Section 176
Proxies
[1932] 2 COMP CAS 108 (CA)
COURT OF APPEAL
v.
International Brick Co.
LORD HANWORTH, M. R., LAWRENCE, L. J., ROMER, L.
J.
R.J. Sutcliffe, for the Appellants.
H.S.G. Buckmaster, for the Respondents.
Lord Hanworth, M.R.—In this case we have to determine a point as to voting in a company. It is a point arising under the articles of association of the company. The question which we have to determine is whether, at the adjourned meeting of the company held on November 3, 1930, the chairman was right in counting 11,396 votes as cast against an amendment then put, or whether they should be counted on the other side, in view of the proxies which had been given. The controversy was whether a retiring director should be re-elected or a new director put in his place. The general meeting was held on October 20, 1930. At that time it was proposed that the retiring director, Mr. Pantlin, should be re-elected, and the plaintiff, Mr. Cousins, proposed by way of amendment that the plaintiff Carr should be elected in his place. The chairman then took objection to the proposed candidate on the ground that he had not properly consented to act as a director. When the result of a vote by show of hands was declared, and it was said that Mr. Pantlin, had been re-elected, a poll was demanded and the meeting was then adjourned till November 3. An arrangement was made in the intervening time that the amendment should be put at the adjourned meeting. Mr. Hopkins was then in the chair, and the amedment was put proposing that Mr. Carr should be elected in place of Mr. Pantlin. The voting having taken place it was declared by the chairman that the amendment was lost, and thereupon the resolution proposing the re-election of Mr. Pantlin, was put and carried by a show of hands. What is said is that 11,396 votes ought not to have been counted against the amendment, although those votes were tendered by the shareholders in person, because it is said that they had lost the right to vote in person after having given proxies which, under the articles of association relating to proxies, held good at the adjourned meeting. The appellant's counsel has argued the case with force and clearness, and a great many of his propositions need not be disputed, while others need not be decided. He has referred to cases which, as he says, decide that the meeting which reached a conclusion on November 2, was the same meeting which began on October 20. It would seem that the system in regard to proxies, laid down by the articles of association, indicates that if a proxy is once given, then, for the purpose of putting an end to it, notice must be given and received by the company before the meeting, and I will take it as established that for the present purpose the meeting so referred to is the meeting which commenced on October 20. Some considerations had been indicated during the argument by Lawrence, L. J., that might make it desirable to hold that there had been such a distinction between the meeting on October 20, and the adjourned meeting on November 2, as to divide them into two separate meetings; but it is unnecessary to determine this, and I am prepared to accept the view that the whole proceedings were all part of the meeting which commenced on October 20.
Attention has been drawn to the decision of Russll, J., in Spiller v. Mayo (Rhodesia) Development Co. (1908), Ltd. In that case he held where there is a continuation of a meeting at a subsequent date, for the purpose of taking a poll, it is all one meeting, and the date of the commencement of the meeting is the date before which a notice must be given revoking a proxy so as to comply with an article similar to Article 76 in the present case. I am accepting that, and I am prepared to deal with the case on the footing that, as matters stand, the proxies given to Mr. Cousins were valid and had not been withdrawn on November 2, or brought to an end by the happening of any of the contingencies mentioned in Article 76.
But the question to be determined is whether a shareholder who has given a proxy is bound by it, when it has been given some days before and has not been determined in accordance with the articles, so as to prevent him from giving a valid vote at the meeting when he attends personally, and by his action in voting in person bringing the system of voting by proxy to an end. Can he vote personally when by proceedings taken some days before he has instituted a system under which his vote must be given by proxy ? The answer must depend on the construction of the articles. The combined effect of the articles, and section 20 the Companies Act, 1929, is to make the provisions as to voting contained in the articles a matter of contract between the shareholders and the company and, it may be, as between the shareholders inter se, though it is not necessary finally to determine that. At any rate, as between shareholders and the company, Articles 74, 75 and 76 have in this case introduced by way of contract certain arrangements as to voting. But that fact does not exclude the ground on which Luxmoore, J., decided this case. Article 74 provides that "votes may be given personally or by proxy." That being so, it became necessary for the articles to lay down how votes by proxy are to be given, because there is not a common law right to vote by proxy, but it is a question for stipulation between the company and the shareholders. Article 74, however, clearly indicates two alternative modes of voting in person or by proxy. The two subsequent articles indicate the path to be followed where a shareholder decides to place his right of voting in the hands of a proxy. What then do I mean by a proxy?—a personal representative of the shareholder who may be described as his agent to carry out a course which the shareholder himself has decided upon.
In the present case due steps were taken to give valid proxies to be effected at the meeting of October 20 or any adjournment thereof, and there was no effective attempt to countervail them by notice in accordance with Article 76. Therefore at the adjourned meeting there were in the hands of the proxy the 11,396 votes in question which, in the ordinary course, would have been valid and counted when tendered. But the persons who had given the proxies were present and, instead of allowing the proxy to hand in the votes, they determined to exercise their alternative right and vote personally, and the votes cast by them personally were in a contrary sense to what they would have been if the proxies had been accepted. It is said that by giving proxies they were prevented from attending personally and voting; that having put in motion the proxy provisions they had disabled themselves from voting personally. The articles might be so drawn as to produce that result, but when I examine these three Articles 74, 75 and 76, I find no such exclusion of the personal right of the shareholder to vote. Article 74 states that there are the alternative rights of voting in person or by proxy. The subsequent articles define the channel along which the proxy system is to flow, but do not negative the continuance of the alternative right of voting personally. It follows that the personal right to vote is not taken away, and indeed it would be strange if a person in the position of an agent could say to his principal "you have entrusted to me a power which I will not allow to pass back to you, although you demand the right to exercise it."
In the absence of clear words taking away the shareholder's personal right to vote after he has put in force the proxy system, that personal right remains, and the shareholder is able to attend and give his own vote according to his own volition, and the proxy has no right to prevent it. For these reasons, which are in addition to those given in the clear judgment of Luxmoore, J., with which I agree, the appeal must be dismissed.
Lawrence, L. J.—I agree, and I have very little to add to the judgments of Luxmoore, J., and the Master of the Rolls with which I entirely concur. The question is whether a shareholder by having appointed a proxy to vote for him at a particular meeting has precluded himself from voting personally at that meeting, and whether, if he does vote personally, the chairman of the meeting is justified in rejecting his vote and accepting that of his proxy. Article 74 gives the shareholder in the respondent company the alternative right to vote, either in person or by proxy. Is there anything in that article to preclude a shareholder from exercising his right to vote personally because before the meeting he has appointed a proxy? It is not suggested that the shareholder is not entitled to attend the meeting, but it is said that he cannot vote personally at it after he has given a proxy, unless that proxy has been duly revoked before the meeting in accordance with Article 76, which is as follows: "A vote given in accordance with the terms of an instrument of proxy will be valid notwithstanding the previous death of the principal or revocation of the proxy or transfer of the shares in respect of which the proxy is given, provided that no intimation in writing of the death, revocation or transfer shall have been received at the office before the meeting." In my judgment, that article does not prevent the shareholder from exercising his right to vote in person. 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 vote contrary to the instructions of the latter. As between these persons and the company, the shareholder is, under Article 74, entitled to exercise his option to vote in person or by proxy at the time when the occasion for its exercise arises, that is to say, when the vote is taken, and if the proxy insists on voting notwithstanding that the shareholder attends and votes and thus a double vote is given at the meeting in respect of the same shares, it is the duty of the chairman to reject the vote of the proxy, because the personal vote is an unequivocal exercise on the part of the shareholder of his option to vote in person.
Article 76 is merely directed to safeguarding the company and the chairman of a meeting when acting on votes given by proxy. It is reasonable, if a shareholder does not attend and vote himself, and if he wishes to revoke a proxy, that he should do so by a proper notice given to the company before the meeting. It is also reasonable that the validity of a vote given by proxy should not depend on whether the shareholder giving the proxy has died before the meeting (a fact which might be difficult to ascertain) unless a proper notice of the death has been given; and the same considerations apply to any transfer of shares made by a shareholder after having given a proxy. Luxmoore, J., was, I think, clearly right in holding that none of these considerations apply when a shareholder, after having given a proxy, comes to a meeting himself and exercises his right to vote in person. In such a case the proxy cannot be used, and there is no necessity to inquire whether it was validly given in the first instance or whether it has since been revoked. In my opinion, therefore, Article 76 has no application to the case where a shareholder attends the meeting and votes in person.
For these reasons, and for those given by the Master of the Rolls, I agree that the appeal should be dismissed.
Romer, L. J.—I am of the same opinion. The decision of Luxmoore, J., seems to me to be summed up in these few lines of his judgment: "There is in my judgment no contract binding the shareholder vis-a-vis the company to exercise the option to vote either in person or by proxy at any time before the actual vote is to be given." With that sentence I find myself in complete accord. By Article 74 votes may be given by shareholders in person or by proxy, and in Article 76, upon which reliance has been placed by the appellants' counsel, we find certain provisions relating to the event of a shareholder having elected that his vote shall be given by proxy and not in person. That article throws no light, in my opinion, upon the question up to what time the shareholder can exercise the option given to him by Article 74 of voting in person or by proxy. It was no doubt contemplated by Article 76 that the proxy was to be revoked by notice in writing; but where a shareholder appears at the meeting and says he prefers to vote in person he is not revoking the proxy previously given, but doing an act which does away with the necessity of the proxy ever being exercised at all. 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 for the proxy being used at all. For these reasons, I agree that the appeal must be dismissed.
We have not been asked to consider whether the 36,991 votes in respect of which proxies were given, but purported to be withdrawn before November 3, and in respect of which shareholders had not voted in person, were properly disallowed. Speaking for myself, I think that they ought to have been disallowed. But it by no means follows that, as between the proxy and the shareholder, the proxy in voting in accordance with the power given to him after notice that the proxy was withdrawn, was not committing a breach of duty to his principal in voting. The question is not raised in this case, but I desire to mention the point to show that it has not been overlooked, and to reserve any opinion upon it.
[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
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.
[1988]
63 COMP. CAS. 736 (DEL)
HIGH COURT OF DELHI
v.
Ganga Ram Agarwal (No. 1)
MAHESH
CHANDRA, J.
I.A.
NO. 4582 OF 1986 IN SUIT NO. 1236 OF 1986.
B.N. Nayyar , Rakesh Sahni and Miss Sudha Srivastava for the Plaintiff.
M.L.
Varma, Suresh Singh and Miss Ashima Sehgal for the
Defendants.
Mahesh Chandra, J.—T his order would dispose of LA. No. 4582 of 1986 filed by defendants Nos. 1, 2, 3 and 6 and 7. The application is opposed on behalf of the plaintiffs. I have heard learned counsel for the parties and have gone through the file and after giving my considered thought to the matter before me, I have come to the following findings.
This application has been filed in the suit filed by the plaintiffs for a declaration that plaintiff No. 1 is a validly renominated director of defendant No. 7-company on the allegations that plaintiff No. 1 was a director of defendant No. 7 and at the annual general meeting held on March 31, 1986, he was to retire by rotation and was to be re-elected as director thereof, being the sole representative of NRI group and being in possession of majority support of other local Indian shareholders in the form of proxies, but defendant No. 1, in conspiracy with defendants Nos. 2 to 4 and two other directors, objected to the renomination of plaintiff No. 1 and, as director himself, with the support of his employee-directors and other bogus shareholders, had forged the proceedings of the meeting in the minutes book, which has cast a cloud on the right of plaintiff No. 1 and other plaintiffs and on the status and title of plaintiff No. 1.
The contention of learned counsel for the defendants in this application is that the simple question involved in the suit is whether plaintiff No. 1 had failed to get re-elected or if he was elected whether the minutes book was forged and/or the proceedings at the annual general meeting had been wrongly recorded in the minutes book to show that he was not re-elected or renominated as a director and as such the grievance of plaintiff No. 1 is of a personal nature and the other plaintiffs have no cause of action to maintain the suit and are not necessary or proper parties. As against this, it has been contended by learned counsel for the plaintiffs that plaintiffs Nos. 2 to 30 are shareholders of defendant No. 7 and as shareholders they have a right and interest in the affairs of the company and they further have a right to have a board of directors of their choice and, consequently, they have a cause of action in this suit and it has been lastly submitted that, in any case, plaintiffs Nos. 2 to 30 are proper parties to this suit.
It has not been urged before me by learned counsel for the defendants that plaintiffs Nos. 2 to 30 are not shareholders of defendant No. 7. That being the position, it would be difficult to accept the contention of learned counsel for the defendants that these plaintiffs have no cause of action. Order 1, rule 1, of the Code of Civil Procedure lays as under :
"All persons may be joined in one suit as plaintiffs where—
(a) any right to relief
in respect of, or arising out of, the same act or transaction or series of acts
or transactions is alleged to exist in such persons, whether jointly, severally
or in the alternative ; and
(b) if such persons
brought separate suits, any common question of law or fact would arise."
Keeping in view the wording of this rule, it would be difficult to say that plaintiffs Nos. 2 to 30 could not be joined as plaintiffs in this suit. Be it under clause (a) or clause (b), they have a right to join as plaintiffs in this suit. Once this conclusion is arrived at, Order 1, rule 10 of the Code of Civil Procedure would not come into play as it cannot be said that plaintiffs Nos. 2 to 30 have been improperly joined as plaintiffs. Reference in this behalf may also be made with advantage to Star Tile Works Ltd. v. N. Govindan, AIR 1959 Ker 254, 264 in which it was held that "a shareholder has certainly got a cause of action to challenge the proceedings negativing his right to vote by proxy when what is asked for in the plaint is that certain proceedings evidenced by certain resolutions purported to have been passed at a meeting have not been validly passed and are not binding on the company or the shareholders, such a relief can be obtained in a civil court and by shareholders......." The fact that shareholders have a right to vote by proxy is too well recognised a fact to be challenged. In any event, a reference to the provisions of section 176, Companies Act, 1956, would show that such a right exists in the shareholders. It has also been submitted on behalf of the defendants that except for plaintiffs Nos. 1, 23 and 30, no other plaintiff was present at the annual general meeting according to their very allegations in the plaint but in view of my discussion above in the light of the provisions of section 176 of the Companies Act, 1956, it cannot be said that non-presence of other plaintiffs adversely affects their right to join as plaintiffs in this suit.
The shareholders of a company have a right and interest in the affairs of the company and they further have a right to have a board of directors of their choice and where these rights of the shareholders are adversely affected by the action of the defendants, such shareholders would certainly have got a cause of action to challenge the proceedings negativing these rights of theirs including the action of the defendants whereby the shareholders' right to vote by proxy has been negatived and they have been prevented from having a board of directors of their choice. This right of the shareholders is joint and several and consequently all such shareholders who have been denied such right can join together as plaintiffs in one and the same suit because not only would common questions of law and fact arise, if separate suits were brought by them individually, but further also because their right to relief arises out of the same acts or transactions or a series of acts or transactions. To hold otherwise would only result in a multiplicity of suits. As the shareholders have a right to vote by proxies under section 176 of the Companies Act, the fact that all such shareholders were not present at the annual general meeting held for electing the board of directors would also be of no consequence so long as they allege to be present through their proxies. From whichever angle I consider the matter before me, I find there is no force in this application and as such this application is liable to be dismissed and is dismissed with costs which are assessed at Rs. 500.
[1961] 31 COMP. CAS.
315 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
Konda Lakshman
Bapuji
P. CHANDRA REDDY, CJ. AND
SRINIVASACHARI, J.
O.S. A. No. 2 of 1960
AUGUST 24, 1960.
CHANDRA REDDY, C.J.-This appeal is against the order of our learned brother, SATYANARAYANA RAJU, J., dismissing Application No. 206 of 1959 filed under section 546(3) of the Companies Act, 1956, by two of the shareholders of the Hyderabad Investment Syndicate Ltd. [in voluntary liquidation], to direct the liquidator, the first respondent, to forfeit all the amounts paid by the auction purchaser, the second respondent, and to re-sell all the assets and liabilities of the company by public auction.
It arises in the following circumstances. The share capital of the Hyderabad Investment Syndicate Ltd. was covered by 50,000 shares of Rs. 50 each. As the affairs of the company were not quite satisfactory, at the 15th general body meeting, the shareholders passed a special resolution that the company should go into voluntary liquidation and appointed the first respondent, the liquidator. He was empowered to exercise the power mentioned in clauses [i] to [iv] of sub-section [2] of section 457 and section 546[1] of the Companies Act. By another resolution, an advisory committee consisting of five members to be elected by the shareholders was constituted.
On July 25, 1958, the liquidator issued a public notice fixing August 25, 1958, for the sale of “all the assets and liabilities of the company as going concern” in public auction. Simultaneously, he issued a notice to all the shareholders of the company requesting them to be present at the sale. On the notified date, public auction was conducted in the presence of an extraordinary general body meeting of the shareholders of the company. As required by the liquidator, the shareholders passed a resolution enabling the liquidator to accept the highest bid at the public auction. In the auction held on the 25th there was a keen competition between the first appellant, represented by Sri S.R. Kimtee, and the second respondent. The bid of Rs. 7,55,000 offered by the second respondent being the highest, the liquidator placed it before the shareholders for their acceptance by way of abundant caution.
The shareholders then passed the following resolution: “The action taken by the liquidator by conducting public auction of all the assets and liabilities of the company just now and in our presence, according to which the highest bid is of Sri C. Sambasiva Rao of Guntur, for Rs. 7,55,000 is hereby approved by this extra-ordinary general body meeting of the shareholders. Unanimously resolved by this special resolution that the said highest bid be finalised and all formalities be completed by the liquidator.”
Under the terms and conditions of sale, the second respondent had to pay the amount of Rs. 7,55,000 in the manner indicated here under: Rs. 18,875 at the time of auction; Rs. 56,625 on or before October 25, 1958; and Rs. 6,79,500 on or before February 25,1959. The auction purchaser paid the first and second installments in time but did not pay the third installment before February 25, 1959.
Meanwhile, the liquidator was anxious to return as early as possible a part of the share capital to the shareholders. For this purpose, he approached the second respondent by letter dated October 9, 1958, for permission to sell three per cent. Government promissory notes belonging to the company and utilise the sale proceeds for the purpose of distributing that amount along with the deposits already made by the second respondent, to the shareholders at Rs. 8 a share. This was acceded to by the second respondent by his letter dated October 10,1958, with the condition that the liquidator should make good any loss that he might sustain in regard to this transaction. Thereafter, the liquidator sold the G.P. notes and the proceeds amounted to Rs. 2,23,641. In addition to this, a sum of Rs. 30,886 standing to the credit of the company in two banks was collected by the liquidator with the consent of the second respondent. The position as on February 25,1959, which was the last date for the payment of the balance price by the auction purchaser, was that Rs. 2,54,527 was realised out of the assets of the company which were sold in public auction. This amount was appropriated by the liquidator towards the purchase price to be paid by the second respondent. Besides these, the second respondent had already paid Rs. 75,500 before the due date. In all, a sum of about Rs. 3,30,000 was realised by the liquidator and the balance remaining unpaid by the second respondent was about Rs. 4,25,000.
It is to pay this sum that the second respondent prayed for extension of time, the reason adduced for the request being that he was unable to fulfill the terms of the contract on account of cyclone that had occurred a few days before. The liquidator, taking into consideration the fact that the second respondent assented readily to the sale of the G.P. notes and the circumstance mentioned in the application for extension of time, extended the time up to May 11, 1959, with the concurrence of the advisory committee.
Before the expiry of this time, two of the shareholders filed the application out of which this appeal arise for the reliefs already mentioned. Between February 25, 1959, and the filing of the application, some more amounts aggregating Rs. 87,000 were realised. During the pendancy of the application the auction purchaser paid the balance of the third installment.
In support of the application, it was urged before our learned brother that the liquidator had no jurisdiction to extend the time for payment of the balance of the sale price and that he could not appropriate the sale proceeds of the assets of the company towards the purchase price.
It was maintained on behalf of the liquidator that extending the time for payment of the balance of the purchase price was well within his powers by virtue of the resolution of the general body meeting held on May 7, 1958, and the terms of section 546 of the Companies Act and that, further, he did so in the interests of the shareholders of the company with the concurrence of the members of the advisory committee. It was further submitted on his behalf that with the amounts realised by the sale of the G.P. notes, and some other assets of the company and with the two installments and part payment of the third installment paid by the second respondent, the liquidator could distribute the share capital at the rate of Rs. 8 a share to most of the shareholders including the first appellant before us. It was also pointed out that the liquidator informed the shareholders by circular notice of all that had taken place prior thereto and how his action had benefited the general body of the shareholders and the circumstances under which he extended the time for payment of the balance of the purchase price with the approval of the advisory committee and that the second appellant has signified his assent to the extension of time.
In this position, the learned judge thought that it was desirable to ascertain the wishes of the shareholders in that behalf before he could dispose of the petition. For that purpose, he appointed Sri T. Lakshmiah, the official liquidator, to convene a meeting of the shareholders by giving them not less than fourteen days’ notice of the time and place of the meeting by advertisement in one issue of a daily newspaper in the English language and a daily newspaper in the regional language and by sending individually to every one of the shareholders of the company notice of the meeting.
Accordingly, the official liquidator convened a meeting on December 5,1959, to find out the attitude of the general body of the shareholders. At that meeting, the shareholders holding 35,832 shares were present and they ratified the action of the liquidator in extending the time for the payment of the balance of the purchase price and in appropriating the amounts realised by the sale of the assets of the concern with the consent of the auction purchaser towards the purchase price. It may be noted that the appellants did not participate in the meeting and oppose the resolution. Thereupon, the conveyer filed his report on December 11,1959, and it was accepted on January 8, 1960.
Statement was made at the bar that the learned Advocate-General appearing for the appellants stated that he would not raise any objection to this report. Thereafter, the application came on for final disposal before our learned brother and he dismissed it in the view that it was competent for the liquidator to extent the time by reason of the provisions of section 546 of the Companies Act and the powers conferred on him by the resolution of the general body meeting of the shareholders at the time of the appointment of the liquidator, especially having regard to the fact that his action was approved by the majority of the shareholders as recited above. It is this conclusion of the learned judge that is impugned before us in this appeal.
In support of this appeal, Sir Ayyappa Sastry made three sub-missions: [i] that the learned judge had no jurisdiction to direct the convening of the meeting of the shareholders of the company by the official liquidator to ascertain their wishes; [ii] that the official liquidator had committed certain irregularities in the conduct of the meeting in that he did not give twenty-one clear days’ notice and that he gave only 73 hours for lodging of proxies; and [iii] that it was not within the competence of the liquidator either to grant time for payment of the balance of the purchase price or to appropriate the amounts realised by the sale of the assets of the company towards the purchase price.
We are of opinion that all the three points lack substance. As regards the first contention, it must be observed that an appeal carried by the appellant against the order of our learned brother directing the official liquidator to summon a meeting for ascertaining the wishes of the shareholders was dismissed by this court in O.S.A. No. 8 of 1959. It is, therefore, not open to the appellants to agitate that matter once again. That apart, the relevant provisions of the Companies Act empower the court to take such a course.
At this stage, it is convenient to read section 557, in so far as it is material for the present enquiry:
“(1) In all matters relating to the winding up of a company, the court may- [a] have regard to the wishes of creditors or contributories of the company, as proved to it by any sufficient evidence; [b] if it thinks fit for the purpose of ascertaining those wishes, direct meetings of the creditors or contributories to be called, held and conducted in such manner as the court directs; and [c] appoint a person to act as chairman of any such meeting and to report the result thereof to the court.”
On the language of this section, there can be little doubt that it is well within the powers of a court to direct the holding of a meeting of the shareholders for the purpose of ascertaining the wishes either of the creditors or of the shareholders in all matters bearing on the winding up of the company. An attempt was made by the learned counsel for the appellants to restrict the scope of the section only to the actual winding up of a company. We do not think that he has succeeded in his attempt. The terms of the section are comprehensive enough to include matters of this description. Emphasis has to be laid on the words “matters relating to the winding up of a company”. Surely, it cannot be postulated that realisation of the assets of the concern are unrelated to the winding up of the company.
Coming next to the alleged irregularity as to sufficiency of notice, the argument is equally unsubstantial. A reference to the notice will clearly indicate that the official liquidator had given twenty-three clear days’ notice. In regard to the lodging of proxies, we do not think that there is any error irregularity committed by the liquidator. It is true that under the present provisions of the Companies Act, 1956, more than forty-eight hours need not be given for the lodging of proxies. But that is not the same thing as saying that if more than forty-eight hours is given for the lodging of proxies it renders the meeting irregular. Be that as it may, it is not open to the appellants to raise this objection now having regard to the fact that the learned Advocate-General appearing for them had categorically stated that he was not going to make any objection to the official liquidator’s report and also to the fact that at the final hearing of the application before our learned brother no such contention was advanced. Nor was that point even taken in the memorandum of the grounds of appeal against the order of the learned judge. For these reasons, this contention is repelled.
The third point to be considered is whether the liquidator had power to extend the time for payment of the balance of purchase price by the auction purchaser. For an appraisal of the contentions urged on either side, it is useful to look at the terms of section 546 of the Companies Act.
That section, in so far as it is of immediate relevance, is in these words:
“The liquidator may-... [iii] compromise any call or liability to call, debt, and capable of resulting in a debt, and any claim, present or future, certain or contingent, ascertained or sounding only in damages, subsisting or alleged to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and all questions, in any way relating to or affecting the assets or liabilities or the winding up of the company, on such terms as may be agreed, and take any security for the discharge of any such call, debt, liability or claim, and give a complete discharge in respect thereof.”
It is manifest that the power conferred by clause [iii] on the liquidator comprehends within its scope the power to compromise “all questions in any way relating to or affecting the assets or liabilities or the winding up of the company.” By virtue of this clause, the liquidator is authorised to settle all matters inter alia affecting in any way the assets or liabilities. It is difficult to posit that the extension of time to pay the dues to the company does not come within the contemplation of this clause. In our opinion, this clause is of very wide amplitude and embraces the power to extend time to an auction purchaser to pay the purchase money or to a debtor to discharge the debt due by him to the concern. We do not think that there is any justification for circumscribing the wide scope of this section. No authority which supports such a contention has been placed before us. We are convinced that the language of the section is susceptible only of the meaning that we have attributed to it.
That apart, the liquidator extended the time with the approval of the advisory committee. It does not stop here. The liquidator’s action was ratified by the general body of shareholders;
It could not be disputed that it was well within the powers of the shareholders to extend time for payment of a debt due to the company or to register their approval to such a course adopted by the liquidator. But the argument pressed upon us is that while it was permissible for the liquidator to seek the permission of the general body of shareholders before he actually extended the time, he could not do so after he had actually granted further time in that regard. We do no think that this makes any difference. All that matters is the approval of the action of the first respondent. If what was done by this respondent was in any way detrimental to the interest of the shareholders, it would not have met with this assent. It is not suggested that the general body had derived any advantage by ratifying the action of the liquidator. In such a situation, it is not open to two of the shareholders holding only 205 shares out of a total of 50,000 shares to question the validity of the resolution in this regard. Moreover, the official liquidator could not disregard the attitude of the second respondent in regard to the realisation of the Government promissory notes and other assets earlier in considering the latter’s request for extension of time. In this context, it is to be remembered that the second appellant intimated to the first respondent that he had no objection to further time being granted provided security was offered. Further, there is not even a suggestion that the first respondent was influenced by any oblique motive in complying with the request of the second respondent in that behalf. It follows that the action of the liquidator in extending the time could not be successfully impugned.
The only question that survives is whether the liquidator was justified in appropriating the sums realised by the sale of the assets of the company towards the purchase price. Unquestionably, if the assets and liabilities of the company were sold as a going concern, the liquidator could not realise them for and on behalf of the company. After the auction, the company was entitled only to the purchase price and it was the auction purchaser who was entitled only to the purchase price and it was the auction purchaser who was entitled to realise all the assets on the completion of the sale. In such a situation, if the liquidator had realised the assets of the company with the permission of the auction purchaser, it could not be postulated that credit could not be given for these sums to the auction purchaser. Surely the liquidator could not retain the assets of the company and at the same time call upon the auction purchaser to pay the full purchase price. It is true that the liquidator was under no obligation to collect the moneys due to the concern for the benefit of the auction purchaser. But when once these amounts were collected by the liquidator with the consent of the auction purchaser for the benefit of the shareholders as desired by them, he is bound to appropriate them towards the purchase price. He cannot keep the realisations of the assets and also demand of the auction purchaser to deposit the entire purchase price.
The argument advanced by Sri Ayyappa Sastry is that such sums as are collected by the liquidator out of the outstanding due to the company should be held by the liquidator in his hands o the credit of the auction purchaser as his trustee and make them over to the auction purchaser after he pays the balance of the purchase price. We do not think that there is any substance in this contention First of all, we cannot overlook the circumstance that the liquidator was anxious to sell the Government promissory notes and utilise the proceeds for distribution amongst shareholders as desired by them before the date specified for the payment of the third installment by respondent No.2. There was, therefore, no question of the liquidator holding the moneys realised by him as trustee of the auction purchaser till February 25, 1959. Moreover, it makes no difference whether the liquidator adjusts the amounts realised by him towards the purchase price and then calls upon the auction purchaser to pay the balance or whether he requires the auction purchaser to pay first the whole of the price and then delivers the sums collected by the liquidator from the assets of the company to the second respondent. We see no force in the submission made on behalf of the appellants in this behalf.
We must also notice here that subsequent to the presentation of this application the whole bid amount had been realised either by the realisation of other assets or by the second respondent depositing the amount. We are told that as required by our learned brother, the auction purchaser made two deposits of Rs. 55,800 each on two days, i.e., on August 1,1959, and on August 3,1959, and that this money was also distributed among the shareholders. It is represented that nearly ninety per cent. of the shareholders have received their share capital at the rate of Rs. 15 a share and that only a few of the shareholders who migrated to Pakistan and the first appellant who refused to receive his share capital that remain unpaid. It is further represented that these amounts are lying with the liquidator to be distributed to the shareholders as and when they claim them. Further, a sale deed is since said to have been executed in favour of the second respondent and that the latter had taken over the assets and liabilities of the company.
On this discussion, it follows that all the contentions advanced on behalf of the appellant are devoid of substance and have to be rejected.
In the result, the appeal fails and is dismissed with costs. The expenses connected with the convening of the meeting by the official liquidator will come out of the estate.
Appeal
dismissed.
[1989] 66 Comp. Cas. 953 (Ker.)
High Court OF Kerala
v.
Federal Bank
K.P. Rachakrishna Menon J.
C.P.
NO. 28 OF 1988
C.M.
Devan and K.R. Venkiteswaran for the Petitioner.
B.S.
Krishnan, K.P. Dandapani, C.K.S. Panicker, C.K. Koshy, P. Gopalakrishna Nair,
P.V. Madhavan Netmbiar, T.R. Raman Pillai, F. Thomas, Mathai M. Paikeday, C.C.
Thomas and K.K. Usha for the Respondent.
K.P. Radhakrishna Menon
J.—An application presented under section
397, read with section 399, of the Companies Act, 1956, for the following
reliefs :
"(a) The
meeting scheduled to be held on August 30, 1988, of the company be conducted by
appointing an advocate Commissioner to supervise the election at the Municipal
Town Hall, Alwaye ;
(b) To declare that the
proxies obtained by the company on August 28, 1988, be declared invalid and
non-existent ;
(c) To conduct the
business to be transacted on August 30, 1988, without taking into consideration
of the proxies obtained by the company on August 28, 1988 ;
(d) To pass such other
orders as this Hon'ble Court may deem fit and proper in the circumstances of
the case."
The sum and substance of
the allegations in the petition is that the chairman and the directors in using
the machinery of the bank to get their candidates elected as directors (to fill
the vacancies caused on the retirement of directors by rotation) has conducted
the affairs of the company in a manner oppressive to the minority shareholders
including the petitioners.
Before I go into the merits
of the case, I shall deal with the preliminary point raised by the company and
the other contesting respondents, namely, whether the petition is maintainable
in law.
The case set up by the
respondents in this regard has two aspects, (1) the company, being a banking
company, any question pertaining to its management requires to be considered
under the provisions contained in the Banking Regulation Act, 1949, for short,
"the Act", (2) to maintain a petition under section 397 of the
Companies Act, the petitioners are bound to obtain the consent in writing of those 100 members/shareholders
mentioned in sub-section 1(a)
of section 399 and who have not figured as petitioners, so that the petition
could be said to be one on their behalf and for their benefit also. Since the
consents in writing of the said members have not been produced, the petition is
liable to be dismissed.
The first aspect : Learned
counsel for the contesting respondents, dilating on this, submitted as follows
:
The rights of the
shareholders in regard to the management of a banking company are circumscribed
by the provisions of the Act. The activities of the' board of directors are
governed by the special provisions contained in the Act. A specific reference,
however, requires to be made to the provisions contained in Part III of the Act
which governs matters relating to suspension of business and winding up of
banking companies. Since the Act is a consolidating Act, the Act is a complete
code in itself as regards the matters it deals with. After the coming into force of the Act, a banking company can
be wound up only under the provisions contained in Part III of the Act. That
means, now, a petition to wind up a banking company under section 433 of the
Companies Act is not possible. If that be the position in law, a petition under
section 397, since the same is enacted with the intention of avoiding winding
up on the "just and equitable" ground (see section 433(f) of the Companies Act), is not
maintainable.
Learned
counsel for the petitioners, on the other hand, contended that inasmuch as the
provisions of the Act are only in addition to and not in derogation of the
Companies Act, the respondents shall not be heard to say that a petition under
section 397 which was enacted with the object of safeguarding the interest of
the shareholders is not maintainable. Amplifying this aspect, learned counsel
submitted that it is enough for a petitioner under section 397 to- show that
the oppressive acts of the majority shareholders have brought about
circumstances which warrant a winding up of the company on the "just and
equitable" ground and not that circumstances warranting a winding up of
the company do in fact exist. In support of this argument he relied on a decision
of the Supreme Court in Shanti Prasad
Jain v. Kalinga Tubes Ltd. [1965]
35 Comp Cas 351.
To
consider the aforesaid competing arguments, it is necessary to study the scope
of the provisions of the Act relating to the management and the winding up of a
banking company vis-a-vis the
provisions under the Companies Act pertaining to the management and winding up
of non-banking companies.
A
question immediately would arise as to what was the reason for the enactment of
a special statute relating to banking companies.
An
effective answer to this question cannot be had unless one is prepared to probe
into the evolution of banking laws in India. It is interesting to note in this
regard that, in the past, India had no special piece of legislation governing
banking companies. There was, therefore, a persistent demand for bringing out a
comprehensive enactment to govern the banking companies and this resulted in
the amendment of the Indian Companies Act, 1913, incorporating Part X-A therein
containing provisions governing matters which are peculiar to the business of
banking. However, there was no special procedure for banking companies,
particularly relating to their winding up. Certain special provisions relating
to banking companies were, therefore, introduced in the Companies Act by the
Indian Companies
(Amendment) Act of 1936. These newly introduced provisions, however, were only
regulatory in nature. This amendment also did not meet the purpose and,
therefore, the Reserve Bank of India framed a draft bill as far back as 1939,
the precursor of the Banking Companies Act, 1949. This 1949 Act was passed to
consolidate the law relating to banking companies. The need for this Act was
realised due to the fact that certain undesirable features in banking,
developed in the meantime, had come to stay. Banks were then being connected
with non-banking companies in that many of the directors of banking companies
were in fact controlling some non-banking companies. This resulted in the
interlocking of shares. Banking companies, therefore, could manipulate the
finances at the disposal of non-banking companies. To put it in a nutshell, the
main features were :
"the grant of loans to persons connected
with the management of companies without adequate security, extensive window
dressing at the time of preparing balance-sheet and, in general, a tendency to
utilise the bank's funds to the detriment of the interest of the
depositors."
The
Banking Companies Act, 1949, notwithstanding, the directors of banks who were
mostly industrialists could influence the banks in granting indiscriminate
advances to non-banking companies, firms or institutions in which these
directors had substantial interest. These and other acts of mismanagement in
the running of the banks resulted in the imposition of "social
control" on banking companies. The "social control" was imposed
through Act 58 of 1968 which amended the Banking Regulation Act. The preamble
to the Amending Act 58 of 1968 reads:
"An
Act further to amend the Banking Regulation Act, 1949, so as to provide for the
extension of social control over banks and for matters connected therewith or
incidental thereto, and also further to amend the Reserve Bank of India Act,
1934, and the State Bank of India Act, 1955."
The
Amending Act introduced radical changes in certain provisions of the Act. The
additional controls and restrictions as imposed by the Amending Act can broadly
be stated as under :
1. Constitution of the board of directors of a
banking company—to the effect that the directors having special knowledge and
practical experience in respect of certain specified subjects related to
banking, are in majority over the directors who are merely industrialists as
popularly known (section 10A of "the Act").
2. Management of the affairs of a banking company by a whole time
chairman who has special knowledge of and practical experience in the working
of a bank or financial economic or business administration (another
encroachment by experts over industrialists), (section 10B of the Act).
3. Restrictions of loans and advances by a banking company to its
directors or to a company or firm in which a director is substantially
interested or to an individual for whom a director is a guarantor (section 20
of the Act).
4. Additional powers conferred on the Reserve Bank of India to enforce
and supervise the social control (mainly sections 30, 35B, 36(1)(d) and 47A of the Act).
5. Punishment for (a)
obstructing any person from lawfully entering or leaving a bank, (b) holding demonstration within a
bank, and (c) acting to undermine
depositors' confidence in a bank (section 36AD of the Act).
6. Special powers of the Central Government to acquire under takings of
banking company when it is satisfied on a report from the Reserve Bank that the
banking company has committed certain defaults and that it is necessary to do
so (Part IIC, sections 36AE to 36AJ of the Act) (see Tannan on Banking Law and Practice).
It would thus be seen that
the provisions of the Act are intended to protect the interest of the
depositors.
The differences noticeable
between the Act on the one hand and the Companies Act on the other require to
be considered in this context. Non-banking companies, it is by now well
established, deal with the money of the stockholders who own a share in the
assets, who appoint their own directors "for better or for worse" and
whose liabilities are also limited. The banking companies, it should be
remembered, deal with money of the depositors who have no security other than
the solvency of the banking company and its sound dealings with their money. As
observed by the Supreme Court "ex facie, the banking companies must be
regulated somewhat differently, the interests of the depositors must be
paramount and the winding up of such companies depends upon other
considerations, chief among which is the desire to pay off the creditors as far
as possible in full or at least equitably. The action is thus dictated-not from
any abstract consideration of a long-range view of the future ability of a bank
to pay its creditors but its ability to pay them at any given time." (See Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962] 32 Comp
Cas 514 (SC).
As to why special
provisions to wind up a banking company were enacted (Part III of the Act), it
is profitable to refer to the following observations of the Supreme Court in Vellukunnel's case [1962] 32 Comp Cas
514 (SC) (p. 530) :
"When the Banking
Companies Act was passed in 1949, it was explained in the note on clause 37,
which corresponded to section 38, that the provisions of the Indian Companies
Act in respect of liquidation of companies did not seem to be suitable for
banking companies, that a bank's business being of an over-the-counter kind,
the bank has to meet immediately its liability and a provision for winding up
of the banking company when it refuses to meet a lawful demand within a stated
time, was necessary. It was also
stated that the Reserve Bank was given authority to apply for the liquidation
of a banking company, if its affairs were conducted to the detriment of the
interests of the depositors." (emphasis supplied).
A banking company,
therefore, could be wound up only under the provisions of Part III of the Act
and not under section 433 read with the allied sections contained in the
Companies Act.
Regarding the management of
the company : After the imposition of "social control" by the
Amending Act No. 58 of 1968, no shareholder of a banking company, unlike the
shareholder of an ordinary company could complain that the affairs of a banking
company are conducted in such a way that one group of shareholders is getting a
benefit against the other, and, therefore, the business of the banking company
is liable to be suspended. A reference in this connection to sections 10A, 10B,
20, 30, 35B, 36(1)(d), 36AD,
36AE, 36AJ and 47A of the Act is profitable.
I shall now deal with some
of the salient provisions. Section 10A provides that not less than fifty-one
per cent. of the total number of members of the board of directors of a banking
company shall consist of persons who shall have special knowledge or practical
experience in respect of one or more of the following matters, namely :
|
(i) accountancy, |
(ii) agriculture and
rural, economy |
(iii) banking, |
|
(iv) co-operation, |
(v) economics, |
(vi) finance, |
|
(vii) law, |
(viii) small-scale
industry, |
|
(ix) and any other matter the special knowledge of, and practical
experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company. This
provision further insists that out of
the aforesaid number of directors, net less than two shall be persons having
special knowledge or practical experience in respect of agriculture and rural
economy, co-operation or small-scale industry. Such persons, however, shall not
have substantial interest in, or be connected with, whether as employee,
manager or managing agent, of any company, not being a company registered under
section 25 of the Companies Act, 1956, or any firm, which carries on any trade,
commerce or industry and which, in either case, is not a small-scale industrial
concern, or shall not be proprietors of any trading, commercial or industrial
concern, not being a small-scale industrial concern. No director of a banking
company, by whatever name called, shall hold office continuously for a period
exceeding eight years notwithstanding anything to the contrary contained in the
Companies Act, 1956, or in any other law for the time being in force.
