be inoperative because the vacancy in which Dakshinamurthy could have been co-opted had itself come to an end under article 53. It is unnecessary to refer to the various infirmities in the appointment of Murugappa Chettiar as a director which are referred to in the judgment of Balakbishna Iyer J. We agree with him that Murugappa Chettiar was never validly co-opted as director, and it was not merely a case of defective appointment as director but of no appointment at all. We must accordingly hold that there was at the time of the annual meeting on February 26, 1951, no director validly in office and on the principle laid down in Isle of Wight Railway Co. v. Tahourdin and Barren v. Potter, Potter v. Berry the members had the right to elect the directors at the annual meeting.
One other contention relating to this part of the case remains to be considered. It was contended that by the time the annual meeting was held on February 26, 1951, the place of Murugappa Chettiar as a director was no longer vacant and therefore the election of six directors was invalid. The argument of the appellants may thus be stated: the general meeting was convened for February 18, 1951. On that day it was adjourned to February 26, 1951. Article 43 provides that if at any meeting at which an election is to take place, the places of the vacating directors are not filled up, the meeting shall stand adjourned till the Same day in the next week at the same time and place and if at the adjourned meeting the places of the vacating directors are not filled up the vacating directors or such of them as have not had their places filled shall be deemed to have been re-elected at the adjourned meeting. The contention is that under this article the meeting should have been adjourned from February 18, 1951, to February 25, 1951, and if on that date there was no election the vacating directors must be deemed to have been re-elected; therefore on February 25, 1951, Murugappa Chettiar became re-elected as director. We do not agree with this contention. Article 43 will apply only when there is a meeting held and as none was held before February 26, 1961, it has no application. Moreover in the view we have taken that there was no director who was in office on the date of the meeting there is no scope for applying article 43.
It was also urged that regulation 50 in Table A of Schedule I of the Companies Act provides that the election of directors other than those who retire, that is under article 63, must be by a special resolution, there was none such in this case and that, therefore, the election is illegal. But under article 33 of the articles of the company, which prevails over Regulation 50 no special resolution is required for election of directors. In the result we hold that the election of defendants 2 to 7 as directors is valid and not open to any objection.
It is next contended that members who were entitled to vote at the meeting had been excluded from exercising their right and that, therefore, the proceedings are illegal. In Application No. 139 of 1951 as part of the order adjourning the meeting originally fixed for January 28, 1951, to February 18, 1952, Krishnaswamy Nayudu J. gave the following directions:—
"But I consider that if it is made clear that the register as on November 28, 1950, will be the register that will be taken into consideration for the purpose of finding out the members who are entitled to vote or to be reckoned in a quorum, the apprehension on behalf of the respondent will disappear. To this course the company could have no objection." (Exhibit P. 4). It was in pursuance of this direction that the chairman declined to permit members who were not on the register of the company on November 28, 1950, to vote at the meeting. The contention of the appellants is that this direction is opposed to Section 79(1)(e) of the Companies Act which provides "any shareholder whose name is entered in the register of shareholders of the company shall enjoy the same rights and be subject to the same liabilities as all other shareholders of the same class."
Article 46 of the articles of the company runs as follows:—
"No member shall be entitled to vote nor be reckoned in a quorum when his name has not been in the register for a continuous period of two months immediately preceding the date of the meeting." The direction made in Exhibit P. 4 is obviously in accordance with this article. But Section 79(1) provides that the provision contained therein shall have effect "notwithstanding any provision made in the articles of the company in this behalf" and the contention of the appellants that article 46 is illegal must be accepted. It is contended on behalf of the respondents that the order in Application No. 139 of 1951 was made at the instance of the company and that the order has become final and that, therefore, its validity cannot now be questioned. The appellants reply that the shareholders were not as such parties to this application and that their rights could not be concluded by an order to which they were not parties. We are inclined to agree with this contention. But the question is whether this contention is open to the plaintiffs. They were on the register of the company on November 28, 1950, and they were allowed to exercise their right of voting. Therefore they are not persons adversely affected by the direction contained in Exhibit P. 4. Their complaint is that two members Srinivasam Pillai and Narasimharn whose names had been placed on the register after November 28, 1960, had sent their proxies on January 25, 1951, and that those proxies had been wrongly rejected. Assuming that Srinivasam Pillai and Narasimham had validly been admitted as members, a point on which Balakrishna Iyer J. had held against them, it is obvious that when their proxies were rejected they were the persons who were wronged and that, therefore, they are the only persons who can make a complaint of it and not other shareholders.
In Pulbrook v. Richmond Consolidated Mining Company the plaintiff who had been elected as a director complained that he had been excluded by the company from taking part in the management and sued for an injunction. The company contended that the action was not maintainable except in the name of the company. Overruling this contention Jessel M.R. held that when the wrong complained against is individual to the shareholder he was the person who was entitled to maintain the action and observed: "But in a case of an individual wrong, another shareholder cannot on behalf of himself and others, not being the individuals to whom the wrong is done, maintain an action for that wrong." That is precisely what the plaintiffs seek to do in this action. They are not themselves wronged and they seek to sue on behalf of themselves and others.
It may also be mentioned that even if the votes of Srinivasam Pillai and Narasimham are counted in favour of the plaintiff's group and against defendants 2 to 7 the result of the election would not be affected and on this ground also this objection must be overruled.
Another contention passed on behalf of the appellants is that at the general meeting held on February 26, 1951, two persons Ramachandran and Narayanaswami who were not members were allowed to take part in the proceedings and record votes, on the strength of powers of attorney which they had obtained from two members, Mrs. Ananthalakshmi Ammal and Sri N. Sri Ram respectively, and that the same was illegal and vitiated the entire proceedings. It is well settled that the right of a member of a company to vote by proxy is not a common law right and that it is determined solely by its articles which constitute a contract between him and the company.
In Haroen v. Phillips where the nature of the right which a member possessed to vote by proxy was discussed, Cotton L.J. observed: "But the whole of Mr. Benjamin's argument really depended on this, that there was a right independently of contract to vote by proxy. I cannot accede to that." Bowbn L.J. observed, "that there is no common law right on the part of a member of a corporation to vote by proxy. We know, of course, that in many cases a man may do through another person what he may lawfully do himself………But when persons agree to act together in the conduct of a business the way in which that business is to be carried on must depend in each case on the contract, express or implied which exists between them as to the way of carrying it on."
In MacLaren v. Thompson Astbury J. observed: "There is no inherent or equitable right in any shareholder to vote by proxy; such right, if it exists, must be found in the contract binding the shareholders generally, that is, in the company's regulations or constitution and it then exists only in the form and subject to the limitations therein appearing."
Vide Halsbury's Laws of England Vol. 8 (2nd edn.) page 61 paragraph 108.
The question then simply is what do the articles say on this matter? Article 38 is as follows:— "On a demand of poll every member present in person or by proxy or by attorney shall have one vote." Under Section 79(2)(g) of the Companies Act "a proxy must be a member of the company," and article 44 in Table A provides "No person shall be appointed a proxy who is not a shareholder," and these provisions are applicable to the present case there being nothing in the articles of the company inconsistent therewith. Therefore, there is no doubt that a proxy can validly be given only to a member. But the respondents argue that article 38 clearly recognises that a member can be present in person or by proxy or by attorney and that, therefore, the attorneys form a class distinct from proxies and as to them there is no limitation that they should be members. Mr. K. Rajah Ayyar contends on behalf of the appellants that in law the status of a proxy is only that of an agent, that no distinction can be made between a proxy and an attorney and that they are synonymous words. He refers to item 48 in Schedule I to the Stamp Act which deals with the power of attorney not being a proxy and item 52 which deals with proxy and argues that this is a recognition that proxies are only a form of power of attorney. He also relies on the observations of Lindley J. in English Scottish and Australian Chartered Bank In re that a "proxy there means some agent properly appointed" and the decision of Satyanarayana Rao and Chandra Reddi JJ. in Narayanan Chettiar v. Kaleswarar Mills where it was held that the relationship between a shareholder and a proxy is that of a principal and an agent. That undoubtedly is so but the question is what do the words "by proxy or by attorney" in article 38 mean? Clearly they cannot be held to be synonymous because the words actually used are "by proxy or by attorney", and not "by proxy or attorney". The argument of the appellants involves the rejection of the words "by attorney" as meaningless surplusage. But it is unnecessary to pursue this matter further because there is a clear ground on which this contention of the appellants must fail. It appears from the voting list appended to the commissioner's report that even excluding the votes cast by the two non-members Narayanaswami and Ramachandran the defendants get 10,120 votes as against 4,078 obtained by the plaintiffs' group. The result of the election has not been affected by this irregularity and, therefore, it cannot be set aside.
Objection is next taken to the inclusion of proxies which were deposited on the 14th and 15th of February 1951. These proxies were cast in favour of the defendants. The contention is that as the meeting was originally fixed for January 28, 1951, as per Exhibit P. 3 the proxies should have been deposited under article 68 in Table A at least 72 hours before the meeting and, therefore those deposited on the 14th and 15th should be rejected. Article 42 of the company's articles provides that the instrument appointing proxy shall be deposited at the registered office of the company not less than 72 hours in advance of the meeting or the adjourned meeting; else it is invalid.
It is argued that this article is opposed to regulation 66 which is obligatory and therefore void. Reliance was also placed on the decision in McLaren v. Thompson that an adjourned meeting was only a continuation of the original meeting and that proxies which could not be used at the date of the original meeting could not be used at the adjourned meeting. But the short answer to this contention is that though the date of the meeting was originally fixed for January 28, 1951, it was not actually held on that date by reason of the order dated January 16, 1951, Exhibit P-3; that there was no notice even given of that meeting and that the meeting which was held on February 18, 1951, can in no sense be said to be an adjourned meeting.
The contention that there had been no valid nomination of the defendants 2 to 7 as directors because it was not made seven days before the meeting is again based on the assumption that there was a meeting on January 28, 1951, and that the meeting held on February 18, 1951, is the continuance thereof. There was no meeting on January 28, 1951, and therefore there can be no question of an adjourned meeting on February 18, 1951. It is conceded that the nominations are in time if the date of the meeting is February 18, 1951, and not January 28, 1951.
It is finally contended that Sanjeevi Naidu the commissioner who was appointed to preside over the meeting which was fixed for February 18, 1951, had no authority to adjourn it to February 26, 1951,and that, therefore, the proceedings of the meeting held on February 26, 1951, are void.
In Halsbury's Laws of England, Vol. V, page 359, paragraph 588, (2nd Edn.) the law is thus stated:—"Except where empowered by the regulations of the company, the chairman cannot adjourn the meeting nor dissolve it while any of the business for which it was called remains untransacted." In this case article 35 provides that the chairman may with the consent of the meeting adjourn it from time to time. It is not now disputed that Mr. Sanjeevi Naidu obtained the consent of the meeting to adjourn it. It is suggested that the order appointing him does not confer upon him power to adjourn the meeting. But the meeting is to be conducted in accordance with the articles of association and the chairman had the authority to adjourn the meeting under article 35. Moreover the plaintiffs themselves pressed for adjournment and it is not open to them to make a complaint of it. In Burt v. The British Nation Life Assurance Association it was held that "a plaintiff who has a right to complain of an act done to a numerous society of which he is a member, is entitled to sue on behalf of himself and all others similarly interested though no other may wish to sue; so although there are a hundred who wish and are entitled to sue, still, if they sue by a plaintiff who is personally precluded from suing, the suit cannot proceed although other persons on whose behalf the suit was instituted might maintain the action as plaintiffs." This principle was applied in this court by Satyanarayana Rao and Panchapagesa Sastri JJ. in Nagappa Chettiar v. Madras Race Club. The plaintiffs having moved for an adjournment of the meeting cannot be heard to object to it. They do not even state that they have been prejudiced in any manner. This objection also must be overruled. In the result the appeal fails and is dismissed with costs.
v.
