Section 252
Directors,
numbers of
[1989] 65 COMP. CAS. 553 (BOM.)
HIGH COURT OF
v.
G.H. GUTTAL J.
Company Petitions Nos. 502, 506,
526, 527, 528, 529
and 530 of 1984. (Company
Applications Nos.
322, 323, 331, 332, 333, 334 and
335 of 1984)
JULY 28, 1988
P.L. Nain and Virag V. Tulzapurkar for the petitioners.
B.J. Rele and Neeta V.
Masurkar for the Registrar of Companies.
G.H. Guttal J.—The directors of Amar Dye-Chem. Ltd. (in liquidation) have
filed these petitions for an order that they be relieved from any criminal
proceedings that might be brought against them for default, negligence,
misfeasance, etc., in compliance with the provisons of section 58A of the
Companies Act and the Companies (Acceptance of Deposits) Rules, 1975. The
applications are made under section 633 of the Companies Act. The Companies
Act, 1956, and the Companies (Acceptance of Deposits) Rules, 1975, are
hereinafter referred to as "the Act" and "the Rules",
respectively.
J.H. Doshi and H.J. Doshi,
who are, respectively, the petitioners in Company Petitions Nos. 502 of 1984
and 506 of 1984 were, at the relevant time, full time directors of the company.
The former was the chairman of the company. The petitioners in Company
Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984, were appointed as
directors of the company on January 11, 1984. They were not directors of the
company on the date on which the winding-up order was made. The petitioners in
Company Petitions Nos. 526 of 1984 and 527 of 1984 were directors in their
capacity as professional men and were not full-time directors of the company.
Company Applications Nos. 322 of 1984 (in Company Petition No. 502 of 1984),
323 of 1984 (in Company Petition No. 506 of 1984), Company Application No. 33
of 1984 (in Company Petition No. 528 of 1984), Company Application No. 334 of
1984 (in Company Petition No. 529 of 1984), Company Application No. 335 of 1984
(in Company Petition No. 530 of 1984), Company Application No. 332 of 1984 (in
Company Petition No. 527 of 1984), and Company Application No. 331 of 1984 (in
Company Petition No. 526 of 1984), are for interim orders to the effect that
the applicants be relieved from any criminal proceedings arising out of their
default in compliance with section 58A of the Act and the Rules of 1975.
The admitted facts are as
under:
(i) The company is engaged in the manufacture and distribution
of dyes, intermediates and chemicals. The company supplies the products mainly
to the textile industry.
(ii) The total of the acceptances of new deposits during July
1983, and October, 1983, was for Rs. 2,94,000 in excess of the permissible
limit. The total of renewals of old deposits between July 1983, and June, 1984,
was for Rs. 46,72,500 in excess of the legal limit.
(iii) In respect of the acceptance of fresh
deposits of Rs. 2,94,000 and renewals of old deposits of Rs. 46,72,500 between
July, 1983, and October, 1983, the company has contravened section 58A of the
Companies Act.
(iv) The aggregate amount of deposits which
was not repaid as on June 30, 1984, was Rs. 45,68,000.
(v) In their return of deposits as on March 31, 1984, filed with
the Registrar of Companies, the company has admitted that a total of Rs.
21,74,664 excess deposits remained unpaid to the depositors.
(vi) In the return of deposits as on March 31, 1984, the company
has stated that the deposits of Rs. 10,72,000 claimed by the depositors had
been deferred with the consent of the shareholders.
(vii) The amount of deposits accepted or renewed
under rule 3(2)(ii) during the year ending March 31, 1985, was Rs. 78,16,000.
During April, May, June, 1984, the company accepted or renewed deposits of the
value of Rs. 15,75,000 from the public and accepted Rs. 3,28,000 from
shareholders.
(viii) No deposits were repaid after September
30, 1983.
Thus, there is an admitted
default in acceptance of deposits.
The arguments advanced by
counsel for the petitioners may be summarised as under:
(1) The directors who are petitioners in Company Petitions Nos.
528 of 1984, 529 of 1984 and 530 of 1984, were appointed on January 11, 1984.
They were not directors on the date on which the winding-up order was made.
Therefore, they should be relieved from liability for the acts of the company.
(2) The petitioners in Company Petitions Nos. 526 of 1984 and 527
of 1984, and those referred to at (1) above were appointed as directors in
their professional capacity and were not full-time directors. Since they were
not concerned with the day to day management of the affairs of the company,
they cannot be held responsible for any act leading to criminal proceedings.
(3) There were special circumstances beyond the control of the
company which caused loss of production and strained the economy of the
company. There was a strike and "go slow" by the workers between 1981
and December 27, 1982, when the company commenced production. However, the
period during which the textile workers' strike affected the sales has not been
stated. These factors caused losses and drove the company to invite deposits.
(4) For the reasons stated in (3) above, the petitioners should
be held to have acted honestly and reasonably within the meaning of section 633
of the Act.
Mr. Rele, appearing for the
Regional Director of the Company Law Board, drew my attention to the provisions
of the Act and the Rules, and urged that in law there is no distinction between
the liability of full-time directors and directors appointed by virtue of their
professional skill. Having regard to the facts of the case, the directors
cannot be said to have acted honestly and reasonably.
In view of the admitted
violation of section 58A of the Act and Rule 3 of the Rules, it is not
necessary to deal with the facts any further. I will immediately proceed to
consider whether the elements of section 633(1) have been fulfilled.
In order to understand the
nature of the liability of the members of the board of directors, certain
provisions of the Companies Act which highlight the responsibility of directors
need to be borne in mind. Section 58A enacts very stringent provisions in
regard to acceptance of deposits. For example,
advertisements inviting deposits, disclosure of the financial position of the
company, application of the Rules even to renewal of deposits highlight the
intention to protect the interests of the investing public. It follows,
therefore, that the officers of the company are enjoined to follow the
provisions strictly.
Similarly, rule 3 employs
language which is prohibitory in its tenor and, therefore, demands strict
compliance.
Does the law make any
distinction between full-time directors and directors who lend their special
skills by accepting membership of the board of directors? The answer is
provided by certain provisions of the Act. Let me consider them.
"Officer", the
word used in section 633, includes "any director, managing agent,
secretaries and treasurers, manager or secretary, or any person in accordance
with whose directions or instructions the board of directors or any one or more
of the directors is or are accustomed to act ......". Thus,
"any director" is an officer of the company. The Legislature which
defined the word "Officer" has made no distinction based on full-time
and part-time performance of duty.
The powers of the company
are exercised by the board of directors.' It shall not exercise any power or do
any act which is required to be exercised of done by the company in general
meetings.
Here again no distinction founded on part-time participation as member of the
board is discernible. A meeting of the board of directors shall be held at
least once in three months. In such
meeting, every member participates in voting and takes decisions without
distinction as to whether he is a part-time or full-time director.
At every annual general
meeting of the company held in pursuance of section 166, the board of directors
is enjoined to lay before the company a balance-sheet. Every balance-sheet and every
profit and loss account of a company shall be signed on behalf of the board of
directors by not less than two directors of the company one of whom shall be
the managing director where there is one. The
balance-sheet and profit and loss account are required to be signed by not less
than two directors. One of them may be a part-time director.
"Director" has been denned to include "any person occupying the
position of director by whatever name called".
The enactment, viz.,
section 58A, which demands strict compliance, the definition of
"Officer" which makes no distinction based on part-time performance
of duties, the equality of the responsibilities of the members of the board of
directors and the definition of "director" which admits of no
differentiation between part-time and full-time directors, has to be construed
according to its plain meaning. For this purpose, one must ask the question :
Does any interpretative criterion point away from what these sections mean? The
words mean what they say. If there is nothing to modify, nothing to alter,
nothing to qualify the language which a statute contains, the words and
sentences must be construed in their ordinary and natural meaning. The words
should be given the meaning which a normal speaker of the English language
would understand them to bear in their context.
The plain meaning of
director is the person occupying the position of director—call him a part-time
director or a full time director. The rules of construction do not call for any
modification or qualification of this meaning. Therefore, every petitioner
herein is a director of the company. Any distinction based on part-time
performance of duties is unrealistic, opposed to the usage of English prose and
would lead to absurd results.
Mr. Nain sought support to
his argument from Trisure India Ltd., In re [1983] 54 Comp Cas 197 (Bom). The
directors were accused of a conspiracy to manipulate the accounts and
intentional misstatements in the prospectus. It was found subsequently that the
books of the company were fabricated and falsified to show a false picture. The
figures of profits and sales shown in the prospectus were based on the
fabricated records. The decision of the trial court not to relieve the
directors from the liability to prosecution was based on events discovered
subsequently. This was the main reason why the Division Bench decided to
relieve the directors from liability for criminal action. The conclusions of
the Division Bench on the facts may be summarised as under:
(a) The directors who were in
(b) The petitioning directors did not take immediate drastic
action as, in theiropinion, the irregularities were not serious.
(c) The directors were not required to go through the account
books, nor were they under any obligation to examine the sale statistics.
(d) The failure to send returns of production to the directors in
(e) The frauds were not known to the directors at the time when
the prospectus was signed by them. The subsequent discovery did not make them
responsible.
It is against the
background of these facts that the judgment has to be understood. All the facts
in that case pointed at Hegde—the managing director. The directors who were in
This is not to suggest that
none of the petitioners herein should be relieved from criminal proceedings.
The point is whether, as a matter of law, the part-time directors carry no
responsibilities which may lead to criminal proceedings. If they are liable,
the question of relief from criminal action becomes part of the court's
discretion. In the matter of proceedings for negligence, default, breach of
duty, misfeance and breach of trust, the Act and the rules admit of no
distinction between members of the board of directors based on their part-time
or full-time performance of duties. Their liability for any proceedings for
such acts is equal.
The next question is
whether, in accepting the deposits in breach of the Act and the Rules, the
petitioners acted honestly and reasonably.
Even if the production
suffered due to go-slow tactics of the workers and the strike, this situation
ended on December 27, 8982, or early in 1983. There is no explanation as to why
new deposits to the tune of Rs. 2,94,000 were accepted after July, 1983. It is
not the case of the petitioners that in July, 1983, also, this situation
continued. Even if it is assumed that the company was in need of money and,
therefore, new deposits were accepted, there is no explanation as to why the
sanction of the company in general meeting was not taken. Then, between July,
1983, and October, 1983, the deposits of Rs. 46,72,500 were renewed. If the
company was unable to repay the old deposits, it is not reasonable to borrow
money and that too, without the sanction of the company. The return of deposits
dated March 31, 1984, shows that a total of Rs. 21,74,664 is the amount of
excess deposits which remained unpaid. Again, in April, May, and June, 198 4, the
company accepted or renewed deposits of the value of Rs. 15,75,000 from the
public and Rs. 3,28,000 from shareholders. All this has been done
notwithstanding the financial position of the company which showed that the
company was not in a position to repay the deposits and that it was not
entitled to borrow money in excess of the limit permitted by law. The meetings
of the board of directors were held every year and the picture was clear to the
directors as to whether they were full-time directors or part time directors.
It is not the case of the part-time directors that they were unable to know the
financial picture in respect of the deposits without scrutiny of the account
books. The statements of profit and loss and the balance-sheet must have shown
that there were deposits in excess of the limit. Yet the board of directors
proceeded to sanction the acceptance of new deposits and renewal of the old
ones. No circumstances which suggest that this was reasonable conduct are
discernible from the petition.
It was urged that the sum
of Rs. 46,72,500 represents renewal of deposits. According to Mr. Nain, the
renewals made between July, 1983, and June, 1984, do not constitute
"acceptance" of deposits. This submission is untenable. When a
company is unable to repay the deposits and, therefore, renews them, what it
does is to accept the old deposits for a longer period. The word
"renew" means "to acquire again". Hence, renewal of fixed
deposits amounts to receiving fresh deposits within the meaning of section 58A
of the Act.