Similarly, a chairman or other whole-time director of a banking company who
happens to be removed from office as such chairman, or whole-time director, as
the case may be, under the provisions of the Act, shall also cease to be a
director of the banking company and shall also not be eligible to be appointed
as a director of such banking company, whether by election or co-option or
otherwise, for a period of four years from the date of his ceasing to be the
chairman or whole-time director, as the case may be. If the above requirements
are not fulfilled at any time, the board of directors shall reconstitute such
board so as to ensure that the said requirements are fulfilled, and for the
purpose of reconstituting the board in the manner indicated above, if it is
necessary to retire any director or directors, the board may, by lots drawn in
such manner as may be prescribed, decide which director or directors shall
cease to hold office and such decision shall be binding on every director of
the board. This section further provides that where the Reserve Bank is of
opinion that the composition of the board of directors of a banking company is
such that it does not fulfil the requirement, namely, not less than fifty one
per cent, of the total number of members of the board of directors of a banking
company shall consist of persons who are having special knowledge or practical
experience in any one or more of the matters stated hereinbefore, the Reserve
Bank has a right, after giving to the banking company a reasonable opportunity
of being heard, to direct the banking company to sq reconstitute its board of
directors as to ensure that the said requirement is fulfilled ; and if, within
two months from the date of receipt of such an order, the banking company does
not comply with the directions, that bank can, after determining by lots drawn
in such manner as may be prescribed, the person who ought to be removed
from the membership of the board of directors, remove such person from the
office of the director and appoint a person who has special knowledge of the
matters referred to above, as a member of the board of directors in the place
of the person so removed, whereupon the person so appointed shall be deemed to
have been duly elected by the banking company as its director. Every
appointment, removal or reconstitution duly made, and every election duly held
under section 10A shall be final and shall not be called in question in any
court. Similarly, every director elected or, as the case may be, appointed
under this section shall hold office until the date up to which his predecessor
would have held office, if the election would not have been held, or, as the
case may be, the appointment had not been made. It is further provided that no act or proceeding of the board of
directors of a banking company shall be invalid by reason only of any defect in
the composition thereof or on the ground that it is subsequently discovered
that any of its members did not fulfil the requirements of this section. Section
10B provides that the chairman
will be entrusted with the management of the whole of the affairs of the
banking company notwithstanding anything contained in any law for the time
being in force or any contract to the contrary. The chairman, of
course, shall exercise his powers subject only to the superintendence, control
and direction of the board of directors. It is imperative that the chairman of
the board of directors shall be a person who has special knowledge and
practical experience of the working of a banking company, or of the State Bank
of India or any subsidiary bank or a financial institution, or financial,
economic or business administration ; provided, however, a person shall be
disqualified for being a chairman if he is a director of any non-banking
company except a director of a subsidiary of the banking company or director of
a company registered under section 25 of the Companies Act, 1956, or is a
partner of any firm which carries on any trade, business or industry, or has
substantial interest in any other company or firm, or is a director, manager,
managing agent, partner or proprietor of any trading, commercial or industrial
concern, or is engaged in any other business or vocation. If the Reserve Bank is of opinion
that any person who has been elected as the chairman of the board of directors
of a banking company is not a fit and proper person to hold such office, it has
the power, after giving to such person and to the banking company a reasonable
opportunity of being heard, by order in writing require the banking company to
elect or appoint any other person, as the chairman of the board of directors
and if, within a period of two months from the date of receipt of such order,
the banking company fails to elect or appoint a suitable person as chairman of
its board of directors, the Reserve Bank may, by order, remove the first-mentioned
person from the office of the chairman and appoint a suitable person in his
place where-upon, the person so appointed shall be deemed to have been duly
elected or appointed, as the case may be, as the chairman of the board of
directors. The chairman,
thus appointed, shall hold office for the residue of the period of office of
the person in whose place he has been so elected or appointed. This right of
the Reserve Bank is without prejudice to the provisions of section 36AA. The
banking company and the chairman against whom an order of removal is made may,
if so advised, within thirty days from the date of communication to it or to
him of the order, prefer an appeal to the Central Government and the decision
of the Central Government thereon, and subject thereto, the order made by the
Reserve Bank, shall be final and shall not be called in question in any court. Section 10-BB provides that where the office
of the chairman of a banking company is vacant, the Reserve Bank may, if it is
of opinion that the continuation of such vacancy is likely to adversely affect
the interests of the banking company, appoint a person, who possesses the
qualifications prescribed under sub-section (4) of section 10-B as
the chairman and where the person so appointed is not a director of such
banking company, he shall, so long as he holds the office of the chairman, be
deemed to be a director. A chairman and the directors appointed by the
Reserve Bank under section 10-A shall not be required to hold qualifying shares
in the banking company. It is important, in this context, to note that the
provisions of sections 10Aand 10B are to have overriding effect over all other
laws, contracts, memorandum and articles of association, etc. Notwithstanding
anything to the contrary contained in section 77 of the Companies Act, no
banking company shall grant any loan or advance on the security of its own
shares, etc., as provided for under section 20. Without obtaining the prior permission of the Reserve Bank, no banking
company shall open a view place of business and transfer an existing place of
business. The accounts and balance-sheet of a banking company are
required to be prepared as provided for under section 29 of the Act. The
balance-sheet and the profit and loss account shall be audited by a qualified
accountant. The auditor shall be one
who was appointed after obtaining the previous approval of the Reserve Bank.
The auditor is bound to act under the directions of the Reserve Bank in respect
of the matters made mention of in the direction. Section S5B provides that no
amendment of any provision relating to the maximum permissible number of
directors or the appointment or reappointment or termination of appointment or
remuneration of a chairman, a managing director or any other director,
whole-time or otherwise or of a manager or a chief executive officer by
whatever name called, whether that provision be contained in the company's
memorandum or articles of association, or in an agreement entered into by it,
or in any resolution passed by the company in general meeting or by its board
of directors shall have effect unless approved by the Reserve Bank. Similarly,
no appointment or reappointment or termination of appointment of a chairman, a
managing or whole time director, manager or chief executive officer by whatever
name called, shall have effect unless such appointment, reappointment or
termination of appointment is made with the previous approval of the Reserve
Bank. The functions and powers conferred on the Reserve Bank by
section 36 of the Act deserve special mention. It has the power to direct the
company to call a meeting of its directors, etc., if it is found that the
affairs of the banking company are being conducted in a manner detrimental to
the interests of the banking company or its depositors. It can depute one or
more of its officers to watch the proceedings at any meeting of the board or of
any committee or of any other body constituted by it; require the company to
give an opportunity to the officers so deputed, to be heard at such meetings
and also require such officers to send a report of such proceedings to the
Reserve Bank. I do not wish to burden this judgment by referring to more such
provisions of the Act pertaining to the management of a banking company.
It can thus be seen from
these provisions that "the Act, at every turn, makes the Reserve Bank the
authority to sanction, permit, certify, accept, report, advise, control,
direct, license and prohibit. There is hardly any provision where the Reserve
Bank's judgment is not made final vis-a-vis
a banking company except rarely where an appeal to the Central Government would
lie". (See Vellukunnel's case
[1962] 32 Comp Cas 574 (SC)). It is clear, therefore, to my mind, that the
object with which these provisions were enacted will get frustrated if the
business of banking companies is even now said to be governed by the provisions
of the Companies Act.
Having understood the scope
of the Act thus, let us see whether a banking company can be wound up under the
"just and equitable" ground. "Just and equitable" ground is
denned by section 433(f) of the
Companies Act. It is true that, under this clause, a company can be wound up
"whenever lack of confidence is rested on a lack of probity in the conduct
of the affairs of the company". (See Loch v. John Blackwood
Ltd. [1924] AC 783 (PC). Similarly, where there is mismanagement and
there is practical difficulty in not getting it remedied, it is a proper case
for winding up on this ground (see Rajahmundry
Electric Supply Corporation Ltd. v. Nageswara Rao (A.) [1956] 26 Comp Cas 91 (SC) ;
likewise, where there is a deadlock in the management and where the substratum
of the company is gone or its only business has become impossible. To put it
differently, before an order for winding up under "just and
equitable" ground is passed, the court, after taking into account all the
facts and circumstances of the case, shall see whether there is any
disorderliness of that magnitude in the management and conduct of the company
warranting an order to wind up the company.
The question that requires
an answer now is : could it be said that, after the imposition of "social
control" by the Amending Act No. 58 of 1968 making the Reserve Bank the
ultimate authority in matters of the management of banking companies, a banking
company is liable to be wound up under the "just and equitable"
ground. My answer to this question is an emphatic "no", because,
notwithstanding anything contained in any law for the time being in force or
any contract to the contrary, the whole affairs of a banking company vest in
the chairman who, virtually, is appointed by the Reserve Bank. There is,
therefore, no possibility of suspension of business or the chairman managing
the affairs of the company with the intent of benefiting one group of
shareholders as against others. It is relevant, in this context, to make a
special reference to the provisions contained in Part III of the Act. As the
caption shows, these provisions govern the suspension of the business and
winding up of banking companies. The High Court, on an application from the
Reserve Bank, can suspend the business of a banking company provided the
conditions stipulated under section 37 are satisfied. The winding up of a
banking company, after the introduction of Part III, can be ordered only on the
ground that the banking company is unable to pay its debts or if an application
for its winding up has been made by the Reserve Bank under section 37 or under
subsection (2) of section 38. The non-obstante clause in section 38, namely,
"notwithstanding anything contained in section 391, section 392, section
433 and section 583 of the Companies Act, 1956" indicates that the
provisions of the Companies Act pertaining to the winding up of a company
should, as they are derogatory to or inconsistent with these provisions, give
way to the provisions of the Act in that regard. A reference to Part IIIA,
particularly to section 45A, irrelevant in this context. The section says that
the special provisions for speedy disposal of winding up proceedings contained
in Part IIIA shall override all other laws including the Companies Act. That
means, that after the introduction of the provisions in Part III and Part IIIA
of the Act, no banking company can be wound up under the "just and equitable"
ground or any other ground enumerated under section 433 of the Companies Act
except on the ground of being unable to pay its debts mentioned in section 38
of the Act. That is the intention of the Legislature is also clear from the
provisions of Part II, IIA and IIB of the Act mentioned supra, making the
Reserve Bank of India the controlling authority in regard to the management of
a banking company subject to certain rights of appeals conferred on aggrieved
parties by the Act, to the Central Government.
From the above discussion,
it is clear that no banking company today can be wound up under "just and
equitable" ground. If that be the position, no petition under section 397
is maintainable because, as observed by the Supreme Court in Rajahmundri Electric Supply Corporation's case
[1956] 26 Comp Cas 91, where the facts proved do not make out a case for
winding up under section 162C (corresponding to section 433(f)), no order under section 153C
(corresponding to section 397) can be passed. It should, in this connection, be
remembered that section 397 of the Companies Act, 1956, is intended to avoid
winding up of a company under the "just and. equitable" ground, if
possible, and keeping the company going but at the same time relieving minority
shareholders from the acts of oppression and mismanagement by the majority
shareholders. In other words, the power under section 397 is intended to
prevent a winding up under the "just and equitable" ground within the
meaning of section 433(f) of
the Companies Act. A reference in this connection to two decisions, one of the
Madras High Court in K.R.S. Narayana
Iyengar v. T.A. Mani, AIR
1980 Mad 338 and one of the Allahabad High Court in Raghunath Swarup Mathur v. Harswarup Mathur [1970] 40 Comp Cas 282, is profitable. From the
law declared by the Supreme Court in Rajahmundri
Electric Supply Corporation's case [1956] 26 Comp Cas 91, it is clear
that section 397 provides an alternative remedy to the minority shareholders
who could, on the said ground of oppression by. majority shareholders, seek a
winding up of the company under section 433(f), that is, on the "just and equitable" ground. That
oppression of minority shareholders will be treated as a "just and
equitable" ground where those who control the company abuse their powers
to such an extent as to seriously prejudice their interest is, no more, a moot
question. (See Anglo-Continental
Produce Co. Ltd., In re [1939] 1 All ER 99 (Ch D). Briefly stated, the
object in enacting section 397 is to salvage a company which otherwise is
liable to be wound up under, the "just and equitable" ground (Section
433(f)). At this juncture, it
is profitable to keep in view the opinion of Lord Clyde, Lord President in Baird v. Lees [1924] SC 83 quoted with approval by the Privy council in Loch v. John Blackwood Ltd. [1924] AC 783 (PC). The opinion reads (at
page 103 of [1939] 1 All ER) :
"I have no intention
of attempting a definition of the circumstances which amount to a 'just and
equitable' cause. But I think I may say this. A shareholder puts his money into
a company on certain conditions. The first of them is that the business in
which he invests shall be limited to certain definite objects. The second is
that it shall be carried on by certain persons elected in a specified way. And
the third is that the business shall be conducted in accordance with certain
principles of commercial administration defined in the statute which provides
some guarantee of commercial probity and efficiency. If shareholders find that
these conditions or some of them are deliberately and consistently violated and
set aside by the action of a member and official of the company who wields an
overwhelming voting power, and if the result of that is that, for the
extrication of their rights as shareholders, they are deprived of the ordinary
facilities which compliance with the Companies Acts, would provide them with,
then there does arise, in my opinion, a situation in which it may be just and
equitable for the court to wind up the company."
But, in the case of a banking
company, it is the Reserve Bank which factually controls the company (as is
seen from the discussion supra) and, therefore, the question of the minority
shareholders or any part of the shareholders being oppressed does not arise at
all. A proceeding under section 397, therefore, cannot be taken cognizance of
by the court if the company involved is a banking company.
Finding it difficult to
grapple with this situation brought about by the provisions of the Act, learned
counsel for the petitioners argues that the above provisions of the Act
notwithstanding, section 397 and other provisions pertaining to the management
and the winding up of companies under the Companies Act are available for being
pressed into service by an aggrieved shareholder although the company involved
is a banking company. In support of this argument, he made reference to the
provisions of section 2 of the Act and contended that the said provisions are
only in addition to and not in derogation of the Companies Act. That means,
according to the counsel, all the provisions of the Companies Act applicable to
winding-up proceedings, are available and consequently, section 397 can be
invoked by aggrieved shareholders for redressal of their grievances. This
argument of learned counsel that the provisions of the Act are not to be
interpreted as in derogation of the provisions of the Companies Act, but in
addition thereto, is due to his apathy to take note of the existence of the
essential qualification embodied in section 2, namely, "save as hereinafter
expressly provided". See Central
Bank of India v. Their Workmen [1959]
29 Com Cas 367; [1959-60] 11 FJR 57. To the same effect is section 616 of the
Companies Act. The newly introduced provisions of the Act by Amending Act 58 of
1968, pertaining to the management of a banking company and its winding up, in
my judgment, will come under the qualifying .clause in section 2 of the Act,
namely, "save as hereinafter expressly provided". It should, in this
connection, be remembered that the Act is one to consolidate and amend the law
relating to banking in the country and that a consolidating Act is a code by
itself in regard to the matters dealt with therein. See Ravulu Subba-Rao v. CIT
[1956] 27 ITR 164 (Mad). In short, any proceeding concerning the management
of a banking company and the one for the winding up of the same could be
maintained only on establishing the requirements prescribed under the
respective provisions of the Act. To the said extent, the provisions of the
Act, in my view, are not in addition to, but in derogation of, the Companies
Act. Section 45A of the Act also can profitably be referred to in this
connection. The above argument of learned counsel for the petitioners is,
accordingly, rejected. The petition under section 397, therefore, is not
maintainable.
The second aspect of the
preliminary point : To maintain a petition under section 397, the petitioner
shall disclose facts showing that the requirements prescribed under section 399
of the Companies Act have been satisfied. To make it appear that the said
requirement has been satisfied, the petitioners along with the petition have
filed a document containing the signatures of 160 shareholders. This document,
according to the petitioners, reflects the consent in writing of the said shareholders.
We shall now see what is the requirement that should be satisfied by a
petitioner under section 397. A reference in this connection to section 399 is
profitable. Sub-section (3) of this section provides that where any members of
a company are entitled to make an application in virtue of sub-section (1), any
one or more of them having obtained the consent in writing of the rest (clause
(a) of sub-section (1) provides
that to maintain a petition under section 397 in the case of a company having share
capital, not less than 100 members of the company shall be there) can make the
application on behalf and for the benefit of all of them. The condition that
the "consent in writing" of those who have not figured as petitioners
shall be obtained is a condition precedent and, therefore, if the petition is
not supported by the "consent in writing" of those shareholders, the
same is not maintainable. The document aforesaid was pressed into service by
the petitioners to show that the above requirement is satisfied. On a perusal
of this document, it is clear that there is nothing there to show that the rest
of the members have given their "consent in writing". On the other
hand, CAW1" who is one of the signatories to the said document has positively
stated that he, his wife and some other signatories who are his relations have
not given their "consent in writing" for the filing of the petition.
The petitioners have not chosen to examine any of the signatories despite the
evidence of CAW1. To say that one has given his "consent in writing",
it should also be proved that he or she gave his consent after having
understood the contents of the petition. A reference in this connection to the
admission of the petitioners in paragraph 9 of the reply-affidavit dated October
13, 1988, is profitable. It reads :
"There is no express
consent given by them to the petition".
In the absence of such
proof, even if there is a "consent in writing", the same may not
satisfy the requirements of section 399. Here, there is no such evidence ; for
that matter, there is no proper pleadings even in this regard. For this reason
also, I am of the view that the petition is not maintainable.
Now, I shall deal with the
merits of the case : Facts essential and requisite for the purpose of this lie
in a narrow compass. The 5.7th annual general meeting of the company, to elect
the directors to fill the vacancies caused by retirement by rotation, was
scheduled to take place on August 30, 1988. Exhibit A-2 is the statutory notice
issued in this regard. Note (1) appended to exhibit A-2 provides that a member
entitled to attend and vote at the meeting is entitled to appoint a proxy to
attend and vote instead of himself. The note further says that the instrument
appointing a proxy shall be deposited at the registered office of the bank not
later than 48 hours before the time for holding the meeting which as per
exhibit A-2, is fixed at 10 a.m. on August 30, 1988. A proxy need not be
member. As per this notice, proxies, therefore, should be deposited before or
at 10 a.m. on August 28, 1988. This time happens to fall on a Sunday and,
therefore, the first petitioner handed over exhibit A-6 letter to the secretary
of the bank with a view to ascertain as to whether the proxies could be
deposited till 10 a.m. on August 28, 1988. The secretary made exhibit A-6(a) endorsement which reads :
"As last 48 hours
falls at 10 a.m. on August 28, 1988, Sunday, proxies will be accepted only up
to 5 p.m. on August 27, 1988".
The petitioners, it is
said, therefore, hurriedly collected the proxies and deposited them at the
registered office of the company before 5 p.m. on August 27, 1988. When they
went to the registered office of the bank for lodging the proxies, they saw on
the notice board a note by the chairman that proxies in connection with the
election can validly be deposited at or before 10 a.m. on August 28, 1988. This
note, it is contended, enabled the fourth respondent, who is one of the
contestants, to deposit the proxies he had collected, including from those who had
originally given proxies to the petitioners, at 10 a.m. on August 28, 1988. The
proxies deposited later would automatically supersede the proxies lodged
earlier and, therefore, the proxies deposited by the petitioners before 5 p.m.
on August 27, 1988, would get automatically superseded by the proxies deposited
on August 28, 1988. This situation brought about by the note issued by the
chairman with the blessings of the directors who informally met in connection
therewith, helped the nominees of the company (fourth respondent and another)
for the election to get a march over the nominees of the petitioners. It is
further stated that since the directors who wanted the chairman to issue the
note represent the majority shareholders, it must be held that this action, of
the directors is in a manner oppressive to the minority shareholders including
the petitioners. The directors used the services of the officials of the bank
to collect the proxies from the shareholders including those who had given
proxies to the petitioners' candidates, for the benefit of the official
candidate and this conduct of the board of directors, representing the majority
shareholders, reflects the misuse of the official machinery resulting in
oppression of the minority shareholders. The company and the chairman have
filed separate counter-statements disputing the above allegations. So is the
case with the fourth respondent. They have emphatically denied the above
allegations.
From the above, it is clear
that the act of oppression pleaded is the undue interest taken by the chairman
and some of the directors to see that their nominees are elected as directors.
These statements may perhaps constitute an isolated act of oppression, assuming
they constitute an act of oppression, but not in any way an act of oppression
continuing down to the date of the petition.
Is this isolated act of
oppression sufficient to maintain a petition under section 397, assuming the
petitioners can press that section into service in this case? An incidental
question arising for consideration in this connection is this: Without a
revocation in writing, could it be said that a vote given in accordance with
the terms of an instrument of proxy is invalid?
Regarding the first
question, the law is well-settled. In order to grant the relief under section
397, a petitioner must show three things : (1) the facts pleaded justify the
making up of a winding-up order on the "just and equitable" ground,
but the winding up would unfairly prejudice the shareholders including the
petitioners who support the petition but an order passed under section 402 of
the Companies Act would grant them appropriate relief. (2) the affairs of the
company are being conducted in a manner oppressive to some part of the
members/shareholders including the petitioners. It is to be noted here that the
section does not require that the oppressed members should be the majority.
"Shareholders with a minority beneficial interest may, by having voting
control, be able to oppress those with the majority, beneficial interest".
The oppression complained of must be suffered by the shareholders in their
capacity as shareholders and not in their character as directors. The
expression employed in the section "the affairs of the company that are
being conducted" indicates, not isolated acts of oppression "but a
continuing process, and one continuing down to the date of the petition".
It is pertinent to note that it is not enough if it is established that the
company's affairs have been conducted unwisely or inefficiently or carelessly.
Under such circumstances also, a shareholder can contend that he has lost
confidence in the manner in which the affairs of the company are conducted.
That is not sufficient. That is not oppression ; "nor is resentment at
being outvoted a ground for relief under this section". (3) To wind up the
company would unfairly prejudice the oppressed members.
It should, in this
connection, be remembered that it is imperative that the petitioner shall
clearly plead these things; or else, for want of pleadings, the petition will
be dismissed. (See Buckley on the
Companies Acts, 14th edition, Vol. one, pages 490 to 493, Shanti Prasad Jain v. Kalinga Tubes Ltd., [1965] 32 Comp
Cas 351 (SC) and Xeedle Industries (India) Ltd. v. Needle
Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743
(SC). Alongside, we should keep in view the law pertaining to
"proxies". A reference in this connection to article 88 of the
articles of association is relevant. It reads :
A vote given in accordance
with terms of an instrument of proxy shall be valid notwithstanding the
previous death of the principal, or revocation of the proxy or transfer of the
shares 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 or
by the Chairman of the meeting before the leader. This article is verbatim
regulation 63 of Table A of Schedule 1 to the Companies Act. Section 28 of the
Companies Act is profitably to be referred to in this connection. This section
provides that the articles of association of a company, limited by shares, may
adopt one or any of the regulations contained in Table A of Schedule 1. It,
therefore, follows that the rights of the shareholders, mentioned under section
176 of the Companies Act in regard to the appointment of another person
(whether a member or not) as his proxy to attend and vote instead of himself,
are governed by article 88. This article is nothing but a replica of regulation
63 of Table A of the Companies Act, as we have already seen. The shareholders
are bound by this article because "the articles constitute a contract
between the company and a member in respect of his rights and liabilities as a
share-holder…" (See Halsbury's
Laws of England, Hailsham edition, para 118, at p. 71, Volume 7). If
that be so, a vote given by a shareholder, in accordance with the terms of an
instrument of proxy, shall be valid notwithstanding the revocation of the
proxy, provided no intimation in writing of the revocation has been received at
the office or by the chairman of the meeting before the vote is given. I am
fortified in this view by a ruling of Russell J. in Spiller v. Mayo (Rhodezia) Development Co. (1908) Ltd. [1926] WN 78. The learned judge
has observed thus :
"........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 this Lordship's opinion that could not
be sustained. (Why his Lordship said so was in fact there was a revocation in
these words : 'I hereby withdraw the proxy that I have lodged with the company
against the reappointment of Mr. C.F. Rowsell as a director'). 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........"
(emphasis
supplied) (See also pages 184 and 185, Shackleton
on the Law and Practice of Meetings, Seventh edition).
It may, in this connection,
be noted that a proxy which is said to be a subsequent proxy can either be
without any date or may bear the same date. In such cases, how could a chairman
of the meeting decide which proxy supersedes which ? Under such circumstances,
only an intimation in writing of the revocation reaching the registered office
of the company before the meeting would help the chairman to decide the
question as to which proxy should be taken into account. It, therefore, follows
that want of revocation in writing, in view of article 88 of the articles of
association (corresponding to regulation 63 of Table A of Schedule 1 to the
Companies Act), makes the proxy given subsequently inconsequential.
Learned counsel for the
petitioners nonetheless contended that if two proxies are given, the latter one
revokes the earlier one. In support of this argument, he pressed into service
the following passage from Halsbury's
Laws of England, Hailsham edition, Volume 7, para 577, at page 341 :
"Ordinarily, a proxy
can be revoked at any time before its use and if two are given, the latter one
revokes the earlier one."
This statement, without
anything more, no doubt, supports the above argument of learned counsel. But
that is not the position if the articles of association provide for such a
contingency is clear from the following principle, stated again in Halsbury :
"The articles of a company usually provide, however, that a
proxy is valid notwithstanding its revocation unless notice of the revocation
is received before the meeting at which it is used".
This passage, as is seen
from the footnote, is a replica of article 73, Schedule 1, Table A, Part I of
the English Companies Act 1948, corresponding to regulation 63, Table A,
Schedule I to the Companies Act, 1956. We have already seen that the rights of
a shareholder to vote by proxy recognised under section 176 of the Companies
Act is guided by article 88, of the articles of association (corresponding to regulation
63 of Table A of Schedule I to the Companies Act, 1956). The above argument of
learned counsel in this regard, therefore, is rejected. There is yet another
aspect that should be borne in mind in this context and it is this : There is nothing in law to exclude Sunday in the
computation of the 48 hours and, therefore, a proxy delivered on Sunday for a
meeting to be held on Tuesday that is 48 hours later would be valid provided
the receipt of the proxies at the time stated could be identified in some way.
(See Shackleton on the Law and
Practice of Meetings, Seventh edition, page 183).
Having
understood the law regarding the lodging of proxies thus, let us see whether
any of the acts of the chairman under the alleged blessings of the directors,
as contended for by the petitioners, could be said to be oppressive to the
petitioners and the minority shareholders represented by them. We have already
seen that the fact that 48 hours before the meeting falls on a holiday is
liable to be ignored for the purpose of lodging proxies. Ignorance of law in
this regard perhaps may be the reason for the issuance of exhibit A-6(a) note by the secretary and the note
pasted on the notice board by the chairman. This may perhaps enable one to
contend that the company's affairs have been conducted inefficiently or
carelessly. The chairman, under such circumstances, can be said to have acted
bona fide and in the interest of the members in issuing the note. It is
relevant, in this context, to note that none of the parties has produced any
letter of revocation of the proxies in the proceedings. That means, assuming
that the fourth respondent managed to get a second proxy from shareholders who
had given the proxies to the petitioners and which were lodged at the
registered office at 10 a.m. on August 28, 1988, the said proxies cannot be
said to supersede the earlier proxies. Under these circumstances, I am of the
view that the allegation that the affairs of the company have been conducted in
a manner which is prejudicial to the minority shareholders is not sustainable
in law. Even otherwise, assuming that what is stated would constitute an
oppressive act, even then, as already observed, that is only a solitary
instance not continuing down to the date of the petition. I am, therefore, of
the view that the petitioners have not been successful in establishing the
oppressive act of the chairman in the conduct of the affairs of the company
warranting any order under section 402 of the Companies Act.
The
company petition, in the light of the findings above, is liable to be
dismissed. I accordingly, dismiss the same with costs, which I fix at Rs.
3,000.
As
per the interim directions issued by this court, the chairman, in the presence
of observers appointed by this court, had conducted the election. Ordinarily,
it would have been enough to direct the
chairman to announce the results. But, in view of the various allegations
regarding the collection of proxies by the contesting parties and particularly
the complaint of the plaintiff (the arguments were heard along with the
arguments in this petition) and in the larger interests of the banking company,
I am of the view that the
following directions require to be issued :
1. The retiring directors who are allowed to continue in office as per
directions of this court shall cease to be directors from today.
2. The chairman, with the approval of the board, can, if so advised,
co-opt two directors and they can function as directors until election is
conducted at the next annual general meeting.
3. The election
aforesaid shall be conducted before September 30, 1989.
4. Subject to the above directions, all interim orders issued during
the pendency of the company petition stand vacated.
Taking note of the
following observations of the Supreme Court in the order in S.L.P. Nos.
14060-64 of 1988 dated December 1, 1988, this judgment is kept in abeyance till
April 8, 1989.
"It is, however,
desirable that the order passed by the learned company judge will not be given
effect to for a period of three weeks after the order is passed."
It is, however, made clear
that this direction will not, in any way, revive the interim orders passed
under section 403 and dismissed today by me.
Issue photostat copy on
usual terms.
[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
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.
[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
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 2˝ 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...
(2) 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...
(2) 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.
[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
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 2˝ 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.
[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
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.
[1989] 66 Comp. Cas. 953 (Ker.)
High Court OF Kerala
v.
Federal Bank
K.P. Rachakrishna Menon J.
C.M.
Devan and K.R. Venkiteswaran for the Petitioner.
B.S.
Krishnan, K.P. Dandapani, C.K.S. Panicker, C.K. Koshy, P. Gopalakrishna Nair,
P.V. Madhavan Netmbiar, T.R. Raman Pillai, F. Thomas, Mathai M. Paikeday, C.C.
Thomas and K.K. Usha for the Respondent.
K.P. Radhakrishna Menon
J.—An application presented under section
397, read with section 399, of the Companies Act, 1956, for the following
reliefs :
"(a) The
meeting scheduled to be held on August 30, 1988, of the company be conducted by
appointing an advocate Commissioner to supervise the election at the Municipal
Town Hall, Alwaye ;
(b) To declare that the
proxies obtained by the company on August 28, 1988, be declared invalid and
non-existent ;
(c) To conduct the
business to be transacted on August 30, 1988, without taking into consideration
of the proxies obtained by the company on August 28, 1988 ;
(d) To pass such other
orders as this Hon'ble Court may deem fit and proper in the circumstances of
the case."
The sum and substance of
the allegations in the petition is that the chairman and the directors in using
the machinery of the bank to get their candidates elected as directors (to fill
the vacancies caused on the retirement of directors by rotation) has conducted
the affairs of the company in a manner oppressive to the minority shareholders
including the petitioners.
Before I go into the merits
of the case, I shall deal with the preliminary point raised by the company and
the other contesting respondents, namely, whether the petition is maintainable
in law.
The case set up by the
respondents in this regard has two aspects, (1) the company, being a banking
company, any question pertaining to its management requires to be considered
under the provisions contained in the Banking Regulation Act, 1949, for short,
"the Act", (2) to maintain a petition under section 397 of the Companies
Act, the petitioners are bound to obtain the
consent in writing of those 100 members/shareholders mentioned in
sub-section 1(a) of section 399
and who have not figured as petitioners, so that the petition could be said to
be one on their behalf and for their benefit also. Since the consents in
writing of the said members have not been produced, the petition is liable to
be dismissed.
The first aspect : Learned
counsel for the contesting respondents, dilating on this, submitted as follows
:
The rights of the
shareholders in regard to the management of a banking company are circumscribed
by the provisions of the Act. The activities of the' board of directors are
governed by the special provisions contained in the Act. A specific reference,
however, requires to be made to the provisions contained in Part III of the Act
which governs matters relating to suspension of business and winding up of
banking companies. Since the Act is a consolidating Act, the Act is a complete
code in itself as regards the matters it deals with. After the coming into force of the Act, a banking company can
be wound up only under the provisions contained in Part III of the Act. That
means, now, a petition to wind up a banking company under section 433 of the
Companies Act is not possible. If that be the position in law, a petition under
section 397, since the same is enacted with the intention of avoiding winding
up on the "just and equitable" ground (see section 433(f) of the Companies Act), is not
maintainable.
Learned
counsel for the petitioners, on the other hand, contended that inasmuch as the
provisions of the Act are only in addition to and not in derogation of the
Companies Act, the respondents shall not be heard to say that a petition under
section 397 which was enacted with the object of safeguarding the interest of
the shareholders is not maintainable. Amplifying this aspect, learned counsel
submitted that it is enough for a petitioner under section 397 to- show that
the oppressive acts of the majority shareholders have brought about
circumstances which warrant a winding up of the company on the "just and
equitable" ground and not that circumstances warranting a winding up of
the company do in fact exist. In support of this argument he relied on a
decision of the Supreme Court in Shanti
Prasad Jain v. Kalinga Tubes
Ltd. [1965] 35 Comp Cas 351.
To
consider the aforesaid competing arguments, it is necessary to study the scope
of the provisions of the Act relating to the management and the winding up of a
banking company vis-a-vis the
provisions under the Companies Act pertaining to the management and winding up
of non-banking companies.
A
question immediately would arise as to what was the reason for the enactment of
a special statute relating to banking companies.
An
effective answer to this question cannot be had unless one is prepared to probe
into the evolution of banking laws in India. It is interesting to note in this
regard that, in the past, India had no special piece of legislation governing
banking companies. There was, therefore, a persistent demand for bringing out a
comprehensive enactment to govern the banking companies and this resulted in
the amendment of the Indian Companies Act, 1913, incorporating Part X-A therein
containing provisions governing matters which are peculiar to the business of
banking. However, there was no special procedure for banking companies,
particularly relating to their winding up. Certain special provisions relating
to banking companies were, therefore, introduced in the Companies Act by the
Indian Companies
(Amendment) Act of 1936. These newly introduced provisions, however, were only
regulatory in nature. This amendment also did not meet the purpose and,
therefore, the Reserve Bank of India framed a draft bill as far back as 1939,
the precursor of the Banking Companies Act, 1949. This 1949 Act was passed to
consolidate the law relating to banking companies. The need for this Act was
realised due to the fact that certain undesirable features in banking,
developed in the meantime, had come to stay. Banks were then being connected
with non-banking companies in that many of the directors of banking companies
were in fact controlling some non-banking companies. This resulted in the
interlocking of shares. Banking companies, therefore, could manipulate the
finances at the disposal of non-banking companies. To put it in a nutshell, the
main features were :
"the grant of loans to persons connected
with the management of companies without adequate security, extensive window
dressing at the time of preparing balance-sheet and, in general, a tendency to
utilise the bank's funds to the detriment of the interest of the
depositors."
The
Banking Companies Act, 1949, notwithstanding, the directors of banks who were
mostly industrialists could influence the banks in granting indiscriminate
advances to non-banking companies, firms or institutions in which these
directors had substantial interest. These and other acts of mismanagement in
the running of the banks resulted in the imposition of "social control"
on banking companies. The "social control" was imposed through Act 58
of 1968 which amended the Banking Regulation Act. The preamble to the Amending
Act 58 of 1968 reads:
"An
Act further to amend the Banking Regulation Act, 1949, so as to provide for the
extension of social control over banks and for matters connected therewith or
incidental thereto, and also further to amend the Reserve Bank of India Act,
1934, and the State Bank of India Act, 1955."
The
Amending Act introduced radical changes in certain provisions of the Act. The
additional controls and restrictions as imposed by the Amending Act can broadly
be stated as under :
1. Constitution of the board of directors of a
banking company—to the effect that the directors having special knowledge and
practical experience in respect of certain specified subjects related to
banking, are in majority over the directors who are merely industrialists as
popularly known (section 10A of "the Act").
2. Management of the affairs of a banking company by a whole time chairman
who has special knowledge of and practical experience in the working of a bank
or financial economic or business administration (another encroachment by
experts over industrialists), (section 10B of the Act).
3. Restrictions of loans and advances by a banking company to its
directors or to a company or firm in which a director is substantially
interested or to an individual for whom a director is a guarantor (section 20
of the Act).
4. Additional powers conferred on the Reserve Bank of India to enforce and
supervise the social control (mainly sections 30, 35B, 36(1)(d) and 47A of the Act).
5. Punishment for (a)
obstructing any person from lawfully entering or leaving a bank, (b) holding demonstration within a
bank, and (c) acting to
undermine depositors' confidence in a bank (section 36AD of the Act).
6. Special powers of the
Central Government to acquire under takings of banking company when it is
satisfied on a report from the Reserve Bank that the banking company has
committed certain defaults and that it is necessary to do so (Part IIC,
sections 36AE to 36AJ of the Act) (see Tannan on Banking Law and Practice).
It would thus be seen that
the provisions of the Act are intended to protect the interest of the
depositors.
The differences noticeable
between the Act on the one hand and the Companies Act on the other require to
be considered in this context. Non-banking companies, it is by now well
established, deal with the money of the stockholders who own a share in the
assets, who appoint their own directors "for better or for worse" and
whose liabilities are also limited. The banking companies, it should be
remembered, deal with money of the depositors who have no security other than
the solvency of the banking company and its sound dealings with their money. As
observed by the Supreme Court "ex facie, the banking companies must be
regulated somewhat differently, the interests of the depositors must be
paramount and the winding up of such companies depends upon other
considerations, chief among which is the desire to pay off the creditors as far
as possible in full or at least equitably. The action is thus dictated-not from
any abstract consideration of a long-range view of the future ability of a bank
to pay its creditors but its ability to pay them at any given time." (See Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962] 32 Comp
Cas 514 (SC).
As to why special
provisions to wind up a banking company were enacted (Part III of the Act), it
is profitable to refer to the following observations of the Supreme Court in Vellukunnel's case [1962] 32 Comp Cas
514 (SC) (p. 530) :
"When the Banking
Companies Act was passed in 1949, it was explained in the note on clause 37,
which corresponded to section 38, that the provisions of the Indian Companies
Act in respect of liquidation of companies did not seem to be suitable for
banking companies, that a bank's business being of an over-the-counter kind,
the bank has to meet immediately its liability and a provision for winding up
of the banking company when it refuses to meet a lawful demand within a stated
time, was necessary. It was also
stated that the Reserve Bank was given authority to apply for the liquidation
of a banking company, if its affairs were conducted to the detriment of the
interests of the depositors." (emphasis supplied).
A banking company,
therefore, could be wound up only under the provisions of Part III of the Act
and not under section 433 read with the allied sections contained in the
Companies Act.
Regarding the management of
the company : After the imposition of "social control" by the
Amending Act No. 58 of 1968, no shareholder of a banking company, unlike the
shareholder of an ordinary company could complain that the affairs of a banking
company are conducted in such a way that one group of shareholders is getting a
benefit against the other, and, therefore, the business of the banking company
is liable to be suspended. A reference in this connection to sections 10A, 10B,
20, 30, 35B, 36(1)(d), 36AD,
36AE, 36AJ and 47A of the Act is profitable.
I shall now deal with some
of the salient provisions. Section 10A provides that not less than fifty-one
per cent. of the total number of members of the board of directors of a banking
company shall consist of persons who shall have special knowledge or practical
experience in respect of one or more of the following matters, namely :
|
(i) accountancy, |
(ii) agriculture and rural, economy |
(iii) banking, |
|
(iv) co-operation, |
(v) economics, |
(vi) finance, |
|
(vii) law, |
(viii) small-scale
industry, |
|
(ix) and any other matter the special knowledge of, and practical
experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company. This
provision further insists that out of
the aforesaid number of directors, net less than two shall be persons having
special knowledge or practical experience in respect of agriculture and rural
economy, co-operation or small-scale industry. Such persons, however, shall not
have substantial interest in, or be connected with, whether as employee,
manager or managing agent, of any company, not being a company registered under
section 25 of the Companies Act, 1956, or any firm, which carries on any trade,
commerce or industry and which, in either case, is not a small-scale industrial
concern, or shall not be proprietors of any trading, commercial or industrial
concern, not being a small-scale industrial concern. No director of a banking
company, by whatever name called, shall hold office continuously for a period
exceeding eight years notwithstanding anything to the contrary contained in the
Companies Act, 1956, or in any other law for the time being in force.