RAGHAVA RAO, J.
Second
Appeal No. 599 of 1950
August 10, 1950
K. Bhashyam and S.V. Venugopalachari, for the appellant.
R. Gopalaswami Aiyangar, for the respondents.
JUDGMENT
There are in the main two interesting questions of company law involved
in this case: (1) whether the suit out of which this second appeal arises is
maintainable; and (2) whether a resolution of the shareholders of a company
known as Vel Brothers Ltd. (hereinafter to be referred to as the company) of
the 3rd November, 1948, removing the plaintiff from its managing directorship
and appointing the first defendant as managing director instead, is invalid or
illegal. The facts which require to be stated for appreciating the point
arising for decision are these. The first and the second defendants called upon
the managing director, the plaintiff, by letter dated 28th September, 1948, to
convene a meeting for electing a new managing director in place of the
plaintiff. The reply of 27th October, 1948,that was given to it by the
plaintiff was that since the general meeting was anyhow going to be held on
30th December, 1948, the matter might be considered at that juncture. Finding
that the plaintiff did not take action on their letter within 21 days the
re-quisitionists sent notices to all the members of a meeting proposed to be
held on 3rd November, 1948, at the registered office of the company at 5 p.m.
The subject, it was said, was the election of a managing director in place of
the plaintiff. It may also be stated that in a letter written by the plaintiff,
Ex. B. 11 of the 27th October, 1948, he himself had expressed an intention to
move a resolution at the meeting to be held on 3rd November, 1948, that the
company be wound up voluntarily. On 3rd November, 1948, it appears however that
the meeting could not be held at the premises of the registered office at the
time fixed because the premises were locked. As the lower appellate court has
found, the shareholders who were assembled at the registered office for the
purpose of the meeting accordingly moved on to the premises at No. 286,
Kallukatti East Street, which is only a few yards off the registered office and
there held a meeting at which a resolution removing the plaintiff from managing
directorship was passed. The validity of the meeting so held and of the
resolution so passed is the subject matter of the present action. The plaintiff
complains that the meeting and the resolution are altogether invalid and
illegal. The answer of the defendants is firstly that a suit of this character
is not maintainable and secondly that the meeting and the resolution are
perfectly legal and valid.
The suit was disposed of by the learned District Munsif of Devakottai on
the basis of a certain admission made by the pleader for the plaintiff on the
plaint which is to the following effect:—
"I admit for the purpose of this suit that the
registered office of the Vel Brothers Ltd., Karaikudi, was not available for
the meeting to be held at 5 p.m. on 3rd November, 1948, and that a meeting was
held at 5-15 p.m. on 3rd November, 1948, in the premises of door No. 286
Kallukatti East Street, and the resolutions complained of by the plaintiff were
passed at that meeting."
No evidence was taken by the learned District Munsif who proceeded on the
basis of this admission to deal with the merits of the case after finding the
suit to be maintainable as not being a matter of mere internal management or a
mere domestic matter on which the court should not interfere. On appeal taken
to the court of the Subordinate Judge of Devakottai the judgment of the learned
District Munsif has been reversed on both the points. The plaintiff accordingly
files this second appeal against the decision of the lower appellate court.
As regards the maintainability of the suit the learned Subordinate Judge
has applied what he calls the well known rule in Foss v. Harbottle which he
defines as being that a court will not interfere with the ordinary management
of a company acting within its powers and has no jurisdiction to do so at the
instance of the shareholders. He has quoted James, L.J., from Mac Dougall v.
Gardiner, at pages 21 and 25 to this effect:—
"I think it is of the utmost importance in all
these companies that the rule which is well known in this court as the rule in
Mozley v. Alston and Lord v. Copper Miners (Governor & Co. of) and Foss v.
Harbottle, should always be adhered to; that is to say, that nothing connected
with internal disputes between the shareholders is to be made the subject of a
bill by some one shareholder on behalf of himself and others, unless there be
something-illegal, oppressive or fraudulent, unless there is something ultra
vires on the part of the company qua company or on the part of the majority of
the company, so that they are not fit persons to determine it; but that every
litigation must be in the name of the company, if the company really desire it.
In my opinion if the thing complained of is a thing
which in substance the majority of the company are entitled to do or if
something has been done irregularly which the majority of the company are
entitled to do regularly, or if something has been done illegally which the
majority of the company are entitled to do legally, there can be no use in
having a litigation about it, the ultimate end of which is only that a meeting
has to be called and then ultimately the majority gets its wishes."
The respondents before me have reiterated the reliance upon this
statement of the law before me. Mr. Gopalaswami Aiyangar has also drawn my
attention to the fact that the resolution passed on 3rd November, 1948, was
later on confirmed by a resolution of a general body meeting held on 30th
December, 1948.
The rule in Foss v. Harbottle has been considered by this court in
Nagappa Chettiar v. Madras Race Club, and has been, with its limitations and
exceptions, set forth in detail in Palmer's Company Law, 19th edition, by A.F.
Topham, K.C., at pages 228 to 230. I have considered the matter carefully and
have come to the conclusion that what we are concerned with here is not really
either the rule or any exception thereto. The question which arises here is
indeed a different matter and is governed not by the rule in Foss v. Harbottle
but by what has been said by Sir George Jesse], M.R., in Pulbrook v. Richmond
Consolidated Mining Co. The ruling of Sir George Jessel, M.R., has been
considered in very close detail by Beasley, J., as he then was in Subramania
Aiyer v. The United India Life Assurance Co. Ltd. The case before the learned
Judge related to the United India Life Insurance Co. Ltd., Madras. There the
articles of association provided for the election or appointment of two
directors by the policy holders of the company, the directors so elected or
appointed to be known as "policy holders' directors ". Two persons
alleging themselves to have been validly elected "policy holders'
directors" sued the company and its directors for a declaration of the
validity of their election as such directors and of their right to act as such
and also an injunction restraining the other directors from interfering with
their right to act as such directors. On objection taken by the defendants that
individually the plaintiffs had no cause of action and that the suit should
have been instituted by the policy holders as a body, the objection was
overruled by the learned Judge who held that the plaintiffs alone could
maintain the suit and that no other policy holders on their behalf could have
maintained it, and that the directors of the company had properly been
impleaded as defendants. Referring to the decision of Sir George Jessel, M.R.,
in Pulbrook v. Richmond Consolidated Mining Co., the learned Judge observes at
page 398 that that decision "seems to be authority both for the statement
that a director who has been excluded from acting as a director by the
directors of a company can sustain an action in his own name on the ground of
individual injury to himself and for the statement that such an action can be
sustained against the other directors." The learned Judge quotes the
following from Sir George Jessel, M.R.'s decision:—
"In this case a man is necessarily a shareholder
in order to be a director, and as a director, he is entitled to fees and
remuneration for his services, and it might be a question whether he would be
entitled to the fees if he did not attend meetings of the board. He has been
excluded. Now, it appears to me that this is an individual wrong, or a wrong
that has been done to an individual. It is a deprivation of his legal rights
for which the directors are personally and individually liable. He has a right
by the constitution of the company to take a part in its management, to be
present, and to vote at the meetings of the board of directors. He has a
perfect right to know what is going on at these meetings."
Reference may be made in this connection also to a Bench ruling of this
Court (of Curgenven and Cornish, JJ.) in Srinivasan v. Watrap Subramania Aiyar,
where after pointing out the distinction between the class of cases illustrated
by Pulbrook v. Richmond Mining Co. on the one hand and the class of cases
illustrated by Foss v. Harbottle on the other the learned Judges ruled that
"The Court has jurisdiction to entertain a suit by shareholders against
the company in respect of an infringement of their individual rights as
shareholders when the interests of justice so require and a suit in substance
to establish and enforce the right of a shareholder to exercise his vote is
therefore maintainable at the instance of a single shareholder."
It is perfectly clear to my mind that in the case before me the plaintiff
is suing in respect of an individual wrong and not a wrong in which all the
shareholders generally and as a body, only are interested. He is asking it to
be declared—and that is principally a matter of concern for him—that he has not
ceased to be the managing director and that the first defendant has not become
that in his place. The question of the maintainability of the suit must
therefore be answered in favour of the appellant before me.
Turning to the other question arising for determination I must state that
the lower appellate court's finding as to what happened on 3rd November, 1948, is
contained in paragraph 16 of its judgment which I may as well quote:—
"There is no evidence as to what actually
happened, as to whether the requisitionists and other members assembled for the
meeting at the registered office and finding it locked adjourned to 236,
Kallukatti East Street, and there held the meeting. But it was admitted that
the meeting was actually held there at 5-15 p.m. It is not disputed that 286,
Kallukatti East Street, is a residential place of the parties, who are close
relations, within a few yards from the registered office of the company, Only
appellants 1, 2 and 4 attended the meeting and the first respondent did not
attend it. It is not suggested that any other member turned up at the
registered office and went away or was prevented from attending the mating held
at 286, Kallukatti East Street, for want of notice. In view of the first
respondent's volte face at the trial and in view of his admission the
appellants did not adduce any oral evidence. In the circumstances, in view of
the pleadings and the admissions made by the first respondent at the trial, it
is quite likely that appellants 1, 2 and 4 assembled at the registered office
for the meeting but the first respondent locked up the premises and made the
registered office not available for the meeting to be held there at 5 p. m. and
did not give them any facilities for holding the meeting and that consequently
they adjourned to 286, Kallukatti East Street, a few yards away and held the
meeting there at 5-15 p.m. and passed the resolutions complained of there at
that meeting to the knowledge of the first respondent. This could reasonably be
presumed under Section 114 of the Evidence Act, having regard to the common
course of natural events, human conduct, and public and private business, in
their relation to the facts of this particular case."
This, it is said, by Mr. Bhashyam, the learned advocate for the
appellant, is not a finding of fact which I should accept; it is a mere surmise
and speculation which should never be regarded as an effective substitute for
proof. I am not prepared to accept the argument. It seems to me rather that
what the learned Judge has recorded in paragraph 16 is an inference of fact
from the admitted circumstances of the case gleanable from the endorsement on
the plaint, the contents of the minutes book and the probabilities of the case.
Accepting this view of the lower appellate court for the purpose of his
argument Mr. Bhashyam urges (1) that the meeting actually held at No. 286,
Kallukatti East Street was not the outcome of an adjournment of a meeting fixed
for one place to another place so that the proceedings at the latter place may
be regarded as a continuation of the meeting initiated earlier at the former
place, and (2) that if on account of the plaintiff's conduct it became
impracticable for the requisitionists to conduct the meeting of the company at
its registered office the proper remedy to be pursued was either to take steps
for a fresh meeting under the Indian Companies Act or to move the court under
Section 79(3) of the Act to order the meeting to be held and conducted in such
manner as the court may think fit. Against the latter contention Mr.