Having regard to the
provisions of the law, I do not find any distinction, in principle, between the
case of a full-time director and the case of a part-time director of a company.
Cases like Trisure India Ltd. [1983] 54 Comp Cas 197 (Bom), are in a different
category. The distinction made in that case was based on the fact that the
petitioning-directors were sought to be held liable because of events
discovered subsequently, and the court, found that, on the date on which the
prospectus was signed, there was nothing which could attribute, to the
directors, knowledge of the fraud. So far as the petitioners in Company
Petitions Nos. 502 of 1984 and 506 of 1984 are concerned, they were associated
personally with the management of the company and were, therefore, not only
cognizant of, but are liable for, the acceptance of the deposits contrary to
the provisions of law.
Notwithstanding the pressure on the company's finances, they cannot be
permitted to shut their eyes to what was obvious to everyone who examines the
affairs of the company even superficially.
Even if all the directors
are, in law, liable for their acts, the question of relieving them is still one
of discretion. Now, the question is whether, in exercise of my discretion, I
should relieve the officers of the company from liability for legal
proceedings. The petitioners, except the petitioners in Company Petition No.
502 of 1984 and Company Petition No. 506 of 1984, were part time directors.
This fact is the basis of Mr. Nain's argument. The petitioners in Company
Petition No. 502 of 1984 and Company Petition No. 506 of 1984 were directly
concerned with the day to day affairs of the company. The petitioners in
Company Petitions Nos. 526 of 1984, 527 of 1984, 528 of 1984, 529 of 1984 and
530 of 1984 were not expected to look after the day to day affairs of the
company. If the responsibility of all the directors, whether they perform part
time duties or full time duties is equal, should any of the directors be
relieved from the liability in respect of negligence, breach of trust,
misfeasance, etc.? This is always a question of judicial discretion. What are
the cases in which part-time directors should be relieved? The answer would
depend upon the circumstances of each case and no rigid formula can be laid
down. In this case, the directors who perform part time functions may be
relieved from liability because no evidence of the fact that they had exercised
any control in the matter has been brough forth. But, in a given case, evidence
about their knowledge of the facts which constitute negligence, breach of
trust, misfeasance, etc., may be brought forth. In such cases, they should not
be relieved from liability for acts of negligence, misfeasance, etc. I should
not be understood to have held that part time directors, by reason of their
part time status, should invariably be relieved from the liability for
negligence, breach of duty, misfeasance, breach of trust, etc.
In my opinion, it will be
unreasonable to fasten these directors with the liability for their defaults,
negligence, misfeasance or breach of trust which might have been caused because
of the conduct of the petitioners in Company Petitions Nos. 502 of 1984 and 506 of 1984, who
were admittedly in charge of the day-to-day affairs of the company.
The
petitioners in Company Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984
were not directors of the company on January 11, 1984, on which date the
winding-up order was made. These petitioners also cannot be held liable for the
acts of the company. They, too, will have to be relieved.
For
all these reasons, I make the following order:
(i) Company Petitions Nos. 502 of 1984 and
506 of 1984 are dismissed. Similarly, Company Application No., 322 of 1984 (in
Company Petition No. 502 of 1984) and Company Application No. 323 of 1984 (in
Company Petition No. 506 of 1984) are dismissed.
The petitioners shall
pay costs of each of these petitions and applications to the Official
Liquidator and the Regional Director of the Company Law Board, quantified at
Rs. 300 each.
(ii) Company Petition No. 526 of 1984, No.
527 of 1984, No. 528 of 1984, No. 529 of 1984 and No. 530 of 1984 are made
absolute in terms of prayer (a).
(iii) There shall be no order on Company
Application No. 331 of 1984 (in Company Petition No. 526 of 1984), Company
Application No. 332 of 1984 (in Company Petition No. 527 of 1984), Company
Application No. 333 of 1984 (in Company Petition No. 528 of 1984), Company
Application No. 334 of 1984 (in Company Petition No. 529 of 1984) and Company
Application No. 335 of 1984 (in Company Petition No. 530 of 1984).
(iv) This
order shall not come into operation for three weeks.
[1987]
62 COMP .CAS. 600 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Moga Transport Co. (P.) Ltd.
D.S.
TEWATTA, J.
APRIL
5, 1983
Bhagirath Dass,
Ramesh Kumar and A. K. Jaiswal for the Petitioner.
D.S. Tewatta, J.—Kundan Singh, petitioner, who was the managing director of
Moga Transport Co. (P.) Ltd. at the relevant time has impugned the direction
contained in letter No. EMP/3232, dated February 16, 1976, from the Labour
Commissioner, Punjab, Chandigarh, to the Collector, District Faridkot (annexure
P-4), to effect recovery of the wages of the workers found due against the company
under various awards from the personal property of the petitioner, on the
ground that the managing director could not be made personally liable for the
dues recoverable from the limited company.
No written statement has
been filed nor any opposition has been entered to this writ petition despite
service.
Mr. Ramesh Kumar, counsel
for the petitioner, has sought to sustain the afore-mentioned ground from the
ratio of a Division Bench decision, of this court in Surinder Nath Khosla v.
Excise and Taxation Commissioner Punjab [1964] 15 STC 838 (P & H). This
court in Surinder Nath Khosla's case held that unless the statute in question
made the managing director of a company personally liable for the dues
recoverable from the company, he could not be held personally responsible.
Neither in the company law
nor in the Industrial Disputes Act does any provision making the managing
director personally liable for recovery of dues against the limited company
exist.
In view of the above, I
hold that the direction contained in annexure P-4 is clearly illegal and the
same is, therefore, quashed. The writ petition is allowed, but with no order as
to costs.
[1987]
62 COMP. CAS. 601 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
State Government of Haryana
S.P.
GOYAL, J.
MAY
6, 1987
Bhagirath Dass and
Ramesh Kumar for the Petitioner.
S.K. Jain for the Respondent.
S. P. Goyal, J.—The petitioner, a director in M/s. Swadesh Rubber
Industries (P.) Ltd. filed a suit against the respondents restraining them from
enforcing the liability of the company against him on account of State and
Central Sales Tax. Along with the suit, he also filed an application for an ad
interim injunction to the same effect. The stand taken by the respondents was
that he being the director of the company during the years when the amount
became due, it could be recovered from him. Both the courts below upheld the
defence and declined the ad interim order.
Learned counsel for the
respondents could not point out any provision of law either in the Companies
Act or in the Sales Tax Act which made the director liable personally for the
amount due from the company nor has been able to cite any authority.
Learned counsel for the
petitioners, on the other hand, relied on the judgment of D. S. Tewatia J. in
Civil Writ No. 2010 of 1976 (Kundan Singh v. Moga Transport Co. P. Ltd.) decided on April 5,
1983, [1987] 62 Comp Cas 600 (P & H),
wherein it was held that neither in the company law nor in the Industrial Disputes
Act is there any provision making the managing director personally liable for
recovery of the dues against the limited company. It is, therefore, apparent
that both the courts below because of misconception of law acted illegally in
exercise of their jurisdiction in declining the prayer for issue of ad interim
injunction. This petition is accordingly allowed and the impugned order
reversed. No costs.
Section 253
Directors,
only individual to be
[1961] 31 COMP. CAS. 143 (SC)
Oriental Metal Pressing Works (P.)
Ltd.
v.
SYED
JAFER IMAM, A. K. SARKAR AND RAGHUBAR DAYAL, JJ.
CIVIL
APEAL NO. 10 OF 1960
DECEMBER
16, 1960
SARKAR,
J. - Dadoba Tukaram Thakoor carried on a business under the name and style
of oriental metal pressing works. On May 26, 1955, a private company was
incorporated under the name of Oriental metal Pressing works Ltd. hereafter
called the company, to take over the aforesaid business. On July 7, 1955.
Dadoba transferred his business to the company. On the same date, an agreement
was made between him and the company by which he was appointed the managing
director of the company for life and was given the power. “by deed inter vives
or by will or codicil to appoint any person to be a managing director in his
place and stead.” Regulation 109 of the articles of the company reproduced
these provisions. The shareholders of the company were Dadoba his brother, the
respondent Bhaskar, and his two sons, the appellant Govind and the respondent
Harsih of whom the first three were the directors, Dadoba being the managing
director. This constitution of the company continued till Dadoba death on
January 14, 1957.
Dadoba had
died leaving a will whereby he purported to appoint the appellant, Govind the
managing director of the company in his place from the date of his death.
Shortly after Dadoba’s death, disputes arose between the appellant, Govind and
the respondent, Bhaskar, the appellant Govind, was contending that the
respondent, Bhuskar, had ceased to be a director on account of his failure to
attend the directors meettings. He also purported to co-opt the appellant,
Bhalchandra , as a director. The respondent, Bhaskar, contended that he had not
ceased to be a director and challenged the legality of the appointment of the
appellant, Bhalchandra, as a director. He further contended that the
appointment of the appellant, Govind, as the managing director of the company
by the will of Dadoba was void. On November 22,1957, the respondent, Bhaskar,
filed a suit in the city civil court of Bombay against the company, the
appellants, Govind and Bhalchandra, and the respondent Harish for the following
declarations and for reliefs incidental thereto:
(a) the appointment of the appellant Govind
as the managing director was void:
(b) the appointment of the appellant,
bhalchandra, as director was illegal and inoperative; and
(c) he (the respondent, Bhaskar) was and
continued to be a director.
The learned
judge of the City civil court accepted all the contentions of the respondent,
Bhaskar and made the declarations claimed.
The company
and the appellands, Govind and Bhalchandra appealed from his decision to the
High court at
It appears
that while the appeal was pending in this court, the respondent, Bhaskar sold
his holding in the Company to the appellant, Govind and has now no interest in
the company or the appeal. No one has consequently appeared to contest the
appeal in this court, the respondent, Harish, apparently not being interested
in doing so. In these circumstances, the questions whether the respondent,
Bhaskar, continues to be director and whether the appellant, Bhalchandra was
legally co-opted as a director are no longer liege issues and have not been
canvassed in this appeal. On those questions, therefore, we express no opinion.
Another result, rather unfortunate, has been that we have not had the advantage
of arguments against the appeal.
The courts
below held that the appointment of the appellant, Govind, as managing directory
by the will of Dadoba was void in view of the provisions of section 312 of the
Companies Act, 1956. That section reads thus:
“Any
assignment of his office made after the commencement of this act by any
director of a company shall be void.”
The Act came into
force on April 1, 1956, and Dadoba had both made his will and died after that
date. The appointment of the appellant, Govind as managing director was,
therefore, made after the commencement of the Act.
Now, section
312 makes the assignment of his office by a director void. It does not on the
face of it say that an appointment by a director of another person as the
director in his place would be void. The High court, however, took the view
that the word ‘Assignment’ in the section included appointment and so such an
appointment would also be void under the section. What we have to decide is
whether the High court was right in this view.
Before we
proceed to examine this question, we have to point out one thing. It appears
that the High court thought that the appellants had conceded that an
appointment by a director of another in his place by act inter vires would be
an assignment of the office of a director within section 312, and had only
contended that such an appointment by will, which is what had been done by
Dadoba would not be an assignment and would not, therefore, be rendered void by
the section. The learned Attorney General, appearing for the appellants, said
that in this the High court was in error and no such concession had been made.
He further expressly withdrew that concession. This he was clearly entitled to
do. It, therefore, becomes unnecessary for us to deal with the reasoning of the
High court in support of the view accepted by it, which were based on the
concession.