Similarly, a chairman or other whole-time director of a banking company who
happens to be removed from office as such chairman, or whole-time director, as
the case may be, under the provisions of the Act, shall also cease to be a
director of the banking company and shall also not be eligible to be appointed
as a director of such banking company, whether by election or co-option or
otherwise, for a period of four years from the date of his ceasing to be the
chairman or whole-time director, as the case may be. If the above requirements
are not fulfilled at any time, the board of directors shall reconstitute such
board so as to ensure that the said requirements are fulfilled, and for the
purpose of reconstituting the board in the manner indicated above, if it is
necessary to retire any director or directors, the board may, by lots drawn in
such manner as may be prescribed, decide which director or directors shall
cease to hold office and such decision shall be binding on every director of
the board. This section further provides that where the Reserve Bank is of
opinion that the composition of the board of directors of a banking company is
such that it does not fulfil the requirement, namely, not less than fifty one
per cent, of the total number of members of the board of directors of a banking
company shall consist of persons who are having special knowledge or practical
experience in any one or more of the matters stated hereinbefore, the Reserve
Bank has a right, after giving to the banking company a reasonable opportunity
of being heard, to direct the banking company to sq reconstitute its board of
directors as to ensure that the said requirement is fulfilled ; and if, within
two months from the date of receipt of such an order, the banking company does
not comply with the directions, that bank can, after determining by lots drawn in
such manner as may be prescribed, the person who ought to be removed
from the membership of the board of directors, remove such person from the
office of the director and appoint a person who has special knowledge of the
matters referred to above, as a member of the board of directors in the place
of the person so removed, whereupon the person so appointed shall be deemed to
have been duly elected by the banking company as its director. Every
appointment, removal or reconstitution duly made, and every election duly held
under section 10A shall be final and shall not be called in question in any
court. Similarly, every director elected or, as the case may be, appointed
under this section shall hold office until the date up to which his predecessor
would have held office, if the election would not have been held, or, as the
case may be, the appointment had not been made. It is further provided that no act or proceeding of the board of
directors of a banking company shall be invalid by reason only of any defect in
the composition thereof or on the ground that it is subsequently discovered
that any of its members did not fulfil the requirements of this section. Section
10B provides that the chairman
will be entrusted with the management of the whole of the affairs of the
banking company notwithstanding anything contained in any law for the time
being in force or any contract to the contrary. The chairman, of
course, shall exercise his powers subject only to the superintendence, control
and direction of the board of directors. It is imperative that the chairman of
the board of directors shall be a person who has special knowledge and
practical experience of the working of a banking company, or of the State Bank
of India or any subsidiary bank or a financial institution, or financial,
economic or business administration ; provided, however, a person shall be
disqualified for being a chairman if he is a director of any non-banking
company except a director of a subsidiary of the banking company or director of
a company registered under section 25 of the Companies Act, 1956, or is a
partner of any firm which carries on any trade, business or industry, or has
substantial interest in any other company or firm, or is a director, manager,
managing agent, partner or proprietor of any trading, commercial or industrial
concern, or is engaged in any other business or vocation. If the Reserve Bank is of opinion
that any person who has been elected as the chairman of the board of directors
of a banking company is not a fit and proper person to hold such office, it has
the power, after giving to such person and to the banking company a reasonable
opportunity of being heard, by order in writing require the banking company to
elect or appoint any other person, as the chairman of the board of directors
and if, within a period of two months from the date of receipt of such order,
the banking company fails to elect or appoint a suitable person as chairman of
its board of directors, the Reserve Bank may, by order, remove the
first-mentioned person from the office of the chairman and appoint a suitable
person in his place where-upon, the person so appointed shall be deemed to have
been duly elected or appointed, as the case may be, as the chairman of the
board of directors. The
chairman, thus appointed, shall hold office for the residue of the period of
office of the person in whose place he has been so elected or appointed. This
right of the Reserve Bank is without prejudice to the provisions of section
36AA. The banking company and the chairman against whom an order of removal is
made may, if so advised, within thirty days from the date of communication to
it or to him of the order, prefer an appeal to the Central Government and the
decision of the Central Government thereon, and subject thereto, the order made
by the Reserve Bank, shall be final and shall not be called in question in any
court. Section 10-BB provides that
where the office of the chairman of a banking company is vacant, the Reserve
Bank may, if it is of opinion that the continuation of such vacancy is likely
to adversely affect the interests of the banking company, appoint a person, who
possesses the qualifications prescribed under sub-section (4) of section 10-B as the chairman and where the person so appointed is
not a director of such banking company, he shall, so long as he holds the
office of the chairman, be deemed to be a director. A chairman and the
directors appointed by the Reserve Bank under section 10-A shall not be
required to hold qualifying shares in the banking company. It is important, in
this context, to note that the provisions of sections 10Aand 10B are to have
overriding effect over all other laws, contracts, memorandum and articles of
association, etc. Notwithstanding anything to the contrary contained in section
77 of the Companies Act, no banking company shall grant any loan or advance on
the security of its own shares, etc., as provided for under section 20. Without obtaining the prior permission of
the Reserve Bank, no banking company shall open a view place of business and
transfer an existing place of business. The accounts and balance-sheet
of a banking company are required to be prepared as provided for under section
29 of the Act. The balance-sheet and the profit and loss account shall be
audited by a qualified accountant. The
auditor shall be one who was appointed after obtaining the previous approval of
the Reserve Bank. The auditor is bound to act under the directions of the
Reserve Bank in respect of the matters made mention of in the direction. Section
S5B provides that no amendment of any provision relating to the maximum
permissible number of directors or the appointment or reappointment or
termination of appointment or remuneration of a chairman, a managing director
or any other director, whole-time or otherwise or of a manager or a chief
executive officer by whatever name called, whether that provision be contained
in the company's memorandum or articles of association, or in an agreement
entered into by it, or in any resolution passed by the company in general
meeting or by its board of directors shall have effect unless approved by the
Reserve Bank. Similarly, no appointment or reappointment or termination of
appointment of a chairman, a managing or whole time director, manager or chief
executive officer by whatever name called, shall have effect unless such
appointment, reappointment or termination of appointment is made with the
previous approval of the Reserve Bank. The functions and powers conferred
on the Reserve Bank by section 36 of the Act deserve special mention. It has
the power to direct the company to call a meeting of its directors, etc., if it
is found that the affairs of the banking company are being conducted in a
manner detrimental to the interests of the banking company or its depositors.
It can depute one or more of its officers to watch the proceedings at any
meeting of the board or of any committee or of any other body constituted by
it; require the company to give an opportunity to the officers so deputed, to
be heard at such meetings and also require such officers to send a report of
such proceedings to the Reserve Bank. I do not wish to burden this judgment by
referring to more such provisions of the Act pertaining to the management of a
banking company.
It can thus be seen from
these provisions that "the Act, at every turn, makes the Reserve Bank the
authority to sanction, permit, certify, accept, report, advise, control,
direct, license and prohibit. There is hardly any provision where the Reserve
Bank's judgment is not made final vis-a-vis
a banking company except rarely where an appeal to the Central Government would
lie". (See Vellukunnel's case
[1962] 32 Comp Cas 574 (SC)). It is clear, therefore, to my mind, that the
object with which these provisions were enacted will get frustrated if the
business of banking companies is even now said to be governed by the provisions
of the Companies Act.
Having understood the scope
of the Act thus, let us see whether a banking company can be wound up under the
"just and equitable" ground. "Just and equitable" ground is
denned by section 433(f) of the
Companies Act. It is true that, under this clause, a company can be wound up
"whenever lack of confidence is rested on a lack of probity in the conduct
of the affairs of the company". (See Loch v. John Blackwood
Ltd. [1924] AC 783 (PC). Similarly, where there is mismanagement and
there is practical difficulty in not getting it remedied, it is a proper case
for winding up on this ground (see Rajahmundry
Electric Supply Corporation Ltd. v. Nageswara Rao (A.) [1956] 26 Comp Cas 91 (SC) ;
likewise, where there is a deadlock in the management and where the substratum
of the company is gone or its only business has become impossible. To put it
differently, before an order for winding up under "just and
equitable" ground is passed, the court, after taking into account all the
facts and circumstances of the case, shall see whether there is any
disorderliness of that magnitude in the management and conduct of the company
warranting an order to wind up the company.
The question that requires
an answer now is : could it be said that, after the imposition of "social
control" by the Amending Act No. 58 of 1968 making the Reserve Bank the
ultimate authority in matters of the management of banking companies, a banking
company is liable to be wound up under the "just and equitable"
ground. My answer to this question is an emphatic "no", because,
notwithstanding anything contained in any law for the time being in force or
any contract to the contrary, the whole affairs of a banking company vest in
the chairman who, virtually, is appointed by the Reserve Bank. There is,
therefore, no possibility of suspension of business or the chairman managing
the affairs of the company with the intent of benefiting one group of
shareholders as against others. It is relevant, in this context, to make a
special reference to the provisions contained in Part III of the Act. As the
caption shows, these provisions govern the suspension of the business and
winding up of banking companies. The High Court, on an application from the
Reserve Bank, can suspend the business of a banking company provided the
conditions stipulated under section 37 are satisfied. The winding up of a
banking company, after the introduction of Part III, can be ordered only on the
ground that the banking company is unable to pay its debts or if an application
for its winding up has been made by the Reserve Bank under section 37 or under
subsection (2) of section 38. The non-obstante clause in section 38, namely,
"notwithstanding anything contained in section 391, section 392, section
433 and section 583 of the Companies Act, 1956" indicates that the
provisions of the Companies Act pertaining to the winding up of a company
should, as they are derogatory to or inconsistent with these provisions, give
way to the provisions of the Act in that regard. A reference to Part IIIA,
particularly to section 45A, irrelevant in this context. The section says that
the special provisions for speedy disposal of winding up proceedings contained
in Part IIIA shall override all other laws including the Companies Act. That
means, that after the introduction of the provisions in Part III and Part IIIA
of the Act, no banking company can be wound up under the "just and
equitable" ground or any other ground enumerated under section 433 of the
Companies Act except on the ground of being unable to pay its debts mentioned
in section 38 of the Act. That is the intention of the Legislature is also
clear from the provisions of Part II, IIA and IIB of the Act mentioned supra,
making the Reserve Bank of India the controlling authority in regard to the
management of a banking company subject to certain rights of appeals conferred
on aggrieved parties by the Act, to the Central Government.
From the above discussion,
it is clear that no banking company today can be wound up under "just and
equitable" ground. If that be the position, no petition under section 397
is maintainable because, as observed by the Supreme Court in Rajahmundri Electric Supply Corporation's case
[1956] 26 Comp Cas 91, where the facts proved do not make out a case for
winding up under section 162C (corresponding to section 433(f)), no order under section 153C
(corresponding to section 397) can be passed. It should, in this connection, be
remembered that section 397 of the Companies Act, 1956, is intended to avoid
winding up of a company under the "just and. equitable" ground, if
possible, and keeping the company going but at the same time relieving minority
shareholders from the acts of oppression and mismanagement by the majority
shareholders. In other words, the power under section 397 is intended to
prevent a winding up under the "just and equitable" ground within the
meaning of section 433(f) of
the Companies Act. A reference in this connection to two decisions, one of the
Madras High Court in K.R.S. Narayana
Iyengar v. T.A. Mani, AIR
1980 Mad 338 and one of the Allahabad High Court in Raghunath Swarup Mathur v. Harswarup Mathur [1970] 40 Comp Cas 282, is profitable. From the
law declared by the Supreme Court in Rajahmundri
Electric Supply Corporation's case [1956] 26 Comp Cas 91, it is clear
that section 397 provides an alternative remedy to the minority shareholders
who could, on the said ground of oppression by. majority shareholders, seek a
winding up of the company under section 433(f), that is, on the "just and equitable" ground. That
oppression of minority shareholders will be treated as a "just and
equitable" ground where those who control the company abuse their powers
to such an extent as to seriously prejudice their interest is, no more, a moot
question. (See Anglo-Continental
Produce Co. Ltd., In re [1939] 1 All ER 99 (Ch D). Briefly stated, the
object in enacting section 397 is to salvage a company which otherwise is
liable to be wound up under, the "just and equitable" ground (Section
433(f)). At this juncture, it
is profitable to keep in view the opinion of Lord Clyde, Lord President in Baird v. Lees [1924] SC 83 quoted with approval by the Privy council in Loch v. John Blackwood Ltd. [1924] AC 783 (PC). The opinion reads (at
page 103 of [1939] 1 All ER) :
"I have no intention
of attempting a definition of the circumstances which amount to a 'just and
equitable' cause. But I think I may say this. A shareholder puts his money into
a company on certain conditions. The first of them is that the business in
which he invests shall be limited to certain definite objects. The second is
that it shall be carried on by certain persons elected in a specified way. And
the third is that the business shall be conducted in accordance with certain
principles of commercial administration defined in the statute which provides
some guarantee of commercial probity and efficiency. If shareholders find that
these conditions or some of them are deliberately and consistently violated and
set aside by the action of a member and official of the company who wields an
overwhelming voting power, and if the result of that is that, for the
extrication of their rights as shareholders, they are deprived of the ordinary
facilities which compliance with the Companies Acts, would provide them with,
then there does arise, in my opinion, a situation in which it may be just and
equitable for the court to wind up the company."
But, in the case of a
banking company, it is the Reserve Bank which factually controls the company
(as is seen from the discussion supra) and, therefore, the question of the
minority shareholders or any part of the shareholders being oppressed does not
arise at all. A proceeding under section 397, therefore, cannot be taken
cognizance of by the court if the company involved is a banking company.
Finding it difficult to
grapple with this situation brought about by the provisions of the Act, learned
counsel for the petitioners argues that the above provisions of the Act
notwithstanding, section 397 and other provisions pertaining to the management
and the winding up of companies under the Companies Act are available for being
pressed into service by an aggrieved shareholder although the company involved
is a banking company. In support of this argument, he made reference to the
provisions of section 2 of the Act and contended that the said provisions are
only in addition to and not in derogation of the Companies Act. That means,
according to the counsel, all the provisions of the Companies Act applicable to
winding-up proceedings, are available and consequently, section 397 can be
invoked by aggrieved shareholders for redressal of their grievances. This
argument of learned counsel that the provisions of the Act are not to be
interpreted as in derogation of the provisions of the Companies Act, but in
addition thereto, is due to his apathy to take note of the existence of the
essential qualification embodied in section 2, namely, "save as hereinafter
expressly provided". See Central
Bank of India v. Their Workmen [1959]
29 Com Cas 367; [1959-60] 11 FJR 57. To the same effect is section 616 of the
Companies Act. The newly introduced provisions of the Act by Amending Act 58 of
1968, pertaining to the management of a banking company and its winding up, in
my judgment, will come under the qualifying .clause in section 2 of the Act,
namely, "save as hereinafter expressly provided". It should, in this
connection, be remembered that the Act is one to consolidate and amend the law
relating to banking in the country and that a consolidating Act is a code by
itself in regard to the matters dealt with therein. See Ravulu Subba-Rao v. CIT
[1956] 27 ITR 164 (Mad). In short, any proceeding concerning the
management of a banking company and the one for the winding up of the same
could be maintained only on establishing the requirements prescribed under the
respective provisions of the Act. To the said extent, the provisions of the
Act, in my view, are not in addition to, but in derogation of, the Companies
Act. Section 45A of the Act also can profitably be referred to in this
connection. The above argument of learned counsel for the petitioners is,
accordingly, rejected. The petition under section 397, therefore, is not maintainable.
The second aspect of the
preliminary point : To maintain a petition under section 397, the petitioner
shall disclose facts showing that the requirements prescribed under section 399
of the Companies Act have been satisfied. To make it appear that the said
requirement has been satisfied, the petitioners along with the petition have
filed a document containing the signatures of 160 shareholders. This document,
according to the petitioners, reflects the consent in writing of the said
shareholders. We shall now see what is the requirement that should be satisfied
by a petitioner under section 397. A reference in this connection to section
399 is profitable. Sub-section (3) of this section provides that where any
members of a company are entitled to make an application in virtue of
sub-section (1), any one or more of them having obtained the consent in writing
of the rest (clause (a) of
sub-section (1) provides that to maintain a petition under section 397 in the
case of a company having share capital, not less than 100 members of the
company shall be there) can make the application on behalf and for the benefit
of all of them. The condition that the "consent in writing" of those
who have not figured as petitioners shall be obtained is a condition precedent
and, therefore, if the petition is not supported by the "consent in
writing" of those shareholders, the same is not maintainable. The document
aforesaid was pressed into service by the petitioners to show that the above
requirement is satisfied. On a perusal of this document, it is clear that there
is nothing there to show that the rest of the members have given their
"consent in writing". On the other hand, CAW1" who is one of the
signatories to the said document has positively stated that he, his wife and
some other signatories who are his relations have not given their "consent
in writing" for the filing of the petition. The petitioners have not
chosen to examine any of the signatories despite the evidence of CAW1. To say
that one has given his "consent in writing", it should also be proved
that he or she gave his consent after having understood the contents of the
petition. A reference in this connection to the admission of the petitioners in
paragraph 9 of the reply-affidavit dated October 13, 1988, is profitable. It
reads :
"There is no express
consent given by them to the petition".
In the absence of such
proof, even if there is a "consent in writing", the same may not
satisfy the requirements of section 399. Here, there is no such evidence ; for
that matter, there is no proper pleadings even in this regard. For this reason
also, I am of the view that the petition is not maintainable.
Now, I shall deal with the
merits of the case : Facts essential and requisite for the purpose of this lie
in a narrow compass. The 5.7th annual general meeting of the company, to elect
the directors to fill the vacancies caused by retirement by rotation, was
scheduled to take place on August 30, 1988. Exhibit A-2 is the statutory notice
issued in this regard. Note (1) appended to exhibit A-2 provides that a member
entitled to attend and vote at the meeting is entitled to appoint a proxy to
attend and vote instead of himself. The note further says that the instrument
appointing a proxy shall be deposited at the registered office of the bank not
later than 48 hours before the time for holding the meeting which as per
exhibit A-2, is fixed at 10 a.m. on August 30, 1988. A proxy need not be
member. As per this notice, proxies, therefore, should be deposited before or
at 10 a.m. on August 28, 1988. This time happens to fall on a Sunday and,
therefore, the first petitioner handed over exhibit A-6 letter to the secretary
of the bank with a view to ascertain as to whether the proxies could be
deposited till 10 a.m. on August 28, 1988. The secretary made exhibit A-6(a) endorsement which reads :
"As last 48 hours
falls at 10 a.m. on August 28, 1988, Sunday, proxies will be accepted only up
to 5 p.m. on August 27, 1988".
The petitioners, it is
said, therefore, hurriedly collected the proxies and deposited them at the
registered office of the company before 5 p.m. on August 27, 1988. When they
went to the registered office of the bank for lodging the proxies, they saw on
the notice board a note by the chairman that proxies in connection with the
election can validly be deposited at or before 10 a.m. on August 28, 1988. This
note, it is contended, enabled the fourth respondent, who is one of the
contestants, to deposit the proxies he had collected, including from those who
had originally given proxies to the petitioners, at 10 a.m. on August 28, 1988.
The proxies deposited later would automatically supersede the proxies lodged
earlier and, therefore, the proxies deposited by the petitioners before 5 p.m.
on August 27, 1988, would get automatically superseded by the proxies deposited
on August 28, 1988. This situation brought about by the note issued by the
chairman with the blessings of the directors who informally met in connection
therewith, helped the nominees of the company (fourth respondent and another)
for the election to get a march over the nominees of the petitioners. It is
further stated that since the directors who wanted the chairman to issue the
note represent the majority shareholders, it must be held that this action, of
the directors is in a manner oppressive to the minority shareholders including
the petitioners. The directors used the services of the officials of the bank
to collect the proxies from the shareholders including those who had given
proxies to the petitioners' candidates, for the benefit of the official
candidate and this conduct of the board of directors, representing the majority
shareholders, reflects the misuse of the official machinery resulting in
oppression of the minority shareholders. The company and the chairman have
filed separate counter-statements disputing the above allegations. So is the
case with the fourth respondent. They have emphatically denied the above
allegations.
From the above, it is clear
that the act of oppression pleaded is the undue interest taken by the chairman
and some of the directors to see that their nominees are elected as directors.
These statements may perhaps constitute an isolated act of oppression, assuming
they constitute an act of oppression, but not in any way an act of oppression
continuing down to the date of the petition.
Is this isolated act of
oppression sufficient to maintain a petition under section 397, assuming the
petitioners can press that section into service in this case? An incidental
question arising for consideration in this connection is this: Without a
revocation in writing, could it be said that a vote given in accordance with
the terms of an instrument of proxy is invalid?
Regarding the first
question, the law is well-settled. In order to grant the relief under section
397, a petitioner must show three things : (1) the facts pleaded justify the
making up of a winding-up order on the "just and equitable" ground,
but the winding up would unfairly prejudice the shareholders including the
petitioners who support the petition but an order passed under section 402 of
the Companies Act would grant them appropriate relief. (2) the affairs of the
company are being conducted in a manner oppressive to some part of the
members/shareholders including the petitioners. It is to be noted here that the
section does not require that the oppressed members should be the majority.
"Shareholders with a minority beneficial interest may, by having voting
control, be able to oppress those with the majority, beneficial interest".
The oppression complained of must be suffered by the shareholders in their
capacity as shareholders and not in their character as directors. The
expression employed in the section "the affairs of the company that are
being conducted" indicates, not isolated acts of oppression "but a
continuing process, and one continuing down to the date of the petition".
It is pertinent to note that it is not enough if it is established that the
company's affairs have been conducted unwisely or inefficiently or carelessly.
Under such circumstances also, a shareholder can contend that he has lost
confidence in the manner in which the affairs of the company are conducted.
That is not sufficient. That is not oppression ; "nor is resentment at
being outvoted a ground for relief under this section". (3) To wind up the
company would unfairly prejudice the oppressed members.
It should, in this
connection, be remembered that it is imperative that the petitioner shall
clearly plead these things; or else, for want of pleadings, the petition will
be dismissed. (See Buckley on the
Companies Acts, 14th edition, Vol. one, pages 490 to 493, Shanti Prasad Jain v. Kalinga Tubes Ltd., [1965] 32 Comp
Cas 351 (SC) and Xeedle Industries (India) Ltd. v. Needle
Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743
(SC). Alongside, we should keep in view the law pertaining to
"proxies". A reference in this connection to article 88 of the
articles of association is relevant. It reads :
A vote given in accordance
with terms of an instrument of proxy shall be valid notwithstanding the
previous death of the principal, or revocation of the proxy or transfer of the
shares 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 or
by the Chairman of the meeting before the leader. This article is verbatim
regulation 63 of Table A of Schedule 1 to the Companies Act. Section 28 of the
Companies Act is profitably to be referred to in this connection. This section
provides that the articles of association of a company, limited by shares, may
adopt one or any of the regulations contained in Table A of Schedule 1. It,
therefore, follows that the rights of the shareholders, mentioned under section
176 of the Companies Act in regard to the appointment of another person
(whether a member or not) as his proxy to attend and vote instead of himself,
are governed by article 88. This article is nothing but a replica of regulation
63 of Table A of the Companies Act, as we have already seen. The shareholders
are bound by this article because "the articles constitute a contract
between the company and a member in respect of his rights and liabilities as a
share-holder…" (See Halsbury's
Laws of England, Hailsham edition, para 118, at p. 71, Volume 7). If
that be so, a vote given by a shareholder, in accordance with the terms of an
instrument of proxy, shall be valid notwithstanding the revocation of the
proxy, provided no intimation in writing of the revocation has been received at
the office or by the chairman of the meeting before the vote is given. I am
fortified in this view by a ruling of Russell J. in Spiller v. Mayo (Rhodezia) Development Co. (1908) Ltd. [1926] WN 78. The learned judge
has observed thus :
"........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 this Lordship's opinion that could not
be sustained. (Why his Lordship said so was in fact there was a revocation in
these words : 'I hereby withdraw the proxy that I have lodged with the company
against the reappointment of Mr. C.F. Rowsell as a director'). 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........"
(emphasis
supplied) (See also pages 184 and 185, Shackleton
on the Law and Practice of Meetings, Seventh edition).
It may, in this connection,
be noted that a proxy which is said to be a subsequent proxy can either be
without any date or may bear the same date. In such cases, how could a chairman
of the meeting decide which proxy supersedes which ? Under such circumstances,
only an intimation in writing of the revocation reaching the registered office
of the company before the meeting would help the chairman to decide the
question as to which proxy should be taken into account. It, therefore, follows
that want of revocation in writing, in view of article 88 of the articles of
association (corresponding to regulation 63 of Table A of Schedule 1 to the
Companies Act), makes the proxy given subsequently inconsequential.
Learned counsel for the
petitioners nonetheless contended that if two proxies are given, the latter one
revokes the earlier one. In support of this argument, he pressed into service
the following passage from Halsbury's
Laws of England, Hailsham edition, Volume 7, para 577, at page 341 :
"Ordinarily, a proxy
can be revoked at any time before its use and if two are given, the latter one
revokes the earlier one."
This statement, without
anything more, no doubt, supports the above argument of learned counsel. But that
is not the position if the articles of association provide for such a
contingency is clear from the following principle, stated again in Halsbury :
"The articles of a company usually provide, however, that a
proxy is valid notwithstanding its revocation unless notice of the revocation
is received before the meeting at which it is used".
This passage, as is seen
from the footnote, is a replica of article 73, Schedule 1, Table A, Part I of
the English Companies Act 1948, corresponding to regulation 63, Table A,
Schedule I to the Companies Act, 1956. We have already seen that the rights of
a shareholder to vote by proxy recognised under section 176 of the Companies
Act is guided by article 88, of the articles of association (corresponding to
regulation 63 of Table A of Schedule I to the Companies Act, 1956). The above
argument of learned counsel in this regard, therefore, is rejected. There is
yet another aspect that should be borne in mind in this context and it is this
: There is nothing in law to exclude
Sunday in the computation of the 48 hours and, therefore, a proxy delivered on
Sunday for a meeting to be held on Tuesday that is 48 hours later would be
valid provided the receipt of the proxies at the time stated could be
identified in some way. (See Shackleton
on the Law and Practice of Meetings, Seventh edition, page 183).
Having
understood the law regarding the lodging of proxies thus, let us see whether
any of the acts of the chairman under the alleged blessings of the directors,
as contended for by the petitioners, could be said to be oppressive to the
petitioners and the minority shareholders represented by them. We have already
seen that the fact that 48 hours before the meeting falls on a holiday is
liable to be ignored for the purpose of lodging proxies. Ignorance of law in
this regard perhaps may be the reason for the issuance of exhibit A-6(a) note by the secretary and the note
pasted on the notice board by the chairman. This may perhaps enable one to
contend that the company's affairs have been conducted inefficiently or
carelessly. The chairman, under such circumstances, can be said to have acted
bona fide and in the interest of the members in issuing the note. It is
relevant, in this context, to note that none of the parties has produced any letter
of revocation of the proxies in the proceedings. That means, assuming that the
fourth respondent managed to get a second proxy from shareholders who had given
the proxies to the petitioners and which were lodged at the registered office
at 10 a.m. on August 28, 1988, the said proxies cannot be said to supersede the
earlier proxies. Under these circumstances, I am of the view that the
allegation that the affairs of the company have been conducted in a manner
which is prejudicial to the minority shareholders is not sustainable in law.
Even otherwise, assuming that what is stated would constitute an oppressive
act, even then, as already observed, that is only a solitary instance not
continuing down to the date of the petition. I am, therefore, of the view that
the petitioners have not been successful in establishing the oppressive act of
the chairman in the conduct of the affairs of the company warranting any order
under section 402 of the Companies Act.
The
company petition, in the light of the findings above, is liable to be
dismissed. I accordingly, dismiss the same with costs, which I fix at Rs.
3,000.
As
per the interim directions issued by this court, the chairman, in the presence
of observers appointed by this court, had conducted the election. Ordinarily,
it would have been enough to direct the
chairman to announce the results. But, in view of the various allegations
regarding the collection of proxies by the contesting parties and particularly
the complaint of the plaintiff (the arguments were heard along with the
arguments in this petition) and in the larger interests of the banking company,
I am of the view that the
following directions require to be issued :
1. The retiring directors who are allowed to continue in office as per
directions of this court shall cease to be directors from today.
2. The chairman, with the approval of the board, can, if so advised,
co-opt two directors and they can function as directors until election is
conducted at the next annual general meeting.
3. The election aforesaid
shall be conducted before September 30, 1989.
4. Subject to the above directions, all interim orders issued during
the pendency of the company petition stand vacated.
Taking note of the
following observations of the Supreme Court in the order in S.L.P. Nos.
14060-64 of 1988 dated December 1, 1988, this judgment is kept in abeyance till
April 8, 1989.
"It is, however,
desirable that the order passed by the learned company judge will not be given
effect to for a period of three weeks after the order is passed."
It is, however, made clear
that this direction will not, in any way, revive the interim orders passed
under section 403 and dismissed today by me.
Issue photostat copy on
usual terms.
[1988]
63 COMP. CAS. 688 (DELHI)
HIGH COURT OF DELHI
v.
V.K. Goel
S.S.
CHADHA AND S.N. SAPRA, JJ.
F.A.O.
(O.S.) NO. 15 OF 1987
C.M.
Oberoi for the Petitioner.
P.P. Malhotra for the Respondent.
S.S. Chadha, J. —This appeal under section 10 of the Delhi High Court Act, 1966, is directed against the order dated February 2, 1987, passed by G.C. Jain J. dismissing an appeal under rule 4, Chapter II, of the Delhi High Court (Original Side) Rules, 1967, against the order of the Registrar dated November 14, 1986, directing that certified copies of the proxies be supplied to the plaintiff in the suit as per the rules.
In order to appreciate the preliminary objection that the appeal is not maintainable, it is necessary to state certain facts. M/s. Swadeshi Polytex Limited (hereinafter referred to as "the company"), defendant No. 2 in the suit/appellant before us, is a public limited company duly incorporated under the Companies Act. Shri V.K. Goel, plaintiff in the suit, is a registered shareholder of 50 equity shares of Rs. 10 each in the company. The secretary of the company issued on January 23, 1986, a notice for holding the 16th annual general meeting of the company on March 15, 1986, at its registered office. Shri Raghu Raj was appointed as the chairman of this annual general meeting of the company. Section 176 of the Companies Act, 1956, gives a right to the members of a company entitled to attend and vote at a meeting to cast their votes by proxy. Some members of the company executed two instruments of proxies each, appointing proxies which were duly lodged with the company. The proxies appointed under one set voted for Dr. Rajaram Jaipuria and his nominees. Proxies appointed by the same members under another set voted for Sri Mahendra Swarup and his nominees. The plaintiff raised objections to the proxies and submitted a letter to the chairman of the meeting in this regard. The objection was that the instruments of proxy by virtue of which the proxies voted in favour of Dr. Rajaram Jaipuria and his nominees were from all over India but had been signed and dated March 13, 1986. In other words, this dating was not done at the time of the execution of the proxies by the members but was done at the time of submission of proxies to the company with the object of making these proxies the last proxies of the members and this act amounted to tampering with the original instruments of proxy with the result that the said proxies were liable to be rejected by the chairman and other scrutinising officers. It was contended that in case there was more than one proxy by the same member, then the matter be investigated to find out which was the last proxy executed by him. The plaintiff by another letter dated April 2, 1986, invited the attention of the chairman that the investigation in terms of article 91 of the articles of association may be made in this behalf. The chairman declared the result on April 4, 1986, after taking into account the votes by proxies objected to by the plaintiff. Being aggrieved, he filed a suit on April 5, 1986, seeking a decree for declaration that the instruments of proxy executed last shall prevail over those executed earlier regardless of the date mentioned in the instrument of proxy; a decree for mandatory injunction commanding the defendants to make an enquiry/investigation into the execution/revocation of the various instruments of proxies and that the results of the poll announced at the 16th annual general meeting were invalid and void besides another relief of an injunction restraining the persons declared as directors of the company from acting as directors of the company.
The suit came up for admission before a learned single judge of this court on April 5, 1986. One of the ex parte orders passed was a direction to the defendants to deposit the proxies in court on April 7, 1986. The defendants were served in the forenoon of April 7, 1986, and they put in appearance in court. The proxies were not deposited in court on April 7, 1986, when the court directed that the order of the deposit of proxies be complied with by April 9, 1986, and after the proxies are deposited, the same be kept in a sealed cover. The defendants moved an application dated April 9, 1986, under section 151 of the Code of Civil Procedure, 1908, being I. A. No. 2351 of 1986, informing the court of the circumstances under which the order of the court for deposit of the proxies could not be complied with. It was pointed out therein that the court of the Sub-Civil Judge, Ghaziabad, in a suit filed by one Shri Mahabir Pershad Dalmia against the chairman of the annual general meeting has by an order directed that the proxies lying with defendant No. 2 company should be seized and deposited in the said court and had appointed a commissioner to serve the order as well as to seize the proxies, and he had served the orders and had seized the proxies.
The issues in the suit were framed on August 19, 1986. Issue No. 10 is whether the proxies in favour of Shri Rajaram Jaipuria and his nominees dated March 13, 1986, had been executed by the shareholders concerned on the same date, i.e., March 13, 1986, and if not, whether the said proxies were invalid? This issue also covered the question whether the proxies bearing the later date would not prevail over a proxy bearing an earlier date. Issue No. 11 is whether the shareholders who had given proxies in favour of Dr. Rajaram Jaipuria and his nominees had also given proxies in favour of Shri Mahinder Swarup and his nominees, and if so, whether the proxies given in favour of Dr. Rajaram Jaipuria and his nominees would stand revoked on that ground? Issue No. 12 is whether some of the shareholders who had given proxies in favour of Dr. Rajaram Jaipuria and his nominees had revoked those proxies, and if so when and to what effect?
The suit was being made ready for trial. The plaintiff moved an application under Order XIII rule 10 of the Code of Civil Procedure, 1908, praying to the court to send for the records of the suit pending in the Court of Sub-Civil Judge, Ghaziabad, being Suit No. 329 of 1986 and inspect and/or permit the plaintiff to inspect the same and also to send for the proxies deposited in the Court of the Sub-Civil Judge, Ghaziabad, in Suit No. 329 of 1986 and inspect and/or permit the plaintiff to inspect the same. G.C. Jain J., by order dated September 26, 1986, observed that it could not be disputed that the proxies alleged to have been filed in that case are relevant documents for the purpose of the disposal of the case and he, therefore, directed that the file of Suit No. 329 of 1986, pending in the court of Shri Kartar Singh, entitled "M.P. Dalmia v. Raghuraj" be summoned in accordance with the rules. The clerk of that court brought the summoned file of the suit together with the documents in two sealed trunks. The sealed envelope containing the judicial file was returned but the clerk was directed to deliver the documents contained in the sealed trunks containing the proxies to the office of this court. The trunks containing the documents were deposited. Directions as to preparation of inventory, etc., were given.
The plaintiff then moved an application under section 151 of the Code of Civil Procedure, 1908, being LA. No. 6171 of 1986, for obtaining the certified copies of the documents. The plaintiff submitted that the proxies and other documents including revocation letters, which are lying in two trunks, are necessary and relevant for the purpose of disposing of the suit and that the plaintiff requires certified copies of all these documents in order to refer to them and to demonstrate that the election of defendants Nos. 3 to 6 is illegal and invalid. The learned single judge directed that the matter be listed before the learned Registrar on November 14, 1986, for orders. The Registrar by order dated November 14, 1986, directed that the certified copies be supplied as per rules within one week from that date and the application was disposed of accordingly.
The defendants challenged the validity of the order of the Registrar dated November 14, 1986, by way of an appeal under rule 4 of Chapter II of the Delhi High Court (Original Side) Rules, 1967. The contention of the counsel was that a copy of only a judicial record could be granted in the manner prescribed by rule 1 of Chapter 5B of the Rules and Orders of the Punjab High Court, Vol. V, as applicable to Delhi, to any person who is legally entitled to receive it. The submission was that the term "judicial record" or record used in those rules meant the record of the suit only and did not include in its ambit the record of the suit pending in the Ghaziabad court which had been summoned by this court and, therefore, copies of the documents, which were part of the case pending in the Ghaziabad court, could not be given. G.C. Jain J., in the order under appeal, observed that there may be merits in the contention raised by learned counsel for the appellant. However, he did not like to go into details but expressed the opinion that the order made by the learned Registrar does not affect the right of the appellant and that, moreover, to prove his case, the plaintiff was required to produce the copies of the instant proxies. He did not find any justification for interference with the order of the Registrar and dismissed the appeal.
Shri C.M. Oberoi, learned counsel for the appellant, submits that so far as the record of the Ghaziabad Court is concerned, the plaintiff is a stranger to the suit in the Ghaziabad Court and as a stranger he cannot obtain the copies of a judicial record during the pendency of the case and has a very limited right to obtain copies of the judicial record after disposal. Undisputedly, the said proxies did not form part of the record of the suit pending in this court. Reliance is placed on Punjab High Court Rules and Orders, Vol. V, Chapter 5B, which are applicable to this court. Under it, a party can obtain a copy of the judicial record but it is urged that he has no right to obtain copies of documents that form part of the record of the file of the Civil Judge, Ghaziabad. Rule 1, Chapter 5B, does not permit urges the counsel, the issue of copies of the record of the Ghaziabad Court by this court. Another submission is that in the scheme of the Companies Act, 1956, there is no provision for any member or shareholder to obtain copies of proxies lodged with the company or the specimen signatures of the shareholders maintained with the company. There is only a very limited right of inspection granted to a shareholder in connection with the proxies lodged with the company after issue of three days' notice to it and such a right does not entitle, says the counsel, any shareholder to obtain copies of the proxies or the signatures or the writings thereon.
Mr. P.P. Malhotra, learned counsel for the contesting respondent No. 1, has raised a preliminary objection to the maintainability of the appeal. Under the Delhi High Court (Original Side) Rules, 1967, Chapter II, rule 4, an appeal is provided to a judge in chamber, from an order passed by the Registrar. It is urged that the order passed by the learned single judge was passed while exercising the appellate powers and by virtue of sub-section (2) of section 104 read with Order 43, rule 1 of the Code of Civil Procedure, no appeal can lie from any order in appeal under the said section. Assuming that the provisions of section 104 of the Code of Civil Procedure are inapplicable and the appeal is under section 10 of the Delhi High Court Act, 1966, then the submission is that the order under appeal is not a "judgment" as the order does not determine any right or liability of the appellant. The order of the learned single judge is also supported on merits.
Section 10 of the Delhi High Court Act, 1966, provides that where a single judge of the High Court of Delhi exercises ordinary civil jurisdiction conferred by sub-section (2) of section 5 on that court, an appeal shall lie from the judgment of the single judge to a Division Bench of that High Court. Under section 5, jurisdiction vested in the High Court of Delhi in respect of the territories for the time being included in the Union Territory of Delhi for all such original, appellate and other jurisdictions, as under the law in force immediately before the appointed day, is exercisable in respect of the said territories by the High Court of Punjab. Under sub-section (2), notwithstanding anything contained in any law for the time being in force, the High Court of Delhi is also vested, in respect of the said territories, with ordinary original civil jurisdiction in every suit the value of which exceeds rupees one lakh. The question of construction of section 10(1) read with section 5(2) of the Delhi High Court Act was decided by a Full Bench of this court in University of Delhi v. Hafiz Mohd. Said, AIR 1972 Delhi 102. The question arose as to what interpretation is to be given to the expression "judgment" in section 10(1) of the said Act. One view advanced was that the word "judgment" should be given the same meaning which has been given by various High Courts while interpreting their Letters Patent. The Full Bench did not agree with this view because of various reasons given in the judgment. One is that the construction of the word "judgment" in the Letters Patent by the various High Courts did not yield any consistent or uniform meaning of it. The Full Bench also held that keeping the historical perspective and the long years for which appeals on the original side were only maintainable either against a decree or against orders enumerated under Order 43, rule 1, the Legislature could not have intended that those orders which were not appealable when passed by the subordinate judge prior to November 1, 1966, when the jurisdiction vested in the High Court of Delhi, should suddenly become appealable. In para 44, it is held (at page 108):
"Our conclusion, therefore, is that an appeal under section 10(1) of the Act against the order of a single judge in the exercise of ordinary original civil jurisdiction to a Division Bench lies only in those cases where an order is a judgment as denned in the Code. In other words, apart from the orders which have the force of the decree, appeals will, therefore, lie only against those orders passed by the single judge which are mentioned in section 104 read with Order 43, rule 1 of the Code and no appeal will lie against other orders which are outside these two provisions."