Gopalaswami Aiyangar has urged that Section 79(3) of the Act applies only to
cases where for any reason it is impracticable to call for a meeting of a
company or to conduct it and not to cases in which it is impracticable to hold
it. Learned counsel seeks to make a distinction between the holding of a
meeting which according to him applies to the stage preliminary to the choice
of the chairman and the conducting of a meeting which applies to the stage
thereafter. I am not satisfied that this distinction which is undoubtedly
subtle is at all sound. In my opinion the expression "to conduct" in the
provision of the statute includes the stage prior to the choice of the
chairman, and the impracticability in the conducting of the meeting did none
the less exist in the present case because in the matter of the assembling of
the shareholders at the premises of the registered office there was no
difficulty. The fact that the words "held" and "conducted"
are both to be found used in the provision of the statute in relation to the
order to be made by the court if the impracticability contemplated by it
arises, affords no ground in support of the contention of counsel. It became
impracticable in the circumstances of this case to conduct the meeting of the
company in the registered office. Whatever the reason for it might be,
sub-section (3) of Section 79 says that it would be open for the court either
on its own motion or on the application of any director of the company or of
any member of the company entitled to vote at the meeting to order a meeting of
the company to be called, held and conducted in such manner as the court thinks
fit. The restricted interpretation sought to be put upon the statutory
provision by learned counsel for the respondents must accordingly be repelled.
The contention of the learned counsel for the appellant that there was no
adjournment from the registered office to No. 286, Kallukatti East Street,
arises on the presupposition that the adjournment must be after a regular
meeting is first held with a chairman. Regulation 55 of Table A of the Indian
Companies Act is referred to in this connection. That provides:—
"The Chairman may with the consent of any
meeting at which a quorum is present (and shall if so directed by the meeting),
adjourn the meeting from time to time and from place to place".
It is said that the place of meeting is very important and only the
chairman of the meeting has the privilege of adjourning it. As against this
submission for the appellant Mr. Gopalaswami Aiyangar urges that the right to
adjourn which is expressed through the chairman where one exists is always a
thing inherent in an assembly which can be exercised by it where none exists.
In support of their respective contentions learned counsel on both sides have
relied upon the case in Subramania v. The United India Life Insurance Co. Ltd.,
one relying upon what is to be found at page 400 where a reference is made to
"the power of the meeting to adjourn itself", the ether relying upon
what is to be found said at page 402 with reference to Lord Harwicke, C.J.'s
pronouncement in the case of Stroughton v. Reynolds. In this last case it was
held that the adjournment of a vestry meeting was a common right vested in the
parishioners at large and not in the vicar, unless by law or by custom it was
shown that the vicar himself had power to adjourn the meeting. I am on the whole
of opinion that the reference to “the power of the meeting to adjourn
itself" at page 400 of the report does not involve and imply that there
must in every case be a meeting held under a chairman at one place before an
adjournment can be said to take place by the actual holding and conducting of a
meeting at another place.
In any case I am not satisfied that if there was a violation of law in
the present case by reason of the people assembled at the registered office of
the company moving on to a place hard by and holding their meeting there in
view of the difficulty of the locking up of the registered office with which
they were confronted when they were assembled there, the violation is to be
regarded as anything more than an irregularity. It does not seem to my mind
that the validity of the meeting actually held at No. 286, Kallukatti East
Street, must necessarily and ipso facto be pronounced against in the absence of
any proof that a different result would have necessarily followed on a fresh
meeting.
One other point which has been debated before me is whether by reason of
his conduct in making the premises of the registered office of the company
unavailable for the meeting to be held the plaintiff is precluded from
complaining of the invalidity of the meeting actually held at 286, Kallukatti
East Street. As to this, it is observed by the learned Subordinate Judge in
paragraph 20 of his judgment as follows:
"It is urged for the first respondent that there
is no evidence to show that he was aware of the meeting held at 286, Kallukatti
East Street, or of the resolution passed at that meeting and if notice were
issued for a fresh meeting to all the members it could not be said that the
same result could have followed, i.e., the same resolutions could have been passed
at such a fresh meeting. But it is quite probable on the pleadings and the
admissions of the first respondent that he was aware of the meeting held at
286, Kallukatti East Street, and no fresh notice was necessary therefor and he
could not be allowed to make the registered office unavailable for such a
meeting to be held there and then contend that the consequent change of venue
of the meeting invalidated the meeting and the resolutions passed at the
meeting for want of notice. He came to Court with the case that he was waiting
for the meeting to be held at the registered office at 5 p.m. anxious to
preside at it and take part in it, but nobody came and nothing happened and no
meeting was held that day at all either at 286, Kallukatti East Street, or anywhere
else. But he gave it up as untrue and admitted that a meeting was actually held
at 286, Kallukatti East Street, and the resolutions complained of were actually
passed. It could little avail him to contend that the resolution was invalid
for want of fresh notice of meeting."
In support of the view of the learned Judge thus expressed Mr.
Gopalaswami Aiyangar relies upon a passage in Broom's Legal Maxims, 8th
edition, page 233, and a passage in the judgment in Subramania Aiyar v. The
United India Life Insurance Co. Ltd., In the case in Subramania Aiyar v. The
United India Life Insurance Co. Ltd. the venue of the meeting of the company
had to be changed from its registered office to the Mahajana Saba Hall on
account of the failure of the company to give those facilities which had been
promised by the seventh defendant on behalf of the company. What happened was
that after the seventh defendant had said that the company would give all
facilities for the meeting, as a matter of fact the company proceeded to
appoint its own directors in haste. Having done so, as the learned Judge
observes, "……..It is clear that it refused to give the facilities for the
meeting being held in its office and the other facilities which the policy
holders desired; in fact, it clearly and definitely declined to allow the
office to be used for the purpose of the adjourned meeting. The policy holders
therefore selected the Mahajana Saba Hall. It was the deliberate act of the
defendants that caused this change of venue and Mr. Alladi Krishnaswami Aiyar
has argued with great force that it does not lie in the mouth of any one who
has by his own act prevented something taking place afterwards to take
exception to that state of affairs and to use that state of affairs for his own
benefit. I think that that argument is a perfectly sound one. It seems to me
that it would be a travesty of the law if a person who has deliberately brought
about a state of affairs should be allowed to take exception to that state of
affairs and use that changed state for his own advantage."
The learned Judge then proceeds to discuss the two English cases, New
Zealand Shipping Co. v. Societe des Ateliers et Chantiers de France and Quesnel
Forks Gold Minning Co., Ltd. v. Ward and Others, and winds up thus: "I
think that the defendants cannot be heard to say that the change of venue was
an irregularity such as to make the meeting of the 5th May invalid."
The passage in Broom's Legal Maxims relied upon before me is part of the
discussion of the maxim "nullus commodum capere potest de injuria sua
propria"—No man can take advantage of his own wrong—to be found at pages
191 to 200 of the tenth and latest edition of the work. There the rule and its
limitations are pointed out in a very exhaustive treatment. The maxim which is
based on elementary principles, as is said in that work, is fully recognised in
courts of law and equity and, indeed, admits of illustration from every branch
of legal procedure. It is therefore a sound principle, as observed at page 193
that "he who prevents a thing from being done shall not avail himself of
the non-performance he has occasioned." Then as observed at page 195, the
maxim applies also with peculiar force to that extensive class of cases in
which fraud has been committed by one party to a transaction, and is relied
upon as a defence by the other. It is pointed out at page 197 citing the Latin
maxim "allegans contraria non est audiendus" that "a person who
has expressly made a verbal representation, on the faith of which another has
acted, shall not afterwards be allowed to contradict his former statement, in
order to profit by that conduct which it has induced." Finally, it is said
at page 199: "In Hooper v. Lane, which strikingly illustrates the rule
that 'no man shall take advantage of his own wrong', various instances were put
by Bramwell, B., showing that the rule 'only applies to the extent of undoing
the advantage gained, where that can be done, and not to the extent of taking
away a right previously possessed."
It is argued by Mr. Bhashyam that the case in Subramania Aiyar v. The
United India Life Insurance Co. Ltd. was one in which there was a separate
meeting held in the changed venue after the earlier meeting had become
frustrated, and that therefore it cannot be applied as being of sufficient
parity of facts, to the case on hand. It is urged therefore that except that
his client cannot dispute the necessity for the meeting which came to be
actually held at 5-15 p.m. on 3rd November, 1948, in other premises he is not
estopped from relying upon the invalidity of that meeting in order to
invalidate the resolution passed at it. Mr. Bhashyam also urges that at best
his client's conduct might be a matter for consideration on a question of costs
and would not preclude an argument of the kind which has been advanced by
learned counsel against the validity of the meeting held at door No. 286,
Kallukatti East Street, and of the resolution passed at it, removing his client
from the office of managing director and appointing the first defendant in his
place. I have carefully considered the matter and have come to the conclusion
that the way in which Mr. Bhashyam seeks to get over the point of estoppel is
not sound. The facts with reference to which he distinguishes the case in
Subramania Aiyar v. The United India Life Insurance Co. Ltd. do not in the
least affect the principle which really falls to be applied to this class of
case. There is no reason why that principle which is so fully discussed in
Subramania Aiyar v. The United India Life Insurance Co. Ltd. with reference to
the English cases and which is of very extensive application in a variety of
cases as pointed out in Broom should not be actually held applicable to the
case on hand, as it was held applicable to the case in Subramania Aiyar v. The
United India Life Insurance Co. Ltd. The differentiation attempted by learned counsel between that case and this is on an
accident of fact and not on an essential of legal principle.
In the result the second appeal
fails and is dismissed with costs. No leave.
[1972] 42 COMP. CAS. 1 (RAJ.)
HIGH COURT OF RAJASTHAN
v.
Edward Mills Co. Ltd., Beawar
L.N. CHHANGANI AND L.S. MEHTA, JJ.
D.B. CIVIL REGULAR FIRST APPEAL NO. 49 OF 1956 IN CIVIL
SUIT NO. 3 OF 1945
DECEMBER 19, 1969
Thanchand
Mehta with Narain Chand Mehta for the Appellants.
M.B.L.
Bhargava with S.N. Bhargava and Doonghar Singh for the Respondent.
L.S.
Mehta, J.—On
July 6, 1906, Seth Guman Mal Lodha, one of the proprietors and a nominee of the
firm, Kamal Nayan Hamir Singh of Ajmer and Kunwar Ram Swarup, son of Rai
Bahadur Seth Champalal of Beawar, executed an agreement. Its relevant terms and
conditions were as follows:
“It was executed for
the purpose of establishing a cloth mill at Beawar. The concern was to be started
in the name of the Edward Mills Company Ltd., Beawar. The two parties would
invest the bulk of the money and the management would also remain in their
hands. They would keep their shares separate, which would not be of the value
of less than rupees one lakh. The rights of both the parties would be equal and
both the parties would have jointly and severally the rights of becoming
manager, chairman, secretary, treasurer, etc. These rights would be exercised
half and half by both the parties and they would be entitled to get the income
in equal shares in respect of all the commissions, salary or any other kind of
income. According to the terms of the memorandum and articles of association
the rights of the chairman and managing director would jointly be exercised by
Seth Guman Mal, proprietor of the firm Kamal Nayan Hamir Singh, and Kunwar Ram
Swarup. After the registration of the memorandum and the articles of
association in the first general meeting, Guman Mal, proprietor of the firm
Kamal Nayan Hamir Singh, would discharge the duties of the chairman and would
continue to do so for the full term of three years. During this period, Ram
Swarup would continue to act as managing director. Thereafter, Seth Guman Mal
would hold the office of the managing director and Ram Swarup would act as
chairman and that procedure would be followed in future. The work and the
rights of the secretary, treasurer and agent would be joint and would be
carried on in the joint names of the parties. All the rights which the executants
of the agreement acquired would not only be enjoyed by them till their
lifetime, but they would also devolve upon their heirs, successors and
administrators or upon those persons who might be their legal heirs and legal
representatives.”