We have given
the views of the High court a most respectful and anxious consideration but we
do not find ourselves able to agree with them. We will personally state our
reasons for this conclusion, but now we wish to point out that in the view that
we have taken of the matter it will not be necessary for us to deal with the
argument advanced in the High court that the section only forbade a director
from appointing his successor, assuming assignment included appointment, but it
did not prevent a managing director from assigning his office or appointing his
successor which was what Dadoba had done. It the section did not prevent a
director from appointing his successor, which we do not think it did, then,
clearly, there is nothing in it which can justify the view that a managing
director cannot appoint his successor.
The section
says that a director shall not be able to assign his office. it may be, as the
High court pointed out, that apart form transfer another meaning of the word
assignment is, appointment. But on plain reading of the language used in the
section, it does not seem to us possible to hold that the word “ assignment” in
it, can mean appointment.
First, the
section talks of assignment of his office by a director. The word his would
indicate that the office contemplated was one held by the director at the time
of assignment. An appointment to an office can be made only if the office is
vacant. it is legitimate therefore, to infer that by using the word his the
Legislature indicated that an appointment by a director to the office which he
previously held but did not hold at the date of the appointment, was not, to be
included within the word assignment. Again, there can be no doubt that the
section was intended to render void a transfer of his office by a director for,
it the section had intended only to avoid an appointment by a director of his
successor, it would have clearly said so and would not have used the word
assignment. Therefore, even if it is possible for the word assignment to have
the meaning of appointment then it would have to be given both the meanings of
transfer and appointment in the section. This is what the High court did. That
would produce a curious result. Transfer and appointment are clearly entirely
different things. Even apart from considerations arising from the law of
conveyance, which the High court was unable to entertain in connection with the
transfer of an officer, a transfer from its very nature inevitably imports the
passing of the thing from one to another; a transfer without the passing of the
thing transferred even when that thing is an office, cannot be conceived. An
appointment, on the other hand, has nothing to do with anything p[assign from
one to another; it connotes the putting in of someone in a vacancy. The acts
constituting a transfer and an appointment are, therefore, wholly dissimilar.
It would be an unusual statute which by the use of a single word intended to
prohibit a the same time, two wholly different acts. We do not think that a
construction leading to such a result is permissible.
Secondly,
section 255 of the Act permits one third of the total number of directors of a
public company and all the directors of a private company to be appointed
otherwise than by the company at a general meeting, if the articles make provision
in this regard. The Act, therefore, expressly permits directors to be appointed
otherwise than by the company. It follows that within the limit as to the
number prescribed by the section. It follows that within the limit as to the
number prescribed by the section, a power of appointment of directors can be
legitimately conferred by the articles on any person including one who holds
the office of a director. The Act expressly permit such power being conferred.
In order, however, that a director may exercise this power of appointment,
there must be a vacant office of a director. He may himself bring about that
vacancy by resignation of his office. The vacancy would again be caused by his
death or by the expiry of the term of his office. It would flow that the act
contemplates an appointment by a director of another person as director to take
his office, when made vacant by his resignation or death or the expiry of the
term of his office. There will be nothing illegal, if the power is exercised in
the case of the death of the director, by an appointment made by his will. It
will not be rights to interpret section 312, when its language does not comply
it, as to bring in conflict with the provisions of section 255. This would
happen, if the word assignment in section 312 was interpreted as including
appointment and thereby making it prevent a director from appointing his
successor when section 255 permits him to do that. Therefore, again we think
that in section 312 the word assignment does not mean appointment.
The High court
was of the view that unless assignment included appointment, the object of the
act would be defeated. It was said that the intention and the object of the
section was to restrain and prevent a director from putting some one in his place
and stead by any act on his part. This point was further expressed more clearly
in the following words. It is now well understood that the new Companies Act
aims ateradicating many serious mischiefs which the principle of perpetual
management of companies had caused n the past. The High court felt that it
would be defeating that aim by reading section 312 as if the words assignment
of his office only meant a transfer of office and did not include the
appointment of his successor by a director. Apparently the High court thought
that by making it possible for a director to choose his successor, the
management of the company would be permitted to remain all along in one hand
and this the act wanted to prevent. It does not seem to us that the act wanted
to prevent this. The act by enacting section 255 shows that it does not
disapprove of a person having power to appoint a succession of directors and in
the case of a private company, a succession even of all the directors. Such a
person would have what has been described as perpetual management. It would
follow that the Act did not consider this as an evil which required prevention.
If perpetual management. by an outsider is not an evil, nor should such
management by one who is a director of the company be so. This aspect is very
clearly illustrated by the case in hand. Dadoba had this perpetual management.
But the whole of the company’s undertaking was really a largess form him. In
fact he held nearly 43% of the shares of the company. It is inconceivable that perpetual
management by him would have worked to the detriment of the company. We are
therefore, unable to agree that it was the object of the Act or of section 312
to prevent a director form the appointing his successor.
In view of the
clear provisions of section 255 we do not thing that it can be said, as was
done in the High court, that sections 254 and 317 of the Act impliedly indicate
that there should be no perpetual management. Section 254 says that a
corporation or an association of persons shall not be eligible as a director.
But this is not because, otherwise, there would be perpetual management. The
persons comprising the corporation or the association must change from time to
time and so, even if they were appointed directors, there would be no perpetual
management. We rather think that the idea behind section 254 is that as the
office of a director is to some extent an office of trust, there should be
somebody readily available who can be held responsible for the failure to carry
out the trust and it might be difficult to fix that responsibility if the
director was a corporation of an association of persons. Turning to section
317, we find that it provides that a managing director cannot be appointed for
a term exceeding five years at a time. Section 315, however, makes section 317
inapplicable to a private company. Therefore, section 317 is not available to
support an argument that the act does not want a private company and we are
concerned with that type of a company to be under perpetual management. But
indeed section 317 does not support that argument in the case of a public
company either. it forbids an appointment of a managing director for more than
five years at a time. It permits the managing director to be reappointed after
a term is over. If he is so reappointed, then there would be perpetual
management by him. The act does not, therefore, intend by section 317, to
prevent that. lastly, section 317 is not concerned with directors, which
section 312 is.
Another
argument that has to be dealt with is that if section 312 does not prohibit an
appointment by a director of his successor, that section can easily be rendered
infructuous by a director adopting the simple device of appointing a person as
his successor in office instead of transferring the office to him. It seems to
us that the question does not rely arise. A director can legally and
effectively appoint his successor only to the extent the articles permit this
subject of course, to the limit prescribed in section 255 in the case of a public
company. An appointment so legally made does not result in an evasion of
section 312 for, as we have earlier said, the section could not have intended
to prevent what another section in the same act made legal. An appointment made
outside the powers legally conferred by the articles is wholly ineffective,
and, therefore, is not an appointment at all and hence again does not result in
an evasion of section 312.
We have now to
consider an argument based on the first proviso to section 86B of the companies
act of 1913. The main part of section 86B contained a provision analogous to
that of section 312 of the new Act. It made an assignment of his office by a
director to another person, under an agreement with the company, void unless
such assignment was approved by a special resolution of the company. Under the
new act the assignment has been made altogether void and would not become valid
even if approved by a special resolution of the company. Now, the proviso laid
down that the exercise by a director of a power to appoint an alternate
director to act for him during an absence of not less than three months form
the district in which meetings of the directors are ordinarily held, if done
with the approval of the board of directors, would not be deemed to be an
assignment of the office within the meaning of this section. The High court
took the view that this proviso showed that in certain circumstances an
appointment by a director of another in his place might be deemed to be an
assignment of his office and that since the new act is a consolidating act, it
must be deemed to have continued the policy of the earlier act and, therefore,
for the purpose of section 312, an assignment must include an appointment.
The learned
Attorney General pointed out that in the new act there is no proviso, and,
therefore, the rule of construction applied by the High court which enables, by
raising a presumption somethings to be included in the main part of a section
by reason of a provision in a proviso to it, has been enacted in the form of an
independent section, namely, section 313. According to him, his departure from
the old arrangement of the provisions in the new act shows that it was not
intended to continue the policy of the old act. He also said that the proviso
in substance sated that the appointment by a director of an alternate director
might, in certain circumstances, be deemed to be an assignment. He pointed out
that by suing the word deemed the proviso made it clear that the appointment of
an alternate director was not a real assignment of office but was only to be
fictionally taken as one. His contention was that such fiction could arise in a
case coming strictly within the proviso but could not by extension be made to
arise in any other case. These seem to us to be arguments of weight. Further in
section 313 of the new act, which has taken the place of the first proviso to
section 86B of the old Act, the power to appoint an alternate director has been
given to the board and not to the director who intends to absent himself. No
scope for any deeming provision as in the act of 1913 remains. Therefore, again
an argument based on the proviso to section 86B would not be available for the
purposes of the present act.
It further
seems to us that the proviso to section 86B does not indicate that it was
intended that the word assignment in the main part of the section would include
appointment. The rule of construction on which the high court relied in
arriving at the view that it did, was put in these words; it is a well
established principle of construction that when one finds a proviso to a
section, the presumption is that but for the proviso the enacting part of the
section would have included the subject matter of the proviso . This rule would
enable the court to hold in regard to section 86B at the most that an
appointment of an alternate director by a director intending to absent himself
would have been an assignment of his office but for the proviso. It would be an
unwarranted extension of this principle to hold that all appointments of their
successors by directors would be assignments within the main part of the
section. In any case, in our view, as in section 312 of the new act so under
the main part of section 86B of the old act, an appointment of a successor to his
office by a director was not an assignment of his office by him for the old act
contained in section 83B provisions substantially similar to those contained in
section 255 of the new act, and the reasons which have inclined us to the view
that in section 312 the word assignment does not included appointment would
equally lead to the same conclusion in regard to section 86B. If the enacting
part did not prohibit the appointment of his successor by a director, such
prohibition cannot be read into it in reliance upon a proviso. We may read here
the observations of Lord Watson in Guardians of the poor of the west Derby
Union v. Metropolitan life Assurance Society [1897] A.C. 647, 652.
I, am
perfectly clear that if the language of the enacting part of the statute does
not contain the provisions which are said to occur in it, you cannot derive
these provisions by implication from a proviso.
It my be that
the proviso was enacted ex abundant cautela or it may be again, to prevent a
possible argument that by the appointment of alternate directors an evasion of
the main part of section 86B was being attempted. In view of the fact that the
power to appoint alternate directors was not given by the old act, but had to
be given by the articles, such an argument might not have been unlikely.
Therefore, it seems to us that the proviso to section 86B of the old act does
not assist the argument that in section 312 of new Act, the word assignment
would include appointment.
We think we
ought to say something about what strikes us to be the policy behind section
312 of the new Act. We have earlier said that under section 255 of that act a
certain number of directors in a public company has to be appointed by the
company in a general meeting. In the case of a private company likewise, the
directors have to be appointed similarly except to the extent the articles
otherwise provide. it would, therefore, appear to be the policy of the act that
to a certain extent the appointment of the directors have to be made by the
shareholders. It is intended that a certain number of directors would be the
chosen representatives of the shareholders. If a director appointed by the
company was permitted to assign his office, then the new incumbent would not be
the chosen representative of the shareholders, and the intention of the act
would be defeated. It seems to us that it is to prevent this result that the
act forbids a director by section 312 from assigning his office. Where however
a director has been appointed otherwise than by the company in a general
meeting, the shareholders have nothing to do with his appointment. Such a
director is not the chosen representative of the shareholders and the
shareholders cannot claim to have a say in the appointment of his successor. We
can discern no policy in the act which can be said to be liable to be defeated
by the appointment of the successor of such a director by him. Therefore,
section 312 was not concerned with such an appointment.