The Supreme Court in Jugal Kishore Paliwal v. S. Sat Jit Singh, [1984] 1 SCC 358 have expressed that this decision is no longer good law in view of the decision in the case of Shah Babulal Khimji v. Jayaben [1981] 4 SCC 8 ; AIR 1981 SC 1786. Paragraph 115 at page 1816 of the above-referred decision was extracted :
"Thus, in other words, every interlocutory order cannot be regarded as a judgment but only those orders would be judgments which decide matters of moment or affect vital and valuable rights of the parties and which work serious injustice to the party concerned. Similarly, orders passed by the trial judge deciding question of admissiblity or relevancy of a document also cannot be treated as judgments because the grievance on this score can be corrected by the appellate court in appeal against the final judgment."
In Shah Babu Lal's case, AIR 1981 SC 1786, it was expressed that a judgment can be of three kinds, a final judgment, a preliminary judgment and intermediary or interlocutory judgment. The word "judgment" has undoubtedly a concept of finality in a broader and not a narrower sense. In respect of intermediary or interlocutory judgment, it was expressed (at pages 1815 and 1816):
"Most of the interlocutory orders which contain the quality of finality are clearly specified in clauses (a) to (w) of Order 43, rule 1, and have already been held by us to be judgments within the meaning of the Letters Patent and, therefore, appealable. There may also be interlocutory orders which are not covered by Order 43, rule 1, but which also possess the characteristics and trappings of finality in that, the orders may adversely affect a valuable right of the party or decide an important aspect of the trial in an ancillary proceeding. Before such an order can be a judgment, the adverse effect on the party concerned must be direct and immediate rather than indirect or remote. For instance, where the trial judge in a suit under Order 37 of the Code of Civil Procedure refuses the defendant leave to defend the suit, the order directly affects the defendant because he loses a valuable right to defend the suit and his remedy is confined only to contest the plaintiff's case on his own evidence without being given a chance to rebut that evidence. As such an order vitally affects a valuable right of the defendant, it will undoubtedly be treated as a judgment within the meaning of the Letters Patent so as to be appealable to a larger Bench. Take the converse case in a similar suit where the trial judge allows the defendant to defend the suit in which case although the plaintiff is adversely affected but the damage or prejudice caused to him is not direct or immediate but of a minimal nature and rather too remote because the plaintiff still possesses his full right to show that the defence is false and succeed in the suit. Thus, such an order passed by the trial judge would not amount to a judgment within the meaning of clause 15 of the Letters Patent but will be purely an interlocutory order.
Similarly, suppose the trial judge passes an order setting aside an ex parte decree against the defendant, which is not appealable under any of the clauses of Order 43, rule 1, though an order rejecting an application to set aside the decree passed ex parte falls within Order 43, rule 1, clause (d), and is appealable, the serious question that arises is whether or not the order first mentioned is a judgment within the meaning of Letters Patent. The fact, however, remains that the order setting aside the ex parte decree puts the defendant at a great advantage and works serious injustice to the plaintiff because as a consequence of the order, the plaintiff has now to contest the suit and is deprived of the fruits of the decree passed in his favour. In these circumstances, therefore, the order passed by the trial judge setting aside the ex parte decree vitally affects the valuable rights of the plaintiff and hence amounts to an interlocutory judgment and is, therefore, appealable to a larger Bench."
We may recall that the relief claimed in the suit is on the allegations that the instrument of proxies in favour of proxies who voted for Dr. Rajaram Jaipuria and his nominee, which were counted, were illegal and invalid and instruments of proxies by virtue of which votes were cast in favour of Shri Mahindra Swarup and his nominee, which were disallowed, were valid. The proxies are thus material and relevant documents for the purpose of the disposal of the suit. The learned single judge in the order under appeal had upheld the order made by the Registrar for supply of certified copies as per rules and expressed that it does not affect the right of the appellant. In our view, he is perfectly justified in saying so. The learned single judge had by an ex parte order made on April 5, 1986, directed the defendants to deposit the proxies in court on April 7, 1986, and on the next date, i.e., April 7, 1986, directed in the presence of counsel for the parties that the order of deposit of proxies be complied with by April 9, 1986. The appellant moved an application dated April 9, 1986, under section 151 of the Code of Civil Procedure, being I.A. No. 2351 of 1986, in which it was stated that the registered office of the company is at Ghaziabad where the proxies and records have been kept and where the annual general meeting had taken place and that the secretary of defendant-No. 2 company, Shri Anil Jhala, had gone to Ghaziabad that morning with a view to collect proxies in order to have the same deposited in this court and sealed (emphasis supplied). The inability to file the proxies was then expressed as the same had been seized by a Commissioner appointed by the Court of Sub-Civil Judge, Ghaziabad. The appellant had thus expressed his willingness to deposit the proxies in this court. In the grounds of appeal filed in this court, the stand of the appellant is that the proxies form part of the record of the civil suit of Ghaziabad Court, and similarly it would have formed part of record of this court, if filed. It is not disputed that if the appellant had deposited the proxies in this court, the plaintiff would be entitled to obtain certified copies. We see no prejudice to the appellant if the copies are obtained out of the summoned record because it was filed in Ghaziabad Court and not in this court.
Section 176 of the Companies Act, 1956, provides that any member of the 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. Sub-section (7) of section 176 provides that every member entitled to vote at a meeting of the company or on any resolution to be moved thereat shall be entitled during the period beginning twenty-four hours before the time fixed for the commencement of the meeting and ending with the conclusion of the meeting, to inspect the proxies lodged at any time during the business hours of the company, provided not less than three days' notice in writing of the intention so to inspect is given to the company. The statutory provisions make it clear that the proxies deposited with a company are open to inspection and there is no secrecy either in the signatures or in the other particulars contained in the instrument of proxy. A proxy can at any time be revoked. As a rule, a proxy is not revoked unless written notice of the revocation has been received by the company. The case of the plaintiff is that the proxies executed in favour of Dr. Rajaram Jaipuria and his nominees had been revoked by execution of later proxies by the same person. The proxies or their certified copies are vital documents for the disposal of the suit. The issue of certified copies can cause no prejudice except that the appellants may want to withhold the documentary evidence from the court at the trial. The direction for the issue of certified copies by the Registrar and upheld by the learned single judge under orders in appeal makes no decision affecting the merits of the suit. It does not affect any vital or valuable right of the appellant except the procedural irregularity, if any, of issuing certified copies of documents contained in the summoned record of the suit in which the plaintiff is not a party.
The learned single judge had exercised the power and discretion under Order XIII, rule 10 of the Code of Civil Procedure for summoning the records from the Ghaziabad court. The plaintiff had shown in the application supported by an affidavit for calling for the record that those documents are material and he had also shown that he could not obtain a duly authenticated copy of the record or such portion thereof and that the production of the original record is necessary for the purposes of justice. The appellant has no grievance against that order and it has become final. The production of the record has been found necessary for the purposes of justice. The plaintiff could not obtain a duly authenticated copy of the record from the Ghaziabad court. At the trial, the proxies will be scrutinised and referred to in oral evidence because of the issues formed in the suit. The proxies may be admitted in evidence and their certified copies will have to form part of the record of the suit in this court. The ordinary copies prepared at the trial by the witness may be objectionable. The learned single judge has done substantial justice between the parties. His order does not decide any aspect of the trial or even an ancillary proceeding in the suit. The issue of certified copies does not adversely affect any right of the company who is the appellant before us. The company should, on the contrary, assist in the ascertaining and determining by the court whether the election to the board of directors is legal and valid or not. We cannot comprehend even remote prejudice to the company by the impugned order. Applying the ratio of Shah Babulal's case, AIR 1981 SC 1786, that every order cannot be regarded as a judgment but only those orders would be judgments which decide matters of moment or affect vital and valuable rights of the parties and which work serious injustice to the party concerned, we find that the order under appeal cannot be treated as a "judgment" within the meaning of section 10(1) of the Delhi High Court Act.
We leave the other question open for decision in an appropriate case. The appeal is not maintainable and is hereby dismissed with no order as to costs.
[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
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.
[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
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.
[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
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 2˝ 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.
[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
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 2˝ 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.
[1971]
41 COMP. CAS. 377(BOM)
Firestone Tyre and Rubber Co.,
v.
Synthetics and Chemicals Ltd.
MADON
J.
SUIT
NO. 522 OF 1969 AND SUIT NO. 681 OF 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 2˝ 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.
[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
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.
[1980] 50 COMP. CAS. 591
(P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Gurdip Singh Gill
PREM CHAND JAIN AND SUKHDEV
SINGH KANG, JJ.
LETTERS PATENT APPEAL NO.
304/77
COMPANY PETITION NO. 110/77 AND
CIVIL MISC. NO. 589/79
G.R. Majithia and M.L. Sharma for the Appellant.
Bhagirath Dass and S.K. Hirajee for the Respondent.
Sukhdev Singh Kang J.—Dissatisfied with the judgment of the learned single judge, who rejected their objections to the proxy of Ram Pal Singh, Saudagar Singh and others have filed this appeal.
Sewak Bus and Transport Co. (P.) Ltd. is a private company being engaged in the business of transport having its registered office at Moga, district Faridkot. Broadly speaking, there are two groups of shareholders in this company, one is led by Saudagar Singh, appellant, and the other by Gurdip Singh Gill, respondent No. 1. The authorised capital of the company is Rs. 3 lakhs divided into 3,000 equity shares of Rs. 100 each. The subscribed and paid up capital of the company is Rs. 2,94,100. The total number of subscribed shares of the company are 2,941. Kartar Singh, Naranjan Singh and Jaswant Singh who had 29, 31 and 11 shares, respectively, had died. One Karam Din who held 22 shares had migrated to Pakistan. Leaving these aside, the effective voting strength comes to 2,848 and the number of members owning these shares is 46. Disputes arose regarding the election of the directors of the company. A meeting was held for the election of the board of directors on September 20, 1976. Both parties claimed that they had won.
Gurdip Singh and others filed a petition under ss. 397, 398 and 399 read with s. 402 of the Companies Act (hereinafter referred to as "the Act"), in which they alleged that the members of their group had been elected directors in the meeting held on 20th September, 1976. Saudagar Singh and others—respondents mentioned in the petition—had taken forcible possession of the buses, the premises and the records of the company in the month of March, 1977. It was also alleged that Saudagar Singh and others were in a minority and they were not entitled to run the affairs of the company; that, on the other hand, Gurdip Singh and others were in a majority of shareholders, but they were being kept out and were being oppressed by the group of Saudagar Singh and others. It was prayed that the respondents, Saudagar Singh and others, may be removed from the illegal possession of the company and they be directed to hand over the records of the company to the petitioners. Another application (C.A. No. 37 of 1977) under s. 403 of the Act, read with O. 40, r. 1 of the CPC, for appointment of a receiver, was filed by the petitioners in the main petition and it was prayed that a receiver may be appointed to manage the affairs of the company during the pendency of the main petition. The respondents, Saudagar Singh and others, opposed this prayer. However, Sharma J. appointed the official liquidator as a receiver, vide order dated 14th April, 1977. The respondents, Saudagar Singh and others, went up in appeal against the order of appointment of the receiver through Letters Patent Appeal No. 74 of 1977. During the pendency of the appeal, the parties entered into a compromise. On the basis of that compromise, an order was passed on 18th April, 1977, that the proceedings of the meeting held on September 20, 1976, were superseded and nobody was deemed to be elected a director. It was ordered that an official chairman be appointed who should hold a special general meeting of the company for the purpose of electing seven directors and the managing director. It was also ordered that the official receiver should take charge of the company and run the same till the election of the new directors and after such election, the official receiver was directed to hand over charge of the office and the business of the company to the newly elected directors. Both the parties were directed to give lists and addresses of the members of the company to the official chairman.
Still another application (C.A. No. 46 of 1977) was filed and the same was disposed of by Sharma J. on 3rd of May, 1977. An agreed order was passed that the list of shareholders as it stood on 24th August, 1976, should be used by the official chairman for the purpose of conducting the election and notices for electing the directors and the managing director be issued to the shareholders on the basis of that list. It was also ordered that the shareholders who had gone abroad be served with telegraphic notices about the date of the meeting.
Notices were issued to the shareholders that the special meeting of the company will beheld on 2nd June, 1977, at 11 a.m. After due service, the official chairman convened a special general meeting which was attended by the shareholders. Both the groups led by Saudagar Singh and Gurdip Singh Gill attended the meeting. Two proxies had been received from Canada, one by Kartar Singh and another by Rampal Singh, two shareholders. Both the proxies were sent in favour of Gurdip Singh Gill. In fact, the official chairman had received one letter from Kartar Singh, which accompanied two proxies in favour of Gurdip Singh Gill. Rampal Singh also sent a letter along with a copy of the proxy sent to the official chairman, direct to Gurdip Singh Gill. Gurdip Singh Gill produced that proxy, the letter and the envelope before the official chairman at the time of the meeting. Saudagar Singh raised objection to these proxies. The official chairman was satisfied that the proxy sent by Kartar Singh was in order and he allowed the same to be used and hence the votes of Kartar Singh were polled in favour of Gurdip Singh Gill group. However, the official chairman was not satisfied regarding the proxy sent by Rampal Singh. Consequently he did not take any decision on the same and referred that matter for decision to the company judge. Apart from the proxy of Rampal Singh, Gurdip Singh Gill group got 1,400 votes and the group of Saudagar Singh obtained 1,403 votes. Rampal Singh, above mentioned, had 45 shares, and thus he had 45 votes. As mentioned earlier, he had sent a proxy in favour of Gurdip Singh Gill group. If these votes were counted in favour of Gurdip Singh, then they were entitled to elect seven directors and the managing director. However, it may be mentioned that before transmitting the case to this court, the official chairman recorded the statements of three witnesses. Baldev Singh and Jagdish Singh appeared on behalf of the objector, Saudagar Singh, and Gurdip Singh made his own statement. Baldev Singh, who is a labour officer of the company, stated that Rampal Singh always signed in Urdu and he never signed in English. He stated that the proxy in dispute was not signed by him. Jagdish Singh also made a statement to that effect. However, Gurdip Singh Gill produced the proceedings book of the company. It bore signatures of Rampal Singh in English.
Before the learned single judge, it was urged on behalf of the appellants, Saudagar Singh and others, that the signatures on the proxy were not of Rampal Singh and that the proxy was not a valid proxy as it had not been properly stamped and in the absence of proper stamp, the proxy could not be used in evidence or taken into account. The appellants did not dispute before the official chairman or the learned single judge that the signatures on the proceedings book were of Rampal Singh. However, the respondents contended that the signatures on the proxy did not tally with the admitted signatures of Rampal Singh in the proceedings book. Before the learned single judge no objection had been raised regarding the proxy of Kartar Singh. That proxy is witnessed by the priest of the Sikh Temple of Abbot Ford and Rampal Singh. It is attested by Rampal Singh and the same priest. The signatures of Rampal Singh tallies with the signatures on the proxy purported to have been sent by Rampal Singh. The latter proxy is attested by Kartar Singh. The signatures on the proxy of Rampal Singh tally with the signatures of Kartar Singh on the proxy sent by Kartar Singh. The same is the position with the proxy sent direct to Gurdip Singh Gill by Rampal Singh. The signatures on the letter purported to have been sent by Rampal Singh along with the proxy sent to Gurdip Singh also tally with the signatures of Rampal Singh on the two proxies i.e., one sent to the official chairman and the other to Gurdip Singh Gill. On behalf of the petitioners, an application (C.A. No. 93 of 1977) had been filed in which it had been stated that Rampal Singh, having come to know about the dispute regarding the genuineness of his proxy, sent his affidavit dated 17th June, 1977, duly attested by a Notary Public, wherein he affirmed the genuineness of the proxy dated 14th May, 1977. The original affidavit has been placed on the file as well as the accompanying letter and the envelope. The signatures of Rampal Singh on this document (affidavit) are also similar to the signatures on both the proxies.
On behalf of the respondents, it was pointed out to the learned single judge that there was some variation in the signatures of the proxy and the signatures in the proceedings book. The learned judge also noticed a slight difference in the signatures on the two documents. However, the learned judge after thoroughly scrutinizing the same came to the conclusion that the small variation could occur with the passage of time. Rampal Singh was about 70 years of age at the time when he signed the proxy. The signatures in the proceedings book had been appended about seven years earlier. With the advancement of age and passage of time such variations were, according to the learned single judge, natural. The variation was the result of the tremors, which result from the trembling of the hands in aged people. The learned single judge considered all these facts and came to a firm conclusion that the signatures on the proxies were of Rampal Singh. The learned judge also did not find any merit in the submission that certain attending circumstances also do cast doubt on the genuineness of the proxy.
The learned single judge also rejected the second contention that, the proxies were not properly stamped. He held that the proxies had been properly stamped within three months of their receipt in India under s. 18 of the Indian Stamp Act, 1899. If they were stamped within three months of the receipt in India, they were valid. He did not accept the argument that s. 18 of the Indian Stamp Act, 1899, was not applicable. So, the learned judge held that the proxy sent by Rampal Singh was a valid proxy and, as such, the votes of Rampal Singh, which are 45 in number, should be credited to the group of Gurdip Singh Gill.
Before us also, Mr. G.R. Majithia has advanced the same arguments. He has vigorously argued that the signatures on the proxy purported to have been sent by Rampal Singh are not the signatures of Rampal Singh. They, according to him, do not tally with the admitted signatures in the proceedings book. The learned counsel has tried to point out that the signatures on the proxy are at variance with the signatures on the proceedings book. He has contended that there are tremors in the signatures of Rampal Singh on the proxy. As observed by the learned single judge, the signature of Rampal Singh on the proxy, to my mind, are of the same person, who has signed the proceedings book. It has to be kept in mind that the signatures in the proceedings book were appended seven years prior to the signing of the proxy. In this long interval slight variation in the style and manner of writing is bound to occur. With the advancement of age also the signatures of a person undergo change. In old people slight trembling of hands is a common sight. We have ourselves compared the signatures on the two copies of the proxies, the letter addressed to Gurdip Singh Gill, the affidavit, the signatures on the proxy of Kartar Singh and the signatures in the proceedings book and find that they are of one and the same person. Even before us, Mr. Majithia has not challenged the genuineness of the proxy of Kartar Singh. He has not challenged the decision of the official chairman accepting the proxy of Kartar Singh. The proxy of Kartar Singh is attested by Rampal Singh. The signatures on this proxy fully tally with the signatures of Rampal Singh on the proxies purported to be the proxy sent by Rampal Singh. Similarly, the signatures of Kartar Singh on the proxy of Rampal Singh fully tally with the signatures of Kartar Singh on the proxy sent by Kartar Singh to the official chairman, regarding which there is no dispute.
Mr. Majithia then pointed out that there are other suspicious circumstances which suggest that the proxy of Rampal Singh is not a genuine document. He argued that in the register of members, the address of Rampal Singh is of a village in Punjab. As such, notice to him and his brother, Jagdish Singh, who is co-sharer with him in these shares, was issued at the village address. No notice was sent by the official chairman to Rampal Singh at his address in Canada. There is no force in this contention. Firstly, somebody from his house situate in his village may have sent information to him regarding the impending meeting. Secondly, Kartar Singh and Rampal Singh, it seems, executed and scribed the proxies at the same time. Both have attested the proxy of each other. These have also been attested by the same priest. Both the proxies were sent in one envelope to the official chairman, with one letter by Kartar Singh. It seems that Kartar Singh on receipt of notice from the official chairman informed Rampal Singh of the meeting to be held for the election of the directors of the company; and on receipt of this information both of them scribed the proxies and attested them and got them attested by the priest and sent them to the official chairman. It may also be mentioned that Kartar Singh has been a director of this company when he was in India. So, it seems that he has retained his interest in the affairs of the company though he is in Canada.
Mr. Majithia then contended that the fact that the proxy had been sent to Gurdip Singh Gill direct, also casts a suspicion on its genuineness. I am afraid, I have not been able to appreciate this argument. As a matter of abundant caution, Rampal Singh sent one copy of the proxy to Gurdip Singh Gill also. He may be thinking that if the proxy sent direct to the official chairman is somehow misplaced, then the proxy sent to Gurdip Singh Gill would be used for the purpose of voting at the election. There is nothing unusual or suspicious about this.
Mr. Majithia also contended that Gurdip Singh Gill was a liar and in view of his conduct no reliance can be placed on his statement. Firstly, we have not placed any reliance on the statement of Gurdip Singh in coming to the conclusion that the signatures on the proxy are of Rampal Singh. Secondly, nothing has been brought out on the file to show that Gurdip Singh is a liar. It was argued that at first Gurdip Singh had stated that the records of the company had been taken into possession by Saudagar Singh and others, but all the same Gurdip Singh Gill produced the proceedings book before the official chairman. Mr. Gurdip Singh Gill had in a general way stated that the premises, records and business, etc., of the company were taken into possession by Saudagar Singh and others. He had not stated that he did not have any document of the company in his possession. Perhaps, he was referring to the current books which were being used from day to day for running the affairs of the company. The proceedings book in question relates to the year 1969-70. For the purpose of the petition under ss. 397, 398 and 399 read with s. 402 of the Act, this proceedings book had no relevance. The records alluded to in this application pertain to the year 1977. So, there is nothing in the conduct of Gurdip Singh to detract from his veracity. Just to repel the imaginary doubts of the respondents, we made a suggestion to Mr. Majithia that Rampal Singh can be asked to send a fresh proxy executed before some independent and respectable person or authority like some responsible officer in the Indian High Commission. After consulting his client, who was present in court during the hearing of this appeal, Mr. Majithia informed us that he would not be satisfied with this procedure as, according to him, Rampal Singh was under the influence of Gurdip Singh Gill. So taking into account all the facts and circumstances, we are of the considered view that the proxy in dispute had been signed by Rampal Singh and it is a genuine document.
The second submission of Mr. Majithia has also no force. Mr. Majithia, after referring to ss. 2, 11, 14, 18, 35 and 62 of the Indian Stamp Act, 1899, has argued that the proxy sent by Rampal Singh was not a valid proxy. According to him, at the time of the meeting, i.e., on 2nd June, 1977, it was not stamped and, therefore, it could not be taken notice of or acted upon and was thus to be rejected. We have carefully gone through ss. 2, 11, 14, 18, 35 and 62 of the Indian Stamp Act, 1899, with the assistance of the learned counsel and find that the case is fully covered by s. 18 of the Indian Stamp Act, 1899, which is reproduced below for facility of reference:
"18. Instruments other than bills and notes executed out of India.—(1) Every instrument chargeable with duty executed only out of India, and not being a bill of exchange or promissory note, may be stamped within three months after it has been first received in India.
(2) Where any such instrument cannot, with reference to the description of stamp prescribed therefor, be duly stamped by a private person, it may be taken within the said period of three months to the Collector who shall stamp the same, in such manner as the State Government may by rule prescribe, with a stamp of such value as the person so taking such instrument may require and pay for".
According to the provisions of s. 18, every instrument chargeable with duty executed out of India and not being a bill of exchange or promissory note, may be stamped within three months after it has been first received in India. In the present case, the proxies were received in India on 23rd of May, 1977. This is the date put by the post office people on the envelope. The requisite stamps were affixed on these proxies on 19th of August, 1977, i.e., well within three months of their receipt in India. So, these proxies are validly and properly stamped. It was argued by the respondents that the provisions of s. 35 of the Indian Stamp Act and not of s. 18 of the said Act were applicable to the present case. This contention is also devoid of any force. Section 35 is not at all applicable to the facts and circumstances of the present case. When the proxies were considered and acted upon by this court, these were properly stamped. The official chairman was appointed only to conduct the proceedings of the special meeting to be held to elect the directors. That was the only task assigned to him by the learned company judge. He did not have any authority to receive the evidence under any law. So, when the proxies were produced before him they were not produced in evidence of something. There was no lis pending. When these proxies were received in evidence by the company judge, who had the authority to receive evidence, these were properly and validly stamped. The learned counsel placed reliance on the decision in Tata Iron and Steel Co. Ltd., AIR 1928 Bom 80, where it had been held that the proxies, which are unstamped and upon which the stamps have not been cancelled, must be excluded and the votes recorded on the authority of such proxies go out. This authority is not applicable to the facts of the present case as the proxy in the present case is properly stamped and it has also been properly cancelled. The scheme of the Stamp Act also suggests that, except in the case of instruments like promissory notes and bill of exchange, etc., an opportunity is provided to the concerned parties to make good the deficiency of the stamps. The learned single judge had validly allowed the petitioners to affix the requisite stamps on the proxies of Rampal Singh and Kartar Singh. So, the proxy of Rampal Singh cannot be held to be invalid on the ground that it was not properly stamped.
No other point was raised.
Consequently, we find no merit in this appeal and the same is hereby dismissed, but keeping in view the facts and circumstances of the case, there will be no order as to costs.
The official receiver has moved Civil Misc. No. 589 of 1979 for being relieved of the duties of an official receiver. Since we have dismissed the Letters Patent Appeal (No. 304 of 1977), the official receiver will be relieved of his duties in compliance with the judgment of the learned single judge. As such, no separate orders are required to be passed in this Civil Misc. Application (No. 589 of 1979).
[1990] 69 COMP. CAS. 158 (DELHI)
HIGH COURT OF DELHI
v.
Apparel Export Promotion Council
MAHINDER
NARAIN J.
I.A. No. 4157 of 1989 in S. No. 1564 of 1988
L.C.
Goyle for the Petitioners.
G.L.
Rawal and Neerja Mehra for the Respondent.
JUDGMENT
Mahinder Narain, J.—By this order, I propose to deal with I.A. No. 4157 of
1989 in Suit No. 1564 of 1988, being an application under Order 39, rules 1 and
2, of the Code of Civil Procedure by which it is prayed that the respondents,
their servants and agents be restrained from enforcing or implementing the
impugned Election Rules, said to have been passed by the executive committee of
the respondent at its meeting held on August 4, 1988, particularly rules 6(c),
7 and 8 thereof.
It is not disputed by the
parties that the respondent, Apparel Export Promotion Council, is a guarantee
company within the meaning of section 25 of the Companies Act. It is also not
disputed between the parties that, being a guarantee company, unless the
articles of its association so provide, there is no right to vote by proxy. As
far as the respondent is concerned, its articles do provide for voting at the
annual general meeting of the society by means of proxies.
Section 176 of the
Companies Act deals with proxies, and it is laid down in section 176(1)(a)
that, if the articles of association so provide, a company, not having a share
capital, shall not be able to have proxies as the manner of voting by its
members, unless its articles so provide. The respondent which is a guarantee
company has provided in its articles that it shall be permissible for members
to vote by proxy. In this view of the matter, section 176 of the Companies Act
will apply to the respondent company. Section 176 of the said Act reads as
under:
"176.(1) 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 :
Provided that, unless the
articles otherwise provide,—
(a) this sub-section shall not apply in the case of a company not having a share capital;
(b) a member of a private company shall not be entitled to appoint
more than one proxy to attend on the same occasion ; and
(c) a proxy shall not
be entitled to vote except on a poll.
(2) In every notice calling
a meeting of a company which has a share capital, or the articles of which
provide for voting by proxy at the meeting, there shall appear with reasonable
prominence a statement that a member entitled to attend and vote is entitled to
appoint a proxy, or, where that is allowed, one or more proxies to attend and
vote instead of himself, and that a proxy need not be a member.
If default is made in
complying with this sub-section as respects any meeting, every officer of the
company, who is in default shall be punishable with fine which may extend to
five hundred rupees.
(3) Any provision contained
in the articles of a public company or of a private company which is a
subsidiary of a public company, which specifies or requires a longer period than forty-eight hours before
a meeting of the company, for depositing with the company or any other person
any instrument appointing a proxy or any other document necessary to show the
validity or otherwise relating to the appointment of a proxy in order that the
appointment may be effective at such meeting, shall have effect as if a period of forty-eight hours had been
specified in or required by such provision for such deposit.
(4) If for the purpose of
any meeting of a company, invitations to appoint as proxy a person or one of a
number of persons specified in the invitations are issued at the company's
expense to any member entitled to have a notice of the meeting sent to him and
to vote thereat by proxy, every officer of the company who knowingly issues the
invitations as afore said or willfully authorises or permits their issue shall
be punishable with fine which may extend to one thousand rupees :
Provided that an officer shall
not be punishable under this sub-section by reason only of the issue to a
member at his request in writing of a form of appointment naming the proxy, or
of a list of persons willing to act as proxies, if the form or list is
available on request in writing to every member entitled to vote at the meeting
by proxy.
(5) 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 corporate, be under its seal or be
signed by an officer or an attorney duly authorised by it.
(5) An instrument
appointing a proxy, if in any of the forms set out in Schedule IX, shall not be
questioned on the ground that it fails to comply with any special requirements
specified for such instrument by the articles.
(6) Every member entitled
to vote at a meeting of the company, or on any resolution to be moved thereat,
shall be entitled during the period beginning twenty-four hours before the time
fixed for the commencement of the meeting and ending with the conclusion of the
meeting, to inspect the proxies lodged, at any time during the business hours
of the company, provided not less than three days' notice in writing of the
intention so to inspect is given to the company".
Mr. Goyle who appears for
the petitioner relies upon the provisions of section 176(6) of the above Act
which lays down that any instrument of proxy which is in the form set out in
Schedule IX, shall not be called in question on the ground of failure to comply
with any special requirements specified for such instrument by these articles.
It is the case of the
petitioner that, by the aforesaid resolution passed by the respondent company
on August 4, 1988, particularly rules 6(c), 7 and 8, have gone beyond the
provisions of section 176(6) inasmuch as they require and add on something more
than what the statute itself requires. The statute requires compliance with the
form set forth in Schedule IX only. The election rules which have been made on
August 4, 1988, are mentioned in paragraph 21 of the petition and rules 6(c), 7
and 8 read as under:
"6(c) A member or his
authorised representative who is entitled to vote at every general meeting shall
be entitled to appoint another person, (whether a member or not) as his proxy
to attend and vote instead of himself but the proxy so appointed shall not have
the right to speak at the meeting. Along with the notice for calling the
meeting, the Council shall send a printed form to each member. Any proxy
appointed through any instrument other
than a printed instrument despatched by the Council referred to above
shall not be valid.
7. In case the proxy so
despatched by the Council is not received, lost, misplaced and not available or
mutilated, a duplicate proxy may be issued from the office of the Council by
the Secretary of the Council, of the said situation. An application to this
effect shall be made by the member concerned to the Secretary of the Council
supported with an affidavit setting out the facts and other such evidence as
may be available with the member. On being satisfied, the Secretary shall
direct issuing of another proxy in lieu of the earlier one and only such proxy
as subsequently issued in the manner as referred to shall be valid. The earlier
proxy shall be invalid.
8. In case a member intends
to revoke the proxy which has been utilised by the said member, he can do so.
In such a situation, he can have a duplicate printed proxy from the office of
the Secretary of the Council. For this purpose, he will be required to make an
application on his letter head duly signed saying therein that the earlier
proxy stands revoked. The Secretary shall issue a fresh proxy and the revoked
proxy shall be invalid and cannot be used for any purpose.
Rule 6(c), therefore,
requires that the proxy appointed through an instrument other than the printed
instrument duly despatched by the Council shall not be valid. Rule 7 deals with
lost proxies, and issuance of another proxy in case the proxy issued by the
Council is lost. Rule 8 deals with the revocation of a proxy.
A number of contentions
have been advanced before me but I think it will be sufficient to dispose of
this application on the basis of the principle which has been enunciated in Nazir Ahmad v. King Emperor, AIR 1936 PC 253(2),
257.
The Privy Council has laid
down that, "where a power is given by a statute to do a certain thing in a
certain way, the thing must be done in that way or not at all. Other methods of
performance are necessarily forbidden".
It is clear from a reading
of section 176(6) of the Companies Act that the only proxy which is required
for the purposes of enabling a person to cast his vote which is provided is in
the form set out in Schedule IX. That proxy cannot be added on to or subtracted
from. No special proxy form issued by any body of persons which adds to the
requirements of a proxy, by imposing any condition, or requiring it to be on
specific proxy paper can be sustained in law. Rules 6(c), 7 and 8 purport to do
exactly the thing which the statute does not require or permit. The respondents
seek to do what the statute necessarily forbids.
Inasmuch as the respondent
is bound by the provisions of the Companies Act, it cannot have any rules
which, by necessary intendment or implication, make a variation between what
the statute permits and what the respondent would like to do. There may be
reasons as far as the company is concerned for attempting to vary the
requirement of the proxy, but, in the face of the prescribed statutory form,
such special proxies are of no avail.
Section 9 of the Companies
Act has been referred to by both the parties before me. Section 9, in my view,
is nothing but a reiteration of the principle which has been laid down in the
aforesaid judgment of the Privy Council. It makes clear specifically with
reference to the Companies Act what is clear even otherwise, that no action
which is contrary to the terms of the statute can be sustained in law. Fine
distinctions, if any, with respect to the meaning of "repugnancy"
need not be considered in the matter which is so clear as this one.
In my view, the members of
the respondent company are entitled to make use of all proxies which are in
accordance with the form prescribed in Schedule IX at any of the general
meetings of the company.
I only need to note that
the principle of ultra vires would also come into play when any action of the
respondent, contrary to the terms of the statute, is attempted. Such action of
the respondent, whether it relates to a provision in the articles, or any
provisions in the rules, or any resolution or any provision in the memorandum,
if it is contrary to or inconsistent with the statutory provisions, will have
no effect or force. It is the statute, in the instant case the Companies Act,
that will prevail.
In this view of the matter,
as what is proposed by the impugned rules, goes beyond what is required by the
statute, the same is of no effect, and in view of the principles set out by
Lord Denning in Bradbury v. London Borough of Enfield [1967] 3
All ER 434 (CA), it is the law (Companies Act, 1956) which must prevail, and
the members of the respondent company are entitled to vote by proxies which are
in accordance with the form prescribed by Schedule IX of the Companies Act,
1956, and the petitioner is entitled to an injunction as sought, restraining
the respondents from giving effect to rules 6(c), 7 and 8 of the Election Rules
which have been framed by the respondent on August 4, 1988.
At the request of the
counsel for the respondent, Mr. G.L. Rawal, it is clarified that, for
exercising the right of revocation, it is not necessary to use the printed form
supplied by the company.
I.A. No. 4157 of 1989
stands disposed of.
Suit be listed before the
Deputy Registrar on January 22, 1990.
[1996]
85 COMP. CAS. 79 (MAD)
HIGH COURT OF MADRAS
Kothari Industrial Corpn. Ltd.
v.
Maxwell Dyes & Chemicals (P.) Ltd.
GOVARDHAN
J.
APPLICATION NOS. 7151 OF
1994 AND 220, 435,
1312, 1628 OF 1995 IN C.S. NO. 1128 OF 1994
AND APPLICATION NOS. 7153 OF 1994 AND
436, 1631 OF 1995 IN C.S. NO. 1132 OF 1994
MAY
16, 1995
Govardhan J. (Application No. 7151 of 1994)—The deponent is the company secretary of the applicant. On September 7, 1994, this court passed an order in O. A. No. 849 and 850 of 1994 in the suit C.S. No. 1128 of 1994 and O. A. Nos. 855 and 856 of 1994 in C. S. No. 1132 of 1994 directing that the annual general meeting of the applicant-company as scheduled would go on with all the resolutions listed for consideration resolutions Nos. 10 to 12. A transfer petition was earlier filed by the applicant in the Supreme Court seeking the transfer of certain suits including this suit to the Delhi High Court or any other High Court. When the above application came up for hearing on September 6, 1994, the Hon’ble Chief Justice of India directed that the petition be posted for nearing on September 9, 1994. On September 9, 1994, the Supreme Court passed an order permitting the first applicant-company to hold the annual general meeting on September 12, 1994, and permitted the respondents and their associates to vote on the basis of their total shareholding submitted by them to the Supreme Court. The court further directed that the votes in respect of the number of partly convertible debentures (PCDs) offered and applied for and the number of additional partly convertible debentures, applied for under the rights issue of the applicant-company in respect of 11 Reliance companies be maintained separately. The Supreme Court further directed that the results of voting on resolutions Nos. 10 to 12 would not be declared nor would any decision about the passing of the said resolutions be taken on the basis of the said voting until further orders. The applicant-company was directed to keep the results of the voting on the rights shares in a sealed envelope and intimate them to the Supreme Court promptly. On September 12, 1994, the annual general meeting of the company was held. Poll was taken on resolutions Nos. 10 and 11. Consideration of resolution No. 12 was deferred till 27th September, 1994. The results of the other resolutions were announced either unanimous or by an overwhelming majority. On October 25, 1994, the sealed envelope was opened. As per the results, 94% of the shareholders present and voting approved resolutions Nos. 10 and 11 and 6% were against the resolutions. The votes in respect of shares covered by the rights PCDs (partly convertible debentures), claimed by the 11 Reliance companies were kept separately as per the directions of the Supreme Court. If these votes are also taken into account, about 87% of the shareholders approved resolutions Nos. 10 and 11 and 13% voted against resolution Nos. 10 and 11.
The applicant-company received a fax on September 10, 1994, addressed by the Life Insurance Corporation of India to the applicant company virtually withdrawing their earlier approval given to resolution No. 12 contained in the notice of the annual general meeting dated August 5, 1994. The General Insurance Corporation of India (GIC) sent a similar letter on September 2, 1994. The applicant-company wrote to the LIC a letter seeking clarifications on the change in their stand taken by them as compared to their earlier stand taken in March, 1994, giving approval to the proposal in resolution No. 12. Till the date of the annual general meeting, viz., September 12, 1994, there was no reply. The board of directors of the applicant-company resolved to defer the consideration of resolution No. 12 on September 12, 1994. The chairman informed the decision of the board at the annual general meeting to defer resolution No. 12 to September 29, 1994, and sought the concurrence of the shareholders. The shareholders were overwhelmingly in favour of deferment of resolution No. 12 and, therefore, it was deferred to September 27, 1994. The Supreme Court directed the results of the voting on resolution Nos. 10 and 11 to this court and the applicant-company could implement the resolutions after obtaining orders on the legality and validity of resolutions from this court.
Resolution No. 10 is as follows :
"Resolved that the consent of the company
be and is hereby accorded for change in the purpose of utilisation of the
proceeds from the issue of 4,72,500—16% secured, redeemable partly convertible
debentures (PCDs) of Rs. 400 each and the issue of 3,60,000 equity shares of
Rs. 10 each at a premium of Rs. 15 per share to overseas corporate bodies (OCB)
for the following projects instead of as originally proposed in the letter of
offer dated October 15, 1992 :
|
|
Rs. In lakhs |
|
|
Granite tiles and expansion of granite monument plants |
482 |
|
|
|
|
|
|
Brewery project |
1,216 |
|
|
Long-term sources for working capital |
150 |
|
|
Issue expenses |
70 |
|
|
|
|
1,918" |
Since a part of the total funds, viz., Rs. 1,216 lakhs out of Rs. 2,250 raised, PCDs was to be utilised for a new project, viz., the beer project, instead of the purpose for which they were originally raised and since in order to comply with the conditions imposed by the financial institutions and other authorities, the beer project could be implemented from funds raised by PCDs earlier, after obtaining the approval of the shareholders of the company at the annual general meeting. There is nothing illegal in such a course of action and it is always left open to the shareholders to deny their permission in which case funds cannot be diverted to the new project not originally envisaged. In the instant case, not less than 87% of the votes polled were cast in favour of resolution No. 10 as proposed by the applicant-company. The company should, therefore, be permitted to implement the resolution. The votes cast against resolutions Nos. 10 and 11 were votes cast by the Reliance companies and their supporters. The Government of India, public financial institutions, the SEBI, the RBI and all other such authorities have permitted the company to implement the beer project. They would not have done so if resolution No. 10 had been illegal or invalid. They have examined the company’s proposal to deploy the funds in a revised manner and only after convincing themselves, they have approved the applicant-company taking up the new project. Public financial institutions hold 34.65% in the aggregate equity capital of the applicant-company and they have voted in favour of resolutions Nos. 10 and 11 on September 12, 1994. The Andhra Pradesh Government has sanctioned land for the beer project. It has even given incentives in the payment of land value, if commercial production could be established before August, 1995. There is nothing illegal in the commencement of the beer project or in implementing, the same or in utilising the funds raised for other purposes for the beer project. Any delay in the implementation of resolution No. 10 will cause undue hardship and damage to the applicant-company. The balance of convenience is in favour of the applicant-company. This court be pleased to dismiss the plaintiff's prayer for permanent injunction regarding resolution No. 10 and permit the applicant-company to implement the resolution.