In
pursuance of the above agreement the Edward Mills Co. Ltd. was incorporated on
August 9, 1906. The substance of the agreement found place in clause VI of the
memorandum of association. It runs as follows :
“VI. Seth Guman Mal,
son of Seth Raj Mal Lodha, proprietor of the firm of Kamal Nayan Hamir Singh of
Ajmer, and Kunwar Ram Swarup, son of Rai Bahadur Seth Champalal of Beawar, or
their heirs, executors, administrators, successors, representatives or their
duly authorised agents or such other person or persons as may from time to time
be appointed by them, shall be agents, secretaries, treasurers, the chairman
and the managing director of the company, and shall not be required to vacate
the said offices until they resign of their own accord, and as a remuneration
for their services a fixed amount of Rs. 250 per month shall from the date of
commencement of the business up to the date the machinery may begin to work, be
given to them; and afterwards the said Seth Guman Mal, proprietor of the firm
of Kamal Nayan Hamir Singh of Ajmer, and Kunwar Ram Swarup, son of Rai Bahadur
Seth Champal of Beawar, shall be allowed 16 per cent. only on the net profits
of the earnings of the company as their commission. As to the way in which the
respective duties of the chairman and the managing director shall be
discharged, Seth Guman Mal and Kunwar Ram Swarup will from time to time settle
between themselves and inform the office of the company of the same.”
Articles
60 and 75 of the articles of association substantially convey the same terms
and conditions. Under article 60 of the articles of association, Seth Guman Mal
and Ram Swarup were to be appointed ex-officio directors as also the chairman
and managing directors of the company, respectively. It also provided that
their heirs, executors, etc., as appointed by them, would be able to act as
such. As to the way in which their respective duties would be discharged Seth
Guman Mal and Ram Swarup would, from time to time, decide and settle between
themselves and inform the company’s office of the same. Article 75 lays down
that Seth Guman Mal and Ram Swarup or their heirs, executors, etc., would be
the chairman and managing director of the company and would not be required to
vacate the office until they resigned of their own accord. They would get Rs.
250 per month from the date of the commencement of the business till the date
the machinery started working. Thereafter, they would get 16% on the net
profits of the company as their commission.
The
defendant No. 1 company’s business was carried on in the manner as set out
above and both Seth Guman Mal and Ram Swarup obtained commission at the rate of
16% on the net profits of the company. The commission was credited in the name
of the firm, Kamal Nayan Hamir Singh and Champalal Ram Swarup.
Seth
Guman Mal died on November 11, 1914. Thereafter, the members of the firm Kamal
Nayan Hamir Singh nominated Seth Gadh Mal Lodha as their representative and by
their letter, dated May 4, 1915, they informed the directors of the company
accordingly. The company by its extraordinary general meeting held on July 23,
1915, passed a special resolution which was confirmed in the next meeting, held
on August 16, 1916, appointing Seth Gadh Mal in place of Seth Guman Mal.
Ram
Swarup died on January 5, 1916. His younger brother, Motilal, defendant No. 2,
was appointed in his place by a special resolution of the company, which was
confirmed at the extraordinary general meting held on June 8, 1916.
Till
the end of June, 1938, Gadh Mal and Motilal acted, respectively, as chairman
and managing director of the company. The firm, Champalal Ram Swarup, defendant
No. 2, and other members of his family were adjudicated insolvent by the Bombay
High Court on July 1, 1938. Thereupon defendant No. 2, Motilal, vacated the
office of the managing director and Seth Gadh Mal Lodha remained the sole
chairman and the managing director. The adjudication was subsequently annulled
by the above court.
Gadh
Mal died on January 11, 1942. The board of directors of the company appointed Seth
Sobhag Mal Lodha on January 17, 1942, in place of Seth Gadh Mal, deceased, as
chairman and managing director of the company. This appointment was temporary
and was subject to the confirmation of the company. An extraordinary general
meeting of the company for making the appointment was convened on February 8,
1942. The meeting was held in the office of the company and Seth Sobhag Mal
Lodha first occupied the chair. Before the meeting could transact the business,
it was dissolved by Seth Sobhag Mal and his supporters left the meeting. The
rest of the shareholders continued the meeting under the chairmanship of K.K.
Bhargava, advocate, and passed a resolution appointing defendent No. 2,
Motilal, as the agent, secretary, treasurer, chairman, and managing director of
the company for a period of 20 years. It was further resolved in the meeting
that he would be entitled to get remuneration at the rate of 10% on the net
profits of the company every year and that he would also act as an ex-officio
director till he held the above-named offices.
On
an application submitted by Sobhag Mal on February 11, 1942, under section
79(3) of the Indian Companies Act, the District Judge, Ajmer, Mr. K.R. Damle,
ordered that the meeting of the company should be held on February 12, 1942,
under the chairmanship of Seth Sobhag Mal. On April 8, 1942, Motilal went up in
revision to the Court of the Judicial Commissioner, Ajmer, against the above
order of the district judge. He also made an application for interim injunction
restraining Sobhag Mal Lodha from acting as managing agent, chairman and
director, but that application was disallowed on May 8, 1942. On May 15, 1942,
the Judicial Commissioner, Ajmer, granted an interim stay of the order of the
district judge and further directed that the resolution of the extraordinary
general meeting, dated February 8, 1942, electing Seth Motilal, was to be acted
upon until further orders. On June 3, 1942, that order was made absolute and
since then Motilal, defendant No. 2, acted as the managing director, etc., of
the company.
Seth
Kanmal, one of the proprietors of the firm, Kamal Nayan Hamir Singh and father
of the plaintiffs Nos. 8 and 9, filed Suit No. 867A/1934 for partition of the
joint family property in the Calcutta High Court. By an order dated April 1,
1935, Seth Gadh Mal was appointed a receiver of the estate and joint properties
including the joint business with power to carry on the existing joint
business. On his death Seth Sobhag Mal, plaintiff No. 1, was appointed in his
place by an order, dated January 16, 1942. Thereafter, Seth Sobhag Mal Lodha
filed the present suit with the leave of the Calcutta High Court. The
plaintiffs Nos. 2 to 9 and the defendants Nos. 4 to 6 are the other proprietors
of the firm, Kamal Nayan Hamir Singh.
The
case set up in the plaint is as follows :
The
families of the plaintiffs and the defendants Nos. 3 to 6 carried on business
under the name and style of M/s. Kamal Nayan Hamir Singh. The joint family of
the defendant No. 2 also carried on the business under the name and style of
M/s. Champalal Ram Swarup of Beawar. It was decided by the two families that in
the matter of holding offices of the managing director, managing agent, etc.,
they should act through their nominees and pursuant to that decision Seth Guman
Mal of the plaintiffs’ family firm and Ram Swarup of the defendant No. 2’s
family firm were, respectively, appointed nominees and representatives of the
said firm for the purpose of managing the business of the company as chairman
and managing director. On the death of Guman Mal, Gadh Mal was nominated by the
proprietors of the firm, Kamal Nayan Hamir Singh, in his place. Similarly, on
the death of Ram Swarup, defendant No. 2, Motilal, was nominated by the firm,
Champalal Ram Swarup. At the commencement of the extraordinary general meeting
held on February 8, 1942, Seth Sobhag Mal Lodha, as chairman, directed the
secretary of the company to record the names of the shareholders who were
present. Thereupon, some of the shareholders in collusion with and at the
instigation of Motilal, defendant No. 2, and the members of his family created
pandemonium and obstructed the secretary from discharging his duties. They also
wanted to remove Seth Sobhag Mal Lodha forcibly from the chair. Thereupon Mr.
Lodha dissolved the meeting and he and his supporters left the place. The rest
of the shareholders insisted upon conducting an extraordinary general meeting
under the chairmanship of Mr. K.K. Bhargava, advocate, and passed a resolution
appointing Motilal, defendant No. 2, as the managing director and chairman.
According to the plaintiffs, this resolution being not valid is not binding
upon the company or the plaintiffs or the defendants Nos. 3 to 6 as the same
was not passed in a properly convened meeting and as no proper notice for the
purpose had been given to the shareholders. The meeting of February 8, 1942,
was not convened for altering the memorandum or the articles of association
regarding change in the commission rate. The plaintiffs further averred that
the orders passed by the Judicial Commissioner on May 15, 1942, and June 3,
1942, were without jurisdiction, null and void and were not binding upon the
plaintiffs and the defendants Nos. 3 to 6.
On
April 1, 1942, the adult members of the firm, Kamal Nayan Hamir Singh, sent a
letter to the directors of the company, informing them that they had nominated
Seth Sobhag Mal as their representative in place of Seth Gadh Mal with the same
rights and privileges. The board of directors in a meeting held on April 18, 1942,
passed a resolution appointing Seth Sobhag Mal Lodha as secretary, treasurer,
agent, managing director, etc., of the Edward Mills Company Ltd., Beawar.
Despite the above resolution, defendant No. 2, Motilal, was wrongfully in the
sole management and possession of the said company, and was not permitting the
plaintiff’s representatives to participate in the management of the company.
The
firm, Kamal Nayan Hamir Singh, received payment of half the commission from
defendant No. 1 up to December 13, 1939, and the plaintiffs and the defendants
Nos. 3 to 6 were entitled to Rs. 23,061, as their share in the commission for
the years 1940 and 1941. They are further entitled to commission from January
1, 1941, up to the date of the suit. Further, the plaintiffs are entitled to a
moiety of the commission from January 1, 1942, up to the date of the suit @ 16%
which amounts to Rs. 3,00,000.
The
firm, M/s. Kamal Nayan Hamir Singh, is a family firm having business at Ajmer
and other places in India. The deceased, Seth Kan Mal Lodha, father of the
plaintiffs Nos. 8 and 9, filed a civil Suit No. 867/A of 1934 for partition in
the Calcutta High Court and late Rai Bahadir Seth Gadh Mal Lodha was appointed
as receiver of the firm and its business by an order dated February 20, 1935.
On his death, the plaintiff, Seth Sobhag Mal Lodha, was appointed a receiver in
his place. The defendant-company could not terminate the agency of the
plaintiffs without their consent and in any case under section 87A of the
Indian Companies Act. The plaintiffs were, therefore, entitled to be associated
with defendant No. 2 in performing the duties of the chairman, managing
director, etc. In the alternative, the plaintiffs were entitled to recover from
the defendant-company a sum of rupees 5 lakhs by way of damages for wrongful
exclusion and dismissal from the offices of the managing director, etc. In the
end, the plaintiffs claimed the following reliefs :
(a) That, it may be declared that on the
death of R.B. Seth Gadh Mal Lodha, the plaintiffs’ family firm, Kamal Nayan
Hamir Singh, having appointed Seth Sobhag Mal Lodha as the nominee to act for
them and the board of directors of the defendant-company having accepted the
nomination, Seth Sobhag Mal Lodha was entitled to be in management and control
of the affairs of the defendant-company jointly with defendant No. 2.