In the present
case Dadoba had power under the articles to appoint a person to be the managing
director in succession to him, and in exercise of that power he had appointed
the appellant Govind as the managing director to hold the office after his
death. such power was clearly recognised by, and legal under section 255 of the
new Act. For the reasons earlier stated, the exercise of such power does not
offend section 312. It follows that the appellant Govind had been lawfully and
validly appointed the managing director of the company.
We, therefore,
declare that the appellant Govind had been validly appointed the managing
director of the company, and set aside the decisions of the courts below that
he had not been so appointed. We have not been asked to interfere with the rest
of the judgment under appeal and we do not do so. We also make no order for
costs as no costs have been asked.
[1984] 55 COMP. CAS. 375 (
High Court OF
Rajindar Sachar and M.L. Jain JJ.
COMPANY APPEAL NO. 23 OF 1981,
COMPANY APPlication NO. 94 OF
1981, AND
COMPANY PETITIONER NO. 58 OF 1979
December 18, 1981
Satish
Chandra, Manmohan Krishan, K.K. Mehra and Ms. Anjana Goswami for the
Petitioner.
G.L. Rawal, and A.N. Parekh for the Respondent.
S.B.
Wad J. (1, 12-10-1981)—On October 1, 1981, I have passed an order
appointing an administrator for the Motion Pictures Association and he has
assumed charge. Ordinarily, I would have passed a reasoned order if there was
sufficient time left for me. But the counsel for some members of the executive
committee was so persistent in my passing an immediate order that there was no
alternative. He filed a separate
Motion
Pictures Association is a company under section 25 of the Companies Act,
controlling distribution and exhibition of Hindi Films (mostly) in the Northern
region. The management and the working of the company are the subject-matter of
innumerable proceedings in this court and subordinate courts for the last over
ten years. These litigations broadly concern the complaints of mismanagement
and oppression by a group of persons which is deeply entrenched in the
executive committee and the sub-committee of the company. The story of Motion
Pictures Association has a touch of Hitchcock Mystery. If it lacks fitness or
if there are any loose ends, that is because
it is a local version of the original film (
The company is unique in
the sense that by itself it does not carry out any commercial or business
venture but indirectly control business of crores of rupees every year. Its
articles of association are so framed that every member is required to register
a picture with the company. Every distributor and exhibitor is also required to
register himself with the company. The members are prohibited from entering
into any contract for distribution and exhibition of the films to non-members.
The articles also provide for resolving of disputes between the members in
regard to their claims. A member who deals with the non-member or who does not
pay dues of other members is liable to be removed from the membership. During
the course of hearing of these matters before me and particularly in the
chamber discussions, the role of black money was also openly discussed. The
underlying theme of the repeated complaints in this court is that these
apparently simple provisions are grossly abused by a group of people for
personal ends and oppression of other members for over a decade. The powers are
so formidable that the company can completely throw a member out of
cinematographic business which no other company can do. This action is in
restraint of trade and denial of fundamental right under art. 19 of the
Constitution.
Unfortunately, this court
has not fully and exhaustively pronounced on these complaints of mismanagement
and oppression so far. The long delay in disposal of these cases results in a
flagging of the interest of the complainants. Some complaints become stale by passage
of time or because some further acts of oppression overtake them. Some become
still born by the technique of compromise developed by the dominating group.
The scope of the enquiry
and the relief, which can be granted under ss. 397 and 398 of the Companies
Act, are now exhaustively set out by the judgment of the Supreme Court in Needle Industries (India)
Ltd. v. Needle Industries Newey (India) Holdivg Ltd. [1981] 51 Comp Cas 743
(SC). The Supreme Court has summarised the
decisions of the English Courts and the Supreme Court rendered so far. An
oppressive conduct means a conduct which is burdensome, harsh and wrongful. The
conduct of a company is expected to be of utmost good faith. The jurisdiction
under ss. 397 and 398 is a "just and equitable" jurisdiction. A
conduct which is technically legal and correct may nevertheless be such as to
justify the application of the "just and equitable" jurisdiction. An
isolated act, which is contrary to law, may not necessarily and by itself
support the inference that the law was violated with the mala fide intention or
that such violation was burdensome, harsh and wrongful but a series of illegal
acts falling upon one another can, in the context, lead justifiably to the
conclusion that they are part of the same transaction of which the object is to
cause or commit the oppression of persons against whom those acts are directed.
The Supreme Court has further summarised the scope of the powers of the company
court in this regard. It has been held that the power conferred on the court to
grant a remedy in an appropriate case appears to envisage reasonably wide
discretion vested in the court in relation to the order sought by a complaint
as the appropriate equitable alternative to a winding-up order. The Supreme
Court has further held that even if a company petition fails the court is not
powerless to do substantial justice between the parties and place them, as
nearly as it may, in the same position as they would have been.
Considering the history of
the litigation since 1972, and repeated complaints of mismanagement and
oppression, I am convinced that at least for some time, the ruling group
(sitting in the executive committee and sub-committees) which is entrenched
since 1969, should be kept away from the control of the company. The general
body of 1,500 members hardly meets. These are the distributors and exhibitors
spread all over the Northern region of
It would be relevant at
this stage to have an overview of the various stages of the controversy and the
strenuous efforts made by company judges for the last decade. The first part of
the remedial steps taken by the company judges from time to time was regarding
annual elections and election of office bearers. From 1969 to 1972 no elections
were held. The normal pattern is not to hold elections on the due dates as
required by the Companies Act or not to hold elections at all. If the articles
of association or the election rules are changed on the eve of the elections
the members are obliged to take legal proceedings restraining the company from
holding the elections. The courts pass an interim order restraining the company
from holding elections and proceedings continue. This suits the dominant group
very well because they are able to continue in power. They agree to a compromise
of not holding elections. This is what happened in Suit No. 476 of 1970. In
C.P. No. 30 of 1979, one member, Mr. J.S. Sood, who by that time had joined the
dominating group moved the said application for the direction that the annual
general meeting should not be held in June, 1979. He was elected to the
executive committee on February 28, 1979, which itself was a delayed election.
After the statutory period was over, that is, on August 30, 1979, the company
judge passed an order that pending further orders the company would not take
any steps to convene the annual general meeting. Annual general meetings for
the year 1971 were held under the orders of the court. The 1972 elections for
the office bearers were found to be illegal by this court and fresh elections
were ordered to be held under the observations of this court. A detailed
procedure for election was also laid down by this court. This is the
subject-matter of the decision of this court in (In the matter of Motion Pictures Association,
One effect of not holding
the elections in time is that two sets of directors/executive committee members
claim to be de jure directors, adding to the mismanagement of the company. This
situation was brought to the notice of this court in C.P. No. 106 of 1974 (B.R.
Kundra v. Motion Pictures Association, [1975] ILR 1 Delhi 692). The same
problem cropped up again in 1976 in C.P. No. 32/76. In the first case the
company judge directed new elections of the office bearers declaring that the
effect of not holding the election on due date was the automatic vacation of
the office by the board of directors. The court also directed fresh elections
to be held under the auspices of the court. In the second case the company
judge directed that the Hony. Secretary would discharge the functions of the
executive committee as an interim measure. But this intervention by the court
did not improve the things much.
The
court found that some change in the articles of association would improve the
situation. The company judges from time to time had expressed the need for it?
This was the second remedial measure taken by the company judge. By order dated
February 20, 1978, passed in C.P. No. 32 of 1976, a number of articles were
amended. The learned company judge observed:/. "There are many defects in
the existing articles which are partly due to multiple membership as a single
person, who is a member of several different concerns, can have more than one
vote. This itself leads to a kind of groupism because persons with higher
financial stakes having more concerns are able to exercise a greater control
over the company and they have also got an advantage in the running of the
association because they are easily elected........further more, the rules
regarding the election of office bearers, compulsory arbitration between the
parties and the general running of the association including the settlement of
the dispute between members and the possibility of debarring the members on
account of defaults, malpractices and so on are defective in many
respects". The company judge also modified partially the election rules.
Bat for appreciating this measure we must see C.P. No. 32/76.
C.P.
No. 32/76 was filed by B. R. Kundra and others under ss. 155, 397 and 398 of
the Companies Act. The petition was filed by Shri K.K. Mehra, Advocate on
December 6, 1976. The grounds of mismanagement and appression mentioned in the
petition were as follows;
(1) Bye-laws were framed in direct contravention
of the memorandum and articles for wholesale dismembership on flimsy grounds.
(2) The
power of dismembership was used to eliminate dissent and opposition.
(3) The office bearers were misusing their powers
to further their own ends and to take undue advantage and monetary gains at the
expense of other members. For example, persons who had obtained old and
repeat-run pictures were not allowed to become the members of the company.
Persons close to the dominant group and particularly Joginder Singh got the
benefit of registration of repeat-run pictures.
(4) If a member has defaulted in payment to
another member he is removed from the membership. No member can thereafter deal
with such a member and his whole business comes to a standstill. This power was
abused by giving low instalments of payments to defaulting members supporting
the dominant group, while the members opposing were directed to pay the whole
amount in lump sum.
(5) The pictures belonging to a defaulting
member are misappropriat ed by the ruling group and is not allowed to do
business. For example, the prints of picture, "Sagina", belonging to
a defaulting member were retained by the vice-president and another close
associate of the general secretary They were running the said picture and
recovering their amounts by such trick.
(6) The idea behind the formation of the
company was to promote the trade and safeguard the interest of persons dealing
in production, distribution, exhibition and exploitation of motion pictures.
But the office bearers were exploiting the members for their personal gains.
For example, a number of office bearers have earned plumbs (sic) and booking of
various cinemas, of as large a number as 8 to 23.
(7) The effort of the ruling group is, on
the one hand, not to make new members and, on the other hand, dismembering such
persons who were opposed to them.
It
was prayed in the said petition that Shri D.N. Gupta, Shri Joginder Singh, Shri
N.B. Mathur and Shri Narain Dass who were the perpetrators of the oppression be
debarred for a period of at least five years from holding any office under the
Companies Act. It was also prayed that every person who is engaged in the trade
of motion pictures should be permitted to become a member of the association.
Articles of association should be suitably amended to see that the dominant
group was not able to continue its hold on the company and to give proper
representation to the minority in the board of directors, etc.
After
the filing of the petition various company applications were filed. Most of the
allegations made in the main company petition and the company applications were
accepted by the company judges. Some such company applications were disposed of
by Anand J. on May 3, 1976. It is clear from the order that Anand J. was more
than convinced about the mismanagement and oppression by the ruling group in
the company. The learned judge come to this conclusion on certain undisputed
facts and by perusing various reports submitted by Mr. A.L. Joshi, advocate,
who was appointed as a court observer to attend the meetings of the executive
committee of the company. It is worthwhile to read the said order and the
reports of Mr. Joshi, advocate, in original. However, some observations made by
the learned judge are pertinent for understanding the complex nature of the
dispute perpetuating in the company for over a decade.
Justice
Anand observed: "The basic hypothesis on which the petitioner justifies
relief is, by and large, undisputed. It is not in dispute that the present
management of the company had over the years been in the control of the group
either by themselves or through their associates......It is also undisputed
that during the last many years there has been discontent among the sections of
the membership of the company............It is also not in dispute that
allegations of oppression of the minority and of mismanagement have not been
made for the first time in the present proceedings and this court had occasion
to consider such allegations even earlier when certain remedial directions were
made by Rangarajan J". Anand J. has further observed: "The
apprehension that the minority, which has taken cudgels against the majority,
which is said to be in the control of the management, is likely to be subjected
to vindictive action, cannot be altogether brushed aside either as unwarranted
or unreasonable and in the situation that has emerged, there is a possibility
that the management of the company may be conducted in a manner that may be prejudicial
to the interest of the minority and, therefore, to that extent, prejudicial to
the interest of the company. Such a possibility would ordinarily justify
protective measure by court in proceedings of the present nature but this is
more so where the membership of the company, unlike the membership of the other
companies, does not involve merely the return on the capital or the right to
participate in the management of the affairs of the company, but may even
prejudicially affect the very right of a member to carry on trade within the
certain territory".