Resolution No. 11 of the notice dated August 5, 1994, is as follows :
"Resolved that pursuant to the provisions of section 81(1A) and other applicable provisions, if any, of the Companies Act, 1956 (including any re-enactment thereof), and subject to such further approvals as may be necessary from any authority and subject to such terms and conditions and modifications as may be prescribed in granting such approvals and agreed to by the board of directors of the company (hereinafter referred to as 'the board' which term shall be deemed to include any committee of the board as may be constituted) consent be accorded to the board to issue, offer and allot by private placement not exceeding 9,00,000 equity shares of Rs. 10 each at a premium to be calculated in accordance with the guidelines of the Securities and Exchange Board of India (SEBI) dated August 4, 1994, and such other amendments as may be made thereto in respect of calculation of the premium on the shares and that the said shares may be offered to Indians (NRIs/overseas corporate bodies (OCBs) as the board, in its absolute discretion and in such manner and within such period and at such time or times may decide and in accordance with the above-said guidelines of the Securities and Exchange Board of India and that the said shares so offered and allotted shall have a lock-in-period of five years from the date of allotment. The aforesaid number of shares have been calculated on the basis of an estimated premium of Rs. 40 per share and that the same shall be varied depending upon the calculation of the premium in accordance with the Securities and Exchange Board of India guidelines by the statutory auditors of the company and a modification in regard to the number of shares, if necessary, will be placed at the general meeting.
Resolved further that such aforesaid shares shall rank pari passu in all respects with the existing equity shares except as regards dividends.
The said shares shall rank for proportionate dividend from the date of allotment."
One of the conditions imposed by the Government of India on the company for implementing the beer project was that 20 per cent. of the project cost is to be financed out of equity to be raised in hard foreign currency from non-resident Indians (NRIs) and foreign bodies corporate. To enable the company to comply with this condition, it was proposed to seek the approval of the shareholders by means of a special resolution to issue shares to NRIs/OCBs at a premium to be calculated in accordance with the guidelines in force and after obtaining the permission of the Reserve Bank of India (RBI) under the Foreign Exchange Regulation Act, 1973 (FERA). The applicant-company has obtained the overwhelming support and approval of its shareholders at the annual general meeting held on September 12, 1994, and has, therefore, complied with the provisions of law and stipulations imposed by the Government of India while granting letters of intent for manufacture of beer. The applicant states that there is nothing illegal in a company issuing shares to NRIs/OCBs on preferential basis at a price calculated in accordance with the applicable guidelines and subject to the Reserve Bank of India approvals as required by law.
The respondents who are minority shareholders have a mistaken impression that their holdings in the company will get reduced if the issued to NRIs/OCBs, as per resolution No. 11. The holdings of all the shareholders in the company will correspondingly be reduced and, therefore, the respondents will not be prejudiced in this regard. In Company Petition No. 39 of 1994 filed by them before the Company Law Broad, the respondent has sought for injunction suppressing this suit. They did not get interim relief from the Company Law Board. They have not referred to it before the Supreme Court.
The objections of the respondents are motivated and are not in the interests of the applicant-company and not in the interests of the majority of the shareholders. The founders of the company, Mr. D. C. Kothari, and father of the second applicant and H. C. Kothari, father of B. H. Kothari, entered into a family arrangement under which the applicant-company it managed by the second applicant and four other companies established by the same founders, are managed by the family members of B. H. Kothari. The objection of the respondent is with the aim of putting Mr. B. H. Kothari in the saddle as their nominee. B. H. Kothari does not hold any shares in the applicant-company. He has never been a member of the board of the applicant-company. The motive and intention of the respondent is only to take over the management from P. D. Kothari.
Resolution No. 12 reads as follows :
"Resolved that pursuant to the provisions of section 81(1A) and other applicable provisions, if any, of the Companies Act, 1956 (including any re-enactment thereof), and subject to such further approvals as may be necessary from any authority and subject to such terms and conditions and modifications as may be prescribed in granting such approvals and agreed to by the board of directors of the company (hereinafter referred to as 'the board', which term shall be deemed to include any committee of the board as may be constituted) consent be accorded to the board to issue, offer and allot not exceeding 1,01,04,000 equity shares of Rs. 10 each at a premium to be calculated in accordance with the guidelines of the Securities and Exchange Board of India (SEB1) dated August 4, 1994, and such other amendments as may be made thereto in respect of calculation of the premium on the shares to Mr. Pradip D. Kothari and his group, viz., his relatives, associates and associate companies (hereinafter referred to as 'the promoters group') as the board, in its absolute discretion and in such manner and within such period and at such time or times, may decide and in accordance with the above-said guidelines of the Securities and Exchange Board of India and that the said shares so offered and allotted shall have a lock-in-period of five years from the date of allotment. The above-said number of shares have been calculated on the basis of an estimated premium of Rs. 40 per share and the same shall be varied depending upon the calculation of the premium in accordance with the Securities and Exchange Board of India guidelines by the statutory auditors of the company and a modification in regard to the number of shares, if necessary, will be placed at the general meeting.
Resolved further that such aforesaid shares shall rank pari passu in all respects with the existing equity shares except as regards dividends The said shares shall rank for proportionate dividend from the date of allotment.”
It is further resolved that the aforesaid
investment of the promoter, group shall not exceed a limit of 51 per cent. of
the equity capital of the company.
After the new economic policy, the financial institutions have been permitting the existing management of various companies in the domestic corporate sector, to increase their stake in the companies managed or owned by them to 51 per cent. with a view to stall the unhealthy take-over bids of companies with proven track records. When various companies have availed of this facility, there is no reason why the applicant-company's present management should not avail of this policy relaxation. It was only on September 2, 1994, and thereafter when litigation was started against the annual general meeting of the company that the financial institutions have changed their stand from what they had earlier agreed. B. H. Kothari and the eleven Reliance companies want to take over the management of the company. It has, therefore, become necessary for the existing management to increase its stake in the company suitably accordance with law and the guidelines in force so that the destabilisation moves initiated by B. H. Kothari and associates are not allowed succeed. The applicant, therefore, prays to permit him to implement resolutions Nos. 10 and 11 and permit him to hold the adjourned annual general meeting to consider and put to vote resolution No. 12.
Application No. 1628 of 1995 :
The applicant is the whole-time director of the defendant-company. This court, by its order dated February 15, 1995, in Application No. 7152 1994, in C. S. No. 1128 of 1994, permitted the applicant-company to hold the adjourned annual general meeting of the company on March 20, to 1995, to consider resolution No. 12 of the notice dated August 5, 1994. One of the conditions in the aforesaid order is that the results of the voting on resolution No. 12 would not be declared nor would any decision about the passing of the resolution be taken on the basis of the said voting till further orders. The adjourned annual general meeting was held on March 20, 1995, at 10 a.m. The applicant has filed an application seeking permission of the court to implement resolutions Nos. 10 and 11 of the notice dated August 5, 1994. He prays that the sealed envelope may be opened and the results of resolution No. 12 may be implemented.
In the counter, the respondent-plaintiff contends briefly as follows : The legality of resolution No. 12 is pending before this court. The applicant-company cannot seek for opening of the envelope before this court. If the resolutions of polling are made known to the parties, the results may become public which will have a serious consequence. Even if the results indicate that resolution No. 12 has been passed by the requisite majority, the request for implementing the said resolution is untenable in the light of the orders of the Supreme Court of India to decide the validity of resolutions Nos. 10, 11 and 12. The request for implementing the results may, therefore, be rejected.
O. A. No. 435 of 1995 :
The applicant is the director of the plaintiff-company. In the affidavit, he contends as follows :
The applicant has filed the suit for declaring that the notice issued by the first respondent-company calling for the 25th annual general meeting of the company on September 12, 1994, for the passing of items Nos. 10 to 12, is illegal and unenforceable and for a permanent injunction restraining the respondents from considering and passing the said resolutions. The Supreme Court by its order dated September 9, 1994, permitted the first respondent-company to take up for consideration resolutions Nos. 10 to 12, but directed that the results would not be declared nor any decision would be taken about the passing of the said resolutions until further orders. At the meeting held on September 12, 1994, the consideration of resolution No. 12 was postponed illegally. The matter was again taken up in the Supreme Court on September 23, 1994, and the Supreme Court did not permit the respondent-company to take up for consideration resolution No. 12 until further orders. It was taken up on October 25, 1994, and the Supreme Court has held that the decision on the legality or otherwise of resolutions Nos. 10 and 11 will have to be considered by this court and until then they cannot be implemented. So far as resolution No. 12 was concerned, the Supreme Court gave liberty to the first defendant to move this court for consideration of the said resolution. The legality of the resolutions is now challenged by the applicant as per directions of the Supreme Court.
Resolution No. 10 is illegal and cannot be implemented for the following reasons : The monies which were to be raised out of the rights issue were never intended to be utilised for a beer project, a different purpose. The company is obliged to keep the monies raised for specific purposes only for that purpose and so long as those purposes are not sought to be implemented, the company is obliged to keep the monies raised out of the rights issue, only in a separate bank account under the provisions of the Companies Act, which the first defendant failed to do. Consequent upon the change in the Government in Andhra Pradesh, a total prohibition was imposed in the State of Andhra Pradesh which bans the manufacture and processing of liquor and spirits in that State. The monies diverted and spent for the beer project have, therefore, become a waste. The company would not have landed in this piquant situation, had it waited for clearance from the authorities for the implementation of the beer project. The Regional Director, Department of Company Affairs, Madras, by his letter dated January 5, 1995, addressed to the Director of Inspection and Investigation, Department of Company Affairs has stated that even though the beer project has been conceived a long time back even prior to the issue of partly convertible debentures, it was not disclosed and that the company has suppressed material facts to its shareholders and had never obtained a letter of intent from the Government of India for establishing the beer project. It appears that based on the above-said letter by the Regional Director, the Central Government has ordered a limited inspection under section 209A of the Companies Act of the accounts of the company. When the matter is the subject-matter of investigation in respect of the end-use of the funds, the utilisation of the funds, which were not to be utilised for purposes other than envisaged, is not legal. Therefore, resolution No. 10 cannot be implemented. The beer project cannot be established in Andhra Pradesh where it can no longer be established, and on that ground also implementation of resolution No. 10 which would divert the monies to the beer project in Andhra Pradesh is not legal. The diversion of funds for the beer project is the subject-matter of pending proceedings before the Company Law Board under sections 397 and 398 of the Companies Act and the Company Law Board is seized of the matter. The applicant herein has, therefore, a prima facie and the balance of convenience is with him for restraining the company from implementing resolution No. 10.
Resolution No. 11 pertains to allotment of shares on preferential basis to overseas bodies corporate/NRIs to an extent of 9 lakh shares. Resolution No. 12 envisages allotment of shares on a preferential basis to persons in the management, viz., Pradip D. Kothari and his group, and empowers the company to allot 51 per cent. of the shareholding on preferential basis. In terms of the guidelines issued by the Central Government, the financial institutions which are the shareholders of the company, viz., etc., LIC, GIC, UTI, etc., own 34 per cent. of the equity capital. Therefore, they cannot obviously vote in support of these resolutions for the following reasons : (1) The company will have to establish that there is good management and track record ; (2) the promoters should provide and disclose the source of funds ; (3) the funds which are to be raised by virtue of preferential allotment or any allotment should be used for productive purposes ; and (4) there should be no family dispute in the management. None of the guidelines is satisfied in this case. There are serious allegations against the company. The defendants have not disclosed the source of funds. The beer project can no longer be construed as a productive purpose as the project was started in the State of Andhra Pradesh where it cannot be now implemented. There is also a serious family dispute which is conceded by the defendants before the Company Law Board. The financial institutions, unmindful of the guidelines of the Government of India, have voted in favour of resolution No. 12, though their attention was expressly brought to these allegations in the form of a writ petition filed by a shareholder. The question whether the financial institutions have acted in accordance with the directions of the Government of India is a serious matter for consideration, and that being the position, special resolution No. 12 cannot be implemented. The financial institutions can permit persons in the management or promoters group to increase their stake up to 22 per cent. only. But the resolution to be passed is for the specific purpose of enabling preferential allotment of shares to the promoters group to an extent of 51 per cent. The number of shares that are to be allotted is also expressly mentioned as 1,01,04,000 which constitutes 51 per cent. The resolution would amount to a complete violation of the guidelines of the Central Government and the Securities and Exchange Board of India. The meeting held on March 20, 1995, is also liable to be declared as illegal, since it was not adjourned validly by obtaining the approval of the members by a show of hands or by a poll. The very adjournment of the meeting on September 12, 1994, and the deferment of consideration of special resolution No. 12 is totally bad and is liable to be declared as illegal. Proxies which have been allowed in the meeting held on September 12, 1994, have been used for the meeting held on March 20, 1994, and it is not correct. The company deliberately did not send any fresh proxies with the ulterior motive of depriving the legitimate shareholders of the company as on date from participating in the meeting. The allotment of shares to overseas bodies corporate/NRIs is an indirect method to further consolidate the position of P. D. Kothari. The allotment of any shares to NRIs would merely enable P. D. Kothari to increase his holding indirectly and, therefore, resolution No. 11 is liable to be declared illegal. For the above reasons, an injunction restraining the defendants, and their men from, in any manner, giving effect to or implementing special resolutions Nos. 10, 11 and 12 said to have been passed on September 12, 1994, and March 20, 1995, may be ordered.
O. A. No. 220 of 1995 :
This application is filed by the plaintiff for injunction in C.S. No. 1128 of 1994.
In this application in the affidavit, the director of the applicant-company contends as, follows : The first defendant-company has come out with a sort of "rights issue" of PCDs, through letter of offer dated October 15, 1992. The company proposed to raise Rs. 1,890 lakhs from the existing shareholders and employees of the company by allotment of PCDs. The purpose is to utilise Rs. 873 lakhs for expanding the capacity of the spinning mills at Singanallur, a sum of Rs. 520 lakhs was for modernisation of the existing mills at Singanallur and Vadamathurai by installing imported autoconers ; a sum of Rs. 637 lakhs was for the utilisation for the setting up of a 100 per cent. export-oriented unit for quarrying granite blocks and processing into granite tiles with a capacity of 50,000 square metres. The respondent, with the intention of defeating the rights of the applicant, deleted the names of the applicant and ten other companies on the ground that when the instruments relating to the transfer of shares have been presented, they have not been duly stamped. The matter is now pending in the Supreme Court. The defendant-company had proceeded to call for the annual general meeting of the company by notice dated August 5, 1994. In item No. 10 of the agenda, the company made it known to the shareholders that the funds which were collected in the year 1992 for the specific purpose were to be diverted for establishing a beer project, for which the company has got a letter of intent in April, 1993, subsequent to the closure of the issue and subsequent to the collection of monies in April, 1993. The validity of resolutions Nos. 10, 11 and 12 have been challenged and suits are filed with interim applications. The Supreme Court, by order dated September 9, 1994, permitted the respondent to hold the meeting on September 12, 1994, but, however, held that the s of voting shall not be declared, nor could it be implemented until further orders. At the meeting held on September 12, 1994, the respondent-company deferred the consideration of resolution No. 12. The Supreme Court passed an order on September 23, 1994, pointing out that inasmuch as resolution No. 12 has not been put to vote, there will be an injunction until further orders as regards resolution No. 12. The Supreme Court has subsequently held that this court should pass further orders. As regards resolutions Nos. 10 and 11, the Supreme Court has held that the legality or otherwise of resolutions Nos. 10 and 11 have to be considered by this court. The court, by its order dated February 15, 1995, permitted the respondent-company to hold a meeting for the consideration of resolution No. 12, but, however, has reserved the right in favour of the applicant to even thereafter challenge the validity and legality of the resolution. The applicant is now moving this court for an order of injunction restraining the implementation of resolution No. 10.
The respondent filed a common counter to this application as well as in Application No. 1312 of 1995 contending the same averments which they have stated in the affidavit of the applicant in A. No. 7151 of 1994 and A. No. 1628 of 1995.
The applicant has filed a reply affidavit repudiating the averments in the counter and contending that Rs. 13 lakhs have so far been spent for the beer project even without getting the approval of the shareholders for diversion of funds and that too in a State where prohibition has been imposed.
O. A. No. 436 of 1995, Application No. 7153 of 1994 in C. S. No. 1132 of 1994 are similar to O. A. No. 435 of 1995 and Application No. 1628 of 1995 and 7151 of 1994 in C. S. No. 1128 of 1994.
Application No. 1312 of 1995 in C. S. No. 1128 of 1994 is an application filed by the plaintiff-applicant with a prayer to direct the respondent to keep the monies earmarked for the beer project in a separate bank account pending disposal of the suit and decision by this court on the legality and validity of resolution No. 10 of the notice dated August 5, 1994, and its implementation.
All the above applications are taken up for a common enquiry, since, all the above applications are in respect of resolutions Nos. 10, 11 and 12 of the notice dated August 5, 1994.
Learned counsel appearing for the plaintiff, Mr. Mohan Parasaran, has opened his arguments by stating that the three resolutions Nos. 10, 11and 12 for the company, Kothari Industrial Corporation Limited cannot be implemented even though the voting pattern of the resolutions is made known and it is just because there have been serious allegations made against the company for diversion of funds in an illegal manner detrimental to the interest of the company as well as the shareholders the Supreme Court has left open the implementation of these resolutions only after establishing the legality of the same and has left open for plaintiff to contend that the resolutions could not be implemented even though the defendants claim that they have absolute and overwhelming majority of the votes polled by the shareholders in the annual general meeting held on two different dates, viz., September 12, 1994, in so far as resolutions Nos. 10 and 11 and March 20, 1995, in so far as resolution No. 12 are concerned. I have already extracted resolutions Nos. 10, 11 and 12 which are the subject-matter of the entire discussion, in the earlier part of this order, while narrating the case of parties.
Learned counsel appearing for the defendants in his arguments has vehemently stated that the objections that have been raised by the plaintiffs are motivated with the intention of inducting Mr. B. H. Kothari on the board of directors of the company and it is nothing but a proxy battle being fought by the said B. H. Kothari and had drawn the attention of this court to para 13 of the plaint. In the said para, the plaintiff had stated that in the interest of the company and the shareholders, the company should go into the hands of a professionally competent person and it would be most appropriate that one of the original promoters of the should be given a chance and at present, it would be none else than B. H. Kothari, son of H. C. Kothari. The above statement, according to learned counsel appearing for the defendants, indicates the intention and the motive behind the objections raised by the plaintiffs in this court. Learned counsel appearing for the plaintiffs would, on the other hand, argue that the applicant had collected money from the shareholders for specific purposes and the particulars of the issue are specific, the monies so collected are admitted to be utilised for other purposes and it is only with the intention of strengthening the hands of the second defendant who is in management of the first defendant and it is an attempt made by the second defendant to defeat the rights of the others, in particular Mr. B. H. Kothari. The question whether the objections with regard to the resolutions were made with the oblique motive or in the interests of the shareholders of their company have to be seen by us before coming to a conclusion whether the first defendant could be permitted to implement the resolutions or before passing an order granting injunction restraining the first defendant from implementing the resolution. To reach this goal, I am of the opinion that we have to trace the history of this dispute a detail.
In C. S. No. 1128 of 1994 filed by Maxwell Dyes and Chemicals Limited and in C. S. No. 1132 of 1994 filed by Swadee Chemicals Private Limited against the first defendant, Kothari Industrial Corporation Limited and another, the relief sought for is the same. That is the declaration of the noticed by the first defendant calling the public to the annual general meeting of the company on September 12, 1994, for the purpose of considering and passing resolutions Nos. 10, 11 and 12 under the caption "Special business" in the agenda, as illegal, void and unenforceable and for a permanent injunction restraining the defendants, their officers, and etc., from passing the above resolutions.
In the two suits, applications for injunction
were also filed in O. A. Nos. 220 of 1995 and 435 of 1995 in C. S. No. 1128 of
1994 and in O. A. No. 436 of 1995 in C. S. No. 1132 of 1994. The learned judge
(Hon'ble Mr. AR. Lakshmanan J.) has observed in his order as follows :
"Even though a prima facie case has been made out for grant of interim
injunction, the same is not granted in view of the representation made by the
advocates appearing for the respondents that the consideration of resolutions
Nos. 10, 11 and 12 will be deferred until further orders." There were
certain transfer petitions pending on the file of the Supreme Court. In
Transfer Petitions Nos. 363 to 365 of 1994, the Supreme Court of India in its
order dated September 9, 1994, has passed an order as follows :
"Taking all the facts and circumstances into consideration and having regard to the fact that the 25th annual general meeting is scheduled to meet on September 12, 1994, and preparations for holding that meeting are complete and its postponement would inconvenience many, we think that the ends of justice would be met if we permit the appellants to hold the meeting subject to the following conditions :
1. The appellants may hold the meeting on September 12, 1994, but the respondent shareholders will be permitted to vote on the basis of their total shareholdings shown in the last column of the statement at page 218 ; however, the votes in respect of the number of PCDs offer and applied for and the number of additional PCDs applied for in rights issue shall be maintained separately ;
2. The result of the voting on resolutions Nos. 10 to 12 taken at the said meeting will not be declared nor will any decision about the passing of the said resolutions be taken on the basis of the said voting till further orders. The question of the rights of the respondents in the number of PCDs offered and applied for and the number of additional PCDs applied for in the rights issue shall be determined hereafter and the court's decision will determine the outcome of resolutions Nos. 10 to 12;
3. The result of the voting on the aforesaid rights shares shall be kept in a sealed envelope and intimated to this court promptly ; and
4. The above arrangement is purely interim and will not prejudice the rights and contentions of the parties, including the contention that the resolutions are even otherwise illegal."
As per the above order, the defendant-company considered resolutions Nos. 10 and 11 at its annual general meeting held on September 12, 1994, the result of the voting was forwarded to the Supreme Court as per the directions of the Supreme Court in para 3 of the above order. Resolution No. 12 was, however, deferred to be considered at the adjourned meeting fixed for September 27, 1994. As per the order dated September 23, 1994, the Supreme Court has passed an injunction in respect of resolution No. 12, until further orders on October 25, 1994 ; the sealed envelope was opened in the apex court and it showed that both resolutions Nos. 10. and 11 had been passed overwhelmingly with 94 per cent. voting without taking into account the disputed shares and 87 per cent. of the voting after taking into account the disputed shares. The Supreme Court has passed an order on that date holding that the decision on the legality or otherwise of resolutions Nos. 10 and 11 will have to be decided before resolutions Nos. 10 and 11 can be implemented. As regards resolution No. 12, the Supreme Court has observed that it will be open to the petitioners to request the High Court of Madras to permit them to put the said resolution for consideration at any subsequent adjourned meeting of the company, and that the High Court will proceed to pass orders uninfluenced by their order dated September 23, 1994, in so far as resolution No. 12 is concerned. It is only in pursuance of the above order of the Supreme Court of India, that the defendants-company have filed Applications Nos. 7151 and 7153 of 1994 seeking permission of this court to hold the adjourned annual general meeting for considering resolution No. 12.
On February 15, 1995, this court, presided over by the Hon'ble Mr. Jagadeesan J., passed an order similar to the order passed by the Supreme Court, permitting the applicants to hold the meeting on March 20, 1995, for considering resolution No. 12, and gave a direction to keep the result of the voting in a sealed envelope and intimate it to this court. The annual general meeting was held on March 20, 1995, and the results were forwarded to this court in a sealed envelope. This court has opened the envelope on April 7, 1995. It was seen that the resolution was passed with 94.44 per cent. of voting without taking into account the disputed shares and there was only 5.56 per cent. of voting against the resolution. After taking into account the disputed shares, the percentage of voting for the resolution was 87.66 per cent. and it was 12.34 per cent. Against the resolution. Since the Supreme Court, in its order dated October 25, 1994, and this court, in its order dated February 15, 1995, has held that the legality otherwise of resolutions Nos. 10, 11 and 12 will have to be decided before the resolutions could be implemented, it is for us no to examine and consider the same in the ensuing discussion.
Learned counsel, appearing for the plaintiff, has challenged legality or otherwise of resolution No. 10 by contending that the cant-company collected the money from the shareholders, for specific purposes as detailed in the notice sent to the shareholders and yet the money so collected was not utilised for the above purposes and it was diverted for the beer project in Andhra Pradesh without the consent of the Andhra Pradesh Government and the shareholders and the money so collected ought to have been kept in a separate account as required under section 73(3) of the Companies Act with details of statement and in the present case, no statement of accounts was filed till date and the money has also not been kept in a separate account. It is also argued by learned counsel that the Central Government, particularly the Department of Company Affairs, have ordered investigation after coming to the conclusion that there has been an irregular deployment of funds by a company and that it is illegal for the company to deploy the funds for purposes) other than for which they have raised the funds and inasmuch as ft company has suppressed the facts of going into the beer project with the letter of offer dated October 15, 1992, it amounts to suppression of information under the prospectus and the resolution passed in pursuance of such a letter is illegal and the court cannot grant permission to implement the illegal resolution and be a party to the illegal activities of the second respondent. Learned counsel, appearing for the plaintiff, has also drawn the attention of this court to the letter of offer dated October 15, 1992 issued by the applicant-company to its shareholders offering PCDs, in which the particulars of the issue are given at page 9 of the said letter. As per the above particulars, the proceeds of the issue will be utilised to put up additional 10,080 spindles at the spinning mill at Singanallur, modernise facilities at the spinning mills, set up a 100 per cent. export oriented unit for the manufacture of 50,000 sq. mts. granite tiles, augment long-term sources for the working capital and meeting the issue expenses. According to the plaintiffs, it is only in pursuance of this letter of offer, the shareholders have paid funds and the notice for the annual general meeting is for conversion of these funds into beer project regarding which there were no particulars given in the letter of offer and, therefore, it is an invalid resolution even if it is passed with a majority. Learned counsel, appearing for the respondent, would argue that the letter of offer is one issued to the existing shareholders and the requirements of section 81(1A)(a) and section 81(1A)(b) of the Companies Act have been duly complied with and there is no requirement under section 81(1) of the Companies Act to disclose to the shareholders anything else. According to learned counsel appearing for the defendants, this letter of offer has to be distinguished from the prospectus issued to the public calling upon them to purchase shares and so long as the requirements of section 81 are complied with, there is nothing improper or illegal in the conversion of the funds. Section 61 of the Companies Act permits the company to vary the terms of the contract referred in the prospectus by getting the approval of the shareholders of the company in the annual general meeting. When the letter of offer is accepted by the shareholders, a contract comes into effect between the company and the shareholders while the prospectus issued to the public itself is to be approved by the shareholders of the company in the annual general meeting to have a contract. Therefore, there is no reason as to why the prospectus issued to the shareholders could not be deployed for a different purpose than the one for which the notice has been issued. Further, the letters of intent for the manufacture of beer are received by Kothari Orient Industries Export Limited on December 15, 1992, from the Government of India and the Government of India in their letter dated December 15, 1992, have observed that they are prepared to issue an industrial licence under the Industries (Development and Regulation) Act, 1951, to Kothari Orient Industries (Exports) Limited for the manufacture of beer in their existing industrial under taking at Singanallur, District Anantapur, in the State of Andhra Pradesh, to the capacity on the basis of maximum utilisation of plant and machinery. This letter has required Kothari Orient Industries (Exports) Limited to confirm their acceptance of the conditions imposed. Subsequently, in pursuance of the letter by Kothari Industrial Corporation Ltd., Government of India, in their letter dated April 6, 1993, have stated that the scheme covered by the letter of intent issued in favour of Kothari Industries (Exports) Ltd., will now be implemented by Kothari Industrial Corporation Ltd., and that the said company will abide by the terms and conditions. From the above correspondence between the Government of India and the sister concern of the applicant-defendant and the defendant, it is seen that the letter of intent itself is dated December 15, 1992, and the Central Government has approved the said letter on April 6, 1993 and as such the question whether Kothari Industries Corporation Ltd., is going to the beer project finds a place in the letter of offer dated October 15, 1992, does not arise at all. Subsequent to the letter of intent in his name, the defendant had approached the Industrial Credit Investment Corporation of India, the lead institution in respect of the term loan lenders and also the debenture trustee for debenture holders and they have responded to the letter of intent seeking their consent for deployment of funds for the beer project instead of the projects mentioned in the letter of offer, viz., modernisation facilities, expansion of textile mills and they have sanctioned it as seen from the correspondence filed by the defendant along with their typed set of papers. The defendant addressed a letter on August 19, 1993, to the Industrial Credit and Investment Corporation of India Limited, seeking approval to revise the priority of implementation of their project giving particulars of the same. The ICICI, in their letter dated November 22, 1993, have stated that based on the discussions they had with the representatives of the defendant, they are agreeable to the proposed changes as indicated in the annexure subject to certain conditions. This approval has been issued by the ICICI not only in their Capacity as leading institution, but also as trustees for the PCDs as mentioned in the above letter itself. In this letter, it is specifically stated that the company shall raise Rs. 350 lakhs or 20 per cent. of the cost of brewery project, whichever is higher, by way of foreign/NRI equity at a premium which will have to be approved specifically. The defendant has sent a. revised proposal for deployment of funds in the letter dated November 24, 1993, to the ICICI for according approval for the proposed issue of equity to NRIs and foreign bodies corporate, a total amount of Rs. 450 lakhs inclusive of a premium at Rs. 15 per share. The ICICI in their letter dated January 18, 1994, have informed the defendant that they have no objection to the proposed equity issue of Rs. 450 lakhs including premium to the NRIs/foreign investors subject to their obtaining the necessary statutory approvals and approval from shareholders for that purpose. The defendants have addressed a letter on January 18, 1994, to the financial institutions, viz., UTI, LIC, GIC, and its subsidiaries requesting the other factors in that letter, to fix a suitable premium for the shares to be offered to the promoters to keep their stake at the existing level of 16.91 per cent. consequent on the offer of Rs. 450 lakhs to foreign/NRI investors. In the said letter, they have informed the financial institutions that after receiving their approval, they would get the approval of the shareholders at an extraordinary general meeting. The defendant had also addressed a letter to the ICICI to approve the company's making a preferential offer to the promoters of such number of shares as would result in the prompters maintaining their equity holding at the present level of 16.91 per cent. The defendant had addressed to the Chairman, Securities and Exchange Board of India, Bombay, their letter dated February 23, 1994, seeking their guidance and suggestions in the beer project. The Securities and Exchange Board of India had sent a reply stating that their guidelines had been covering issues mentioned in the letter of the defendant like private placements and by way of preferential allotments to identified NRIs and OCBs., in favour of the defendant and that they are free to do so and determine the terms thereof including pricing, after obtaining the consent of the shareholders. The Unit Trust of India, who was approached by the defendant-company for processing their application and for decision for fixing up premium for preferential offer to the promoters group and for issue of shares to NRIs has sent a reply to the effect that the total holding of the promoters including NRIs/OCBs after the proposed preferential offer shall not exceed 51 per cent. of the issued capital. This letter has been signed not only by the General Manager, UTI, but also by the General Manager, GIC of India and the Executive Director of LIC of India, showing that the financial institutions have no objection for the deployment.
The defendant has also filed the letter received from the Zonal Manager of the Industrial Estate, Patancheru of Andhra Pradesh, which shows that they are allotting 71,970.428 sq. mtrs. for setting up their industry for the manufacture of beer on outright sale basis, at a tentative rate of Rs. 60 per sq. mtr. The defendant has also filed the letter addressed to them by the Government of India permitting the applicant-company to implement the letter of intent for the beer project in the State of Andhra Pradesh. The defendant has also filed a letter from the Reserve Bank of India dated August 10, 1994, in which the Reserve Bank of India has stated that the defendant has their approval to enter into technical collaboration with Dab Brau-Consult GmbH, Germany for the manufacture of beer subject to certain conditions. The Reserve Bank of India has reiterated their approval remaining unchanged in their letter dated August 12, 1994, addressed to the defendant. The Reserve Bank of India has also addressed a letter to the defendant stating that they shall be glad to know exact amount of premium for the proposed issue to enable them to consider their request for issue of equity shares to NRIs with repatriation benefits. It is thus seen that the defendant-company has addressed the authorities, viz., the Central Government, the State Government, financial institutions like the ICICI, UTI, GIC, LIC, and also the Reserve Bank of India for obtaining their consent and approval to the issue of debenture shares in favour of NRIs towards the beer project and the beer project has been approved by the Government of India as well as the Government of Andhra Pradesh. The correspondence filed by the applicant also shows that the Andhra Pradesh Government has even allotted plots for the factory to enable the defendant to start the beer project in Andhra Pradesh in pursuance of the sanction given by them subject to the approval by the shareholders. Resolution No. 10 approves the deployment of the funds to the beer project with a certain percentage of shares to NRI's, and the objections raised by the plaintiff to hold that the deployment is not proper and, therefore, the resolution is illegal cannot be given any credence at all.
Learned counsel, appearing for the defendant, has cited two authorities reported in Narendra Kumar Maheswari v. Union of India, AIR 1989 SC 2139 and Madan Gopal Jajoo v. Union of India, AIR 1992 Delhi 253; [1996] 85 Comp. Cas. 153 infra, for the proposition that a company could utilize funds raised for a particular project for which the funds were raised to another project. The Supreme Court has held in the former decision that the approval obtained for the change in the scope of the project from the financial institutions, viz., the ICICI, being a Government organization, it is acceptable. It has also held that the deviation from the earlier proposal for the deployment of funds to a project other than that for which a proposal was made was neither illegal nor void. In the latter case, the Supreme Court has held that where the resolutions in the shareholders and debenture holders meeting were passed with overwhelming majority, any order by the court that the debenture issue may be recalled would | result in an unsettling effect on the capital market and it would affect the right of almost the whole of the investing public. The Supreme Court has, therefore, not encouraged any deviation from the resolutions passed by a majority of the shareholders. In the above circumstances the reasons given by the plaintiff to declare resolution No. 10 as invalid on the ground that the promoter is trying to increase his share capital by issuing the debenture shares to NRIs who are his own associates is a wrong approach which has not been notified in the notice and the project itself cannot be implemented is not a tenable contention. It is more so when the Ordinance introducing prohibition in Andhra Pradesh which is taken the sheet-anchor by the plaintiff to contend that the beer project could not be implemented in Andhra Pradesh on account of the policy decision of the State Government itself is not challenged before the Supreme Court as contended by learned counsel appearing for the defendant. Learned counsel, appearing for the defendant, would also argue that just because prohibition has been introduced in Andhra Pradesh, it cannot be stated that the manufacture of beer itself is prohibited. According to him manufacture is to be distinguished from consumption is also a point in favour of the defendant to come to the conclusion that the contention of the plaintiff that the beer project cannot be implemented and any resolution recognizing it, is an invalid one is not a tenable one.
Learned counsel, appearing for the plaintiff, has also argued that there is an investigation pending against the defendant-company in respect of the mismanagement and misfeasance of the affairs of the company and when an investigation is pending, a resolution diverting the funds of the company to another project is not proper, since, it is not only the interest of the company but also the interests of the public which are also involved in this. Learned counsel, appearing for the plaintiff, bases his argument on this aspect on account of the letter addressed by the Regional Director of the Company Law Affairs, Madras, to the Director of Company Law. Learned counsel, appearing for defendants Nos. 1 and 2 would argue that there is no such enquiry pending as alleged by learned counsel, appearing I for the plaintiff, and the letter relied on by the plaintiff is an internal correspondence between the Regional Director and the Director and it cannot be considered as evidence of investigation. The plaintiff (sic) would also contend that a copy of the letter has not been sent to them and the letter surreptitiously obtained cannot be the basis to hold that there is an investigation pending against the company. Learned counsel, appearing for the plaintiff, would reply the same by contending that whether motivated or not, the fact remains that an investigation is pending and till the investigation is over, the beer project should not be permitted to be implemented, since it would encourage the diversion of the funds and wasteful capital expenditure. Learned counsel would also request the defendants to file an affidavit if necessary stating that there is no investigation pending against them. This argument of learned counsel, appearing for the plaintiff, is not tenable since it is for the plaintiff to prove that there is an investigation pending against the company. The letter relied on by the plaintiff ends with a note that it may, however, appear at the threshold that the diversion of PCDs for modernization of the textile units to the beer project has been requested by obtaining the approval from debenture-holders and members. This observation by the Regional Director would drive us to the conclusion that the Regional Director has been satisfied that the deployment of funds is quite regular in view of the requisite approval of the debenture-holders and members having been obtained. Therefore, the proposed inspection under section 209A of the Companies Act cannot be considered as an investigation pending against the company preventing them from implementing the resolutions passed on the beer project.
Learned counsel, appearing for the plaintiff, would also argue that no accounts have been furnished till date with regard to the collection of the funds and the amount should have been kept in a separate account until the requisite permission is given by a stock exchange and it has also not been done by the defendant-company and, therefore, there is a violation of section 73 of the Companies Act and on account of the same also, the resolution cannot be permitted to be implemented. Learned counsel, appearing for the defendant, would argue that the stock exchange at Madras has been informed of the transfer of the shares and they have also sent letters informing that the stocks in shares have been listed in the Madras Stock Exchange. The provisions of section 73 of the Companies Act would be applicable only if a prospectus had been issued calling for applications for shares and not in cases where a notice of issue has been sent to the shareholders. Letters of the stock exchange dated March 12, 1993, and September 24, 1993, reveal that the shares have been listed on the stock exchange at Madras. Therefore, the contention of the plaintiff that the amount raised has not been kept in a separate bank account and, therefore, the resolutions cannot be permitted to be implemented is not convincing and acceptable.
Learned counsel appearing for the defendant would also argue that even if it is assumed that there is a misstatement in the letter of offer, the shareholder, who has subscribed on the basis of the misstatement, is entitled to compensation for loss or damage, if any, caused to him as per section 62 of the Companies Act and the first defendant had also expressed its opinion that the plaintiff is at liberty to withdraw the application and the stock invested if they are not for the deployment of the funds to the beer project and in spite of it the plaintiffs have not either withdrawn the application or asked for repayment of the amount, but are simply objecting to the implementation of the resolution only to achieve their object of bringing B. H. Kothari into the limelight. The plaintiffs are described as satellite companies of Ambani. B.H. Kothari, son of H.C. Kothari, is the son-in-law of Mr. Ambani. He is not a director in the defendant-company. In the above background, the argument of learned counsel appearing for the defendant that the objection with regard to resolution No. 10 passed by the shareholders is only to enable Mr. B.H. Kothari to take over the management cannot be said to be without any basis or weight. I am, therefore, of the opinion that resolution No. 10 passed by an overwhelming majority of the shareholders of the defendant-company is to be permitted to be implemented.
The next resolution which we have to consider is resolution No. 11. This is attacked questioning the validity of the same by stating that offer has been made to a select group, viz., NRIs to the detriment of minority group. The contention of the plaintiffs is that the NRIs to whom shares are offered will be close associates or relations of the promoter and offering the shares to them would only result in diluting the percentage of holding of the plaintiffs and it cannot be approved. We have already seen that the offer to NRIs has been made to comply with the conditions imposed in the letter of intent given by the Government of India and it has been approved by the ICICI who are the trustees of the debenture shareholders. We have seen that the Securities and Exchange Board of India guidelines do not prohibit transfer of debenture shares to NRIs. The Securities Contracts (Regulation) Act, the Reserve Bank of India, financial institutions, etc., encourage the transfer of shares up to 20 per cent. of the purchase cost in favour of NRIs. The offer to NRIs, therefore, does not appear to be an offer made to increase the percentage of holding of the shares with the second defendant, diluting the percentage holding of the plaintiffs. Resolution No. 11 being consequent upon resolution No. 10, the reason given by the plaintiffs to hold this resolution invalid and, therefore, that should not be permitted to be implemented is, therefore, not stainable.
Learned counsel, appearing for the plaintiff, would argue that the letters of intent and financial institutions no doubt permit the promoter to issue debenture shares in favour of NRIs but it should not be against law. When learned counsel contends that the issue of shares could not be against law and yet the first defendant proposed to issue shares in favour of NRIs it is for the plaintiffs to show how the issue of debentures in favour of NRIs is against law. There is no such evidence placed before the court.
Learned counsel, appearing for the plaintiffs, relied upon in Needle Industries case [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298, for questioning in the validity of the resolution contending that the offer is made to a select group to the detriment of the minority group. We have to refer to the decision in O. S. Appeals Nos. 39 to 42 of 1995, in the matter of Investment Trust of India Ltd.'s case [1996] 85 Comp Cas 75, wherein a Division Bench of this court has held that Needle Industries' case [1981] 51 Comp. Cas 743 ; AIR 1981 SC 1298, is not applicable to a listed public limited company. The defendant-company being a public listed company, the law laid down in Needle Industries' case [1981] 51 Comp Cas 743 ; AIR 1981 SC 1298, cannot be made applicable. Therefore, the contention of the plaintiff that resolution No. 11 encourages allotment of debentures in favour of a particular section of people and, therefore, it cannot be implemented is untenable. I am, therefore, of the opinion that resolution No. 11 is to be permitted to be implemented.