(b) That it may be declared that the
resolution purporting to have been passed on the 8th February, 1942, at the
extraordinary general meeting of the company held by the partisans of the 2nd
defendant, who broke up the meeting, being ultra vires and invalid is not
binding on the plaintiffs and the defendant-company.
(c) That it may be declared that the
orders, exhibit F, passed by the Judicial Commissioner of Ajmer-Merwara in
respect of the resolution purport ed to have been passed by the said meeting of
the shareholders held on the 8th February, 1942, are without jurisdiction, null
and void and not binding on the parties hereto.
(d) That the defendants Nos. 1 and 2 may
be ordered to hand over the management and charge of the affairs of the 1st
defendant-company to Seth Sobhag Mal Lodha on behalf of the plaintiffs’ said
family firm in accordance with the memorandum and articles of association of
the defendant-company.
(e) That the defendants or such of them
as may be held liable may be ordered to pay to the plaintiffs and defendants
Nos. 3 and 4 Rs. 3,73,061, the commission on net profits up to the date of the
suit.
(f) That in the alternative the
defendant-company may be ordered to pay to the plaintiffs on behalf of the
plaintiffs’ said family firm damages to the tune of Rs. 5 lakhs for wrongful
dismissal and exclusion of the plaintiffs’ nominee from the management and
control of the 1st defendant.
(g) That the defendants Nos. 1 and 2 or
one or more of them may be ordered to pay the plaintiffs costs of the suit.
(h) That such further and other reliefs
as the circumstances of the case may require may be granted to such of the
plaintiffs and in such capacity as may be found to be entitled thereto against
such of the defendants as may be held liable.
The
defendants Nos. 1 to 3 contested the suit. Defence of the defendants Nos. 1 and
2 are substantially the same. According to them, Seth Guman Mal and Ram Swarup
were the promoters of the company in their individual and personal capacity.
They were agents, secretary, chairman, managing director, etc., in their
individual and personal capacity and not as the nominees or representatives of
their respective firms. The company was the sole and the final authority to
make the appointment and the right never vested in any other person or family.
The appointments of Seth Gadh Mal Lodha and Seth Motilal were not virtually by
nominations made by the respective firms, but because of the fact that the
company chose them by resolutions adopted in its extraordinary general
meetings. They did not hold the position identical to those occupied by Seth
Guman Mal and Ram Swarup. No disorder or confusion prevailed at the meeting of
February 8, 1942. There was no apprehension of breach of the peace at that
time, nor was any attempt made to remove Seth Sobhag Mal Lodha forcibly from
the chair. The shareholders made proposals for electing the chairman of the
meeting. Sobhag Mal Lodha, however, illegally insisted on occupying the chair
and, finding the majority against him, he left the meeting along with his
supporters. The meeting could not have been dissolved by Seth Sobhag Mal Lodha
under any circumstances. The shareholders were within their rights to elect the
chairman for the meeting and to proceed with the business. After Seth Sobhag
Mal Lodha had walked out, the resolution, dated February 8, 1942, was perfectly
valid and did not violate the memorandum of association or the articles of
association. The resolution of the board of directors of April 18, 1942,
appointing Seth Sobhag Mal Lodha was without jurisdiction and inconsistent with
the company’s resolution of February 8, 1942. R.S. Motilal was the only person
legally entitled to be in the sole management
and charge of the defendant-company. The defendants further pleaded that the
plaintiffs were not entitled to any damage or commission whatever. The suit
related to the appointment and dismissal by a company of its managing agent,
etc., and that matter pertained to the internal affairs of the company and as
such they were outside the purview of the court. The suit was barred by section
11, Civil Procedure Code, on account of the decision of the Judicial
Commissioner, Ajmer, and was bad for mis-joinder of the parties. Clause VI of
the memorandum of association did not operate in law to create any agreement or
contract between the company and the persons named therein and was, therefore,
not binding upon the company. There was no privity of contract between the
plaintiffs and the defendants Nos. 3 to 6 on the one hand and defendant-company
on the other and, therefore, the suit for appointment of plaintiff No. 1 as
also for the recovery of the damages was not maintainable. The suit was barred
by section 69 of the Indian Partnership Act, 1932, as the firm, Kamal Nayan
Hamir Singh, was a partnership firm and not a joint Hindu family firm and it
could not have filed a suit without registration. Defendant No. 2 also pleaded
that the plaintiffs had not come with clean hands as they themselves were
guilty of repeated breaches of the contract. On more than one occasion they
transferred shares to others in contravention of term No. 5 of the agreement
dated July 6, 1906. Seth Gadh Mal on the annulment of the attachment order did
not take the answering defendant No. 2 in the joint management of the company
in contravention of the clause 1 of the agreement and deprived him of his due
shares of the managing agency commission for the years 1937 and 1938. The
agreement between Seth Guman Mal Lodha and Seth Ram Swarup was in substance a
partnership agreement. The partnership must be deemed to have come to an end on
the adjudication of the defendant No. 2 and other members of his family as insolvent
and, therefore, no suit on the basis of the agreement could lie. The plaintiff
and the defendants Nos. 3 to 6 did not constitute the firm as there have been
many deaths in the family since 1936. In any case, the plaintiffs had no right
to bring the suit after the death of Seth Gadh Mal Lodha.
Defendant No. 3 contested
the suit on the ground that he had been wrongly impleaded and the plaintiffs
are not entitled to get any relief.
The District Judge, Ajmer,
framed as many as 31 issues. The plaintiffs examined 6 witnesses. The
defendants produced 5 witnesses. Both the parties also produced a large number
of documents in support of their respective pleas. The relevant documents have
been referred to in the paper book.
The trial court gave the
following finding :
1. That the family firm of Seth Guman Mal and that of Ram Swarup were
the promoters of the company, defendant No. 1, and the agreement, dated July 6, 1906, was executed
by Seth Guman Mal Lodha and Ram Swarup on behalf of their respective families.
2. That no partnership came into existence between
the two families and the partnership created by the agreement of July 6, 1906,
was between Seth Guman Mal and Kunwar Ram Swarup only, carrying with it the
necessary incidence and the resolution on the demises of the partners, if it
could be deemed to have continued after their deaths, stood dissolved under
section 42 of the Indian Partnership Act on defendant No. 2’s adjudication as
insolvent
3. That the provisions in the memorandum of
association and the articles of association of the company relating to the
management are merely details of the management for the purpose of carrying on
business of the company and that the company was entitled to regulate details
in such manner as it liked. Therefore, clause VI of the memorandum of
association and articles 60 and 75 of the articles of association could not be
specifically enforced and they did not give any cause of action to the
plaintiffs.
4. That the company recognised the rights of the
firm, Kamal Nayan Hamir Singh, to the extent that its nomination of Seth Gadh
Mal as its representative in place of Seth Guman Mal was accepted by the
resolution, dated July 3, 1915, and July 23, 1915. Though half the commission
was credited to the firm, Kamal Nayan Hamir Singh, it would not amount to any
implied agreement entitling the firm to take part in the management of the
company.
5. That there was no rowdyism or disorder in the
general meeting of the company, held on February 8, 1942, so as to result in a
breach of the peace and that the shareholders were entitled to elect the
chairman. Seth Sobhag Mal was not justified in asserting his right to preside
over the meeting as he himself was a candidate for the office of the chairman,
etc. The meeting of the shareholders, dated February 8, 1942, therefore, was
proper and justified, appointing defendant No. 2 as chairman and managing
director.
6. That
the plaintiffs are not entitled to be associated with defendant No. 2 as
agents, etc.
7. That with the institution of the suit for
partition in the Calcutta High Court by Seth Kan Mal the status of the joint
family, even if it was joint, was changed and thereafter as the business was
carried on jointly, the firm became an ordinary partnership concern subject to
the Indian Partner ship Act. As the firm was not registered, section 69 of the
Partnership Act stood in the way of filing the suit without the registration of
the firm.
8. That in the balance-sheet a sum of Rs.
2,015-6-6, as a moiety of the commission from January 11, 1942, is credited to
Seth Gadh Mal and the same amount to Seth Motilal. Similarly from January 17,
1942, to February 8, 1942, during which time Sobhag Mal remained chairman,
etc., half the amount of commission of Rs. 3,706-2-6 was credited to Seth
Sobhag Mal. These amounts can be recovered by the heirs of Seth Sobhag Mal or
by the firm, Kamal Nayan Hamir Singh.
Aggrieved
against the above judgment, the present appeal has been filed on behalf of the
plaintiffs.
Before
the main points raised on behalf of the appellants in the course of the
arguments are set out, it may be stated that Seth Sobhag Mal died in the course
of the pendency of the appeal. In paragraph 49 (a) of the plaint it is
mentioned that it may be declared that on the death of Seth Gadh Mal Lodha the
plaintiffs’ family firm having appointed Seth Sobhag Mal to act as nominee for
them, Seth Sobhag Mal Lodha was entitled to be in the management and control of
the affairs of the company, jointly with defendant No. 2. In the case of
personal action, i.e., in an action where the relief sought is personal to the
deceased, the right to sue will not survive to or against his representative. A
right intimately connected with the individuality of the deceased will not
survive on the basis of the well known maxim actio personalis moritur cum
persona (a personal right of action died with the person). However, if
emoluments are attached to the office, the right to sue will survive and the
suit will not abate. As has been conceded by learned counsel for the appellants
no useful purpose is likely to be served by declaring at this stage that the
deceased, Seth Sobhag Mal Lodha, was entitled to be in the management and
control of the affairs of the company jointly with Seth Motilal, defendant No.
2. We are, therefore, not required to give any finding on this aspect of the
matter.
Learned
counsel for the appellants raised the following Main points in the course of
his arguments :
(1) That the resolution of the company,
dated February 8, 1942, appointing Motilal was not valid, as the general
meeting of the shareholders which had stood dissolved, was not to continue and
approve of the appointment of defendant No. 2.
(2) That section 69 of the Partnership
Act, 1932, does not apply to the case and that even if it is applicable, the
plaintiffs’ case fell within the exception provided by sub-section (3).
(3) That there was an implied agreement
between the plaintiff and the defendant-company, as the latter ratified or
acted upon the terms of the agreement, dated July 6, 1906, arrived at between
the nominees of the two firms, Kamal Nayan Hamir Singh of Ajmer and Champalal
Ram Swarup of Beawar.
(4) That the plaintiffs-appellants and
the defendants Nos. 3 to 6 are entitled for the years 1940 and 1941 to the
moiety of commission of a sum of Rs. 23,061 having not been contested by the
defendants Nos. 1 and 2 and having been wrongly rejected by the trial court.