In
various applications moved in C.P. No. 32 of 76, the following orders were
passed by the court:
(1)
The
company was directed to maintain status quo and was restrained from expelling
any member except with the leave of the court. Mr. A.L. Joshi, advocate, was
appointed as a court observer to attend the meeting of the executive committee.
He attended the meetings for over a year and submitted reports on various
irregularities and acts of oppression.
(2)
Considering the fact that
the expulsion of a member completely prohi bits such a person from carrying on
cinema trade, detailed directions were given regarding procedure to be followed
when a member is to be expelled for non-payment of dues. A full procedure for
notice, enquiry, reasonable opportunity to a member to present his case, etc.,
was ordered by the court. A member was also given liberty to move this court in
case of unjustified expulsion.
(3)
This application related to
supersession of the executive committee or in the alternative suitable
representation for the minority group on the committee. On August 30, 1976, Kapoor
J. directed annual general meeting to be held which was held on September 29,
1976, Kapur J. observed: that the holding of the annual general meeting and the
election of the new executive committee would not prejudice the court's power
to supersede the "board", if necessary. Justice Anand found that Mr.
A.L. Joshi, advocate, who was appointed as an observer could not effiectively
protect the interest of the minority group. It was ordered that a special
meeting of the company should be held presided over by Satya Dev Sharma,
advocate, and elect two members outside the executive committee members to be
the additional directors. The court found that with these steps there will be
no need for supersession of the executive committee.
(4)
This application related to imposition of
unreasonable penalties, non-registration of a picture where a member owes some
money to other members and improprieties in relation to appointment of
arbitrators for settling dispute between the parties. As regards the
registration of pictures where the dues are outstanding, the company promised
that no discrimination would be made. No order was, therefore, found necessary.
The court further directed that no penalty would be imposed on account of delay
in registration of a picture without granting to the affected person reasonable
opportunity of being heard. The learned judge further directed that a person
interested in the picture belonging to a particular member or is hostile to
him, should not be appointed as an arbitrator in his dispute with another
member. The court constituted a panel of four advocates who could work as
arbitrators if the company and a member do not agree on any.
Against the orders of Kapur
J. to hold the elections, the dominant group preferred an appeal. Certain
assurances were given on behalf of the executive committee members of the
company to the appellate court. Mr. B.R. Kundra, represented by Mr. K.K. Mehra,
advocate, compromised the matter. In terms of compromise the amendments of the
articles of association were submitted to the company judge, Kapur J., by B.R.
Kundra and Joginder Singh. As stated earlier, Kapur J. by his order dated
February 20, 1978, approved the said amendments to the articles of association
and election rules. C.P. No. 32/76 was thus disposed of by Kapur J. without
taking detailed evidence in the main C.P. or pronouncing on the correctness of
the allegations. Although the judge had himself observed that the board of
directors can be superseded if the conditions so warrant, even after the
re-elections, no order was passed in relation to the supersession of the board,
or debarring the dominant group of the four people in the executive committee,
namely, B.N. Gupta, Joginder Singh, K.B. Mathur, Narain Dass and others. Kapur
J. perhaps thought that the minority group and the majority group have settled
all their disputes. The learned judge also thought that by amending the
articles all complaints of mismanagement and oppression would be over. The
reading of the order as a whole would convince one that Kapur J. was proceeding
on the assumption that evils of groupism, dismembering the members arbitrarily,
abuse of arbitration proceedings and other malpractices exist in the management
of the company. These orders would show how great effort was made by Anand J.
and Kapur J. to eliminate mismanagement and oppression and to avoid
supersession of the board of directors.
After amending the articles
and some changes in the election rules, Kapur J. ordered on February 20, 1978,
that the annual general meeting for the year ending 1977 should be held before
31st May, 1978. It was accordingly fixed on May 27, 1978 On June 18, 1978, Mr.
B.R. Kundra, who had now joined the ruling group and was made chairman for the
annual general meeting, cancelled 18 nomination papers. The petitioners claimed
that these nomination papers were of the persons opposed to the ruling group
and that they were rejected on frivolous and untenable grounds. C.A. No. 223/78
was thereafter filed by one Khan, one of the directors of the company, for a
ruling on the proper interpretation of some new articles without which
elections would not have been free and fair. On May 19, 1978, Kapur J.
cancelled the scheduled elections on 27th May, 1978, along with nominations because
of the above illegalities and directed that the elections should be held by the
end of July, 1978. The learned judge decided to further modify the Election
Rules to "enable the elections to be held in a free and impartial manner
without raising complications that have arisen over the past several years
regarding these elections". The learned judge also held that the
postponement of the elections shall not be treated as a default under the
Companies Act, but in case the Registrar of Companies has any objection, this
matter may be dealt with on a formal application later, if necessary".
This order was passed on May 19, 1978. The learned company judge further
extended the time for holding elections and directed that they should be held
before February 15, 1979, but noting that sufficient delay had already taken
place in holding the elections, the learned judge brought out some changes in
the election rules.
This order was passed on
December 11, 1978. As no date for the annual general meeting was announced by
the company, the matter was again brought before the learned company judge on
December 20, 1978. The company judge felt so frustrated with the tactics of
postponement of the elections that he was required to administer the following
warning to the company:
"It is regrettable
that no date for the annual general meeting has been fixed in spite of the
order passed on 11th December, 1978 As pointed out earlier, the annual general
meeting was to be held on 27th May, 1978, and has been postponed by the order
passed by myself on 19th May, 1978. This does not mean that the meeting should
not take place at all and the interim arrangement should continue ad-infinitum.
I am compelled, therefore, to take all the necessary arrangements about the
annual general meeting on the assumption that a date will be fixed very shortly
by the existing committee. In any case, the stay order will have to be
discharged and if no meeting is held then the present office-bearers will face
prosecution..........The annual general meeting cannot be held on or before
28th February, 1979, on which date the stay order will expire and the interim
arrangement will also come to an end".
Considering the experience
of the rejection of the nomination papers earlier, the learned judge directed
that Mr. A.L. Joshi, advocate, would participate in the examination of the
nominations and no nomination papers should be rejected without his consent.
The court also indicated that Mr. C.L. Mehra, a retired deputy registrar of the
court, should act as a chairman for the annual general meeting.
Another dispute which arose
was regarding the irregularities committed by the company in matters of
receiving authorisations for participation in the election by partnership firms
who were the members of the company. When the articles of association were
amended on February 20, 1978, an amendment in the election rules in regard to
authorisation by partnership firms was also made by the company judge. The
authorisation was to be done by the partnership firms on the forms prescribed
by the company and which form should be sent to the partnership firms at least
45 days in advance of the election date. The application was held to be not
maintainable by Kapur J. but held that if there was any illegality in the
elections on this account it would be open for the aggrieved parties to raise
it by way of challenge to elections in the appropriate proceedings.
Two appeals were filed
before the Division Bench of this court-Company Appeal No. 1/79 was filed by
the dominant group against the order of Kapur J. directing the elections to be
held on or before February 28, 1979, and appointing Mr. A.L. Joshi, advocate,
to scrutinise the nominations. Company Appeal No. 3/79 was filed by the
opponents (J L. Bhasin & others) against the order of the company judge,
dismissing the application in regard to the irregularities in the matter of the
authorisation by partnership firms. The Division Bench made certain clarifications in the orders but
maintained other directions of Kapur J. Against the order of the Division Bench
passed in Company Appeal No. 3 of 1979 Mr. Khan, who was one of the applicants
before Kapur J., filed a special leave petition in the Supreme Court (S.L.P.
(Civil) No. 1843 of 1979). The S.L.P. was disposed of by the Supreme Court on April
9, 1979. Noting the observations of Kapur J. the Supreme Court clarified :
"We make it clear that if and when the validity of the election held at
the meeting of 28th February, 1979, is challenged by the appellant or any other
member of the first respondent-association in an appropriate proceedings, it
would be open to the court to entertain and decide the charge on any grounds
available to the appellant including the grounds dealt with in these
observations, as if these observations had not been made at all". The
observations referred to were the observations made by the Division Bench of
this court which were found to be unnecessary by the Supreme Court.
The
elections were held on February 28 1979. Shri Kundra become the chairman for
the annual general meeting and not Mr. C.L. Mehra as suggested by the company
judge. The membership at that time was about 1,350. Half of the membership,
that is, about 670, was of the partnership firms. Although the entire elections
and the nominations for the annual general meeting held on 27th May, 1978, were
cancelled by Kapur J., the authorisation forms for that meeting were treated by
the company as valid authorisation forms. No new authorisation forms were sent
to the partnership firms. The result was that out of 670 partnership firms only
170 could participate in the elections and 500 partnership firms were denied
the right to participate in the elections. There were other alleged
irregularities in the elections.
Number
of new acts of mismanagement and oppression were continued by the dominant
group as before and some new additional acts were done during the period when
the managing committee appointed for the year ending 1976 was continuing for 2½
years without elections. On this background the present Company Petition No.
58/79 was filed on June 30, 1979. The petition was admitted by the company
judge. Admission and denial of the documents filed took place. The petition was
amended thereafter under the orders of the court. The issues are framed and the
petition is now posted for hearing.
The
grievances in the present petition relating to mismanagement and oppression are
as follows:
(1) The same group of people consisting of
Shri Joginder Singh, B.N. Gupta, M.B. Mathur, Narain Das, Dinkar Desai and
others, against whom Company Petition No. 32 of 1976 was filed by Mr. B.R.
Kundra is perpetuating in power. The group
avoids holding elections, manipulates elections, acts in disregard of the
orders of the court from time to time and indulges in acts of mismanagement and
oppression. The group is in power since 1969.
(2) Shri B.R. Kundra and Shri J.S. Sood, who had moved Company
Petition No. 32/76, for removal of the said dominant group from power are won
over by the group and are now the parties to mismanagement and oppression. Shri
Kundra, without consulting 260 members, who had filed Company Petition No.
32/76, agreed to a compromise in Company Appeal No. 26 of 1977. Shri Joginder
Singh without authorisation from the company agreed to the said compromise. By
practising this fraud Shri Kundra and Shri Joginder Singh avoided the enquiry
in the mismanagement and oppression of the members raised in Company Petition
No. 32 of 1976. They had agreed to the changes in the articles of association
in their individual capacity with the said fraudulent arrangement.
(3) The changes in the articles of association and the election
rules regarding authorisation of representative by the partnership firms were
unauthorised and were not binding on the members of the association. The
changes were made with a view to enable the dominant group to further oppress
the members.
(4) Annexure 11 (Regarding authorisation by the partnership
firms) is approved by the court on February 20, 1978, was also void because it
seriously affected the voting rights of the members.
(5) The elections held on February 28, 1979, were illegal because
they were in breach of various directions isssued by the company court on May
19, 1978, December 11, 1978, and December 20, 1978,.
(6) The said elections are illegal because voting right was
denied to 500 partnership firms by not issuing fresh authorisation forms for
the said election.
(7) The elections were so manipulated that out of 1,350 members,
about 320 members only could attend the meeting and vote.
(8) The said elections are bad in law because the nomination
papers of certain members representing joint stock companies were illegally
rejected.
(9) There is misappropriation/reckless spending of about Rs. 21
lakhs by the dominant group deposited by the members with the company in trust.
There are serious instances of the sub-committees oppressing the members who
are opposed to the ruling clique, and of favouring the members who are with the
ruling group. There is misuse of what is called D. R. Rules of the association in regard to the
recovery of dues of the members. Number of instances are quoted in the
petition.