The plaintiffs have questioned the legality of resolution No. 12 on several grounds. The first ground of attack made by learned counsel, appearing for the plaintiffs, is that the passing of the resolution on March 20, 1995, when a notice has been issued to hold the meeting on September 12, 1994, is improper and illegal. The defendants have produced the original minutes of September 12, 1994. The plaintiffs have also participated in the above meeting held on September 12, 1994. There are entries in the minutes which would show that the plaintiffs have expressed their opinion when the second defendant has sought for postponing the meeting to a future date. After a discussion on the above subject, it has been decided by the shareholders who were present on September 12, 1994, to have the meeting with regard to resolution No. 12 postponed to a future date. The Supreme Court was also aware of the adjournment of resolution No. 12 to a future date and they have also given directions. In our court also, the adjournment of the meeting for considering resolution No. 12 has been considered and a direction has been given by this court to hold the meeting on March 20, 1995. When the plaintiffs were parties to the proceedings dated September 12, 1994, and the meeting was adjourned to a future date for considering resolution No. 12, the present contention of the plaintiffs that the adjournment was improper and illegal and, therefore, the resolution passed on March 20, 1995, is an illegal resolution, cannot be given any weight at all.
Learned counsel, appearing for the plaintiffs, has also argued that the two letters addressed by the financial institutions which was the reason for the adjournment sought by the second defendant have not been placed before the shareholders and, therefore, there is suppression of a material fact before passing the said resolution and on that ground also, the resolution has to be held as an invalid one. Here again, I wish to state that the two letters of the financial institutions have been considered those who have assembled at the meeting and only after a detailed discussion with regard to the necessity for postponing the meeting, the meeting has been adjourned as in the minutes. Therefore, it cannot be stated that there is any suppression of material fact before the shareholders who have assembled to pass resolution No. 12. Learned counsel, appearing for the plaintiffs, would argue that there is no proper notice for the meeting dated March 20, 1995. The meeting held on March 20, 1995, is a meeting which has been adjourned from September 12, 1994. Since it was held after 30 days, a notice has also been sent enclosing the proxy forms to A enable such of those shareholders who have purchased shares subsequent to September 12, 1994, to participate in the meeting. The meeting being a continuation of the original meeting, the notice containing the same form of resolution and explanatory statement has been stated in the notice and there is nothing improper to hold that there is no valid notice. At one stretch, learned counsel, appearing for the plaintiff, would argue that there is no necessity for giving notice and at another stretch, learned counsel would argue that there is no proper notice. The plaintiffs are blowing hot and cold at the same time with regard to the notice sent for the meeting held on March 20, 1995. I am of the opinion that it cannot be appreciated at all. The resolution to be passed and the explanatory statement of accounts were made known to the shareholders to form an opinion whether they should or should not approve the proposal regarding the increase of the percentage of the promoters by preferential offer up to 51 per cent. Therefore, the contention of learned counsel, appearing for the plaintiff, that there was no mention about 26 per cent. as per the letter of the financial institution is not relevant since it is less than 51 per cent. Learned counsel, appearing for the plaintiffs, would also argue that proxies provided for the meeting of September 12, 1994, itself have been utilized for the meeting held on March 20, 1995, and that is also not proper. Since the meeting held on March 20, 1995, is only an adjourned meeting, there is nothing improper in using the proxies already furnished to the shareholders. At any rate, when the subsequent notice has been issued new blank proxy forms have been sent to the shareholders and if anybody had desired to change the proxy, they could have done it. Even though fresh proxy forms have been sent for the meeting on March 20, 1995 to enable the purchasers of shares subsequent to September 12, 1994 to exercise their option, the previous shareholders also could have utilized the same if they have an intention to change the proxy. Therefore, it cannot be a ground to hold that the meeting has not been properly held and old proxies have been used. At any rate, none of the above reasons canvassed by the plaintiffs can be valid reasons for holding that the resolution passed on March 20, 1995, is an improper and illegal one. The main ground on which resolution No. 12 has been challenged by the plaintiffs is that there are disputes between two groups and one cannot defeat the other by increasing the shareholding against the guidelines issued by the Government regarding the promoters' right to the detriment of the other. According to the plaintiffs, the promoters' right to increase the shareholding is only 26 per cent. and in the present case, as per the notice and resolution, the promoters' intention is to issue equity shares numbering 1,01,04,000 at Rs. 10 each and it is against the guidelines issued by the Government. Learned counsel, appearing for the defendants, would argue that there are no such guidelines issued by the Government as contended by the plaintiff. The attention of this court has been drawn to the wording in the notice as well as in the resolution which is to the effect that it is proposed to issue to Mr. Pradip D. Kothari and his relative associates, and associate companies, viz: the promoters group, not exceeding 1,01,04,000 equity shares of Rs. 10 each in accordance with the guidelines dated August 4, 1994, of the Securities and Exchange Board of India details of which are set out in the explanatory statement relating to this item. The wording used in the notice as well as the resolution is stated as "not exceeding". It does not necessarily mean that the minimum issue is 1,01,04,000 ; the maximum only is mentioned and, therefore, it is always open to the shareholders to reduce the same in the meeting after discussion. But the results of the meeting had disclosed that except the plaintiffs, none other has opposed this proposal to increase the shareholding. In the notice itself, it is mentioned that the proposal is subject to the guidelines of the Securities and Exchange Board of India. The lock-in-period is also stated as five years. When the notice refers to the guidelines issued by the Securities and Exchange Board of India and the lock-in-period is also mentioned, the shares, even if issued, cannot be utilized by the person in whose name they have been issued to the detriment of others.
Learned counsel, appearing for the defendants, would also argue that the only Act which was restricting the capital issues is the Capital Issues (Control) Act of 1947, and this Act has been repealed by the Capital Issues (Control) Repeal Ordinance of 1992 promulgated on May 29, 1992, and published on the same date in the Gazette of India (Extraordinary) and, therefore, there is no restriction on the promoters to increase the share capital. Learned counsel has also brought it to the notice of this court that the number of companies of the Reliance group of which, the plaintiffs also form part, have also increased their share capital to the maximum and the contention of the plaintiffs that the promoter cannot be issued with 51 per cent. of shares is only an attempt to vindicate their personal grievance. It is not disputed by the plaintiff that some of their sister concerns have increased the capital issue. While so, there appear to be no bona fides in their objecting to the issue of the proposed number of shares in favour of Pradip D. Kothari and his associates as per resolution No. 12. Learned counsel, appearing for the defendants, would also argue that subsequent to the introduction of the liberalisation policy, the A promoters can have their share capital up to 75 per cent. and the issue to the public is restricted to only 25 per cent. This percentage of shares which a promoter can have, subsequent to the introduction of the liberalisation policy, is not challenged by the plaintiffs. Therefore, the proposal to issue 1,01,04,000 equity shares in favour of Pradip D. Kothari and 20 per cent. of shares to NRIs cannot be considered, as steps taken against the interest of the minority shareholders. On that ground, the resolution cannot be declared as an improper or illegal one to deny the permission sought for by them.
Learned counsel, appearing for the plaintiffs, would argue that four things are to be considered by the financial institutions supporting the preferential offer to promoters and they are : (1) the past record of the company ; (2) funds to be used for productive purposes ; (3) source of the promoters for the funding ; and (4) there should not be any family dispute. Learned counsel, appearing for the plaintiffs, would argue that the fact that an investigation is pending before the Director of Company Affairs is evidenced and, therefore, the management cannot be considered as having a good past record. We have already seen that there is no investigation pending before the Company Law Board and what has been suggested by the Regional Director to the Director is only to hold an inspection and, therefore, the management cannot be said to be having a past record of shady nature. As far as the productive purposes are concerned, learned counsel would argue that the beer project cannot be considered as a productive purpose and it is more so when the State in which it is to be implemented, has introduced total prohibition. The introduction of total prohibition by the newly formed State Government of Andhra Pradesh is subsequent to the notice. That the previous Government has approved the scheme and has offered its assistance cannot be denied. The manufacture of beer in collaboration with a foreign country is only productive in nature and it cannot be stated that the funds are not to be used for productive purposes. Therefore, the second requirement is also satisfied. As regard the source of funding, the promoters have indicated issuing of collection of share capital through NRIs, financial institution including the ICICI. Therefore, the third requirement is also satisfied. As regards the fourth requirement, learned counsel, appearing for the defendants, vehemently argued that it is a misnomer to say that there is a family dispute between the two cousins which would stand in the way of implementing the resolution. According to learned counsel, the fathers of P.D. Kothari, viz., D. C. Kothari and H. C. Kothari, who were brothers, have effected a mutual settlement between them in 1989 under which four companies have been set apart to the share of Mr., H.C. Kothari and one, viz., the defendant to Mr. D. C. Kothari and even the minimum shares owned by one group in the companies of the other have been withdrawn and each one of them is looking after the affairs of their companies for the past so many years and it is not correct to say that there is a rift in the management of the defendant-company which would stand in the way of the resolution being recognized as a valid one. The founders, namely, D.C. Kothari and H.C. Kothari, have divided among! them and they have come to an understanding in the year 1989 with regard to the management of the companies which have been allotted to their respective shares and, therefore, it cannot be stated that there is any rift in the management of the first defendant-company which is under the control of Mr. P. D. Kothari. Learned counsel for the plaintiffs would argue that it is only because of the support of the financial institutions that this resolution has been passed and the stand taken by them in modification of their earlier stand is not correct. This court cannot sit in judgment over the policy decision taken by the financial institutional whether or not to support the resolution and decide the issue in favour of the applicant in the light of the arguments of the learned advocate. Resolution No. 12 cannot be held an invalid one holding that the financial institutions have not considered these aspects before granting their support to the proposed issue of shares. Learned counsel, appearing for the defendants, would cite the decision reported in Bamfard v. Bamford [1969] 1 All ER 969, and would argue that unless some provision to the contrary is found in the charter or other instrument by which the company is incorporated, the resolution of a majority of shareholders at a duly convened meeting upon any question, will be legally a competent one. In the present case, all the three resolutions have been passed by an overwhelming majority of shareholders after due consideration of the stand taken by the plaintiffs. In such a case, the majority alone will have their way and the minority can have their say alone. They cannot permitted to nullify the effect of the resolutions passed by the shareholder of the company. In this connection, when we consider the balance of convenience, it would also show that if recognition for these resolutions is not given, the vast majority of the shareholders of the company will be prejudiced and hardship will be caused to them since it is against their desire to pass the resolutions whereas no prejudice will be caused to the plaintiffs if the resolutions are allowed, to be implemented. It is more so when the plaintiffs are actually agitating not for upholding any of their rights but to bring the interest of Mr. B. H. Kothari to the limelight as contended by them in paragraph 13 of the plaint. The learned advocate for the defendants would describe the dispute between the plaintiffs and defendants as a proxy battle fought by Mr. B. H. Kothari. There is considerable weight in this argument of the learned advocate. For these reasons. I am of the opinion that all the three resolutions passed by the majority of shareholders have to be approved and permission has to be granted to implement them. In that view, the applications are ordered as follows.
O.A. No. 436 of 1995 in C. S. No. 1132 of 1994, O. A. No. 435 of 1995 in C.S. No. 1128 of 1994 and O. A. No. 220 of 1995 in C. S. No. 1128 of 1994 filed by the respective plaintiffs for injunction, are dismissed. Applications Nos. 7151 of 1994 for a direction to implement resolutions Nos. 10 and 11 A. No. 1628 of 1995 for a direction to implement resolution No. 12 in C.S. No. 1128 of 1994 are allowed. So also, A. No. 7153 of 1994 and A No. 1631 of 1995 in C. S. No. 1132 of 1994 for directions to implement resolutions Nos. 10, 11 and 12 are allowed as prayed for. Application No. 1312 of 1995 in C. S. No. 1128 of 1994 for a direction to the respondents to keep the money collected for the beer project in a separate account is also dismissed.
[1996]
85 COMP CAS 111 (MAD)
HIGH COURT OF MADRAS
Maxwell Dyes and Chemicals (P.) Ltd.
v.
Kothari Industrial Corporation Ltd.
SRINIVASAN
AND AR. LAKSHMANAN, JJ.
O.S.A.
NOS. 127 TO 134 OF 1995
Mohan
Parasaran and Satish Parasaran for the Appellants.
Anil
Diwan, T.V. Padmanabhan and S. Madhavan and R. Krishnamurthi, for the Respondent.
AR. Lakshmanan, J.—The common order, which is appealed against was passed by
Govardhan J. in
respect of the prayers for interim reliefs. The facts, which are the foundation
for filing the present appeals are also closely interconnected with the reliefs
sought for. The respondents in all the appeals are common. Hence, all the
appeals were heard together.
The first appellant has
instituted C.S. No. 1128 of 1994 seeking for a declaration that the notice
issued by the first respondent calling for the 25th annual general meeting of
the company on September 12, 1994, for the purpose of considering and passing
items Nos. 10, 11 and 12 under the caption "special business" in the
agenda is illegal, void and unenforceable and for permanent injunction
restraining the respondents, their officers, subordinates, etc., from
considering and passing resolutions Nos. 10, 11 and 12 set out in the agenda in
the notice for the 25th annual general meeting of the first defendant-company
under the caption "special business" to be held on September 12,
1994, or any other date. The second appellant has filed the suit for declaring
that the notice issued by the first respondent calling for the 25th annual
general meeting of the company on September 12, 1994, for the purpose of
considering and passing items Nos. 10, 11 and 12 under the caption
"special business" in the agenda, as illegal, void and unenforceable,
and for a permanent injunction restraining the respondents, their officers,
subordinates, etc., from considering and passing resolutions Nos. 10, 11 and 12
set out in the agenda in the notice for the 25th annual general meeting of the
first respondent-company under the caption "special business" to be
held on September 12, 1994, or on any other future date.
The first respondent
which was formerly known as Kothari (Madras) Limited had been incorporated
under the Companies Act on July 1, 1970. It proceeded to change its name to
Kothari Industrial Corporation Limited in April, 1984. The first
respondent-company was formed, incorporated and controlled by the family of the
Kotharis who have been carrying on business in the city of Madras and elsewhere
for several decades. The family of the Kotharis first established its business,
namely, Kothari and Sons, in the year 1918 and the said companies had been
formed and founded by Mr. C.M. Kothari who was the founder of the Kothari group
of companies. The founder, C.M. Kothari, had two sons, namely, Sri D.C. Kothari
and H.C. Kothari. They had entered the family business in the years 1933 and
1936 respectively. Both of them acquired vast business interests including tea
and coffee estates, acquired spinning mills in the State of Andhra Pradesh,
established a sugar factory under the name and style of Kothari Sugars and
Chemicals Limited and also started various other businesses. Many of the
businesses which were started by them were carried on jointly till the year
1982 and in the said year D.C. Kothari and H.C. Kothari decided to separate
their business interests and accordingly a scheme was worked out as a result of
which some of the companies went to the control of D.C. Kothari and some went
to the control of H. C. Kothari. However, no express agreement was reached
among the family of the promoters, namely, Sri D.C. Kothari and H.C. Kothari,
with regard to the first respondent-company. H.C. Kothari passed away in early
1992 and soon, thereafter, in June, 1992, Sri D.C. Kothari also passed away
which resulted in the management of the H.C. Kothari group of companies coming
into the hands of B.H. Kothari and the management of the D.C. Kothari group of
companies coming into the hands of P.D. Kothari, the second respondent herein.
The shareholding pattern in
the first respondent-company was divided approximately as follows:
|
(i) Unit Trust of
India, LIC, GIC and their subsidiaries |
|
|
|
: 34 per cent, of the share capital. |
|
(ii) Sri P.D.
Kothari and his group |
: 14 per cent. |
The appellant along with
ten other group companies along with Investment Trust of India and another
Reliance group company, Reliance Capitals, had substantial stakes in the share capital
of the company which is almost equivalent to the holding of the second
respondent and his associates.
According to the
appellants, the second respondent, who was in the management of the first
respondent-company, wanted to secure control and management of the first
respondent-company and exclude any role by the appellants and other companies
which were supporting the second respondent's cousin, B.H. Kothari, and which
had also allowed various acts of oppression and mismanagement. According to the
appellants, when the appellants and other companies had acquired substantial
stakes in the company by acquiring about 4,77,560 equity shares approximately
amounting to 6.23 per cent. of the equity capital of the company between June,
1991, and September, 1992, the respondents, with a mala fide intention of
removing the names of the appellants and other companies from the registers,
had moved the Company Law Board for rectification of the share registers, in
spite of transfers having duly taken place and rights having accrued in favour
of the appellants and other companies. It is the case of the appellants that
the attempt of the respondents for rectification of the share register was
particularly made with a mala fide and oblique motive in view of the fact that
the first respondent company had resorted to a rights issue of partly
convertible debentures to the existing shareholders by its letter of offer
dated October 15, 1992. The appellants and other investing companies which had
acquired shares in the first respondent-company had applied not only for the
rights issue to which they are entitled but also for partly convertible
debentures on additional rights basis before the closure of the issue on
December 15, 1992. It is their case that it was only after the closure of the
issue that the respondents proceeded to institute company petitions as stated
above before the Company Law Board seeking for rectification of the share
register for deletion of the names of the appellants and other companies which
was ultimately not accepted in the light of the judgment of the single judge
and the Division Bench of this court (see [1996] 85 Comp Cas 79). The judgment
of the Division Bench of this court has not been stayed by the Supreme Court.
According to the
appellants, the respondents made attempts seeking permission of this court to
have deployment of the proceeds raised from the shareholders for the
implementation of a project relating to manufacture of beer, in the State of
Andhra Pradesh; for raising the equity capital from non-resident Indians by way
of foreign subscriptions for an aggregate value of Rs. 4.5 crores; and to raise
the stake of the existing promoters of the company, namely, P.D. Kothari and
his relatives, associates and associate companies from the present level of 14
per cent, to 51 per cent, in the equity share capital of the company. The
further case of the appellants is that the appellants, after having been
unsuccessful in the interlocutory applications and having lost in the Letters
Patent Appeals, the respondents proceeded to call for the annual general
meeting of the first respondent-company for September 12, 1994, at 10.30 a.m.
at the Music Academy, Madras. In the said meeting, among other things, three
important items were to be considered and transacted. They were (1) utilisation
of the proceeds from the issue of rights issue of partly convertible debentures
for the beer project; (2) offering of shares to non-resident Indians and
overseas bodies corporate; and (3) to increase the stakes of the existing
promoters and his relatives, associates. Inasmuch as items Nos. 10, 11 and 12
under the caption "special business" in the agenda for the meeting
which was to be held on September 12, 1994, according to the appellants
challenging the action of the respondents was illegal, they filed the suits for
the reliefs.
This court by interim
order, dated September 7, 1994 (AR. Lakshmanan J.) in O.A. Nos. 849 and 850 of
1994 in C.S. No. 1128 of 1994 and O.A. Nos. 855 and 856 of 1994 in C.S. No.
1132 of 1994 filed by both the appellants herein found that, prima facie, a
case has been made out by them for the grant of interim injunction. But,
however, before this court, an undertaking was given by learned counsel who
appeared for the respondents that the consideration of resolutions Nos. 10, 11
and 12 set out as special business in the notice for the 25th annual general
meeting of the first respondent-company, which was to be held on September 12,
1994, or on any other future date will be deferred until further orders from
this court. Accordingly, it was ordered that the meeting will go on with the
other resolutions listed for consideration except resolutions Nos. 10, 11 and
12. After giving that undertaking, however, the respondent moved transfer
petitions before the Supreme Court of India and the Supreme Court of India by
order dated September 9, 1994, considering the facts and circumstances of the
case and to avoid any prejudice to the large body of shareholders, permitted
the meeting to take place by also allowing the appellants to vote not only in
respect of the disputed but also undisputed shares in terms of the statements
furnished to the Supreme Court. But, however, the Supreme Court of India
directed that the result of voting will not be declared nor will any decision
about the passing of the said resolutions be taken on the basis of the said
voting until further orders. The Supreme Court directed the results of the
voting to be intimated to it.
However, it is contended by
the appellants that at the meeting held on September 12, 1994, the second
respondent proceeded to illegally adjourn the meeting only in respect of
resolution No. 12 and allowed the voting to take place in respect of
resolutions Nos. 10 and 11 which is the subject-matter of the suit. In fact,
the adjournment itself was ex facie illegal as it was done without there having
been a motion brought in for adjournment and without there being a proposal or
seconding for the adjournment and without even the consent of the shareholders.
Further, the second respondent himself could not at all have been the chairman
even in respect of the decision for adjournment of the meeting in respect of
resolution No. 12 in which he was directly interested.
The results of the voting
on resolutions Nos. 10 and 11 were sent to the Supreme Court of India. Liberty
was also sought for by the respondents to hold the adjourned meeting on
September 27, 1994. But the Supreme Court of India declined the request for
permitting resolution No. 12 to be taken up at the meeting on September 27,
1994, and held that resolution No. 12 will not be put to vote at the meeting
scheduled to be held on September 27, 1994, till further orders. As regards
resolution No. 12, it was indicated that the said resolution was not put to
vote at the meeting on September 12, 1994, but however, an order was passed on
September 23, 1994, prohibiting the said resolution being taken up for
consideration and to be put to vote at the next meeting which was to be held on
September 27, 1994. It was directed by the Supreme Court that it will now be
open to the respondents to request this court to permit them to put the said
resolution for consideration at any subsequent adjourned meeting of the company
and that this court will proceed to pass orders uninfluenced by the order of
the Supreme Court, dated September 23, 1994, in so far as resolution No. 12 was
concerned. This court was directed to consider expediting the hearing of the
matter. Pursuant to the orders of the Supreme Court of India, there was one
other consent order passed in respect of voting rights which was passed on
January 3, 1995.
While matters stood thus,
in the meanwhile the respondents filed Applications Nos. 7152 and 7154 of 1994
in C.S. Nos. 1128 and 1132 of 1994 filed by the appellants seeking for permission
of this court to hold the adjourned annual general meeting to consider and to
put to vote resolution No. 12 of the notice dated August 5, 1994, issued by the
respondents to its shareholders by allowing the 11 Reliance companies to
exercise their voting rights in the same manner as exercised by them in respect
of resolutions Nos. 10 and 11. This court by order dated February 15, 1995,
after taking note of the earlier orders passed by the Supreme Court of India
and other facts, granted permission for holding the adjourned annual general
meeting for consideration of resolution No. 12 as prayed for in the light of
the orders passed by the Supreme Court of India and further directed that the
said meeting could be held on March 20, 1995. However, it was directed that the
result of the voting on resolution No. 12 would not be declared but should be
kept in a sealed envelope and intimated to this court. This court further held
that merely because permission was given to the respondents to hold the
meeting, the appellants herein will not lose their right to challenge the
validity of the meeting. It was held by this court that it was always open to
the appellants to challenge the validity of the meeting itself or the results
thereof, when the subject is taken up by this court for consideration.
Based on the said orders of
this court, the respondents proceeded to issue notices by enclosing proxy
forms.
In view of the subsequent
developments which took place in the matter, the appellants herein had filed
applications seeking for amendment of the pleadings in the plaint, amendment of
the cause title, relief sought for and also furnished various other documents
supporting the claims for amendment. In fact, the first appellant filed O.A.
No. 435 of 1995 in C.S. No. 1128 of 1994 and the second appellant filed O.A.
No. 436 of 1995 in C.S. No. 1132 of 1994 seeking for injunction restraining the
respondents, their men, officers, subordinates or any one claiming under them
from giving effect to or implementing resolutions Nos. 10, 11 and 12 said to
have been passed on September 12, 1994, and March 20, 1995, as is evident from
the resolutions which were disclosed before the Supreme Court of India and this
court. The respondent companies had filed Application No. 7151 of 1994 in C.S.
No. 1128 of 1994 and Application No. 7153 of 1994 in C.S. No. 1132 of 1994
seeking for permission for the implementation of resolutions Nos. 10 and 11
approved by the general body of the company held on September 12, 1994. They
also filed Application No. 1628 of 1995 in C.S. No. 1128 of 1994 and
Application No. 1631 of 1995 in C.S. No. 1132 of 1994 seeking for opening of
the sealed envelope in this court and causing the results of the poll to be
known to the respondents and its shareholders and if the results indicate that
resolution No. 12 has been passed by the requisite majority as per the
provisions of the Companies Act, to allow the respondents to implement the
same. The appellants also took out O.A. No. 220 of 1995 in C.S. No. 1128 of
1994 and sought for injunction restraining the respondents from in any manner
proceeding to further implement the beer project or from carrying out any
construction for the beer project or from carrying on any manufacturing
activities or trading activities either directly or indirectly in beer. One
other Application No. 1312 of 1995 in C.S. No. 1128 of 1994 was filed by the
first appellant seeking for directing the respondents to keep the monies
earmarked for the beer project in a separate bank account pending disposal of
the suit and the decision by this court on the legality and validity of
resolution No. 10 of he notice dated August 5, 1994, and implementation thereof
in the light of the directions of the Supreme Court.
All the applications were
posted for hearing before the learned judge. Time for filing counter was given
by the learned single judge in respect of the application seeking for amendment
of the plaints and pleadings and the said applications were adjourned for
further hearing after vacation. In the submission of the appellants even for
deciding the entire interim applications under appeal, the decision on the
applications seeking for amendment of the plaint based on subsequent events was
vital and relevant for determination of the issues and to assess the prima
facie case and balance of convenience.
The learned single judge
proceeded to hear the applications and was pleased to pass common orders on May
16, 1995, allowing all the applications filed by the respondents and dismissing
the applications filed by the applicant companies, thus in effect paving the
way for implementation of resolutions Nos. 10, 11 and 12 and also for the
implementation of the beer project and thus overriding the various objections
which were raised by the appellants.
Mr. Mohan Parasaran
contended that the order of the learned single judge is erroneous and the
learned judge ought to have appreciated that the applicants/appellants have
established not only a strong prima facie case for grant of injunction
restraining the implementation of resolutions Nos. 10, 11 and 12 but also in
respect of the implementation of the beer project and for deposit of monies in
a separate bank account earmarked for the beer project in the light of the
reports that the monies earmarked for some other projects were diverted for the
beer project illegally, which was the subject-matter of enquiry under section
209A of the Companies Act. Learned counsel contended that the learned single
judge was in error in not granting injunction with regard to the implementation
of resolution No. 10 for establishing the beer project in the State of Andhra
Pradesh and that the learned judge ought to have seen that prima facie there is
a strong case for grant of injunction in the light of the fact that in respect
of the very same beer project, there was already an investigation under section
209A, which was ordered by the Central Government to be conducted with regard
to diversion of funds and must have further seen that the beer project had been
implemented even prior to getting the approval of the shareholders. According
to the appellants, the learned judge had. committed an error in holding that
the beer project could not have been envisaged as on the date of the letter of
offer on October 15, 1992, since the letter of intent by the Central Government
was issued to the sister concern of the respondent only on December 15,1992.
The company failed to produce fund flow statements for the beer project which
it was implementing in the State of Andhra Pradesh even during the pendency of
the suit and prior to the institution of the suit which would have clearly
shown the utilisation of funds and the source for implementation of the beer
project.
It is contended that the
learned judge has not given due weight to the enquiry under section 209A
directed to be instituted by the Central Government in respect of the very beer
project and has also failed to prove that the company has discharged its burden
to the court by showing that there was no diversion of funds by not having kept
the money earmarked for the beer project in a separate account from out of the
monies collected for a different project. According to Mr. Mohan Prasaran,
without the approval of the shareholders the company was in error in proceeding
to implement the beer project and even in the counter filed by the respondents
in Application No. 220 of 1995 this question about utilisation of the funds for
the implementation of the beer project is quite evasive. In so far as
resolution No. 11 which pertains to allotment of shares on preferential basis
to overseas bodies corporate and non-resident Indians, it is the case of the
appellants that the respondents cannot resort to private placements in a rights
issue and resolution No. 11 was sought to be brought in so as to bring in investment
from non-resident Indians Dr overseas bodies corporate, who are none other than
the associates or relatives of the persons in the management of the respondent
and this would only mean that what actually the respondent was seeking was to
provide private placements with foreign bodies which, as per the understanding
of the appellants, is quite contrary to the guidelines issued by the Securities
and Exchange Board of India In terms of which it could be inferred that private
placements could only be tagged to public issues and not to rights issues and
allotment could be made only in accordance with the prescribed percentage as
part of a single composite issue and, therefore, the respondents could have
only resorted to a fresh public issue and could not have resorted to
preferential issues in respect of resolution No. 11.
In so far as resolution No.
12 was concerned, Mr. Mohan Parasaran, contended that the learned judge was in
error in seeking to distinguish the judgment of the Supreme Court in Needle Industries' case [1981] 51
Comp Cas 743; AIR 1981 SC 1630. According to learned counsel, mala fides were
writ large which was the basis for resolution No. 12 as evident from several
facts including the attempt on the part of the respondents to resort to rectification
of the share register after the closure of the rights issue resorted to by them
in October, 1992, so as to completely throw out from the share register the
appellants and other group companies thereby reducing their holdings and
resulting in the banishment of opposition against the management of the second
respondent. It is contended that the learned single judge was in error in
relying upon the Division Bench ruling of this court which was given in a
different factual background where admittedly in that case, the appellants who
were before this court were not qualified minority shareholders and, therefore,
it is incorrect on the part of the learned judge to have held that sections 397
and 398 will not apply to listed public limited companies. That question was
not decided by this court in the context of proving mismanagement.
Mr. Mohan Parasaran then
contended that the original adjournment of consideration of item No. 12 itself
was clearly illegal and invalid, in view of the fact that the adjournment of
the meeting for consideration of item No. 12 was done without there having been
any proposal or seconding of the said proposal that the resolutions for
adjournment have not been put to vote. Secondly, the decision to adjourn was
taken and implemented by the chairman, who himself was biased and interested in
respect of resolution No. 12 and such a decision was taken in the light of the
financial institutions withdrawing their support for resolution No. 12.
Mr. Mohan Parasaran
contended that in the present case, the record of the company shows that there
were serious allegations of mismanagement and oppression which are the
subject-matter of proceedings before the Company Law Board and investigation
has been ordered into the accounts of the company under section 209A of the Act
by the Central Government. As regards use of funds for productive purposes, the
implementation of the beer project in the State of Andhra Pradesh is not
feasible and cannot be said to be productive as there is complete prohibition with
regard to not only consumption but also manufacture of liquor and further in
fact a family dispute was pending which was the result of the litigation
including the one started by P.D. Kothari in seeking for rectification of the
share register which is pending before the Supreme Court.
Mr. Mohan Parasaran then
contended that essentially the dispute between the two cousin brothers was the
backbone of the litigation and it is not a proxy fight but it is a direct fight
between two cousin brothers which was not properly appreciated by the learned
judge. It is submitted that the appellants have a strong prima facie case for
grant of injunction in respect of the implementation of resolutions Nos. 10, 11
and 12 and the balance of convenience also lies in granting injunction.
In fine, Mr. Mohan
Parasaran contended that in so far as resolution No. 10 is concerned, prima
facie, the resolution which is stated to have been passed on September 12,
1994, is illegal and cannot be implemented in view of the fact that there was
already a diversion of monies for the beer project even without the approval of
the shareholders, which is evident from the enquiry, which has been ordered by
the Central Government, into the accounts of the company under section 209A of
the Companies Act.
It is contended that in so
far as resolution No. 11 is concerned, again a prima facie case and balance of
convenience lie in granting the injunction and the illegality is apparent in
this regard. It is argued that the action of the respondents in bringing in
resolution No. 12 is a clear case of mismanagement and is contrary to the
decision of the Supreme Court in the case of Needle Industries' [1981] 51 Comp Cas 743. Further, resolution
No. 12 is deemed to have lapsed because consideration of the said resolution
and the adjournment of the said resolution for subsequent consideration at the
meeting held on September 12, 1994, is illegal.
Lastly, it is submitted
that the monies which have been collected for different projects in October,
1992, and not implemented have to be kept under a separate bank account and
even the funds which have been earmarked for the beer project have to be kept
under a separate account which has not been done and they have merely taken the
objections that this being a rights issue, they had no objection to keeping the
monies in a separate bank account; but, when there are serious acts of
mismanagement and allegations of diversions, a duty is cast upon the
respondents to keep the monies under a separate account even assuming that
section 73(3) of the Companies Act is not attracted.
Our attention was drawn to
the entire pleadings and the documents filed by both the parties and also the
orders passed by this court and the Supreme Court. Our attention was also drawn
to certain passages in Companies Act by
A. Ramaiya, particularly with reference to the directors' fiduciary duties and
the chairman's power to adjourn the meeting and issue of further capital and
propriety in rights issue, and also para 7.04 of Law and Practice of Meetings by Shackleton, seventh edition.
Mr. Anil Diwan, learned
senior counsel and Mr. R. Krishnamurthi, learned senior counsel, appearing on
behalf of respondents Nos. 1 and 2, respectively, drew our attention to certain
passages in the plaint, counter-affidavits and rejoinders. Mr. R. Krishnamurthi
invited our attention to the various findings given by the learned single judge
with reference to resolutions Nos. 10 to 12 and argued that the learned judge
has gone through the entire records and evidence placed before him and held
that each and every institution and authority, both governmental and financial
institutions, have approved the proposal for the beer project, and has also
elaborately dealt with the various contentions of the appellants. He would
further submit that the voting on the resolutions is a clear testimony of the
fact that 94 per cent, of the shareholders are supporting the respondents and
have totally rejected the stand of the appellants and that the shareholders who
supported the resolutions include the financial institutions of this country,
namely, the Unit Trust of India, Life Insurance Corporation of India Ltd.,
General Insurance Co. Ltd., ICICI and the subsidiaries of the General Insurance
Company, viz., New India Assurance Co. Ltd., Oriental Fire Insurance Co. Ltd.,
United India Insurance Co. Ltd., and the National Insurance Co. Ltd., who, in
the aggregate, hold about 34 per cent, of the voting power. He also denied that
resolution No. 12 was brought with an ulterior motive. As regards resolution
No. 12, Mr. R. Krishnamurthi contended that the proceedings of the meetings
were duly recorded and the copy of the minutes was given to the appellants and
they at no time questioned the minutes and, therefore, it is too late for the
appellants to raise this point before the appellate court. Concluding his
arguments, Mr. R. Krishnamurthi said that the learned single judge has rightly
held that the balance of convenience is in favour of the respondents' implementing
the shareholders' decision and cannot be against such implementation especially
when the appellants have not established as to how their rights would be
affected if the decisions are implemented and even if the appellants' rights
are alleged to have been affected, in corporate democracy, the appellants have
to sail with the majority and cannot dictate terms to the company after the
majority approval has been obtained. Therefore, he prayed for the dismissal of
all the appeals.
Mr. Anil Diwan, learned
senior counsel, while inviting our attention to the relevant passages in the
plaint, counter-affidavits and other documents and also the letter of intent
given to the first respondent for the beer factory, and the letter of intent
issued by the Government of India and the letter to the ICICI by the first
respondent dated August 19, 1993, and the letter from the ICICI to the first
respondent dated November 22, 1993, in regard to the utilisation of the
proceeds of partly convertible debentures submitted that while considering the
request of the first respondent for approval for the change in the scope of the
proposal and utilisation of the proceeds of partly convertible debentures of
Rs. 1,918 lakhs, the ICICI agreed to the proposed changes as indicated in the
annexure subject to certain conditions mentioned in their letter dated November
22, 1993. Mr. Anil Diwan also relied on the letter dated February 23, 1994,
sent by the second respondent to the Chairman, Securities and Exchange Board of India, Bombay, requesting him to consider and fix a suitable
premium taking into consideration the peculiar circumstances of the case
mentioned in the said letter.
While answering the
argument of Mr. Mohan Parasaran with reference to the letter dated May 1,1995,
of the Regional Director of the Department of Company Affairs, learned senior
counsel, Mr. Anil Diwan, pointed out that the said letter was not addressed to
the first respondent. With regard to the enquiry under section 209A of the
Companies Act directed to be instituted by the Central Government in respect of
the beer project, learned senior counsel contended that the section 209A
inspection is in no way relevant to decide the legality of the resolution. He
said that utilisation of funds for the beer project spent from debentures so
far has seen the approval of the debenture-holders and the debenture trustees,
and the only dispute before this court is the deployment of funds from the
share capital.
We have perused the letters
and the other correspondence. As a matter of fact, the ICICI, the lead
institution had specifically approved the beer project and the deployment of
the funds. Therefore, it is contended that the appellants' stand is untenable
being one of obstruction in the progress and development of the company, which
is desired by a vast majority of shareholders representing 94 per cent, or 87
per cent., as the case may be, and all the debenture-holders, the debenture
trustees and the public financial institutions having about 34 per cent, stake
in the company. He also invited our attention to paragraph 39 of the common
counter-affidavit dated July 10, 1995.
We have already seen that
every institution and authority, both governmental and financial, has approved
the proposal for the beer project and the learned single judge has also
elaborately dealt with the various contentions' of the appellants. The licence
for beer had been suspended by the Central Government for a considerable period
and it was available for licensing only in the year 1989. However, there was no
letter of intent with the company at the time when the partly convertible
debentures issue was made by the company. The matter was pending consideration
by the Ministry of Industry. The company could not have any intention of
manufacturing beer without a letter of intent. Since the Controller of Capital
Issues insisted upon appraisal of the project covered under the letter of
offer, the ICICI, one of the premier financial institutions of the country and
who are the company's lead institution, had appraised the projects covered
under the letter of offer and the company had also indicated this fact in their
application to the Controller of Capital Issues. Only based on the statement,
consent was accorded. When the proposal for the beer project came through, the
company sought the permission of the shareholders for re-deployment of a part
of the funds raised through the letter of offer for the beer project and 94 per
cent, of the shareholders voted in favour of the resolution.
While answering the
contention of Mr. Mohan Parasaran that there has been diversion of funds for
the beer project without the approval of the shareholders, Mr. Anil Diwan
contended that the said contention is totally false. According to him, all
monies spent for the beer project have been out of the company's own funds and
debentures after obtaining the consent of the debenture-holders, and all the
facts and materials relating to the beer project were furnished before the
learned single judge. In fact, some of the representatives of the appellants
have also spoken in the general meeting against resolution No. 10. Despite
this, the resolution was passed with 94 per cent, of the votes polled.
Therefore, as rightly pointed out by learned senior counsel for the
respondents, the arguments of learned counsel for the appellants regarding the
implementation of the beer project are totally irrelevant. In fact, it is
stated in paragraph 7 of the common counter-affidavit filed on behalf of the
respondents dated July 31, 1995, as to how the said resolution was passed by
the shareholders in regard to the implementation of the beer project as well as
the implementation and approval of the shareholders accorded for resolution No.
10, which is already in progress.
As already seen, resolution
No. 10 of the notice dated August 5, 1994, accords the consent of the company
for change in the purpose of utilisation of the proceeds from the issue of
partly convertible debentures for certain projects, instead of as originally
proposed in the letter of offer dated October 15, 1992. One of such projects
for which change in the purpose of utilisation of the proceeds has been
consented to overwhelmingly by the shareholders is the brewery project, for
which a sum of Rs. 12.16 crores has been earmarked in the said resolution. The
resolution was placed before the shareholders and the approval of the
shareholders was sought for utilising a sum of Rs. 12.16 crores out of Rs.
18.28 crores, being the funds contributed by them by subscription to partly
convertible debentures issued by the company in October, 1992, for the beer
project as against certain other projects originally envisaged in October,
1992, by the company. The board of directors of the company, after receiving
the letter of intent for the beer project in April, 1993, decided to utilise
the partly convertible debentures funds for the manufacture of beer instead of
spending the same for the projects for which the partly convertible debentures
funds were raised. Accordingly, a letter dated August 19, 1993.was addressed to
ICICI, which is the lead institution and also the debenture trustee, in terms
of the loan arrangement, seeking its concurrence for change in the utilisation
of funds by revising the earlier projects as follows:
(a) Deferring the implementation of
10,080 spindle mills;
(b) Implementation of granite tiles
project;
(c) Implementation of brewery project in
Andhra Pradesh.
We have already noticed the
letter addressed to ICICI. The board of directors have informed ICICI of the
reasons for undergoing changes in the priorities of implementation of the
projects originally envisaged in the letter of offer. The company has also
informed ICICI of the conditions imposed in the letter of intent dated December
15, 1992, which include non-availing of loans from financial institutions and
collecting 20 per cent, of the project cost of brewery, viz., Rs. 450 lakhs,
from non-resident Indians, in foreign exchange. It is also not in dispute that
the project originally envisaged had to undergo a change in the opinion of the
board of directors of the company in view of the developments subsequent to'
the issue of letter of offer, which developments have been gone into by the
lead institution, viz., ICICI, before according its approval to the company for
the revised utilisation of funds. We have already seen that the change in the
utilisation of funds as envisaged in resolution No. 10 has been approved by the
lead institution, debenture holders, trustee of debenture holders and the
shareholders of the company. As rightly pointed out by Mr. Anil Diwan, it is
the duty and responsibility of the company to implement the said resolution in
the interests of those who had voted for it and in the interests of the company
as well. In our view, the appellants have no legal right to stand in the way of
implementation of resolution No. 10.