We
may now take up the first point pressed on behalf of the appellants. Learned
counsel for the appellants has argued that by virtue of the agreement of July
6, 1906, Seth Guman Mal was appointed as chairman. After his death on November
11, 1914, Gadh Mal was appointed to the office on July 23, 1915, and that
appointment was duly confirmed by the company in its extraordinary general
meeting, held on August 16, 1915 : vide annexure “A”. On the death of Gadh Mal
occurring on January 11, 1942, the board of directors passed a resolution on
January 17, 1942, appointing Seth Sobhag Mal in his place till the appointment
was duly made by the extraordinary general meeting of the company. Thereafter,
notice, exhibit 5, dated January 22, 1942, was issued in connection with that
appointment. In pursuance of the notice a meeting of the shareholders was
convened on February 8, 1942. Owing to the pandemonium in the meeting, Seth
Sobhag Mal was constrained to dissolve it. After its dismissal Sobhag Mal and
his supporters left the place. Thereafter the remaining shareholders continued
the meeting and passed a resolution appointing defendant No. 2, Motilal, as
chairman, etc. Such a meeting conducted after its dissolution, according to the
learned counsel, was illegal, as it could not have been presided over by a
person other than Sobhag Mal and as no prior notice had been issued for the
purpose, the shareholders had also no authority to reduce the amount of the
commission to 10% from 16% payable to the chairman and managing director,
according to the terms of the memorandum and articles of association without
issuing a specific notice in respect thereto.
The
agreement, dated July 6, 1906, is the basis of the suit. That indenture was
entered into between Guman Mal, respresenting the firm, Kamal Nayan Hamir
Singh, and Ram Swarup, nominee of the firm Champalal Ram Swarup of Beawar.
According to this covenant certain arrangements had been arrived at in respect
of the management of the company which was still in embryo or rudimentary
stage, and which was incorporated subseqently, i.e., on August 9, 1906. Under
the agreement each one of the promoters was to purchase a certain number of
shares and was to pay at least a sum of Rs. 1 lakh. Both the parties, the
agreement provided, were entitled jointly or severally to the rights of
membership, chairmanship, etc., as also to equal remuneration. Whatever rights
accrued to the parties by virtue of the agreement or partnership was not
limited to their lifetime. But they devolved upon their legal representatives,
heirs, executors and administrators. Clause VI of the memorandum of association
and articles 60 and 75 of the articles of association are also to this effect.
It was that a fixed amount of Rs. 250 per month was payable to the parties as
remuneration for their services from the date of commencement of the business
up to the date of the actual starting of the work. Thereafter they were to get
16% of the net profits of the earnings of the company as their commission. This
commission was divisible between the two parties half and half. Guman Mal and
Ram Swarup took over the management after the company began to function. Guman
Mal died on November 11, 1914 (vide paragraph 9 of the plaint). After his
death, a letter was written on May 4, 1915, by the family members of the firm,
Kamal Nayan Hamir Singh of Ajmer, nominating Gadh Mal in place of the deceased.
This communication was put up before the meeting of the company. The company
made the appointment of Gadh Mal on July 23, 1915. That appointment was
confirmed by the company at its extraordinary general meeting held on August
16, 1915 (vide paragraph 11 of the plaint). Thus, after the death of Guman Mal,
Gadh Mal stepped into the shoes of the original promoter and the company
clothed him with all the rights and the powers as contained in clause VI of the
memorandum of association and articles 60 and 75 of the articles of
association. Ram Swarup died on June 5, 1916, whereupon Seth Motilal was
nominated by the members of the joint family firm, Champalal Ram Swarup, as
successor of Ram Swarup and the defendant-company passed a special resolution
which was confirmed at the extraordinary meeting of the company held on June 8,
1916 (see special resolution forming part of annexure “A”). As a result of
these proceedings, the defendant No. 2, representing his family firm, occupied
the same position as Ram Swarup as contemplated by the memorandum or articles
of association of the company : vide paragraph 12.
The
above was the position in so far as Gadh Mal and Motilal were concerned. On the
death of Gadh Mal on January 11, 1942, trouble ensued. Certain important events
took place in the firm of Champalal Ram Swarup in the year 1938. The joint
family of the defendant No. 2, Motilal, became heavily indebted. By its order,
dated July 1, 1938, the High Court of Bombay, in its insolvency jurisdiction, adjudicated
the firm, M/s. Champalal Ram Swarup, as, insolvent. On its insolvency its
property vested in the official assignee of the High Court. The office of the
managing, director of the defendant-company occupied by defendant No. 2 on
behalf of the joint family firm was vacated by virtue of article 68 of the
articles of association and section 87 of the Indian Companies Act (see
paragraph 15 of the plaint). In this context the legal position, as emerged (1)
on account of the death of Gadh Mal, and (2) by the adjudication of the
insolvency, was that the two parties lost their original characteristics.
On
January 17, 1942, a meeting of the directors was convened by Sobhag Mal. The
board of directors appointed Sobhag Mal as chairman, etc., till such time as the
appointment was duly made. A notice was issued to the shareholders of the
Edward Mills Co. Ltd., Beawar, that an extraordinary general meeting of the
company would be held on February 8, 1942, at 1 P.M. for making the appointment
of Sobhag Mal: vide exhibit 5, annexure “D”. The notice suggests three things,
namely:
1. That Seth Sobhag Mal was the representative of
the firm, Kamal Nayan Hamir Singh of Ajmer.
2. That
the appointment of Sobhag Mal was ad hoc till such time as it was duly made.
3. That for the sake of appointment, an
extraordinary general meeting of the company was necessary.
Article
72 of the articles of association provides that the permanently appointed
chairman of the company was also to be the chairman in the meetings of the
board of directors and in his absence the managing director would preside. In
the absence of both of them, the directors present would elect a chairman from
amongst themselves for the said meeting. Article 49 provides that the chairman
would preside over every general meeting and in his absence the managing
director would preside. In the absence of both of them one of the directors
present would be elected as the chairman for the time being and in the absence
of the directors or if the director present declined to preside over the
meeting, the shareholders present would choose one of their own members as the
chairman of the meeting. According to these provisions the only person who had
a right to preside was the permanent chairman and in his absence the managing
director.
From
a perusal of the notice referred to above, it is clear that Sobhag Mal was not
the permanent chairman. He had, therefore, no right to preside over the
meeting. The right to appoint the chairman vested in the shareholders. Sobhag
Mal Lodha, by virtue of his temporary appointment, insisted that he had the
sole right to preside over the meeting. Since he had not been appointed as
permanent chairman, it was within the right of the general body of the company
to choose first a director to function as chairman and in his absence any one
of the shareholders could have been taken as chairman. Sobhag Mal could not
have insisted that it was he alone who could preside over the meeting and when
he was not permitted to exercise that right he unauthorisedly declared the
meeting dissolved. Sobhag Mal had no legal right to insist upon presiding over
the meeting, specially when the issue of his own appointment was under hot
discussion. The shareholders, however, went ahead with the meeting under the
chairmanship of K.K. Bhargava, advocate. The company resolved that Motilal
should be appointed chairman, secretary,: managing agent, etc., of the company
for a period of 20 years with effect from the date of the resolution and that
he was to be paid only 10% of the net profits of the company every year instead
of 16% as previously drawn by the persons concerned. It may be mentioned here
that by this time the order of adjudication had been annulled by the Bombay
High Court on April 15, 1941.
It
is settled law that when once a meeting is called, no chairman can arbitrarily
dispose of it. Its continuance or dispersion rests entirely on the will of the
shareholders. It is mentioned in the Law and Practice of Meetings by Frank
Shackleton, 3rd edition, page 69, that a chairman cannot adjourn a meeting at
his own will and pleasure without the consent of the members unless the
business for which it was convened has been concluded. That means that a
chairman has no power to adjourn the meeting at his own choice. The power of
adjournment vests in the majority of those present at the meeting. If a
chairman should vacate the chair or adjourn the meeting regardless of the views
of the majority, those remaining, even if a minority, can appoint a chairman
and conduct the business left unfinished by the former chairman: see Cates by
v. Burnett.This
point was also considered by a Division Bench of this court in Deodutt Sharma
v. Zahoor Ahmed Zaid and it was
held that:
“Once a meeting had
been properly called and it meets, the chairman of the meeting can only adjourn
it with the consent of the majority of the members....... if the chairman
adjourns a meeting contrary to the wishes of the members present and thereby
interrupts or leaves unfinished the business for which the meeting was
summoned, the remaining members can lawfully continue the business; and in the
absence of their proper chairman it is open to them to elect another chairman
to act as his substitute and continue the business and any business which was
duly notified in the notice for the meeting could be transacted to completion,
and if it is so transacted it would be valid.”
Similar
views were expressed in Stoughton v. Reynolds, in Nation
Dwelling Society v. Sykes and in
Catesby v. Burnett quoted supra. In the last case there was much opposition in
the meeting. There was considerable uproar when the chairman declared the
auditors elected and he declared the business to be closed and left the chair
and the hall. The remaining members continued the business and elected Catesby
to the chair and some new directors were also elected. The question arose,
whether the proceedings after the chairman had vacated the chair and dissolved
the meeting were valid. It was held that the proceedings were regular and that
the appointment of the new directors was valid.
The
above cases clearly established the principle that where a meeting is
unlawfully adjourned by the chairman thinking that he is not likely to succeed
in his object, the remaining members do possess the right to continue the
meeting and conduct the business left untransacted by the chairman.
Contention
of learned counsel for the appellants is that owing to the utter confusion and
disorderliness the chairman was constrained to dissolve the meeting. The
plaintiffs have given evidence to prove that there was disorderliness and
uproar in the meetting. To make out this fact the plaintiff, Seth Sobhag Mal,
who was obviously the best person to prove the circumstances in which the
meeting was dissolved, did not come forward to give evidence on the point.
Under illustration (g) to section 114, Evidence Act, the court may presume that
the evidence which could be and is not produced, would, if produced, be
unfavourable to the person who withholds it. The Judicial Committee of the
Privy Council has, in several cases, strongly condemned the practice of parties
to a suit withholding from the court the evidence which may throw light on the
point for determination: vide Murugesam Pillai v. Gnanasambandha Pandara Sannadhi and Ram
Prakash Das v. Anand Das. Similar are
the views of their Lordships of the Supreme Court in Hiralal v. Badkulal. It appears
from the evidence of Seth Kaluram, P.W. 1, that disorder was created in the
meeting and that the shareholders were protesting against Seth Sobhag Mal being
on the chair. This disorder continued till 3 or 4 P.M. It is not clear from the
statement of this witness that there was such a disorder as to give rise to the
apprehension of breach of the peace. The witness also appeared as a witness
against Motilal in a criminal case on behalf of the prosecution. The other
witness is P.W. 3, Mithan Lal, advocate, who has stated that an objection was
raised about the election of the chairman. When the situation grew tense, the
Lodha party decided to dissolve the meeting. The witness appeared as a counsel
for Sobhag Mal in the revision petition before the Judicial Commissioner. He
does not remember the names of the shareholders who were present in the
meeting. He also does not recollect the agenda of the meeting held on February
8, 1942. He cannot recall the names of those who were participating in the
discussion on behalf of the Beawar firm. The other witness on the point is
Narain Das Mohta, P.W. 5. He says that the supporters of Motilal began to say
in the meeting that Seth Sobhag Mal should not occupy the chair and that the
meeting should elect its own chairman. He further says that it was not possible
to continue the meeting. In the cross-examination he admits that Sobhag Mal’s
sister’s daughter was married to his son. The witness in the cross-examination
admits that he was sitting at a distance of 5 or 6 feet from Seth Sobhag Mal
and that the members appeared to be gentlemen. He then says that he inferred
that there might be violence. He also admits that he did not sit in the meeting
continuously and that he came out of the meeting after 5 or 7 minutes.