(10) There is misuse of powers resulting in
acts of oppression of the members in regard to registration and de-registration
of pictures. Number of instances are cited. Provisions of art. 25 regarding
calling of the meeting of the executive committee are misused to see that the
opposition members are not able to attend the meetings.
(11) Illegal collections are made from the members
and heavy penalties are imposed on the members opposing the ruling group.
(12) Provisions
regarding membership and arbitration under article 68(1) are continuously
misused.
(13) The members of the association are
exploited and pressurised for the personal gains of the ruling group. Number of
instances are quoted.
(14) The changes in the election rules made by
the executive committee on May 19, 1979, were illegal and ultra vires the
articles of association and the Indian Companies Act. They were made with a
view to disentitle the company members and the partnership firms from
contesting elections. These changes were made to supersede the rules framed by
this court from time to time and as late as December 11, 1978.
(15) The attempt to postpone the elections for
the year ending 1978 made by the ruling group with the Registrar of Companies
was illegal. C. P. No. 30/79, filed for the same purpose collusively by Shri J.
S. Sood was fraudulent.
(16) The financial year was illegally changed
with retrospective effect, by the executive committee on May 29, 1979, so as to
continue the unauthorised rule by the dominant group.
In
the said petition under ss. 397, 398 and s. 156, the following reliefs are
claimed;
(1) That the erring members of the Motion
Pictures Association the erring office bearers/directors of respondent No. 1,
namely, Joginder Singh, Narain Das, P.N. Gupta, M.B. Mathur, Dinkar R. Desai,
respon dents Nos. 2 to 6, respectively, perpetrators of mismanagement,
misappropriation and oppression be disqualified, debarred and expelled for a
period of at least five years from the membership and their holding any office
or membership of the executive committee of respondent No. 1.
(2) The respondent-company may be restrained
in any manner from amending or tampering with the articles of association or to
make rules, bye-laws or regulations of the association and more particularly in
admitting temporary provisional members. The amendment of articles effected by
Shri Joginder Singh and Shri B.R. Kundra in their individual capacity and as ordered by the court by its order dated
February 20, 1978, may be set aside and that the articles be amended after
having representations from all the members of the association. The amended
election rules as circulated on May 24, 1978, may be held invalid.
(3) Free and fair elections of the respondent-company for the
year ending 1978 be directed to be held under the supervision and control of
this court and the illegally elected executive committee on February 28, 1979,
be superseded.
(4) An
interim board for managing the affairs of the company should be appointed.
(5) Effective
representation should be given to minority members on the board of directors.
C.A. No. 455/79 & C.A.
No. 610/79 were thereafter moved by the petitioners for supersession of the
executive committee. The new allegations of oppression and mismanagement are
quite serious. Supersession is also a relief claimed in the main C.P. The
company judge rejected them. Company Appeals Nos. 3 and 5 of 1980, which arose
out of the said petitions, were dismissed by the Division Bench on April 22,
1980. The Division Bench held that the matter raised there would be fully gone
into in the main C.P. and as such no interim orders were called for. One year
and a half has elapsed since then and the main C.P. is not yet heard. Both
parties now want that I should not wait for the hearing of the C.P. but should
pass appropriate orders immediately. By a separate order in C.A. No. 53/81, I
have held that the executive committee and office bearers elected on August 30,
1980, were not legally elected.
This application with other
(53/81) was heard by me in the months of March and April, 1981. Appointment of
an administrator and superseding an elected body is an extreme step. It should
not be normally resorted to if the elections are free and fair. Even though
there are persistent allegations since 1969 regarding the manipulation of the
elections by small groups of members, I refrained from passing the order as in
my discretion I thought that the disposal of the main C.P. expeditiously would
be a better course to follow. The experience regarding the company work,
particularly in regard to Motion Pictures Association, is that the allegations
of mismanagement, oppression or manipulation of elections develop a colour of
staleness due to passage of time and inability of the company judge to decide
the matters expeditiously due to pendency of work in this court. No C.P. can be
disposed of within one year's time with all the company applications. The
company court directs the elections to be held and provides also assistance
with the hope that free and fair elections would be held and the problems would
be resolved but the
real question of an oppression by a group remains unresolved. Injustice mounts
over another injustice and relations between the groups get further strained.
Faced
with this difficulty during the course of the hearing and at various turns of
the arguments, the question of settlement of disputes through a compromise was
mooted by me. Both the parties readily agreed. My suggestion was to refer the
entire pending dispute to an arbitrator with liberty to the parties to raise
other agreed issues before the arbitrator. This was acceptable to both the
parties. It was agreed that each party should separately meet me in chamber
without lawyers. Thereafter, the lawyers would join so as to give the formal
form to the formula. I passed an order to this effect in C.A. No. 53 of 1981,
on April 7, 1961. During the month of April, 1981, some chamber sittings were
held with the parties. They agreed upon the arbitration by a retired judge of
this court. The question which remained unresolved was what arrangement to be
made for the interregnum. The petitioner's group suggested that an
administrator should be appointed. The group which now controls the company
insisted that the management should be handed back to them. Mr. Joginder Singh
represented that group. He, after consulting his advocates, Mr. K.K. Mehra and
Mr. G.L. Rawal, finally confirmed that unless the management was reverted to
his group the proposal of arbitration was not acceptable. I had withheld
passing of any order in the three C.As., which I had heard as I was exploring
the possibility of compromise.
After
the failure of the compromise talks for a relatively lasting solution I
proceeded with the writing of the orders. A most unmistakable fact which is
apparent through the protracted rounds of litigation In re Motion Pictures
Association, is that every order, interim or final, becomes a subject matter of
appeals before the Division Bench or the Supreme Court. Naturaly, the hearing
of the main C.P. again is pushed back. Another difficulty was of the
overlapping nature of the disputed questions of fact and law in the said C.As.
and the main C.P. A court should refrain from pronouncing on such disputed
questions before the evidence is taken and arguments advanced in support of
legal submissions in the C.P. If this is not done with discriminating mind,
number of difficulties are created in the future course of litigation. This can
be seen from the Division Bench judgment in Company Appeals Nos. 3 and 5 of
1980. The question whether the executive committee deliberately avoided the
holding of elections for the years 1977 and 1978 or whether the meetings could
not be held because of the order of the company judge dated August 30, 1979, is
a question seriously raised in the main C.P. So also is the question regarding
alleged misappropriation. The Division Bench
rightly observed at a number of places that the said questions cannot be
finally decided without leading evidence in the main C.P. However, the
observations made for the limited purpose of the disposing of the C.As. by the
Division Bench are utilised by the counsel for the company almost in every
subsequent C.A. as if the matters were finally concluded by the Division Bench
judgment in the said appeals. The Supreme Court order rejecting the S.L.P.
(expressly keeping the question of the illegalities of the elections open) is
also utilised for the same purpose. This tendency of the parties to overuse the
previous judgment in C.As. was another reason why I decided not to pass any
orders in the said C.As. During the course of hearing of these petitions,
several times, I had made observations to that effect and the parties and their
counsel always gave me an impression that they agreed that the course of action
I was following was the only course open in the circumstances.
I finally decided not to
pronounce any order in the said C.As. but to expedite the hearing of the main
C.P. On May 11, 1981, I listed the matter for framing of the issues in the main
C.P. on May 20, 1981. Counsel for the petitioner filed his draft issues on May
20, 1981. Mr. Mehra appearing for the company requested for further time to file
the draft issues. The matter was, therefore, adjourned twice. Thereafter, the
draft issues were discussed and finalized and the matter is now set for the
affidavits of the parties by way of evidence.
By my decision not to pass an
order in the said C.As., the petitioner should have felt aggrieved because they
wanted immediate relief. The respondent-company or the members of the executive
committee should not have any grievance. However, it is surprising that C.A.
No. 1 of 1981, which is filed by Shri Joginder Singh, Shri Dinkar Desai and two
other members of the executive committee, the grievance is made of the fact
that I decided not to pass any order in C.A. No. 94/81 before the C.P. was
decided. The company, which is respondent No. 4 in the said appeal, had no such
grievance. I wonder whether my efforts for compromise and difficulties in
passing orders in C.As. were brought to the notice of the Division Bench or
not.
In the said appeal it is
agreed by the parties that I should pronounce my order in C.A. No. 94 of 1981,
without waiting for the decision in the C.P. because hearing of the C.P. and
the decision is likely to take longer time. Even if the parties co-operate
earnestly, decision in C.P. will take some time. I am of the considered opinion
that an administrator should be appointed immediately to run the company.
The suit (438/81) filed by
M/s. Navrang Theatres (P.) Ltd. for permanent injunction restraining the
executive committee members, from acting as office bearers and restraining the
executive committee from amending the rules of the association, is pending in
the trial court. Mainly, the legality of elections held on August 30, 1980, are
challenged. An order in the nature of interim injunction restraining the
executive committee from acting as office bearers and from amending the rules
of the association is in operation. The executive committee members preferred a
writ petition (C.M. (M.) 223 of 1980) under art. 227 against the said ad
interim injunction. This court granted stay of the said interim order while
admitting the said petition. The interim order passed by this court was vacated
by me on February 17, 1981, with other directions. As the trial court hurriedly
passed an order suspending the interim injunction order, of its own, without
following the directions given by me. I stayed that order on February 20, 1981.
The result is that the original interim injunction order passed by the trial
court is in full operation. That order was an interim order passed by me pending
notice. The company as well as the executive committee members are taking
different stands in the different petitions as to whether this order has
finally disposed of C.M. (M) No. 223/80 or not. However, this is not of much
consequence since CM. (M) No. 223/80, is now withdrawn by the petitioners
therein on August 14, 1981. The position in law, therefore, is that the
executive committee members and the company are left with no complaint against
the interim injunction passed by the trial court and themselves want to contest
the matter finally in the suit. Mr. K.K. Mehra, their counsel, showed such an
anxiousness of the hearing of the said suit on the last date of hearing that he
has moved an application for the return of the suit record to the trial court
immediately. My order dated February 20, 1981, can no more be a matter of
controversy either to the members of the executive committee or to the company.
That order was passed only to reinforce the original order of the trial court
restraining the executive committee members from acting as office bearers or
for changing the rules of the association. A substantive writ petition, C M.
(M) No. 223/80, against the original order of the said trial court is now
withdrawn. This is another reason why I have found it fruitless to pass any
order in this matter.
Some other details of these
proceedings should be noted because they show activities of the members of the
executive committee to delay and thwart the legal process so as to avoid the
decision of the courts on the illegalities and mismanagement in the conduct of
the company. M/s. Navrang Theatres (P.) Ltd., one of the petitioners in CP. No.
58/79, filed a suit No. 438 of 1980, in the Court of Senior Sub-Judge, Delhi.
The suit was filed against the Motion Pictures Association and the members of
the executive committee. Legality of certain election rules and election held
pursuant to the said Rules in 1980 was challenged. It was also prayed that
executive committee members should be restrained from working as office
bearers. It was then prayed that the circular dated November 18, 1980, whereby
the plaintiff was removed from the association, should be declared as null and
void. In C.P. No 32 of 1976, the company judge, from time to time, had given
elaborate orders for the procedure to be followed before a member is removed
from the association. One grave consequence of the removal from the membership
is that he is completely thrown out of business as no member of the association
(under the articles of the association) can have any cinematographic contract
with a non-member. An application for ad interim injunction under O. 31, rr. 1
and 2 read with s. 151, CPC, was also moved. By a detailed order the trial
court passed an ad interim injunction order restraining the executive committee
members from acting as office bearers and restraining the association from
amending any rules. This order was passed on 5th December, 1980. The trial
court fixed 16th December, 1980, for confirmation of the said order after
notice to the defendants. The executive committee members, however, did not go
before the trial court but filed C M. (M) No. 223/80 in this court under art.