In fact, the implementation
of the project commenced immediately after the letter of intent was received by
the company in April, 1993, and as per the records placed before us, the
company had incurred a total expenditure of Rs. 15.45 crores up to May 16,
1995, and a sum of Rs. 16.48 crores as on July 24, 1995, and steps had already
been taken to implement the beer project and to utilise the funds raised from
the debenture holders. Out of the said expenditure of Rs. 16.48 crores as of
July 24, 1995, a sum of Rs. 1.34 crores had been contributed from internal
accruals of the company and a sum of Rs. 9.97 crores has been borrowed from
hire purchase and leasing companies by way of lease finance. A sum of Rs. 5.17
crores has been spent from the proceeds of partly convertible debentures,
pursuant to the approval granted by ICICI by its letter dated November 22,1993.
Under these circumstances, we are of the view that the implementation of the
beer project as well as the implementation of the approval of the shareholders
accorded in resolution No. 10, which is already in progress, is, therefore,
essential in the circumstances of the case.
Mr. Mohan Parasaran sought
directions to keep the monies collected pursuant to the letter of offer dated
October 15, 1992, in a separate bank account. We are of the view that such a
request is not sustainable either in law or on facts. In fact, the monies
collected pursuant to the letter of offer dated October 15, 1992, have been
merged with the general funds of the company after the allotment of the partly
convertible debentures and as a result, the company's liabilities to its
bankers in the cash credit account had decreased and the company is saving
about 18.75 per cent, interest on such decrease in cash credit borrowings, and
if, as claimed by the appellants, the funds are kept separately in a bank
account, it will not fetch any interest more than 11 per cent, and such an
action on the part of the company will be detrimental to the interest of the
company as well as its shareholders and debenture holders, who had reposed
confidence in the management of the company.
Admittedly, the appellants
have not contributed a single rupee to the funds of the company by way of
subscription to partly convertible debentures pursuant to the letter of offer
dated October 15, 1992, and whatever subscriptions they have made pursuant to
the said offer are lying with their bankers to their own credit in stock
invests yielding interest to the appellants. When the monies of the appellants
are not at all with the company, they have no locus standi to expect the
company not to utilise the funds contributed by others and not by themselves,
especially when those who had contributed had given their approval. Mr. Anil Diwan,
learned senior counsel, at the time of hearing, in fact, has offered to the
appellants to take back the amounts lying in the form of stock invests with
their bankers if they are not inclined to approve the beer project. Mr. Mohan
Parasaran, learned counsel for the appellants, has not accepted the said offer.
In fact, the appellants have rejected the offer of the respondents, vide their
letter dated October 10, 1994.
It is also not in dispute
that certain developments took place politically in the State of Andhra Pradesh
subsequent to August 5, 1994, and as a result of the change in the political
field, in December, 1994, an ordinance was issued prohibiting the consumption
of liquor in the State' of Andhra Pradesh. This ordinance was the subject-matter
of challenge before the Andhra Pradesh High Court, which finally held that
manufacture of liquor was not banned but only consumption of liquor was banned
in the State. It is stated that the matter is in appeal before the Supreme
Court and in the meanwhile, the Andhra Pradesh Government had recently issued a
fresh Ordinance banning even the manufacture of liquor in the State. As rightly
pointed out by Mr. Anil Diwan, these developments are beyond the control of the
company and the company had to take steps, in the light of these developments,
for relocating its beer project in some other State. The company, in fact, took
steps to obtain approval from the Maharashtra Government for setting up the
beer project in the State of Maharashtra, and from the Central Government for
permission to relocate the project. The Government of Maharashtra recommended
to the Central Government the proposal of the company to shift the project from
Andhra Pradesh to Maharashtra, based on which the Central Government by its
Letter No. LI: 560(92)/95-Amendment, dated July 28, 1995, permitted the
shifting of the location for setting up the brewery unit from Andhra Pradesh to
Maharashtra.
Mr. Anil Diwan, learned
senior counsel, submitted that out of the total expenditure of Rs. 16.48 crores
incurred by the company on the beer project so far, the expenditure on plant
and machinery alone amounts to Rs. 10.85 crores. This plant and machinery can
be moved to the new location immediately. This apart, the company had incurred
an expenditure of Rs. 80 lakhs on the technical know-how paid to colloborators
and Rs. 75 lakhs on pre-operative expenses. The company had also incurred
interest and lease rentals amounting to Rs. 2.03 crores on leased items of
plant and machinery and has deposited a sum of about Rs. 10 lakhs with various
authorities.
Mr. Mohan Parasaran
contended that in view of the impossibility of putting up the beer project in
the State of Andhra Pradesh, resolutions Nos. 10 and 11 are to be stayed or not
given effect to. We are unable to countenance the said request. In our opinion,
the said request is most unreasonable and unfair, as the beer project could be
put up anywhere in India with the approval of the Central Government and the
concerned State Government. This situation had arisen to the company not
because of the company's own fault or action but on account of political
changes taking place in the country developments consequent to which have to be
considered by the company with a view to change its own plans and business activities
accordingly. As rightly urged by Mr. Anil Diwan, learned senior counsel, any
commercial and business decisions are in the absolute domain of the board of
directors of the company and, therefore, the court would not interfere with
such commercial decisions. We, therefore, have no hesitation in rejecting the
contention of Mr. Mohan Parasaran in regard to resolution No. 10 and upholding
the contentions of the respondents for the reasons stated supra.
As regards resolution No.
11, it was argued that the said resolution gives approval to the board of
directors of the company to issue, offer and allot, by private placement, not
exceeding 9,00,000 equity shares of Rs. 10 each at a premium to be calculated
in accordance with the guidelines of the Securities and Exchange Board of India
dated August 4, 1994, and such other amendments as may be made thereto in
respect of calculation of the premium on the shares and to offer such shares to
non-resident Indians/overseas corporate bodies as the board in its absolute discretion
may decide. In this connection, our attention was drawn to the letter of the
second respondent dated February 23, 1994, addressed to the chairman of the
Securities and Exchange Board of India, Bombay, and the reply received from the
Securities and Exchange Board of India dated March 7, 1994. The letter dated
March 7, 1994, was sent by the Division Chief, Primary Market Department,
Securities and Exchange Board of India, to the second respondent. In that
letter it was proposed to collect a sum of Rs. 4.50 crores from non-resident
Indians and overseas corporate bodies and that the same was proposed to be done
through private placements and by way of preferential allotments to identified
non-resident Indians and overseas corporate bodies. The Securities and Exchange
Board of India replied saying that the second respondent is free to do so and
determine the terms thereof including pricing after obtaining the consent of
the shareholders under the Companies Act, as also subject to other guidelines
relating to the issue of shares to non-resident Indians and overseas corporate
bodies.
Resolution No. 11 also
further states that the said shares so allotted shall have a lock-in period of
five years from the date of allotment and that the number of shares, viz.,
9,00,000 equity shares, mentioned in the resolution, have been calculated on
the basis of an estimated premium of Rs. 40 per share, and the number of shares
will vary based on the calculation of the premium in accordance with the
Securities and Exchange Board of India guidelines.
The learned single judge,
while considering this aspect of the matter, has observed as follows (at p. 105
supra):
"Learned counsel
appearing for the plaintiff would argue that the letters of intent and financial
institutions no doubt permit the promoter to issue debenture shares in favour
of non-resident Indians, but it should not be against law. When learned counsel
contends that the issue of shares could not be against law and yet the first
defendant proposed to issue shares in favour of non-resident Indians, it is for
the plaintiffs to show how the issue of debentures in favour of non-resident
Indians is against law. There is no such evidence placed before the court".
At the time of hearing, it
is stated that after the judgment of the learned single judge permitting the
implementation of resolution No. 11, the board of directors had issued and
allotted 6,60,598 equity shares of Rs. 10 each at a premium of Rs. 58.12 per
share to an overseas corporate body and the company had issued the allotment
letter to the said allottee on June 20, 1995. A return in Form No. 2 prescribed
under the Companies Act in respect of this allotment was filed with the
Registrar of Companies, Madras, on June 21, 1995. It is stated that the value
of this allotment works out to Rs. 450 lakhs, which is 20 per cent of the
original cost of the beer project, viz., Rs. 22.50 crores, which the company
had to raise from abroad in foreign exchange as per the terms and conditions of
the letter of intent for the beer project issued to the company, which details
have been fully gone into by ICICI, the lead institution and the debenture
trustee.
It is contended by Mr. Anil
Diwan that the issue of preferential shares to non-resident Indians has fetched
more foreign exchange to the country. It is not in dispute that the shares have
been purchased by non-resident Indians at a very high price of Rs. 68.12 per
share when the price of share of the first respondent-company in the secondary
market was less than Rs. 40, by which, undisputedly, the company and in turn,
its members would be much benefited. The appellants, in our view, have no case
in so far as resolution No. 11 is concerned since the said resolution has
already been implemented. We also see merit in the contention of learned senior
counsel for the respondents and, therefore, we reject the contention of the
appellants in this regard.
In reply to the arguments
of Mr. Mohan Parasaran on resolution No. 12, Mr. Anil Diwan, learned senior
counsel, submitted that the notice empowers the board of directors of the
company to issue, offer and allot not exceeding 1,01,04,000 equity shares of
Rs. 10 each at a premium to be calculated in accordance with the guidelines of
the Securities and Exchange Board of India. The resolution also states that the
investment of the promoters group in the said shares shall not exceed a limit
of 51 per cent, of the equity capital of the company. It is not disputed that
resolution No. 12 was approved overwhelmingly by the shareholders of the
company on March 20, 1995, i.e., at the adjourned annual general meeting. After
the judgment of the learned single judge delivered on May 16, 1995, the company
had issued and allotted an aggregate of 24,74,569 shares of Rs. 10 each at a premium
of Rs. 53.27 per share to the second respondent and his group and after this
issue and allotment to the promoters group, the total number of shares held by
the promoters group in the share capital of the company amounts to 26 per cent.
We are, therefore, of the view that the resolution, as passed by the
shareholders, was fully implemented and the promoters group today holds 26 per
cent, in the equity capital of the company which is well within the
norms/guidelines applicable for such investment and issued by the Securities
and Exchange Board of India and others.
This apart, the financial
institutions holding about 34 per cent, in the capital of the company had
specifically approved the said issue and allotment. They had also voted in
favour of resolution No. 12 at the adjourned meeting held on March 20, 1995,
which shows their faith in the good management of the first respondent/company.
The company had complied with the guidelines issued by the financial
institutions even though such guidelines are not statutory or mandatory in
nature, as they are not issued under any law in force. A return in Form No. 2,
prescribed under the Companies Act in respect of this allotment, was filed with
the Registrar of Companies on May 16, 1995, under cash receipt No. 5934 issued
by the Registrar of Companies. Learned senior counsel appearing for the
respondents denied the allegation of the appellants that resolution No. 12 was
brought with an ulterior motive. He said that the promoters have been permitted
to increase their shareholding up to 51 per cent, and it was in pursuance of
this policy, resolution No. 12 was proposed. The very fact that 94 per cent, of
the shareholders voted in favour of this resolution at the meeting is
sufficient rebuttal of the various allegations of the appellants.
Mr. Mohan Parasaran
contended that the original adjournment of the meeting for consideration of
item No. 12 itself was clearly illegal and invalid in view of the fact that the
adjournment of the meeting for consideration thereof was done without there
having been any proposal or seconding of the said proposal and that the
resolutions for adjournment have not been put. to vote. In reply to this
contention, Mr. Anil Diwan contended that the appellants and associates did
demand a poll on certain resolutions but never asked for a poll on the question
of adjournment when the matter was put up to the meeting. Having not raised a
demand for poll on the question of adjournment, the appellants cannot raise
this point of the adjournment not being legal, before this court.
It is contended by Mr. Anil
Diwan, learned senior counsel, that the proceedings of the meetings were duly
recorded and a copy of the minutes was also given to the appellants and the
appellants admittedly at no point of time questioned the minutes. Therefore, as
rightly urged by learned senior counsel for the respondents, it is too late in
the day for the appellants to raise this point before the appellate court. It
is not in dispute that the minutes being authenticated documents under the
provisions of the Companies Act, no adverse view is possible. The learned
single judge himself has held that the oral submission made by the appellants
in this regard has no basis.
In this regard, learned
senior counsel for the respondents invited our attention to articles 76 and 78
of the memorandum and articles of association of the first respondent-company,
which read as follows:
"76. The chairman, if
any, of the board of directors, shall preside as chairman at every general
meeting of the company.
78. The chairman may, with
the consent of any meeting at which a quorum is present (and shall if so
directed by the meeting), adjourn that meeting from time to time and from place
to place, but no business shall be transacted at any adjourned meeting other
than the business left unfinished at the meeting from which adjournment took
place. When a meeting is adjourned for thirty days or more, notice of the
adjourned meeting shall be given as nearly as may be as in the case of an
original meeting. Save as aforesaid, it shall not be necessary to give any
notice of an adjournment or of the business to be transacted at an adjourned
meeting".
In fact, on the adjourned
meeting held on March 20, 1995, poll was taken and two scrutineers were also appointed.
In fact, the second respondent did not preside over that meeting and one Mr.
P.G. Daftary presided over the meeting. Our attention was drawn to the minutes
of the annual general meeting held on September 12, 1994, at 10.30 a.m. at the
Music Academy, Madras. No objection was taken to the second respondent
presiding over that meeting. No poll was also demanded. Regarding item No. 12,
it is seen from the minutes of the meeting dated September 12, 1994, that the
chairman (Pradip D. Koth-ari) informed the members that the financial
investment institutions, viz., the Life Insurance Corporation of India, the
General Insurance Corporation of India and the Unit Trust of India holding
substantial equity shares in the company had, by their letter of UTI No. UT/D01/10-36/3219/93-94,
dated March 18, 1994, countersigned by LIC and GIC, permitted the company to
make a preferential offer to the promoters to increase their equity stake to 51
per cent. It is also seen from the said minutes that poll was demanded for
other items.
The minutes of the
adjourned 25th annual general meeting held on March 20, 1995, at 10 a.m. at
Music Academy, Madras, is available at page 181 of the typed set volume 3. The
chairman of the company Pradip D. Kothari welcomed the members and informed
that since he was personally interested in the proposed resolution, he would
not chair the meeting and requested the members to elect a chairman for the
meeting. Thereupon, Mr. V. Thirupathi, nominee director of the Industrial
Credit and Investment Corporation of India, a shareholder of the company,
proposed the name of P.G. Daftary, director as chairman for the meeting, which
was seconded by Mr. Halasyam, a shareholder. The proposal was put to vote and
Mr. P.G. Daftary was elected unanimously to chair the meeting. Thereupon,
Pradip D. Kothari vacated the chair and Mr. P.G. Daftary occupied the chair.
In that meeting, Mr. T.V.
Padmanabhan, legal adviser of the company, informed the members that the High
Court had permitted the company to convene the meeting to consider resolution
No. 12 of the notice dated August 5, 1994, and, therefore, the resolution could
be considered. The representatives of the Skylab Detergents (P.) Ltd. mentioned
that the court had only ordered the meeting to be held on March 20, 1995, and
the contents of the resolution were not approved by the court. Further, he also
said that there was material change in the resolution already circulated, in
that, as per the institutional guidelines, the promoters could subscribe only
up to 26 per cent, and not 51 per cent, as per the resolution circulated. He
also contended that as there was a material change, the original resolution
could not be considered at the adjourned meeting, and a fresh meeting had to be
convened for the purpose. He also pointed out that the original proxies lodged
for the annual general meeting held on September 12, 1994, would be used for
the adjourned meeting. A fresh meeting, in his view, was required to be
convened.
The chairman of the
meeting, thereupon requested the legal adviser of the company, who was present
on invitation, to clarify the points raised by the members. After some
discussion, Mr. Janakiram, a shareholder, said that he did not want a poll to
be conducted since the resolution could be passed by show of hands as the
shareholders had complete confidence in the management. Mr. Pradip D. Kothari,
while thanking him for the sentiments expressed, advised that the poll was
required to be conducted since in terms of the orders of the High Court, the
results should not be declared but had to be submitted to the High Court in a
sealed envelope. Thereupon, the chairman appointed two persons as scrutineers
of the poll. The chairman asked the company secretary to arrange for
distribution of ballot papers and then the scrutineers took charge of the poll.
The chairman of the meeting mentioned that since the result of the poll could
not be announced at the end of the meeting in view of the court's order, the
-meeting would stand terminated as soon as the results of the poll were
received by him in a sealed cover from the scrutineers. The chairman declared
the polling as closed at 1 p.m. The chairman received a sealed cover from the
scrutineers at 9.15 p.m., and informed the members that he would arrange to
file the same with the High Court. The meeting thereafter terminated with the
vote of thanks to the chair.
In fact, article 79 of the
memorandum and articles of association of the first respondent-company provides
that a resolution put to the vote of the meeting shall be decided on a. show of
hands, unless a poll is demanded in accordance with the provisions of section
179 of the Companies Act. Unless a poll is to be demanded, a declaration by the
chairman that a resolution has, on a show of hands, been carried unanimously or
by a particular majority or lost and an entry to that effect in the books of
the proceedings of the company shall be conclusive evidence of the fact without
proof of the number or proportion of the votes recorded in favour of or against
that resolution.
The further argument of Mr.
Mohan Parasaran in regard to calling for fresh proxies is also baseless for the
simple reason that fresh proxies ought to be called for as it is a matter of
right to the shareholders to change their respective proxies for the adjourned
meetings and for the new shareholders to give their own proxies for the
adjourned meeting. It is also stated that in order to enable the shareholders
to exercise their rights, the notice of the adjourned meeting was enclosed with
the proxy form. We are unable to understand as to how it could be categorised
as an unlawful act on the part of the first respondent-company. It is suffice
to state that the adjourned meeting shall transact only the business left
untouched in the original meeting and no new business could be transacted. In
accordance with this principle, resolution No. 12 alone was to be transacted
and, therefore, the notice of the meeting was issued with the same wording as
that of the previous notice of meeting dated August 5, 1994.
The further argument of Mr.
Mohan Parasaran, learned counsel for the appellants, that there is a material
change in the resolution as it was proposing for 26 per cent, in the place of
51 per cent, and that it is a new resolution altogether, has no basis. The
learned single judge has considered this point also in his order. The original
resolution envisages for an increase of promoters stake up to 51 per cent, and
the proposal to increase up to 26 per cent, is within the arithmetic figure of
51 per cent, and as such, there is no deviation from the original resolution.
Therefore, we are of the view, that the various reasons cited by Mr. Mohan
Parasaran to contend that the adjournment was not valid have no basis at all.
Further, the fact that the overwhelming majority of the shareholders voted for
this resolution also shows that the shareholders were in full agreement with
the resolution. The reference to the guidelines issued by the Central
Government is not correct and the appellants were not able to produce any such
guidelines before this court. As contended by learned senior counsel for the
respondents, it is for the shareholders to decide these issues and they have
decisively and overwhelmingly approved the resolution. Merely because a
shareholder acting as a proxy has alleged mismanagement, it cannot be contended
that these resolutions cannot be voted upon by the shareholders.
In regard to the argument
of Mr. Mohan Parasaran that investigation had been ordered under the Companies
Act by the Central Government, the respondents have specifically denied the
same. They also further said that the Central Government has not addressed any
letter to the respondents in this regard. According to learned senior counsel
for the respondents, it is only an investigation and the Central Government is
entitled to investigate into the matter pertaining to any company.
Section 176 of the
Companies Act deals with proxies. Articles 88, 89 and 90 of the articles of
association of the first respondent-company, which deal with proxies, read as
follows:
"88. On a poll, votes
may be given either personally or by proxy. A company or other body corporate
entitled to vote may vote in accordance with the provisions of section 187 of
the Act.
89. (a) The instrument appointing a proxy
shall be in writing under the hand of the appointer or of his attorney duly
authorised in writing, or if the appointer is a corporation either under the
common seal or under the hand of an officer, or attorney so authorised. Any
person may act as proxy whether he is a member or not.
(b) A corporate body (whether a company within the meaning of the
Act or not) may, if it is a member or a creditor or a debenture holder of the
company by the resolution of its board of directors or other governing body,
authorise such person as it thinks fit to act as its representative at any
meeting of the company or at any meeting of any class of members of the company
or at any meeting of any creditors of the company held in pursuance of the
Companies Act or any rules made thereunder or in pursuance of the provisions
contained in any debenture or trust deed, as the case may be. The person so
authorised by resolution as aforesaid shall be entitled to exercise the same
rights and powers including the right to vote by proxy on behalf of the body
corporate which he represents as he could exercise if he were a member,
creditor or holder of debentures of the company.
(c) So long as an authorisation under sub-clause (b) above is in force, the power to
appoint a proxy shall be exercised only by the person so appointed as
representative.
90. The instrument
appointing a proxy and the power of attorney or other authority, if any, under
which it is signed or a notarially certified copy of that power or authority
shall be deposited at the registered office of the company not less than
forty-eight hours before the time for holding the meeting or adjourned meeting
at which the person named in the instrument proposed to vote in the case of a
poll, not less than twenty- four hours before the time appointed for the taking
of the poll and in default, the instrument of proxy shall not be treated as
valid".
Therefore, we reject the
contention of Mr. Mohan Parasaran in regard to calling for fresh proxies since
it is a matter of right given to the shareholders to give their own proxies for
the adjourned meeting, as has been held by us in paragraphs supra.
Mr. Mohan Parasaran finally
requested this court at least to maintain status quo till the disposal of the suit
with regard to resolution No. 12. In reply to the said argument, it was
vehemently contended by learned senior counsel appearing for the respondents
that the appellants made attempts to convince the other shareholders to vote
against the resolution and in spite of such opposition, the shareholders
overwhelmingly approved the resolution rejecting the plea of the appellants at
the meeting, and having failed in their attempt to defeat the resolution at the
meeting, the appellants have now come to this court to oppose the
implementation of the said resolution. We are of the view that the appellants
having participated in the meeting actively and intensively, it does not lie in
their mouth to say that the meetings were illegal. As pointed out by learned senior
counsel for the respondents, such allegations against the resolutions and the
meetings are only lame excuses to enable the appellants to continue the proxy
litigation in courts. The appellants, in our view, have no case at all, leave
alone a prima facie case, for the grant of injunction. The learned single judge
had appreciated all the materials, placed before him before deciding the issue
involved. It is incorrect on the part of the appellants to state that the
learned judge has not appreciated the facts placed before him while coming to
the conclusion that resolutions Nos. 10 to 12 are implementable. A perusal of
the judgment of the learned single judge would go to show that the learned
judge has gone through the entire evidence and records placed before him before
deciding the issues involved and has held that each and every institution and
authority, both governmental and financial institutions, have approved the
proposal for the beer project, and has also elaborately dealt with the various
contentions of the appellants.
We are also unable to
appreciate the contention of Mr. Mohan Parasaran that the implementation of the
resolution should be stayed since the proceedings under sections 397 and 398 of
the Companies Act are pending before the Company Law Board. We are of the view
that the pendency of the proceedings before the Company Law Board cannot be
relied on to stall the implementation of the resolutions. The Company Law Board
will make appropriate enquiries and decide the petitions on their own merits.
In fact, it is brought to our notice that the Company Law Board has refused to
stay the consideration of the resolutions by the shareholders.
On a consideration of the
entire evidence on record and the arguments of learned counsel appearing on
either side, we are of the view, that the adjourned meeting for consideration
of resolution No. 12 was valid and proper. This apart, this court alone had
permitted the meeting to take place on March 20, 1995, and the appellants had
also participated in that meeting and voted against the resolution. It is,
therefore, not now open to the appellants to contest the same. Since the
resolutions have been passed by the shareholders in an overwhelming majority,
it is not for this court to interfere with the decision of the shareholders. In
so jar as resolution No. 12 is concerned, the same has been implemented and
shares to the extent of 26 per cent, have already been allotted to Pradip D.
Kothari and others and thus, the said resolution had been implemented.
Therefore, we are of the view, that the present application for injunction to
restrain the implementation of resolution No. 12 is liable to be rejected.
The company has already
commenced implementation of its projects and is continuing. Substantial sums of
money had already been invested in the beer project and it will not be in the
company's interest or in public interest not to proceed with the project by
diverting part of the funds as approved by resolution No. 10. There is no
obligation on the part of the company to keep the money in a separate account
and there can never be such an obligation after the listing of partly
convertible debentures by stock exchanges. The appellants have not made out any
case for the grant of interim orders. In our considered view, the order passed
by the learned single judge is correct.
This court, in the decision
in Vivek Goenka v. Manoj Sonthalia [1995] 83 Comp Cas
897, 908 rendered by one of us, viz., AR. Lakshmanan J., held as follows :
"It is the duty of
this court to recognise the corporate democracy of a company in managing its
affairs. It is not for this court to restrict the powers of the board of
directors. The board of directors in various resolutions have appointed the
sixth defendant as executive director, managing editor and chairman. It will
not be open to this court to interdict the functions of the board-managed
company. As rightly contended by Mr. P. Chidambaram, the learned senior
advocate, it will not be open to this court to interfere with the day-to-day
functions, management and administration of a company unless it is established
that the decisions taken by the board are ultra vires the Act or the articles
of association of the company. At this interlocutory stage this court is
concerned only with the prima facie case and balance of convenience as
disclosed by the documents produced by both parties. It is for the plaintiff to
let in oral evidence at the time of trial and establish his case".
We have considered all the
contentions urged by the parties on a prima facie view. It is not necessary for
us to deal with each and every contention urged by the parties as most of them
relate to the merits of the suit. Both sides cited a number of decisions in
support of their respective contentions. We do not think it is necessary for us
to refer to all of them as we have decided these appeals on the facts and
circumstances of the case. Therefore, we confine ourselves only to one decision
of this court which is directly on point. None of the grounds raised and argued
by the appellants merit any consideration.
For the foregoing reasons
we hold that all the appeals fail and are dismissed. However, there will be no
order as to costs.
[1996]
85 COMP CAS 111 (MAD)
HIGH COURT OF MADRAS
Maxwell Dyes and Chemicals (P.) Ltd.
v.
Kothari Industrial Corporation Ltd.
SRINIVASAN
AND AR. LAKSHMANAN, JJ.
O.S.A.
NOS. 127 TO 134 OF 1995
SEPTEMBER
27, 1995
Mohan
Parasaran and Satish Parasaran for the Appellants.
Anil
Diwan, T.V. Padmanabhan and S. Madhavan and R. Krishnamurthi, for the Respondent.
AR. Lakshmanan, J.—The common order, which is appealed against was passed by
Govardhan J. in
respect of the prayers for interim reliefs. The facts, which are the foundation
for filing the present appeals are also closely interconnected with the reliefs
sought for. The respondents in all the appeals are common. Hence, all the
appeals were heard together.
The first appellant has
instituted C.S. No. 1128 of 1994 seeking for a declaration that the notice
issued by the first respondent calling for the 25th annual general meeting of
the company on September 12, 1994, for the purpose of considering and passing
items Nos. 10, 11 and 12 under the caption "special business" in the
agenda is illegal, void and unenforceable and for permanent injunction
restraining the respondents, their officers, subordinates, etc., from
considering and passing resolutions Nos. 10, 11 and 12 set out in the agenda in
the notice for the 25th annual general meeting of the first defendant-company
under the caption "special business" to be held on September 12,
1994, or any other date. The second appellant has filed the suit for declaring
that the notice issued by the first respondent calling for the 25th annual
general meeting of the company on September 12, 1994, for the purpose of
considering and passing items Nos. 10, 11 and 12 under the caption
"special business" in the agenda, as illegal, void and unenforceable,
and for a permanent injunction restraining the respondents, their officers,
subordinates, etc., from considering and passing resolutions Nos. 10, 11 and 12
set out in the agenda in the notice for the 25th annual general meeting of the
first respondent-company under the caption "special business" to be
held on September 12, 1994, or on any other future date.
The first respondent
which was formerly known as Kothari (Madras) Limited had been incorporated
under the Companies Act on July 1, 1970. It proceeded to change its name to
Kothari Industrial Corporation Limited in April, 1984. The first
respondent-company was formed, incorporated and controlled by the family of the
Kotharis who have been carrying on business in the city of Madras and elsewhere
for several decades. The family of the Kotharis first established its business,
namely, Kothari and Sons, in the year 1918 and the said companies had been
formed and founded by Mr. C.M. Kothari who was the founder of the Kothari group
of companies. The founder, C.M. Kothari, had two sons, namely, Sri D.C. Kothari
and H.C. Kothari. They had entered the family business in the years 1933 and
1936 respectively. Both of them acquired vast business interests including tea
and coffee estates, acquired spinning mills in the State of Andhra Pradesh,
established a sugar factory under the name and style of Kothari Sugars and
Chemicals Limited and also started various other businesses. Many of the
businesses which were started by them were carried on jointly till the year
1982 and in the said year D.C. Kothari and H.C. Kothari decided to separate
their business interests and accordingly a scheme was worked out as a result of
which some of the companies went to the control of D.C. Kothari and some went
to the control of H. C. Kothari. However, no express agreement was reached among
the family of the promoters, namely, Sri D.C. Kothari and H.C. Kothari, with
regard to the first respondent-company. H.C. Kothari passed away in early 1992
and soon, thereafter, in June, 1992, Sri D.C. Kothari also passed away which
resulted in the management of the H.C. Kothari group of companies coming into
the hands of B.H. Kothari and the management of the D.C. Kothari group of
companies coming into the hands of P.D. Kothari, the second respondent herein.
The shareholding pattern in
the first respondent-company was divided approximately as follows:
|
(i) Unit Trust of India, LIC, GIC |
|
|
and their subsidiaries |
: 34 per cent, of the share capital. |
|
(ii) Sri P.D. Kothari and his group |
: 14 per cent. |
The appellant along with ten
other group companies along with Investment Trust of India and another Reliance
group company, Reliance Capitals, had substantial stakes in the share capital
of the company which is almost equivalent to the holding of the second
respondent and his associates.
According to the
appellants, the second respondent, who was in the management of the first
respondent-company, wanted to secure control and management of the first
respondent-company and exclude any role by the appellants and other companies
which were supporting the second respondent's cousin, B.H. Kothari, and which
had also allowed various acts of oppression and mismanagement. According to the
appellants, when the appellants and other companies had acquired substantial
stakes in the company by acquiring about 4,77,560 equity shares approximately
amounting to 6.23 per cent. of the equity capital of the company between June,
1991, and September, 1992, the respondents, with a mala fide intention of
removing the names of the appellants and other companies from the registers,
had moved the Company Law Board for rectification of the share registers, in
spite of transfers having duly taken place and rights having accrued in favour
of the appellants and other companies. It is the case of the appellants that
the attempt of the respondents for rectification of the share register was
particularly made with a mala fide and oblique motive in view of the fact that
the first respondent company had resorted to a rights issue of partly
convertible debentures to the existing shareholders by its letter of offer
dated October 15, 1992. The appellants and other investing companies which had
acquired shares in the first respondent-company had applied not only for the
rights issue to which they are entitled but also for partly convertible
debentures on additional rights basis before the closure of the issue on
December 15, 1992. It is their case that it was only after the closure of the
issue that the respondents proceeded to institute company petitions as stated
above before the Company Law Board seeking for rectification of the share
register for deletion of the names of the appellants and other companies which
was ultimately not accepted in the light of the judgment of the single judge
and the Division Bench of this court (see [1996] 85 Comp Cas 79). The judgment
of the Division Bench of this court has not been stayed by the Supreme Court.
According to the
appellants, the respondents made attempts seeking permission of this court to
have deployment of the proceeds raised from the shareholders for the
implementation of a project relating to manufacture of beer, in the State of
Andhra Pradesh; for raising the equity capital from non-resident Indians by way
of foreign subscriptions for an aggregate value of Rs. 4.5 crores; and to raise
the stake of the existing promoters of the company, namely, P.D. Kothari and
his relatives, associates and associate companies from the present level of 14
per cent, to 51 per cent, in the equity share capital of the company. The
further case of the appellants is that the appellants, after having been
unsuccessful in the interlocutory applications and having lost in the Letters
Patent Appeals, the respondents proceeded to call for the annual general
meeting of the first respondent-company for September 12, 1994, at 10.30 a.m.
at the Music Academy, Madras. In the said meeting, among other things, three
important items were to be considered and transacted. They were (1) utilisation
of the proceeds from the issue of rights issue of partly convertible debentures
for the beer project; (2) offering of shares to non-resident Indians and
overseas bodies corporate; and (3) to increase the stakes of the existing
promoters and his relatives, associates. Inasmuch as items Nos. 10, 11 and 12
under the caption "special business" in the agenda for the meeting
which was to be held on September 12, 1994, according to the appellants
challenging the action of the respondents was illegal, they filed the suits for
the reliefs.
This court by interim
order, dated September 7, 1994 (AR. Lakshmanan J.) in O.A. Nos. 849 and 850 of
1994 in C.S. No. 1128 of 1994 and O.A. Nos. 855 and 856 of 1994 in C.S. No.
1132 of 1994 filed by both the appellants herein found that, prima facie, a
case has been made out by them for the grant of interim injunction. But,
however, before this court, an undertaking was given by learned counsel who
appeared for the respondents that the consideration of resolutions Nos. 10, 11
and 12 set out as special business in the notice for the 25th annual general
meeting of the first respondent-company, which was to be held on September 12,
1994, or on any other future date will be deferred until further orders from
this court. Accordingly, it was ordered that the meeting will go on with the
other resolutions listed for consideration except resolutions Nos. 10, 11 and
12. After giving that undertaking, however, the respondent moved transfer
petitions before the Supreme Court of India and the Supreme Court of India by
order dated September 9, 1994, considering the facts and circumstances of the
case and to avoid any prejudice to the large body of shareholders, permitted
the meeting to take place by also allowing the appellants to vote not only in
respect of the disputed but also undisputed shares in terms of the statements
furnished to the Supreme Court. But, however, the Supreme Court of India
directed that the result of voting will not be declared nor will any decision
about the passing of the said resolutions be taken on the basis of the said
voting until further orders. The Supreme Court directed the results of the
voting to be intimated to it.
However, it is contended by
the appellants that at the meeting held on September 12, 1994, the second
respondent proceeded to illegally adjourn the meeting only in respect of
resolution No. 12 and allowed the voting to take place in respect of
resolutions Nos. 10 and 11 which is the subject-matter of the suit. In fact,
the adjournment itself was ex facie illegal as it was done without there having
been a motion brought in for adjournment and without there being a proposal or
seconding for the adjournment and without even the consent of the shareholders.
Further, the second respondent himself could not at all have been the chairman
even in respect of the decision for adjournment of the meeting in respect of
resolution No. 12 in which he was directly interested.
The results of the voting
on resolutions Nos. 10 and 11 were sent to the Supreme Court of India. Liberty
was also sought for by the respondents to hold the adjourned meeting on
September 27, 1994. But the Supreme Court of India declined the request for
permitting resolution No. 12 to be taken up at the meeting on September 27,
1994, and held that resolution No. 12 will not be put to vote at the meeting
scheduled to be held on September 27, 1994, till further orders. As regards
resolution No. 12, it was indicated that the said resolution was not put to
vote at the meeting on September 12, 1994, but however, an order was passed on
September 23, 1994, prohibiting the said resolution being taken up for
consideration and to be put to vote at the next meeting which was to be held on
September 27, 1994. It was directed by the Supreme Court that it will now be
open to the respondents to request this court to permit them to put the said
resolution for consideration at any subsequent adjourned meeting of the company
and that this court will proceed to pass orders uninfluenced by the order of
the Supreme Court, dated September 23, 1994, in so far as resolution No. 12 was
concerned. This court was directed to consider expediting the hearing of the
matter. Pursuant to the orders of the Supreme Court of India, there was one
other consent order passed in respect of voting rights which was passed on
January 3, 1995.
While matters stood thus,
in the meanwhile the respondents filed Applications Nos. 7152 and 7154 of 1994
in C.S. Nos. 1128 and 1132 of 1994 filed by the appellants seeking for
permission of this court to hold the adjourned annual general meeting to
consider and to put to vote resolution No. 12 of the notice dated August 5,
1994, issued by the respondents to its shareholders by allowing the 11 Reliance
companies to exercise their voting rights in the same manner as exercised by
them in respect of resolutions Nos. 10 and 11. This court by order dated
February 15, 1995, after taking note of the earlier orders passed by the
Supreme Court of India and other facts, granted permission for holding the
adjourned annual general meeting for consideration of resolution No. 12 as
prayed for in the light of the orders passed by the Supreme Court of India and
further directed that the said meeting could be held on March 20, 1995.
However, it was directed that the result of the voting on resolution No. 12
would not be declared but should be kept in a sealed envelope and intimated to
this court. This court further held that merely because permission was given to
the respondents to hold the meeting, the appellants herein will not lose their
right to challenge the validity of the meeting. It was held by this court that
it was always open to the appellants to challenge the validity of the meeting
itself or the results thereof, when the subject is taken up by this court for
consideration.
Based on the said orders of
this court, the respondents proceeded to issue notices by enclosing proxy
forms.
In view of the subsequent
developments which took place in the matter, the appellants herein had filed
applications seeking for amendment of the pleadings in the plaint, amendment of
the cause title, relief sought for and also furnished various other documents
supporting the claims for amendment. In fact, the first appellant filed O.A.
No. 435 of 1995 in C.S. No. 1128 of 1994 and the second appellant filed O.A.
No. 436 of 1995 in C.S. No. 1132 of 1994 seeking for injunction restraining the
respondents, their men, officers, subordinates or any one claiming under them
from giving effect to or implementing resolutions Nos. 10, 11 and 12 said to
have been passed on September 12, 1994, and March 20, 1995, as is evident from
the resolutions which were disclosed before the Supreme Court of India and this
court. The respondent companies had filed Application No. 7151 of 1994 in C.S.
No. 1128 of 1994 and Application No. 7153 of 1994 in C.S. No. 1132 of 1994
seeking for permission for the implementation of resolutions Nos. 10 and 11
approved by the general body of the company held on September 12, 1994. They
also filed Application No. 1628 of 1995 in C.S. No. 1128 of 1994 and
Application No. 1631 of 1995 in C.S. No. 1132 of 1994 seeking for opening of
the sealed envelope in this court and causing the results of the poll to be
known to the respondents and its shareholders and if the results indicate that
resolution No. 12 has been passed by the requisite majority as per the provisions
of the Companies Act, to allow the respondents to implement the same. The
appellants also took out O.A. No. 220 of 1995 in C.S. No. 1128 of 1994 and
sought for injunction restraining the respondents from in any manner proceeding
to further implement the beer project or from carrying out any construction for
the beer project or from carrying on any manufacturing activities or trading
activities either directly or indirectly in beer. One other Application No.
1312 of 1995 in C.S. No. 1128 of 1994 was filed by the first appellant seeking
for directing the respondents to keep the monies earmarked for the beer project
in a separate bank account pending disposal of the suit and the decision by
this court on the legality and validity of resolution No. 10 of he notice dated
August 5, 1994, and implementation thereof in the light of the directions of
the Supreme Court.
All the applications were
posted for hearing before the learned judge. Time for filing counter was given
by the learned single judge in respect of the application seeking for amendment
of the plaints and pleadings and the said applications were adjourned for
further hearing after vacation. In the submission of the appellants even for
deciding the entire interim applications under appeal, the decision on the
applications seeking for amendment of the plaint based on subsequent events was
vital and relevant for determination of the issues and to assess the prima
facie case and balance of convenience.
The learned single judge
proceeded to hear the applications and was pleased to pass common orders on May
16, 1995, allowing all the applications filed by the respondents and dismissing
the applications filed by the applicant companies, thus in effect paving the
way for implementation of resolutions Nos. 10, 11 and 12 and also for the
implementation of the beer project and thus overriding the various objections
which were raised by the appellants.
Mr. Mohan Parasaran
contended that the order of the learned single judge is erroneous and the
learned judge ought to have appreciated that the applicants/appellants have
established not only a strong prima facie case for grant of injunction
restraining the implementation of resolutions Nos. 10, 11 and 12 but also in
respect of the implementation of the beer project and for deposit of monies in
a separate bank account earmarked for the beer project in the light of the
reports that the monies earmarked for some other projects were diverted for the
beer project illegally, which was the subject-matter of enquiry under section
209A of the Companies Act. Learned counsel contended that the learned single
judge was in error in not granting injunction with regard to the implementation
of resolution No. 10 for establishing the beer project in the State of Andhra
Pradesh and that the learned judge ought to have seen that prima facie there is
a strong case for grant of injunction in the light of the fact that in respect
of the very same beer project, there was already an investigation under section
209A, which was ordered by the Central Government to be conducted with regard
to diversion of funds and must have further seen that the beer project had been
implemented even prior to getting the approval of the shareholders. According
to the appellants, the learned judge had. committed an error in holding that
the beer project could not have been envisaged as on the date of the letter of
offer on October 15, 1992, since the letter of intent by the Central Government
was issued to the sister concern of the respondent only on December 15,1992.