From
the nature of the above evidence, given by the plaintiff’s witnesses, it is not
made out satisfactorily that the meeting was rough and that the rowdy elements continuously interrupted it.
Defendant’s witness, Shirdhar Lal, says that no shareholder obstructed the
recording of the proceedings. Similarly the witness, Kaushal Kishore, deposes
that there was no pandemonium or apprehension of breach of peace. Another defendant’s
witness, Mahesh Dutt Bhargava, advocate, testifies that there was no danger of
any breach of the peace. To the same effect is the testimony of Chand Mal
Bajaj, who says that there was no rowdyism in the meeting.
From this evidence it is
apparent that no uncontrollable rowdyism was created in the meeting and that
Seth Sobhag Mal could not have dissolved it without the consent of the
shareholders present on the spot. In this view of the matter, the trial court
rightly held that it was the privilege and the right of the shareholders
assembled at the meeting to decide that they should continue its business.
Learned counsel for the
appellants has further urged that no proper notice in regard to the appointment
of Motilal had been issued and, therefore, the meeting could not have taken up
that question for consideration. In support of his argument he relied upon
Narayanlal Bansilal v. Maneckji Petit Mfg. Co. In that
case a company was incorporated in 1876, and its articles of association, which
was then registered, having become out of date, the directors desired to
substitute for them 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, desired to
have an agreement with the company fixing the duration of the agency and
defining their powers. The directors convened an extraordinary general meeting
of the shareholders to pass the necessary resolution for carrying out the said
purpose. The notice convening the meeting set out necessary resolutions and was
accompanied by 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
declaring that the resolutions were inoperative on the ground of insufficiency
of the notice and for injunction restraining the directors from acting upon
them, it was held that the notice should have given sufficiently full and frank
disclosure of the facts and the effect of the resolutions and the agreement and
consequently the resolutions were inoperative and not binding upon the company.
In the present case the notice, annexure “D”, dated January 22, 1942, contained
that the directors appointed Seth Sobhag Mal Lodha in place of late Rai Bahadur
Seth Gadh Mal Lodha till such time the appointment was duly made. It further
incorporated that an extraordinary general meeting would be held at the
registered office of the company at Beawar, on February 8, 1942, for making the
above appointment. The notice suggested that the meeting was called for the
appointment of the chairman, managing director, etc. The directors could not
have bound the company to appoint only the person nominated by the directors
and fettered its discretion. It was within the discretion of the shareholders
to make appointment of a person of their choice for the above post. In
substance, the notice was for the appointment of chairman, managing director,
etc., and the shareholders considered the suggestion of the directors and made
an appointment of defendant No. 2, Moti Lal. Under the circumstances, it cannot
be said that the shareholders travelled beyond the agenda fixed for holding the
meeting. There was nothing wrong if the shareholders reduced the emoluments of
the managing directors, etc., while making his appointment. The Bombay
authority, under the special circumstances of this case, does not come to the
aid of the appellants. Be that as it may, it cannot be said that the resolution
passed by the company, appointing the defendant No. 2, Motilal, on February 8,
1942, was ultra vires or illegal for want of proper notice. Notice is simply an
intimation to all concerned that a particular body is going to meet at a
particular place, time and date for transacting a partilar business. Here, the
particular subject according to the notice was the appointment of a chairman,
etc. Simply because the shareholders appointed another person for the post does
not mean that the meeting went beyond the notice.
We may now switch over to
the second point raised on behalf of the appellants. It pertains to the
applicability of section 69 of the Indian Partnership Act, 1932. Learned
counsel for the appellants has argued that the agreement of 1906 was not
between the two joint family firms. The partnership agreement properly
described was between the two members of the two families and that it is
inappropriate to describe such a partnership as one between the two Hindu
undivided families. The partnership in fact was created between Seth Guman Mal
and Ram Swarup only for carrying on the business of managing agency, etc. On
the death of Seth Guman Mal and Ram Swarup, the partnership was dissolved. Even
if the partnership continued after their death, it stood dissolved under
section 42 of the Indian Partnership Act on the adjudication of the defendant
No. 2, Motilal, as insolvent. Learned counsel further urged that as the
original agreement was between 2 individuals, section 69 of the Indian
Partnership Act, 1932, would not apply to this case. According to him even if
it is held that there existed a partnership, the exception incorporated in
sub-section (3) to section 69 of the Act would apply to this case and under
this sub-section the plaintiffs are entitled to realise the property of the
dissolved firm. Another suit had been brought by Sobhag Mal and others as
partners and proprietors of Kamal Nayan Hamir Singh of Ajmer. Paragraph 33 of
the plaint mentions that the firm of M/s. Kamal Nayan Hamir Singh is a family
firm doing business
at Ajmer and at other places in India. The plaintiff No. 1 along with the other
plaintiffs or defendants Nos. 3 and 4 are the members of the said firm.
Paragraph 34 of the plaint provides that Seth Sobhag Mal is competent to file
the suit on behalf of the firm, Kamal Nayan Hamir Singh, and that with a view
to avoid all future disputes and complications all the members of the firm have
been impleaded as parties to the suit. It is also stated in paragraph 33 of the
plaint that Kan Mal Lodha, father of the plaintiffs Nos. 8 and 9, filed a suit
No. 867A of 1934 for partition in the Calcutta High Court and the late Seth
Gadh Mal Lodha was appointed receiver of the assets and business of the said
firm by an order dated February 20, 1935. On his death, the plaintiff, Sobhag
Mal, was appointed receiver in his place by the High Court, vide its order
dated January 13, 1942, a copy of which is marked exhibit 1. The agreement,
dated July 6, 1906, incorporates that Seth Guman Mal, proprietor of the firm,
Kamal Nayan Hamir Singh, Ajmer, and Ram Swarup of the firm Rai Bahadur Seth
Champalal Ram Swarup of Beawar, representing the two firms, agreed to start a
mill at Beawar. Clause VI of the memorandum of association provides that Seth
Guman Mal, proprietor of the firm, Kamal Nayan Hamir Singh of Ajmer, and Ram
Swarup, son of Rai Bahadur Seth Champalal of Beawar, would be allowed 16% of
the net profits of the earnings of the company as their commission. It further
lays down that Seth Guman Mal and Ram Swarup, their heirs, executors,
administrators, successors, representatives or the duly authorised agents or
such other person or persons, as may, from time to time, be appointed by them,
would be the chairman, etc. On the death of Guman Mal the members of the Lodha
family nominated Gadh Mal, on May 4, 1915: vide exhibit 6. In annexure “C” it
is mentioned that the deceased, Guman Mal, was a coparcener in the joint and
undivided family and was one of the proprietors of the said family firm. He
represented the said firm of Kamal Nayan Hamir Singh as a trustee thereof and
in that capacity he enjoyed powers and privileges including the right to act as
chairman, managing director, etc. Similar was the position in regard to Ram
Swarup. Ram Swarup died on June 5, 1916, and Motilal was appointed in his
place. It is also in evidence from the record that the commission earned by
Gadh Mal and Ram Swarup were credited to their respective firms. That shows
that Gadh Mal and Motilal represented the two family firms and that other
members of the firm were equally interested in the share of the commission. The
suit has been filed on behalf of the firm, Kamal Nayan Hamir Singh. A partition
suit was also filed in the High Court of Calcutta and Seth Gadh Mal was
appointed receiver of the said business and on his death Sobhag Mal was
appointed receiver in his place (see paragraph 33 of the plaint).
The
above documents suggest that the suit has been filed on behalf of the firm. On
the filing of the partition suit No. 867 A of 1934 in the High Court of
Calcutta by the deceased, Kan Mal Lodha, father of the plaintiffs Nos. 8 and 9,
the joint family firm continued carrying on business and a receiver was
appointed to manage the estate and its business. With the filing of the
partition suit, the status of the joint family underwent a change and the
business became a partnership business. Under section 69 of the Indian
Partnership Act, 1932, no suit could have been instituted unless the partnership
was registered. Section 69 of the Indian Partnership Act, 1932, runs as follows
:
“(1) No suit to enforce a right arising from a
contract or conferred by this Act shall be instituted in any court by or on
behalf of any person suing as a partner in a firm against the firm or any
person alleged to be or to have been a partner in the firm unless the firm is
registered and the person suing is or has been shown in the register of firms
as a partner in the firm.
(2) No suit to enforce a right arising from a
contract shall be instituted in any court by or on behalf of a firm against any
third party unless the firm is registered and the persons suing are or have
been shown in the register of firms as partners in the firm.
(3) The provisions of sub-sections (1) and (2)
shall apply also to a claim of set-off or other proceeding to enforce a right
arising from a con tract, but shall not affect,—
(a) the enforcement of any right to sue for
the dissolution of a firm or for accounts of a dissolved firm, or any right or
power to realise the pro perty of a dissolved firm, or
(b) the powers of an official assignee,
receiver or court under the Presidency Towns Insolvency Act, 1909, or the
Provincial Insolvency Act, 1920, to realise the property of an insolvent partner.
(4) This
section shall not apply—
(a) to firms or to partners in firms which
have no place of business in the (State) or whose places of business in (the
State) are situated in areas to which, by notification under section 56, this
chapter does not apply, or
(b) to any suit or claim of set-off not
exceeding one hundred rupees in value which, in the presidency towns, is not of
a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882,
or outside the presidency towns, is not of a kind specified in the Second
Schedule to the Provincial Small Cause Courts Act, 1887, or to any proceeding
in execution or other proceeding incidental to or arising from any such suit or
claim”.
This
section, speaking generally, bars certain suits and proceedings as a
consequence of the non-registration of the firms. Sub-section (1) prohibits the
institution of a suit between partners inter se or between partners and the
firm for the purpose of enforcing a right arising from a contract or conferred
by the partnership Act, unless the firm is registered and the person suing has
been shown in the register of firms as a partner in the firm. Sub-section (2)
similarly prohibits a suit by or on behalf of the firm against a third party
for the purpose of enforcing rights arising from a contract unless the firm is
registered and the person suing is or has been shown in the register of firms
as a partner in the firm. Under the third sub-section a claim of set-off which
is in the nature of a counter-claim is also similarly barred. Then that
sub-section bars other proceedings. The sub-section, however, does not affect
power to realise the property of a dissolved firm. Here, according to the
plaint, the suit in substance was filed on behalf of the firm. There was,
therefore, no question of realising the property of a dissolved firm. After the
partition suit the firm began to be governed by the Indian Partnership Act. In
this view of the matter, subsection (3) of section 69 will not apply to this
case to enable the plaintiffs to file a suit without the registration of the
firm.