227 of the Constitution and s. 24 (for transfer of the suit) against the said
interim injunction. On 8th December, 1980, Anand J. admitted the petition and
stayed the interim injunction order. The main contention raised in the said CM.
was that Shri Devinder Singh, managing director of Navrang Theatres (P.) Ltd.
who controls the cinema in Ghaziabad and has extensive influence there filed a
frivolous suit in Ghaziabad and obtained an injunction. It was then stated that
said Shri Devinder Singh who is the signatory to the present Company Petition
No. 58 of 1979, under ss. 397 and 398 of the Companies Act filed a criminal
case at Ghaziabad. It is then stated that both in the civil suit and in the
criminal case, said Devinder Singh managed to obtain orders from the courts at
Ghaziabad. It was then averred that as he was frustrated in those attempts Suit
No. 438 of 1981 was filed in Delhi by suppression of facts and he managed to
obtain the interim injunction. It is then averred that the grounds taken in the
said suit were exactly similar to the grounds in the main C.P. and other
applications moved in the company court. Some days after the admission of the
said CM. by this court an application was moved by said Navrang Theatres and
the company before the trial court for compromise of the suit and for
withdrawal of the injunction order. It appears that there is a pattern of compromising
the matters in the court. I have referred to them earlier. The most glaring
example was C.P. No. 32 of 1976. Mr. Kundra who was the petitioner along with
260 others and wherein gross allegations of gross mismanagement and oppression
were made.against Shri Joginder Singh and four others, was suddenly compromised
in the appellate court. Similar is the case of Shri J.S. Sood, (who had filed
earlier proceedings against the company and who has now joined the ruling
group) moved a company petition in this court for not holding the elections.
When this matter was brought to my notice I found that the proposal of
compromise should be examined by the trial court by evidence. An application
was made in the trial court by some of the petitioners that they should be
impleaded as parties in the said suit. Since the allegations in the said suit
were mainly in relation to illegality of elections of the association and had a
vital bearing on the main C.P. in this court, I wanted that the trial court
should examine the question of impleading the said petitioners in the main C.P.
as parties in the said suit. On February 17, 1981, I passed an order vacating
the original stay order passed by this court on December 8, 1980, and directed
the trial court to hear the application for impleading first and then to decide
the question of compromise. Another question which needed investigation was how
the Navrang Pictures which was removed from the membership was suddenly
readmitted to membership.
Against my order dated
February 17, 1981, a special leave petition was filed in the Supreme Court on
behalf of the members of the executive committee by the paid secretary. The
matter was again brought to my notice on February 19, 1981, and it was pointed
out that Navrang Pictures, the plaintiffs, had moved an application for
withdrawal of their original application under O. 39, rr. 1 and 2. It was
brought to my notice that the trial court had stayed its interim injunction
order contrary to my orders. The trial court order will show that even the file
of the suit was not before the court. On 20th February, 1981, I, therefore,
passed an order staying the operation of the last order of the trial court by
an interim order and directed the matter to be listed on February 26, 1981. Mr.
Mehra, appearing for the executive committee members, promised to produce the
order of the trial court before me on that date. On February 25, 1981, some
members of the executive committee filed an appeal before the Division Bench of
this court being Company Appeal No. 1 of 1981. The appeal was not admitted
because it was against an interim order. Thereafter, I was hearing C.A. No. 94
of 1981, C.A. No. 53 of 1981 and other applications. I made efforts to have
permanent solution by way of arbitration. I was quite hesitant to pass any
order of supersession of the executive committee. It appears that these facts
were not brought to the notice of the Division Bench and, therefore, the
Division Bench admitted the appeal on 30th July, 1981. After admission of the
appeal by the Division Bench the executive committee members withdrew C.M.(M)
223/80, perhaps in the hope that they will get a favourable order from the
appellate court. The effect of the withdrawal of C.M.(M) 223/80 was that the
executive committee members were now ready to go before the trial court, which
they ought to have done eight months back but instead they kept on filing the
appeals and petitions for interim orders.
The interim injunction
order restraining the executive committee from functioning was not of much
restraint because they performed all the functions through the paid secretary.
This led to the petition for contempt before me. The executive committee never
showed any anxiety to call annual general meeting for the next year. The two
applications were moved before me for permitting the company to make statutory
expenses and other expenses and urgent orders were sought but neither the
managing committee nor the company ever sought modification of the interim
injunction order so as to enable them to call the annual general meeting. On
September 1, 1981, Company Appeal No. 1 of 1981 was disposed of by the Division
Bench with an order permitting the executive committee to make certain
expenses. The annual general meeting was due on September 30,1981, but even
before the Division Bench no permission was sought for holding the annual
general meeting. In C.A. No. 518 of 1981, filed on September 23, 1981, for the
first time the question of calling of the annual general meeting was raised
before me. Even then no particular urgency or early orders were sought by Mr.
Mehra on September 24, 1981, in regard to the holding of the elections. In
C.M.(M) No. 223/80, under art. 227 and s. 24 of the CPC, executive committee
members had prayed that the suit in the trial court should be transferred to
this court. The petitioners in the main C.P. have now filed an application
being C.M.(M) No. 163 of 1981 for the same relief of the transfer of the suit
to this court. Considering the experience of multiplicity of proceedings
created by the parties in regard to the said suit and also considering the fact
that the questions of fact and law raised in the said suit are inextricably
interwoven with the questions of fact and law raised in the main C.P.,
appropriate orders will be passed after hearing the parties. The disposal of
the suit, with all evidence, will naturally take some time. I will pass
separate orders on those applications.
There is another proceeding
between the parties in the nature of contempt of court. Civil Contempt Petition
No. 2 of 1981 is filed against Shri Joginder Singh, the alleged Hony. secretary
for the company, and Mr. J.C. Basu, a paid secretary of the company. The
allegations are that in spite of the interim injunction restraining the members
of the executive committee from working as office bearers of the company, the
said two gentlemen are collecting moneys in cash from the members and spending
them. There are other specific allegations showing that they are in fact
running the company as if no injunction is in operation. Similar allegations
were made by the petitioners in the substantive proceedings arising out of the
interim order passed by the trial court. The said contempt petition is heard by
me and the orders are reserved. The factual averments in the petition regarding
various actions taken are not denied by the said contemners. The defence is
that the said action could be lawfully taken by Mr. Basu and the sub-committee
of the company. The action of Mr. Basu (merely a paid secretary of the company)
in collecting the cash amount not depositing it in the bank and disposing of
the same cannot be justified. Shri Joginder Singh has taken a stand that
neither he nor any members of the executive committee had instructed Shri Basu
to take the various actions complained of by the petitioners. In the interest
of the company and the large number of its members this state of affairs should
not be allowed to continue. An immediate arrangement for setting right the
administration of the company is, therefore, necessary.
For proper and effective
disposal of the main C.P. full and truthful disclosure of the material is
necessary. Considering the repeated allegations that the executive committee
works as an exclusive group, in a secretive manner and for personal ends there
is necessity of an independent agency to assist the court for effective and
quick disposal of the main C.P.
There is yet another reason
why an independent authority is necessary for taking immediate control of the
administration of the company. The parties are not agreeable to hold the fresh
elections unless the question of the legality of earlier elections and
amendment of election rules published simultaneously along with the notices for
the earlier election, are decided. The Division Bench, hearing appeals Nos. 3
and 5 of 1980, has referred to the impasse created by the rival stands of the
parties, in this regard. If, therefore, the Central Government or this court
eventually directs that the elections should be held on certain footing, it
should be at the auspices of an independent authority so as to obviate the
malpractices and untoward incidents in the wake of the elections.
It is necessary to explain
why the special sub-committees are also superseded along with the executive
committee. The sub-committees are constituted by nomination by the members of
the executive committee. The nomination of a particular group and its
associates in the executive committee and sub-committees for the last decade is
also noted by and commented upon by Anand J. and Kapur J. in the past. It was
argued before me that the sub-committees are the real functioning bodies under
the articles of association and the executive committee is a mere appellate
authority, without any original functions. A bare reading of the articles of
association would show that that is not the legal position but even assuming
that the interpretation of the company is correct, the question is not of the
legality. The powers may be legal but still they can be abused by way of
mismanagement and oppression. The exercise of the power may lack good faith and
the conduct of the sub-committees may result into harshness, serious detriment
to a class of members and wrongful benefit to other members. These are the
precise allegations in the company petitions and various applications moved
before me. In the contempt petitions is demonstrated as to how the members are
removed without proper procedure as laid down by Anand J. and also the
arbitrary way registration of pictures is done. If the sub-committees are allowed
to function, the executive committee will be able to do the mischief
indirectly, which they are not allowed to do directly. Instead, it is better
that the functions of these committees are performed by an independent
committee of four members as stated in the order.
I have carefully gone
through the efforts made by various company judges from time to time to avoid
supersession of the executive committee and the sub-committees to find out a
solution short of supersession and their failure. I cannot ignore their
experiences and herculean efforts to reduce the dominance of a particular
group, to curtail arbitrariness in the matter of removal of members, to
eliminate illegalities and malpractices in the elections. I also cannot ignore
the deliberate changes in the election rules, on the eve of elections so as to
deprive the majority of members from exercising their voting rights. The fact
that out of about 1,400 members, only about 320 members could vote in 1979
elections and only 136 members could vote in 1980 elections speak volumes for
the 'democratic character' of the elected bodies of the association. The
working of the company, as disclosed before the court, has left permanent
impression on the company judges that a court's intervention is urgently necessary
in this company because of the business of crores of rupees is controlled by
company registered under s. 25 of the Act, and that the management possesses
total power of denying the constitutional rights of trade and business to its
members. Taking into consideration the experience of earlier company judges and
my experience I find that prima facie the management of the company lacks in
good faith and probity. It has a prima facie tendency and habit of being
burdensome, harsh and wrongful to the members. Equity demands that the control
of the company should vest in an independent authority of an administrator so
as to restore the confidence of the members in the company. I am aware that
this is not a permanent solution. This order is, therefore, an interim measure
till the main C.P. is disposed of. In the main C.P. also there is a prayer for
an interim order superseding the board. This order has become further necessary because
the term of the present executive committee and the sub-committee has come to
an end on September 30, 1981. The legality of the earlier election [1979] is
yet to be decided in the main C.P. In C.A. No. 53 of 1981, I have held that the
amendment to election rules made on August 6, 1980, depriving about two-thirds
of the members of their right to contest for the posts of office bearers and
executive committee, are illegal. In oppressive elections, to these offices
held on August 30, 1980, based on the said amended election rules are also
illegal and oppressive.
I
am sure that with his maturity and vast experience, the administrator, will not
be required to use all the powers conferred upon him. I hope, he will be able
to create confidence amongst all sections of the associations and provide a
healing touch to the strained relations between the members.
I
have already expedited the hearing of the main C.P. and it is at the stage of
evidence.
Company
Application No. 53 of 1981:
S.B.
Wad J. (Dated
12-10-1981)—This application was filed by the petitioners in the main C.P.
challenging the legality of the amendments to the election rules made on May
24, 1979, and August 6, 1980. Pursuant to these amendments in the election
rules, the annual general meeting elections were held on August 30, 1980;
legality of these elections are also challenged in the application.
The
application was heard by me alongwith C.A. No. 94 of 1981. I reserved
orders in both the matters, but, ultimately, decided to postpone the orders
till the main C.P. was heard. On October 1, 1981, I pronounced an order in C.A.
No. 94 of 1981 and the main C.P. because both parties wanted the order
to be pronounced immediately. Parties also requested that I should pass an
order in this application also.