The company failed to produce fund flow statements for the beer project which
it was implementing in the State of Andhra Pradesh even during the pendency of
the suit and prior to the institution of the suit which would have clearly
shown the utilisation of funds and the source for implementation of the beer
project.
It is contended that the
learned judge has not given due weight to the enquiry under section 209A
directed to be instituted by the Central Government in respect of the very beer
project and has also failed to prove that the company has discharged its burden
to the court by showing that there was no diversion of funds by not having kept
the money earmarked for the beer project in a separate account from out of the
monies collected for a different project. According to Mr. Mohan Prasaran,
without the approval of the shareholders the company was in error in proceeding
to implement the beer project and even in the counter filed by the respondents
in Application No. 220 of 1995 this question about utilisation of the funds for
the implementation of the beer project is quite evasive. In so far as
resolution No. 11 which pertains to allotment of shares on preferential basis
to overseas bodies corporate and non-resident Indians, it is the case of the appellants
that the respondents cannot resort to private placements in a rights issue and
resolution No. 11 was sought to be brought in so as to bring in investment from
non-resident Indians Dr overseas bodies corporate, who are none other than the
associates or relatives of the persons in the management of the respondent and
this would only mean that what actually the respondent was seeking was to
provide private placements with foreign bodies which, as per the understanding
of the appellants, is quite contrary to the guidelines issued by the Securities
and Exchange Board of India In terms of which it could be inferred that private
placements could only be tagged to public issues and not to rights issues and
allotment could be made only in accordance with the prescribed percentage as
part of a single composite issue and, therefore, the respondents could have
only resorted to a fresh public issue and could not have resorted to
preferential issues in respect of resolution No. 11.
In so far as resolution No.
12 was concerned, Mr. Mohan Parasaran, contended that the learned judge was in
error in seeking to distinguish the judgment of the Supreme Court in Needle Industries' case [1981] 51
Comp Cas 743; AIR 1981 SC 1630. According to learned counsel, mala fides were
writ large which was the basis for resolution No. 12 as evident from several
facts including the attempt on the part of the respondents to resort to
rectification of the share register after the closure of the rights issue
resorted to by them in October, 1992, so as to completely throw out from the
share register the appellants and other group companies thereby reducing their
holdings and resulting in the banishment of opposition against the management
of the second respondent. It is contended that the learned single judge was in
error in relying upon the Division Bench ruling of this court which was given
in a different factual background where admittedly in that case, the appellants
who were before this court were not qualified minority shareholders and, therefore,
it is incorrect on the part of the learned judge to have held that sections 397
and 398 will not apply to listed public limited companies. That question was
not decided by this court in the context of proving mismanagement.
Mr. Mohan Parasaran then
contended that the original adjournment of consideration of item No. 12 itself
was clearly illegal and invalid, in view of the fact that the adjournment of
the meeting for consideration of item No. 12 was done without there having been
any proposal or seconding of the said proposal that the resolutions for
adjournment have not been put to vote. Secondly, the decision to adjourn was
taken and implemented by the chairman, who himself was biased and interested in
respect of resolution No. 12 and such a decision was taken in the light of the
financial institutions withdrawing their support for resolution No. 12.
Mr. Mohan Parasaran
contended that in the present case, the record of the company shows that there
were serious allegations of mismanagement and oppression which are the
subject-matter of proceedings before the Company Law Board and investigation
has been ordered into the accounts of the company under section 209A of the Act
by the Central Government. As regards use of funds for productive purposes, the
implementation of the beer project in the State of Andhra Pradesh is not
feasible and cannot be said to be productive as there is complete prohibition
with regard to not only consumption but also manufacture of liquor and further
in fact a family dispute was pending which was the result of the litigation
including the one started by P.D. Kothari in seeking for rectification of the
share register which is pending before the Supreme Court.
Mr. Mohan Parasaran then contended
that essentially the dispute between the two cousin brothers was the backbone
of the litigation and it is not a proxy fight but it is a direct fight between
two cousin brothers which was not properly appreciated by the learned judge. It
is submitted that the appellants have a strong prima facie case for grant of
injunction in respect of the implementation of resolutions Nos. 10, 11 and 12
and the balance of convenience also lies in granting injunction.
In fine, Mr. Mohan
Parasaran contended that in so far as resolution No. 10 is concerned, prima
facie, the resolution which is stated to have been passed on September 12,
1994, is illegal and cannot be implemented in view of the fact that there was
already a diversion of monies for the beer project even without the approval of
the shareholders, which is evident from the enquiry, which has been ordered by
the Central Government, into the accounts of the company under section 209A of
the Companies Act.
It is contended that in so
far as resolution No. 11 is concerned, again a prima facie case and balance of
convenience lie in granting the injunction and the illegality is apparent in
this regard. It is argued that the action of the respondents in bringing in
resolution No. 12 is a clear case of mismanagement and is contrary to the
decision of the Supreme Court in the case of Needle Industries' [1981] 51 Comp Cas 743. Further, resolution
No. 12 is deemed to have lapsed because consideration of the said resolution
and the adjournment of the said resolution for subsequent consideration at the
meeting held on September 12, 1994, is illegal.
Lastly, it is submitted
that the monies which have been collected for different projects in October,
1992, and not implemented have to be kept under a separate bank account and
even the funds which have been earmarked for the beer project have to be kept
under a separate account which has not been done and they have merely taken the
objections that this being a rights issue, they had no objection to keeping the
monies in a separate bank account; but, when there are serious acts of
mismanagement and allegations of diversions, a duty is cast upon the
respondents to keep the monies under a separate account even assuming that
section 73(3) of the Companies Act is not attracted.
Our attention was drawn to
the entire pleadings and the documents filed by both the parties and also the
orders passed by this court and the Supreme Court. Our attention was also drawn
to certain passages in Companies Act by
A. Ramaiya, particularly with reference to the directors' fiduciary duties and
the chairman's power to adjourn the meeting and issue of further capital and
propriety in rights issue, and also para 7.04 of Law and Practice of Meetings by Shackleton, seventh edition.
Mr. Anil Diwan, learned senior
counsel and Mr. R. Krishnamurthi, learned senior counsel, appearing on behalf
of respondents Nos. 1 and 2, respectively, drew our attention to certain
passages in the plaint, counter-affidavits and rejoinders. Mr. R. Krishnamurthi
invited our attention to the various findings given by the learned single judge
with reference to resolutions Nos. 10 to 12 and argued that the learned judge
has gone through the entire records and evidence placed before him and held
that each and every institution and authority, both governmental and financial
institutions, have approved the proposal for the beer project, and has also
elaborately dealt with the various contentions of the appellants. He would
further submit that the voting on the resolutions is a clear testimony of the
fact that 94 per cent, of the shareholders are supporting the respondents and
have totally rejected the stand of the appellants and that the shareholders who
supported the resolutions include the financial institutions of this country,
namely, the Unit Trust of India, Life Insurance Corporation of India Ltd.,
General Insurance Co. Ltd., ICICI and the subsidiaries of the General Insurance
Company, viz., New India Assurance Co. Ltd., Oriental Fire Insurance Co. Ltd.,
United India Insurance Co. Ltd., and the National Insurance Co. Ltd., who, in
the aggregate, hold about 34 per cent, of the voting power. He also denied that
resolution No. 12 was brought with an ulterior motive. As regards resolution
No. 12, Mr. R. Krishnamurthi contended that the proceedings of the meetings
were duly recorded and the copy of the minutes was given to the appellants and
they at no time questioned the minutes and, therefore, it is too late for the
appellants to raise this point before the appellate court. Concluding his arguments,
Mr. R. Krishnamurthi said that the learned single judge has rightly held that
the balance of convenience is in favour of the respondents' implementing the
shareholders' decision and cannot be against such implementation especially
when the appellants have not established as to how their rights would be
affected if the decisions are implemented and even if the appellants' rights
are alleged to have been affected, in corporate democracy, the appellants have
to sail with the majority and cannot dictate terms to the company after the
majority approval has been obtained. Therefore, he prayed for the dismissal of
all the appeals.
Mr. Anil Diwan, learned
senior counsel, while inviting our attention to the relevant passages in the
plaint, counter-affidavits and other documents and also the letter of intent
given to the first respondent for the beer factory, and the letter of intent
issued by the Government of India and the letter to the ICICI by the first
respondent dated August 19, 1993, and the letter from the ICICI to the first
respondent dated November 22, 1993, in regard to the utilisation of the
proceeds of partly convertible debentures submitted that while considering the
request of the first respondent for approval for the change in the scope of the
proposal and utilisation of the proceeds of partly convertible debentures of
Rs. 1,918 lakhs, the ICICI agreed to the proposed changes as indicated in the
annexure subject to certain conditions mentioned in their letter dated November
22, 1993. Mr. Anil Diwan also relied on the letter dated February 23, 1994,
sent by the second respondent to the Chairman, Securities and Exchange Board of India, Bombay, requesting him to consider and fix a suitable
premium taking into consideration the peculiar circumstances of the case
mentioned in the said letter.
While answering the
argument of Mr. Mohan Parasaran with reference to the letter dated May 1,1995,
of the Regional Director of the Department of Company Affairs, learned senior
counsel, Mr. Anil Diwan, pointed out that the said letter was not addressed to
the first respondent. With regard to the enquiry under section 209A of the
Companies Act directed to be instituted by the Central Government in respect of
the beer project, learned senior counsel contended that the section 209A
inspection is in no way relevant to decide the legality of the resolution. He
said that utilisation of funds for the beer project spent from debentures so
far has seen the approval of the debenture-holders and the debenture trustees,
and the only dispute before this court is the deployment of funds from the
share capital.
We have perused the letters
and the other correspondence. As a matter of fact, the ICICI, the lead
institution had specifically approved the beer project and the deployment of
the funds. Therefore, it is contended that the appellants' stand is untenable
being one of obstruction in the progress and development of the company, which
is desired by a vast majority of shareholders representing 94 per cent, or 87
per cent., as the case may be, and all the debenture-holders, the debenture
trustees and the public financial institutions having about 34 per cent, stake
in the company. He also invited our attention to paragraph 39 of the common
counter-affidavit dated July 10, 1995.
We have already seen that
every institution and authority, both governmental and financial, has approved
the proposal for the beer project and the learned single judge has also
elaborately dealt with the various contentions' of the appellants. The licence
for beer had been suspended by the Central Government for a considerable period
and it was available for licensing only in the year 1989. However, there was no
letter of intent with the company at the time when the partly convertible
debentures issue was made by the company. The matter was pending consideration
by the Ministry of Industry. The company could not have any intention of
manufacturing beer without a letter of intent. Since the Controller of Capital
Issues insisted upon appraisal of the project covered under the letter of
offer, the ICICI, one of the premier financial institutions of the country and
who are the company's lead institution, had appraised the projects covered
under the letter of offer and the company had also indicated this fact in their
application to the Controller of Capital Issues. Only based on the statement,
consent was accorded. When the proposal for the beer project came through, the
company sought the permission of the shareholders for re-deployment of a part
of the funds raised through the letter of offer for the beer project and 94 per
cent, of the shareholders voted in favour of the resolution.
While answering the
contention of Mr. Mohan Parasaran that there has been diversion of funds for
the beer project without the approval of the shareholders, Mr. Anil Diwan
contended that the said contention is totally false. According to him, all
monies spent for the beer project have been out of the company's own funds and
debentures after obtaining the consent of the debenture-holders, and all the
facts and materials relating to the beer project were furnished before the
learned single judge. In fact, some of the representatives of the appellants
have also spoken in the general meeting against resolution No. 10. Despite
this, the resolution was passed with 94 per cent, of the votes polled.
Therefore, as rightly pointed out by learned senior counsel for the
respondents, the arguments of learned counsel for the appellants regarding the
implementation of the beer project are totally irrelevant. In fact, it is
stated in paragraph 7 of the common counter-affidavit filed on behalf of the
respondents dated July 31, 1995, as to how the said resolution was passed by
the shareholders in regard to the implementation of the beer project as well as
the implementation and approval of the shareholders accorded for resolution No.
10, which is already in progress.
As already seen, resolution
No. 10 of the notice dated August 5, 1994, accords the consent of the company
for change in the purpose of utilisation of the proceeds from the issue of
partly convertible debentures for certain projects, instead of as originally
proposed in the letter of offer dated October 15, 1992. One of such projects
for which change in the purpose of utilisation of the proceeds has been
consented to overwhelmingly by the shareholders is the brewery project, for
which a sum of Rs. 12.16 crores has been earmarked in the said resolution. The
resolution was placed before the shareholders and the approval of the
shareholders was sought for utilising a sum of Rs. 12.16 crores out of Rs.
18.28 crores, being the funds contributed by them by subscription to partly
convertible debentures issued by the company in October, 1992, for the beer
project as against certain other projects originally envisaged in October,
1992, by the company. The board of directors of the company, after receiving
the letter of intent for the beer project in April, 1993, decided to utilise
the partly convertible debentures funds for the manufacture of beer instead of
spending the same for the projects for which the partly convertible debentures
funds were raised. Accordingly, a letter dated August 19, 1993.was addressed to
ICICI, which is the lead institution and also the debenture trustee, in terms
of the loan arrangement, seeking its concurrence for change in the utilisation
of funds by revising the earlier projects as follows:
(a) Deferring the implementation of
10,080 spindle mills;
(b) Implementation of granite tiles
project;
(c) Implementation of brewery project in
Andhra Pradesh.
We have already noticed the
letter addressed to ICICI. The board of directors have informed ICICI of the
reasons for undergoing changes in the priorities of implementation of the
projects originally envisaged in the letter of offer. The company has also
informed ICICI of the conditions imposed in the letter of intent dated December
15, 1992, which include non-availing of loans from financial institutions and
collecting 20 per cent, of the project cost of brewery, viz., Rs. 450 lakhs,
from non-resident Indians, in foreign exchange. It is also not in dispute that
the project originally envisaged had to undergo a change in the opinion of the
board of directors of the company in view of the developments subsequent to'
the issue of letter of offer, which developments have been gone into by the
lead institution, viz., ICICI, before according its approval to the company for
the revised utilisation of funds. We have already seen that the change in the
utilisation of funds as envisaged in resolution No. 10 has been approved by the
lead institution, debenture holders, trustee of debenture holders and the
shareholders of the company. As rightly pointed out by Mr. Anil Diwan, it is
the duty and responsibility of the company to implement the said resolution in
the interests of those who had voted for it and in the interests of the company
as well. In our view, the appellants have no legal right to stand in the way of
implementation of resolution No. 10.
In fact, the implementation
of the project commenced immediately after the letter of intent was received by
the company in April, 1993, and as per the records placed before us, the
company had incurred a total expenditure of Rs. 15.45 crores up to May 16,
1995, and a sum of Rs. 16.48 crores as on July 24, 1995, and steps had already
been taken to implement the beer project and to utilise the funds raised from
the debenture holders. Out of the said expenditure of Rs. 16.48 crores as of
July 24, 1995, a sum of Rs. 1.34 crores had been contributed from internal accruals
of the company and a sum of Rs. 9.97 crores has been borrowed from hire
purchase and leasing companies by way of lease finance. A sum of Rs. 5.17
crores has been spent from the proceeds of partly convertible debentures,
pursuant to the approval granted by ICICI by its letter dated November 22,1993.
Under these circumstances, we are of the view that the implementation of the
beer project as well as the implementation of the approval of the shareholders
accorded in resolution No. 10, which is already in progress, is, therefore,
essential in the circumstances of the case.
Mr. Mohan Parasaran sought
directions to keep the monies collected pursuant to the letter of offer dated
October 15, 1992, in a separate bank account. We are of the view that such a request
is not sustainable either in law or on facts. In fact, the monies collected
pursuant to the letter of offer dated October 15, 1992, have been merged with
the general funds of the company after the allotment of the partly convertible
debentures and as a result, the company's liabilities to its bankers in the
cash credit account had decreased and the company is saving about 18.75 per
cent, interest on such decrease in cash credit borrowings, and if, as claimed
by the appellants, the funds are kept separately in a bank account, it will not
fetch any interest more than 11 per cent, and such an action on the part of the
company will be detrimental to the interest of the company as well as its
shareholders and debenture holders, who had reposed confidence in the
management of the company.
Admittedly, the appellants
have not contributed a single rupee to the funds of the company by way of
subscription to partly convertible debentures pursuant to the letter of offer
dated October 15, 1992, and whatever subscriptions they have made pursuant to
the said offer are lying with their bankers to their own credit in stock
invests yielding interest to the appellants. When the monies of the appellants
are not at all with the company, they have no locus standi to expect the
company not to utilise the funds contributed by others and not by themselves,
especially when those who had contributed had given their approval. Mr. Anil
Diwan, learned senior counsel, at the time of hearing, in fact, has offered to
the appellants to take back the amounts lying in the form of stock invests with
their bankers if they are not inclined to approve the beer project. Mr. Mohan
Parasaran, learned counsel for the appellants, has not accepted the said offer.
In fact, the appellants have rejected the offer of the respondents, vide their
letter dated October 10, 1994.
It is also not in dispute
that certain developments took place politically in the State of Andhra Pradesh
subsequent to August 5, 1994, and as a result of the change in the political field,
in December, 1994, an ordinance was issued prohibiting the consumption of
liquor in the State' of Andhra Pradesh. This ordinance was the subject-matter
of challenge before the Andhra Pradesh High Court, which finally held that
manufacture of liquor was not banned but only consumption of liquor was banned
in the State. It is stated that the matter is in appeal before the Supreme
Court and in the meanwhile, the Andhra Pradesh Government had recently issued a
fresh Ordinance banning even the manufacture of liquor in the State. As rightly
pointed out by Mr. Anil Diwan, these developments are beyond the control of the
company and the company had to take steps, in the light of these developments,
for relocating its beer project in some other State. The company, in fact, took
steps to obtain approval from the Maharashtra Government for setting up the
beer project in the State of Maharashtra, and from the Central Government for
permission to relocate the project. The Government of Maharashtra recommended
to the Central Government the proposal of the company to shift the project from
Andhra Pradesh to Maharashtra, based on which the Central Government by its
Letter No. LI: 560(92)/95-Amendment, dated July 28, 1995, permitted the
shifting of the location for setting up the brewery unit from Andhra Pradesh to
Maharashtra.
Mr. Anil Diwan, learned
senior counsel, submitted that out of the total expenditure of Rs. 16.48 crores
incurred by the company on the beer project so far, the expenditure on plant
and machinery alone amounts to Rs. 10.85 crores. This plant and machinery can
be moved to the new location immediately. This apart, the company had incurred
an expenditure of Rs. 80 lakhs on the technical know-how paid to colloborators
and Rs. 75 lakhs on pre-operative expenses. The company had also incurred
interest and lease rentals amounting to Rs. 2.03 crores on leased items of
plant and machinery and has deposited a sum of about Rs. 10 lakhs with various
authorities.
Mr. Mohan Parasaran
contended that in view of the impossibility of putting up the beer project in
the State of Andhra Pradesh, resolutions Nos. 10 and 11 are to be stayed or not
given effect to. We are unable to countenance the said request. In our opinion,
the said request is most unreasonable and unfair, as the beer project could be
put up anywhere in India with the approval of the Central Government and the
concerned State Government. This situation had arisen to the company not
because of the company's own fault or action but on account of political changes
taking place in the country developments consequent to which have to be
considered by the company with a view to change its own plans and business
activities accordingly. As rightly urged by Mr. Anil Diwan, learned senior
counsel, any commercial and business decisions are in the absolute domain of
the board of directors of the company and, therefore, the court would not
interfere with such commercial decisions. We, therefore, have no hesitation in
rejecting the contention of Mr. Mohan Parasaran in regard to resolution No. 10
and upholding the contentions of the respondents for the reasons stated supra.
As regards resolution No.
11, it was argued that the said resolution gives approval to the board of
directors of the company to issue, offer and allot, by private placement, not
exceeding 9,00,000 equity shares of Rs. 10 each at a premium to be calculated
in accordance with the guidelines of the Securities and Exchange Board of India
dated August 4, 1994, and such other amendments as may be made thereto in
respect of calculation of the premium on the shares and to offer such shares to
non-resident Indians/overseas corporate bodies as the board in its absolute
discretion may decide. In this connection, our attention was drawn to the
letter of the second respondent dated February 23, 1994, addressed to the
chairman of the Securities and Exchange Board of India, Bombay, and the reply
received from the Securities and Exchange Board of India dated March 7, 1994.
The letter dated March 7, 1994, was sent by the Division Chief, Primary Market
Department, Securities and Exchange Board of India, to the second respondent.
In that letter it was proposed to collect a sum of Rs. 4.50 crores from
non-resident Indians and overseas corporate bodies and that the same was proposed
to be done through private placements and by way of preferential allotments to
identified non-resident Indians and overseas corporate bodies. The Securities
and Exchange Board of India replied saying that the second respondent is free
to do so and determine the terms thereof including pricing after obtaining the
consent of the shareholders under the Companies Act, as also subject to other
guidelines relating to the issue of shares to non-resident Indians and overseas
corporate bodies.
Resolution No. 11 also
further states that the said shares so allotted shall have a lock-in period of
five years from the date of allotment and that the number of shares, viz.,
9,00,000 equity shares, mentioned in the resolution, have been calculated on
the basis of an estimated premium of Rs. 40 per share, and the number of shares
will vary based on the calculation of the premium in accordance with the
Securities and Exchange Board of India guidelines.
The learned single judge,
while considering this aspect of the matter, has observed as follows (at p. 105
supra):
"Learned counsel
appearing for the plaintiff would argue that the letters of intent and
financial institutions no doubt permit the promoter to issue debenture shares in
favour of non-resident Indians, but it should not be against law. When learned
counsel contends that the issue of shares could not be against law and yet the
first defendant proposed to issue shares in favour of non-resident Indians, it
is for the plaintiffs to show how the issue of debentures in favour of
non-resident Indians is against law. There is no such evidence placed before
the court".
At the time of hearing, it
is stated that after the judgment of the learned single judge permitting the
implementation of resolution No. 11, the board of directors had issued and
allotted 6,60,598 equity shares of Rs. 10 each at a premium of Rs. 58.12 per
share to an overseas corporate body and the company had issued the allotment
letter to the said allottee on June 20, 1995. A return in Form No. 2 prescribed
under the Companies Act in respect of this allotment was filed with the
Registrar of Companies, Madras, on June 21, 1995. It is stated that the value
of this allotment works out to Rs. 450 lakhs, which is 20 per cent of the
original cost of the beer project, viz., Rs. 22.50 crores, which the company
had to raise from abroad in foreign exchange as per the terms and conditions of
the letter of intent for the beer project issued to the company, which details
have been fully gone into by ICICI, the lead institution and the debenture
trustee.
It is contended by Mr. Anil
Diwan that the issue of preferential shares to non-resident Indians has fetched
more foreign exchange to the country. It is not in dispute that the shares have
been purchased by non-resident Indians at a very high price of Rs. 68.12 per
share when the price of share of the first respondent-company in the secondary
market was less than Rs. 40, by which, undisputedly, the company and in turn,
its members would be much benefited. The appellants, in our view, have no case
in so far as resolution No. 11 is concerned since the said resolution has
already been implemented. We also see merit in the contention of learned senior
counsel for the respondents and, therefore, we reject the contention of the
appellants in this regard.
In reply to the arguments
of Mr. Mohan Parasaran on resolution No. 12, Mr. Anil Diwan, learned senior
counsel, submitted that the notice empowers the board of directors of the
company to issue, offer and allot not exceeding 1,01,04,000 equity shares of
Rs. 10 each at a premium to be calculated in accordance with the guidelines of
the Securities and Exchange Board of India. The resolution also states that the
investment of the promoters group in the said shares shall not exceed a limit
of 51 per cent, of the equity capital of the company. It is not disputed that
resolution No. 12 was approved overwhelmingly by the shareholders of the
company on March 20, 1995, i.e., at the adjourned annual general meeting. After
the judgment of the learned single judge delivered on May 16, 1995, the company
had issued and allotted an aggregate of 24,74,569 shares of Rs. 10 each at a
premium of Rs. 53.27 per share to the second respondent and his group and after
this issue and allotment to the promoters group, the total number of shares
held by the promoters group in the share capital of the company amounts to 26
per cent. We are, therefore, of the view that the resolution, as passed by the
shareholders, was fully implemented and the promoters group today holds 26 per
cent, in the equity capital of the company which is well within the
norms/guidelines applicable for such investment and issued by the Securities
and Exchange Board of India and others.
This apart, the financial
institutions holding about 34 per cent, in the capital of the company had
specifically approved the said issue and allotment. They had also voted in
favour of resolution No. 12 at the adjourned meeting held on March 20, 1995,
which shows their faith in the good management of the first respondent/company.
The company had complied with the guidelines issued by the financial
institutions even though such guidelines are not statutory or mandatory in
nature, as they are not issued under any law in force. A return in Form No. 2,
prescribed under the Companies Act in respect of this allotment, was filed with
the Registrar of Companies on May 16, 1995, under cash receipt No. 5934 issued
by the Registrar of Companies. Learned senior counsel appearing for the
respondents denied the allegation of the appellants that resolution No. 12 was
brought with an ulterior motive. He said that the promoters have been permitted
to increase their shareholding up to 51 per cent, and it was in pursuance of
this policy, resolution No. 12 was proposed. The very fact that 94 per cent, of
the shareholders voted in favour of this resolution at the meeting is
sufficient rebuttal of the various allegations of the appellants.
Mr. Mohan Parasaran
contended that the original adjournment of the meeting for consideration of
item No. 12 itself was clearly illegal and invalid in view of the fact that the
adjournment of the meeting for consideration thereof was done without there
having been any proposal or seconding of the said proposal and that the
resolutions for adjournment have not been put. to vote. In reply to this
contention, Mr. Anil Diwan contended that the appellants and associates did
demand a poll on certain resolutions but never asked for a poll on the question
of adjournment when the matter was put up to the meeting. Having not raised a
demand for poll on the question of adjournment, the appellants cannot raise
this point of the adjournment not being legal, before this court.
It is contended by Mr. Anil
Diwan, learned senior counsel, that the proceedings of the meetings were duly
recorded and a copy of the minutes was also given to the appellants and the
appellants admittedly at no point of time questioned the minutes. Therefore, as
rightly urged by learned senior counsel for the respondents, it is too late in
the day for the appellants to raise this point before the appellate court. It
is not in dispute that the minutes being authenticated documents under the
provisions of the Companies Act, no adverse view is possible. The learned
single judge himself has held that the oral submission made by the appellants
in this regard has no basis.
In this regard, learned
senior counsel for the respondents invited our attention to articles 76 and 78
of the memorandum and articles of association of the first respondent-company,
which read as follows:
"76. The chairman, if
any, of the board of directors, shall preside as chairman at every general
meeting of the company.
78. The chairman may, with
the consent of any meeting at which a quorum is present (and shall if so
directed by the meeting), adjourn that meeting from time to time and from place
to place, but no business shall be transacted at any adjourned meeting other
than the business left unfinished at the meeting from which adjournment took
place. When a meeting is adjourned for thirty days or more, notice of the
adjourned meeting shall be given as nearly as may be as in the case of an
original meeting. Save as aforesaid, it shall not be necessary to give any
notice of an adjournment or of the business to be transacted at an adjourned
meeting".
In fact, on the adjourned
meeting held on March 20, 1995, poll was taken and two scrutineers were also
appointed. In fact, the second respondent did not preside over that meeting and
one Mr. P.G. Daftary presided over the meeting. Our attention was drawn to the
minutes of the annual general meeting held on September 12, 1994, at 10.30 a.m.
at the Music Academy, Madras. No objection was taken to the second respondent
presiding over that meeting. No poll was also demanded. Regarding item No. 12,
it is seen from the minutes of the meeting dated September 12, 1994, that the
chairman (Pradip D. Koth-ari) informed the members that the financial
investment institutions, viz., the Life Insurance Corporation of India, the
General Insurance Corporation of India and the Unit Trust of India holding
substantial equity shares in the company had, by their letter of UTI No.
UT/D01/10-36/3219/93-94, dated March 18, 1994, countersigned by LIC and GIC,
permitted the company to make a preferential offer to the promoters to increase
their equity stake to 51 per cent. It is also seen from the said minutes that
poll was demanded for other items.
The minutes of the
adjourned 25th annual general meeting held on March 20, 1995, at 10 a.m. at
Music Academy, Madras, is available at page 181 of the typed set volume 3. The
chairman of the company Pradip D. Kothari welcomed the members and informed
that since he was personally interested in the proposed resolution, he would
not chair the meeting and requested the members to elect a chairman for the
meeting. Thereupon, Mr. V. Thirupathi, nominee director of the Industrial
Credit and Investment Corporation of India, a shareholder of the company,
proposed the name of P.G. Daftary, director as chairman for the meeting, which
was seconded by Mr. Halasyam, a shareholder. The proposal was put to vote and
Mr. P.G. Daftary was elected unanimously to chair the meeting. Thereupon,
Pradip D. Kothari vacated the chair and Mr. P.G. Daftary occupied the chair.
In that meeting, Mr. T.V.
Padmanabhan, legal adviser of the company, informed the members that the High
Court had permitted the company to convene the meeting to consider resolution
No. 12 of the notice dated August 5, 1994, and, therefore, the resolution could
be considered. The representatives of the Skylab Detergents (P.) Ltd. mentioned
that the court had only ordered the meeting to be held on March 20, 1995, and
the contents of the resolution were not approved by the court. Further, he also
said that there was material change in the resolution already circulated, in
that, as per the institutional guidelines, the promoters could subscribe only
up to 26 per cent, and not 51 per cent, as per the resolution circulated. He
also contended that as there was a material change, the original resolution
could not be considered at the adjourned meeting, and a fresh meeting had to be
convened for the purpose. He also pointed out that the original proxies lodged
for the annual general meeting held on September 12, 1994, would be used for
the adjourned meeting. A fresh meeting, in his view, was required to be
convened.
The chairman of the
meeting, thereupon requested the legal adviser of the company, who was present
on invitation, to clarify the points raised by the members. After some
discussion, Mr. Janakiram, a shareholder, said that he did not want a poll to
be conducted since the resolution could be passed by show of hands as the
shareholders had complete confidence in the management. Mr. Pradip D. Kothari,
while thanking him for the sentiments expressed, advised that the poll was
required to be conducted since in terms of the orders of the High Court, the
results should not be declared but had to be submitted to the High Court in a
sealed envelope. Thereupon, the chairman appointed two persons as scrutineers
of the poll. The chairman asked the company secretary to arrange for
distribution of ballot papers and then the scrutineers took charge of the poll.
The chairman of the meeting mentioned that since the result of the poll could
not be announced at the end of the meeting in view of the court's order, the
-meeting would stand terminated as soon as the results of the poll were
received by him in a sealed cover from the scrutineers. The chairman declared
the polling as closed at 1 p.m. The chairman received a sealed cover from the
scrutineers at 9.15 p.m., and informed the members that he would arrange to
file the same with the High Court. The meeting thereafter terminated with the
vote of thanks to the chair.
In fact, article 79 of the
memorandum and articles of association of the first respondent-company provides
that a resolution put to the vote of the meeting shall be decided on a. show of
hands, unless a poll is demanded in accordance with the provisions of section
179 of the Companies Act. Unless a poll is to be demanded, a declaration by the
chairman that a resolution has, on a show of hands, been carried unanimously or
by a particular majority or lost and an entry to that effect in the books of
the proceedings of the company shall be conclusive evidence of the fact without
proof of the number or proportion of the votes recorded in favour of or against
that resolution.
The further argument of Mr.
Mohan Parasaran in regard to calling for fresh proxies is also baseless for the
simple reason that fresh proxies ought to be called for as it is a matter of
right to the shareholders to change their respective proxies for the adjourned
meetings and for the new shareholders to give their own proxies for the adjourned
meeting. It is also stated that in order to enable the shareholders to exercise
their rights, the notice of the adjourned meeting was enclosed with the proxy
form. We are unable to understand as to how it could be categorised as an
unlawful act on the part of the first respondent-company. It is suffice to
state that the adjourned meeting shall transact only the business left
untouched in the original meeting and no new business could be transacted. In
accordance with this principle, resolution No. 12 alone was to be transacted
and, therefore, the notice of the meeting was issued with the same wording as
that of the previous notice of meeting dated August 5, 1994.
The further argument of Mr.
Mohan Parasaran, learned counsel for the appellants, that there is a material
change in the resolution as it was proposing for 26 per cent, in the place of
51 per cent, and that it is a new resolution altogether, has no basis. The
learned single judge has considered this point also in his order. The original
resolution envisages for an increase of promoters stake up to 51 per cent, and
the proposal to increase up to 26 per cent, is within the arithmetic figure of
51 per cent, and as such, there is no deviation from the original resolution.
Therefore, we are of the view, that the various reasons cited by Mr. Mohan
Parasaran to contend that the adjournment was not valid have no basis at all.
Further, the fact that the overwhelming majority of the shareholders voted for
this resolution also shows that the shareholders were in full agreement with
the resolution. The reference to the guidelines issued by the Central
Government is not correct and the appellants were not able to produce any such
guidelines before this court. As contended by learned senior counsel for the
respondents, it is for the shareholders to decide these issues and they have
decisively and overwhelmingly approved the resolution. Merely because a
shareholder acting as a proxy has alleged mismanagement, it cannot be contended
that these resolutions cannot be voted upon by the shareholders.
In regard to the argument
of Mr. Mohan Parasaran that investigation had been ordered under the Companies
Act by the Central Government, the respondents have specifically denied the
same. They also further said that the Central Government has not addressed any
letter to the respondents in this regard. According to learned senior counsel
for the respondents, it is only an investigation and the Central Government is
entitled to investigate into the matter pertaining to any company.
Section 176 of the
Companies Act deals with proxies. Articles 88, 89 and 90 of the articles of
association of the first respondent-company, which deal with proxies, read as
follows:
"88. On a poll, votes
may be given either personally or by proxy. A company or other body corporate
entitled to vote may vote in accordance with the provisions of section 187 of
the Act.
89. (a) The instrument appointing a proxy
shall be in writing under the hand of the appointer or of his attorney duly
authorised in writing, or if the appointer is a corporation either under the
common seal or under the hand of an officer, or attorney so authorised. Any
person may act as proxy whether he is a member or not.
(b) A corporate body (whether a company within the meaning of the
Act or not) may, if it is a member or a creditor or a debenture holder of the
company by the resolution of its board of directors or other governing body,
authorise such person as it thinks fit to act as its representative at any
meeting of the company or at any meeting of any class of members of the company
or at any meeting of any creditors of the company held in pursuance of the
Companies Act or any rules made thereunder or in pursuance of the provisions
contained in any debenture or trust deed, as the case may be. The person so
authorised by resolution as aforesaid shall be entitled to exercise the same
rights and powers including the right to vote by proxy on behalf of the body
corporate which he represents as he could exercise if he were a member,
creditor or holder of debentures of the company.
(c) So long as an authorisation under sub-clause (b) above is in force, the power to
appoint a proxy shall be exercised only by the person so appointed as
representative.
90. The instrument
appointing a proxy and the power of attorney or other authority, if any, under
which it is signed or a notarially certified copy of that power or authority
shall be deposited at the registered office of the company not less than
forty-eight hours before the time for holding the meeting or adjourned meeting
at which the person named in the instrument proposed to vote in the case of a
poll, not less than twenty- four hours before the time appointed for the taking
of the poll and in default, the instrument of proxy shall not be treated as
valid".
Therefore, we reject the
contention of Mr. Mohan Parasaran in regard to calling for fresh proxies since
it is a matter of right given to the shareholders to give their own proxies for
the adjourned meeting, as has been held by us in paragraphs supra.
Mr. Mohan Parasaran finally
requested this court at least to maintain status quo till the disposal of the
suit with regard to resolution No. 12. In reply to the said argument, it was vehemently
contended by learned senior counsel appearing for the respondents that the
appellants made attempts to convince the other shareholders to vote against the
resolution and in spite of such opposition, the shareholders overwhelmingly
approved the resolution rejecting the plea of the appellants at the meeting,
and having failed in their attempt to defeat the resolution at the meeting, the
appellants have now come to this court to oppose the implementation of the said
resolution. We are of the view that the appellants having participated in the
meeting actively and intensively, it does not lie in their mouth to say that
the meetings were illegal. As pointed out by learned senior counsel for the
respondents, such allegations against the resolutions and the meetings are only
lame excuses to enable the appellants to continue the proxy litigation in
courts. The appellants, in our view, have no case at all, leave alone a prima
facie case, for the grant of injunction. The learned single judge had
appreciated all the materials, placed before him before deciding the issue
involved. It is incorrect on the part of the appellants to state that the
learned judge has not appreciated the facts placed before him while coming to
the conclusion that resolutions Nos. 10 to 12 are implementable. A perusal of
the judgment of the learned single judge would go to show that the learned
judge has gone through the entire evidence and records placed before him before
deciding the issues involved and has held that each and every institution and
authority, both governmental and financial institutions, have approved the
proposal for the beer project, and has also elaborately dealt with the various
contentions of the appellants.
We are also unable to
appreciate the contention of Mr. Mohan Parasaran that the implementation of the
resolution should be stayed since the proceedings under sections 397 and 398 of
the Companies Act are pending before the Company Law Board. We are of the view
that the pendency of the proceedings before the Company Law Board cannot be
relied on to stall the implementation of the resolutions. The Company Law Board
will make appropriate enquiries and decide the petitions on their own merits.
In fact, it is brought to our notice that the Company Law Board has refused to
stay the consideration of the resolutions by the shareholders.
On a consideration of the
entire evidence on record and the arguments of learned counsel appearing on
either side, we are of the view, that the adjourned meeting for consideration
of resolution No. 12 was valid and proper. This apart, this court alone had
permitted the meeting to take place on March 20, 1995, and the appellants had
also participated in that meeting and voted against the resolution. It is,
therefore, not now open to the appellants to contest the same. Since the
resolutions have been passed by the shareholders in an overwhelming majority,
it is not for this court to interfere with the decision of the shareholders. In
so jar as resolution No. 12 is concerned, the same has been implemented and
shares to the extent of 26 per cent, have already been allotted to Pradip D.
Kothari and others and thus, the said resolution had been implemented.
Therefore, we are of the view, that the present application for injunction to
restrain the implementation of resolution No. 12 is liable to be rejected.
The company has already
commenced implementation of its projects and is continuing. Substantial sums of
money had already been invested in the beer project and it will not be in the
company's interest or in public interest not to proceed with the project by
diverting part of the funds as approved by resolution No. 10. There is no
obligation on the part of the company to keep the money in a separate account
and there can never be such an obligation after the listing of partly
convertible debentures by stock exchanges. The appellants have not made out any
case for the grant of interim orders. In our considered view, the order passed
by the learned single judge is correct.
This court, in the decision
in Vivek Goenka v. Manoj Sonthalia [1995] 83 Comp Cas
897, 908 rendered by one of us, viz., AR. Lakshmanan J., held as follows :
"It is the duty of
this court to recognise the corporate democracy of a company in managing its
affairs. It is not for this court to restrict the powers of the board of
directors. The board of directors in various resolutions have appointed the
sixth defendant as executive director, managing editor and chairman. It will
not be open to this court to interdict the functions of the board-managed
company. As rightly contended by Mr. P. Chidambaram, the learned senior
advocate, it will not be open to this court to interfere with the day-to-day
functions, management and administration of a company unless it is established
that the decisions taken by the board are ultra vires the Act or the articles
of association of the company. At this interlocutory stage this court is
concerned only with the prima facie case and balance of convenience as
disclosed by the documents produced by both parties. It is for the plaintiff to
let in oral evidence at the time of trial and establish his case".
We have considered all the
contentions urged by the parties on a prima facie view. It is not necessary for
us to deal with each and every contention urged by the parties as most of them
relate to the merits of the suit. Both sides cited a number of decisions in
support of their respective contentions. We do not think it is necessary for us
to refer to all of them as we have decided these appeals on the facts and
circumstances of the case. Therefore, we confine ourselves only to one decision
of this court which is directly on point. None of the grounds raised and argued
by the appellants merit any consideration.
For the foregoing reasons
we hold that all the appeals fail and are dismissed. However, there will be no
order as to costs.