In
support of the above proposition a reference is made to Mst. Jatti v. Banwari
Lal. In
that case it has been held by Lord Dunedin that where a separation is effected
between brothers and the business is carried on by the brothers the business
becomes an ordinary partnership subject to the Partnership Act. In
Girijanandini Devi v. Bijendra Narain Choudhary, his
Lordship, Shah J., speaking for the court, observed that partition may
ordinarily be effected by institution of a suit, by submitting the dispute as
to the division of the properties to arbitrators, by a demand for a share in
the properties or by conduct which evidences an intention to sever the joint
family ; it may also be effected by agreement to divide the property. His
Lordship has further pointed out that merely because one member of the family
severs his relation, there is no presumption that there is severance between
the other members. In Baij Nath Prasad v. Ram Gopal Lachhmi Narayan, a Division
Bench of the Calcutta High Court comprising Costello, Actg. C.J. and McNair J.,
considered the point in issue and observed that the institution of a suit for
partition by a member of the joint family is an unequivocal intimation of his
intention to separate and that there is consequently a severance of his joint
status from the date when the suit is instituted. A decree may be necessary for
working out the results of the severance and for allotting definite shares, but
the status of the plaintiff as separate in estate is brought about by assertion
of his right to separate, whether he obtains a consequential decree or not. It
has further been laid down in that case that a joint Hindu trading family
governed by Mitakshara law carried on business in different groups at various
places in India. Subsequently, a member of the family instituted a suit for
partition and if the business of the family was still being carried on as
before without any change until final partition decree was passed, there was in
fact a contractual partnership based upon an agreement to be implied from the
conduct of the case. There is also an instructive judgment on the point in
Kesrimal v. Dalichand. In that
case Modi J. observed that before a partner of the firm can Maintain a suit to
enforce a right arising from a contract against any third party, two conditions
must be fulfilled. Firstly, that the firm should be registered, and where a
partner thereof happens to have died, a fresh or de novo registration of the
firm need not be insisted upon as a matter of law and the firm can still be
considered to be a registered one. Secondly, that the person or the persons on
whose behalf the suit is or has been brought must have been shown as a partner
in the register of firms at the time of the institution of the suit. If both
these conditions are not fulfilled, such a suit must be held to be bad and
unmaintainable and would have to be dismissed. To the same effect is the
decision of a Division Bench of the Bombay High Court in Shriram Sardarmal
Didwani v. Gourishankar alias Rameshwar Joharmal, wherein it
has been pointed out that a suit instituted on behalf of an unregistered
partnership must be immediately dismissed. In Govindmal v. Kunj Beharilal, Tendolkar
J., while dealing with section 69 of the Partnership Act, 1932, illustrated
that the provisions of section 69 are mandatory and unlike their counterpart in
England there is no power to grant to the defaulting partnership any relief
against the disability imposed by the section. The section debars an
unregistered firm from filing a suit. Its effect is that a suit by an
unregistered firm is at its inception bad, and the moment the court is
satisfied that the plaintiffs are an unregistered firm, it must treat the suit
as not having been filed and dismiss it.
There
is a recent decision of a Division Bench of the Gujarat High Court in Bharat
Sarvodaya Mills Co. Ltd. v. Mohatta Bros, wherein it
has been held that section 69 bars a suit against a third party if it is for
enforcing a right arising from a contract. Two mandatory requirements must be
fulfilled before such a suit can be instituted to enforce contractual rights of
the firm or on behalf of the firm. They are: (1) that the firm must be a
registered firm, and (2) that the persons suing are or have been shown in the
register of firms as partners of the firm. The requisite conditions will have
to be treated as mandatory conditions. Unless these two conditions are
fulfilled, there would be a fatal bar to the entire suit and it would be wholly
incompetent in a court of law.
From
the above authorities it is clear that where, as here, severance of the joint
family took place by the filing of a partition suit and when the family business continued to be conducted as before, a contractual
partnership based upon an implied agreement came into existence and when such a
partnership was formed, section 69 of the Indian Partnership Act, 1932, would
govern the case and no suit could have been instituted by or on behalf of the
firm without registration.
Learned counsel for the
appellants cited Daitari Mohapatra v. Brundaban Matia . In that
case the plaintiff alleged that there was a partnership between him and the
defendant for the purpose of doing repair work to Khera Bridge in 1944, and
that the work was completed in due course on June 5, 1944. The execution of the
repair work was entrusted to the defendant and the plaintiff’s function as a
partner was to contribute certain sums of money and also to Maintain accounts.
The plaintiff further alleged that, though the work was completed on June 5,
1954, the defendant evaded paying the net sum due to him on some pretext or
other. He, therefore, brought the suit claiming a sum of Rs. 689-9-6. The
defendant pleaded that the suit was barred under section 69(3)(a) of the
Partnership Act, 1932. The High Court held that the suit was in essence a suit
for the recovery of some money due to the plaintiff on final settlement of accounts
of the partnership business between him and the defendant. Therefore, the
non-registration of the firm under the Partnership Act would not operate as a
bar to the Maintainability of the suit in view of clause (a) of sub-section (3)
of section 69 of the Act. The facts of that case are obviously distinguishable
from those of the present one, inasmuch as in the Orissa case the partnership had already been dissolved
after the completion of the work. Therefore, that case does not in any manner
help the appellants.
We may now deal with the
third point raised on behalf of the appellants regarding the liability of the
company in terms of the agreement of 1906, which was in existence prior to its
incorporation. Learned counsel for the appellants has submitted that the
agreement of 1906 was the basis of the suit. This very agreement was
subsequently ratified by the company and was acted upon by it and, therefore,
the company is liable for the suit amount. In this connection it may be pointed
out that ratification can only be by a person ascertained at the time of the
act done, i.e., by a person in existence either actually or in contemplation of
law : vide Kelner v. Baxter A contract entered into on behalf of a
company before its incorporation is not binding upon the company. After the
company comes into existence the company cannot ratify the contract entered
into prior to its incorporation. It can, of course, enter into a new contract
upon the same terms. In this connection a reference is made to In re
Northumberland Avenue Hotel Company. In that
case an agreement was entered into between W on the one part and D on the other for
an intended company to be incorporated. The company was registered on the
following day. The memorandum of association provided that the company should
carry the agreement into effect. No fresh agreement with W was signed or sealed
with the company. The company took possession of the land, expended money on
the building and acted on the agreement, which they considered to be binding on
them. The company failed to complete the building. W took out a summons to be
allowed to prove for damages against the company for the breach of the
agreement. It was held that the agreement having been entered into before the
company was in existence, was incapable of confirmation and that the acts of
the company, having evidently been done under the erroneous belief that the
agreement between W and D was binding on the company, was not evidence of a
fresh agreement having been entered into between W and the company and there
was, therefore, no agreement between W and the company and that the summons
must be dismissed. Another important case on the point in issue is in Ram Kumar
v. Sholapur Spg. and Wvg. Co. In that case
Beaumont C.J. pointed out that a company cannot be bound by a contract entered
into on its behalf before it was formed, and it is not competent to bring a
company into existence bound to enter into a contract with a third party, the
terms of which have been arranged before the company is formed. It is for the
company to consider after its formation whether it will enter into the contract
or not. A condition in a memorandum of association which is nothing more than a
detail of management for the purpose of carrying on the business of the
company, cannot be considered to be a vital condition. Learned counsel for the
appellants has submitted that there was an agreement entered into between Guman
Mal and Ram Swarup in the year 1906 when the company was not in existence. Soon
after the company was incorporated, it incorporated the terms of the agreement
in the memorandum of association and the articles of association and the
company also acted accordingly by appointing chairman and the managing
directors in accordance with the terms of the contract and it also paid
commission from time to time. It should, therefore, be assumed, the counsel
adds, that there was an implied agreement. The court does not interfere with
the internal management of the affairs of the company. The memorandum of
association does not constitute a contract between a company and a third party
who may be named therein. It is for the company to enter into a new contract
upon its formation. That being the legal position, the third contention of
learned counsel for the appellants lacks substance and is hereby repelled.
Coming
now to the last point in regard to the decree for a sum of Rs. 23,061, learned
counsel has submitted that specific issue No. 12 was framed by the trial court.
The finding on that issue runs as follows :
“The claim of the plaintiffs and the defendants
Nos. 3 to 7 for a sum of Rs. 23,061 is not denied by the defendants Nos. 1 and
2. In fact a cheque for the amount was given but it was not encashed.”
Despite this finding, the trial
court, the counsel submits, did not pass any decree on account of this amount.
Learned counsel for the side opposite contended that this amount was not
admitted by the defendants in their written statement, and as the
plaintiffs-firm is not registered, they are not entitled to obtain a decree for
the item in question. Paragraph 31 of the plaint runs as follows:
“31.That the firm of Kamal
Nayan Hamir Singh has received payment of the one-half of the commission from
defendant No. 1 up to December 31, 1939. The plaintiffs and defendants Nos. 3
and 4 are now entitled to Rs. 23,061 on account of their moiety of the
commission for the years 1940 and 1941.”
Paragraph 21 of the written
statement filed by the defendant No. 1, Edward Mills Co. Ltd., Beawar, is in
the terms set out below :
“21.That paragraph 31 of
the plaint is not admitted. The claim advanced is vague particularly as to how
the plaintiffs and defendants Nos. 3 and 4 claimed to be entitled to any amount
that may be payable to the deceased, R.B. Seth Gadh Mal Lodha. The plaintiffs
have not stated as to how Rs. 23,061 claimed are made up.”
Paragraph 22 of the written
statement filed by Motilal is as under :
“22.That paragraph 31 of
the plaint is not admitted. The claim advanced is vague particularly as to how
the plaintiffs and defendants Nos. 3 and 4 claim to be entitled to any amount
that may be payable to the deceased, R.B. Seth Gadh Mal Lodha. The plaintiffs
have not stated as how Rs. 23,061 claimed are made up.”
From the above pleadings it
is not clear that the defendants admitted the claim of Rs. 23,061. Order 12,
rule 6, Civil Procedure Code, provides :
“Judgment on admissions:—Any party may, at any
stage of a suit, where admissions of fact have been made, either on the
pleadings or other wise, apply to the court for such judgment or order as upon
such admissions he may be entitled to, without waiting for the determination of
any other question between the parties; and the court may upon such application
make such order, or give such judgment, as the court may think just.”
The use of the words “or
otherwise” without the words “in writing” which are used in rule 1 of Order 12
shows that a judgment may be given even on a verbal admission. (See In re Beeny
: Ffrench v. Sproston and Premsuk
Das v. Udairam).
Rule 6 of Order 12 is wide enough to afford relief not only in cases of
admissions made in the pleadings but also in cases of other admissions. The
object of Order 12, rule 6, Civil Procedure Code, is to enable a party to
obtain speedy judgment at least to the extent of the relief which, according to
the admission of the defendant, the plaintiff is entitled to and the rule has
been made wide enough to afford relief not only in cases of admissions made in
the pleadings but also on admission de hors the pleadings. To limit the rule to
cases where the plaintiffs accept the admission of the defendant as a whole
would be to deprive the rule of its utility : vide Tahilram v. Vassumal. Keeping in
view the finding of the trial court while dealing with issue No. 12, it is
clear that the defendants did not deny the claim of the plaintiffs for Rs.
23,061, in the course of their arguments before it. On the basis of such an
admission the trial court could have passed a decree for the said amount
irrespective of the implications of other issues framed, specially when the
claim is severable and the defendants admitted their liability in respect of
the fragment of the claim. A court has jurisdiction under Order 12, rule 6,
Civil Procedure Code, to enter a judgment for the plaintiffs to pass a decree on
the admitted claim with liberty to the plaintiffs to proceed with the suit in
the ordinary way as to the remainder of the claim.
In the result, we partly accept this appeal and pass a decree for an additional sum of Rs. 23,061, on account of the commission for the year 1940-41 in favour of the plaintiffs and the defendants Nos. 3 and 4 against defendant No. 1, the company. In other respects, the appeal is dismissed. In the special circumstances of the case, the parties are left to bear their own costs.