The
changes brought about in the relevant election rules are as follows :
The
original election rules published on 2nd June, 1975, made the following
provision regarding persons who cannot contest the elections or nominate any
one to contest elections to the executive committee.
"Rule
6. Who cannot nominate or be nominated.—Non-members and/or attorneys or
agents/representatives of any description whatsoever of members in their such
capacities are neither eligible to nominate themselves as candidates to the
office of the member of the executive committee, excepting authorised representatives
of company members, who are eligible to nominate and/or be nominated".
By a resolution dated
May 15, 1979 (circulated to the members on May 24, 1979), the said rule was
amended as follows:
"Non-members and/or
attorneys or agents/representatives of any description whatever of members, in
their such capacities, are neither eligible to nominate a candidate nor are
eligible to be nominated themselves as candidates to the office of the member
of the executive committee or to the office of any one of the nine honorary
office bearers of the association".
The rule was further
amended and circulated to the members of the association on August 6, 1980.
This was done along with the circular prescribing the schedule for the annual
general meeting/elections to be held on August 30, 1980. After the amendment
the said r. 6 read as follows :
"Non-members and/or
attorneys or agents/representatives of any description whatever of members, in
their such capacities, are neither eligible to nominate a candidate nor are eligible
to be nominated themselves as candidates to the office of the member of the
executive committee or to the office of any one of the nine office bearers of
the association. Partners of partnership firm, members and representatives of
body corporate, even though authorised under section 187 of the Companies Act,
1956, cannot nominate or be nominated".
The combined effect of the
amendments made by the executive committee was that partners of partnership firms
and representatives of the companies were prevented from contesting elections
to the executive committee or as office bearers of the association. The grave
effect of these amendments is that about two-thirds of members of the
association are prevented from contesting election and to take part in the
management of the company. Such an amendment with serious consequences ought to
have been placed before the general body before they were approved by the
executive committee. The amendment had the effect of completely-destroying the
democratic character of the management of the company. It has enabled the small
group of the people with their supporters to get unanimously elected. In the
elections held in 1979 and 1980 the voting figures are quite revealing. Out of
about 1,400 members, about 320 voted in the elections held in 1979 and only 136
could cast their votes in the elections held in 1980.
These amendments are prima
facie violative of ss. 187 and 253 of the Companies Act and the articles of
association themselves. They are also oppressive to the members of the company.
I am, prima facie, convinced that the present executive committee was not
legally constituted, So is the case with the nine office bearers.
It
may be noted that the annual general meeting held in February, 1979, was for
the year ending 1977. An annual general meeting held in August, 1980, would
naturally be for the year ending 1978. In the annual general meeting held on
30th August, 1980, income and expenditure account for the period January 1,
1978, to March 31, 1979, and the audited balance-sheet as on March 31, 1979,
were adopted. No annual general meeting for the year ending 1979 and the year
ending 1980 has been held so far. In the said meeting dated August 30, 1980,
M/s. Dial & Co., Chartered Accountants, were retrospectively appointed as
auditors for the period April 1, 1979, to March 31, 1980. The said annual
general meeting was "adjourned" to September 30, 1980, for
consideration and adoption of the accounts for the period April 1, 1979, to
March 31, 1980. This is clear breach of s. 210 of the Companies Act.
The
challenge to the amendment is on the grounds that they are illegal and grossly
oppressive. It is alleged that the object of the amendments was to deprive
about two-thirds members of the association from participating in the
management of the association by depriving them the the right to contest
elections. The association has a history of manipulation of elections through
election rules. The details are set out in the interim order in the main C.P.
in C.A. No. 94 of 1981. They should be read as a part of this order.
The
association has about 1,400 members. Out of that about half the number consists
of partnership firms. About 150 members are limited companies. Kapoor J.
amended the articles of association in 1978. The learned judge also changed the
election rules whereby it became obligatory for a partnership member to secure
a prescribed authorisation form from the association so as to nominate its
representative for the purposes of election. Elections were held on February
28, 1979. One of the main complaints about this election is that no
authorisation forms were sent to partnership firms, their old authorisation
forms were held to be invalid. The result was that out of about 650 partnership
firms, only 177 could participate in the election. The learned company judge
have taken serious note of this fact. Because of the objections raised by the
members, the executive committee now amended the rules of the election on May
24, 1979. They were again amended on August 6, 1980, and representatives of
partnership firms and bodies corporate were prohibited from nominating or be
nominated for election to the executive committee or to be office bearers of
the association.
Mr.
K.K. Mehra, appearing for the company, argued that the questions raised in this
application were already decided against the petitioners in Company Appeals
Nos. 3 and 5 of 1980 and the S.L.P. filed by the peti tioners in the Supreme
Court. I have gone through the judgment of the Division Bench in the said
company appeals. I do not find that the Division Bench has held that the
amendments dated May 24, 1979, were validly made. In fact, the Division
Bench, agreeing with Mr. K.K. Mehra for the company, held that the matter
should be decided in the main company petition. The judgment by the Division
Bench was delivered on April 22, 1980. The major amendment regarding the
prohibition of the partnership firms and the companies from participating in
the elections was made on August 6, 1980. This amendment was, therefore, not
before the Division Bench. The general approach of the Division Bench was that
these matters should be decided in the main C.P. This was confirmed by the
Supreme Court by dismissing the S.L.P. Mr. Mehra pointed out that in the
additional affidavit filed by the petitioners in the Supreme Court they had
referred to the said amendments to election rules. The Supreme Court decision
has to be understood only in relation to the decision of the High Court and nothing
more. The submission of Mr. Mehra is rejected.
The
articles of association of this company do not lay down any qualifications for
a person to be a member of the executive committee, that is, director. It was
so because it is a company under s. 25 of the Act. Anybody can be a director.
Articles 3, 4 and 7 of the articles of association entitle partnership firms
and limited companies to become members. The articles of association are in the
nature of a contract between its members and subject to the provisions of the
Companies Act and memorandum of association constitute the working constitution
of the company. There is no prohibition in the articles of association for the
partnership firms and the limited companies from deputing their representatives
to contest the elections to the executive committee or to be its office
bearers. Indeed, there could not have been any such provision once the articles
permit the firms and limited companies to be the members. That would be
contrary to the fundamental principles of management recognised by the
Companies Act. It would also be most undemocratic. The executive committee has,
therefore, no power or competence to frame the election rules in violation of
the articles of association. The amendments to election rules dated May 24,
1979, and August 6, 1980, are, therefore, ultra vires the articles of
association and, therefore, void.
Amendment
dated August 6, 1980, is further grossly violative of the Companies Act itself
because it states that notwithstanding s. 187 of the Act, the representatives
of the limited companies and partnership firms cannot nominate or be nominated
to membership of the executive committee or to be office bearers of the company
under s. 9 of the Companies Act has overriding effect on the memorandum and
articles of association.
As
stated earlier, the articles of association do not create any bar for the
partnership firms and the limited companies from contesting the elections
through their representatives. Section 253 of the Act lays down that no body
corporate, association or firm, shall be appointed director of a company, and
only an individual shall be so appointed. This section does not prohibit one of
the partners of a firm or an individual representative of a limited company
from becoming a director. The only requirement of the section is that a natural
person can alone act as a director. Practical convenience suggests that a group
of persons like partnership firms or the entire administrative difficulties in
the working of the board of directors (sic).
The
executive committee cannot create ejection rules to override the provisions of
articles of association and s. 253 of the Act. Mr. K.K. Mehra argued that Mr.
Saxena who was appointed to assist the court's observer for the elections held
on February 28, 1979, had rejected the nominations of representatives of
limited companies. This argument was also raised before the Division Bench
deciding Company Appeals Nos. 3 and 5 of 1980. Mr. Saxena's action might
provide an excuse for the company for depriving majority of its members from
contesting elections. But, that cannot be cited as an "authority" on
the legal position or proper interpretation of s. 253 of the Act. The company
had earlier refused to give authorisation slips to about 500 partnership firms
illegally. In this background, the motive in citing Mr. Saxena's opinion is
quite obvious.
Section
187 of the Companies Act enables the board of directors or other governing body
to authorise representatives of the limited companies to participate in the
meetings of the company. The articles of association had recognised the right
of the partnership firms and the limited companies to fully participate in the
management of the company. Indeed, the original election rules recognised this
legitimate right of the members. Mr. Mehra argued for the company that the
meetings referred to in the said section are meetings of the company and not of
the directors. It is difficult to agree with this interpretation. The meetings
referred to are, all the meetings. The board of directors also holds meetings
of a company. Other provisions are made in the Companies Act for annual general
meeting and other meetings of the general body and they have a different
object. The executive committee was itself aware that s. 187 permits the
limited companies to have their representatives on the executive committee or
to the office bearers. That is the reason why the amendment dated August 6,
1980, provides "even though authorised u/s. 187 of the Companies Act,
1956", which, of course, is illegal.
An
illegal act per se does not amount to oppression for the purpose of ss. 397 and
398 of the Act but if there is a pattern and almost continuous process of illegal actions, the said illegalities
themselves amount to oppression. Apart from this, to deprive the valuable right
to about 2/3rds members of the association from participating in the management
of the company with its earlier background is per se oppressive. The amendment
dated August 6, 1980, was circulated to the members along with the circular for
the annual general meeting/elections on August 30, 1980. The motive was quite
clear and, indeed, the final results of elections prove it. Out of 1,400
members, only 136 members could participate in the elections. There were no
nominations apart from the exact number of the executive committee members and
the office bearers. Their election was, therefore, unanimous.
Articles of association
with election rules were extensively amended by Kapoor J. only a year back. The
alleged difficulty of s. 253 was not even mooted before Kapoor J. The executive
committee did not even place the matter before the general body. An amendment
intended to affect the valuable right of the majority of its members should
have been done only with the approval of the general body. Each member has a
vital stake in the management of the company.
The circulars dated May 24,
1979, and August 6, 1980, and the elections held on August 30, 1980, are
illegal and oppressive within the meaning of ss. 397 and 398 of the Companies
Act. I have already appointed an administrator as an interim measure, till the
disposal of the C.P.
Company
Appeal No. 23 of 1981:
The judgment of the court
was delivered by
Rajindar Sachar J. (18-12-1981)—These two appeals will be disposed of by a
common order because they raise the same points and facts are quite
interrelated and mixed one into the other. By the said impugned orders of
October 1, 1981, and October 12, 1981, the learned single judge has restrained
the appellant from functioning as the executive committee of respondent No. 2
association and instead appointed an administrator of the company to take
charge of the company. He has also held some amendments in election rules to be
void and the election held on August 30, 1980, at which the appellants were
elected, to be void.
Section 25 of the Companies
Act, 1956 (hereinafter to be called as"the Act") empowers the Central
Govt. if it is satisfied that an association is about to be formed as a limited
company for promoting art, charity or any other useful object it may by licence
direct that the association may be registered as a company with limited
liability and the association may thereupon be registered accordingly and on
registration shall enjoy all the privileges and (subject to the provisions of
this section) be subject to all the obligations of limited companies. Sub-s.
(4) of s. 25 further provides that a firm may be a member of any association or company licensed
under this section, but on the dissolution of the firm, its membership of the
association or company shall cease.
Respondent
No. 2, the Motion Pictures Association (hereinafter to be called "the
association"), is registered under s. 25 of the Act. Amongst others, the
objects for which the association has been established is to promote, aid,
help, encourage and develop the production, distribution and exhibition of the
Indian Film or Motion Pictures Industry in all possible ways. By article 3 the
membership of the association will be open to persons, firms, joint stock
companies carrying on business of either film distributors or film exhibitors
in the State of U.P. and in the Union territory of Delhi. Article 4(b) provides
that subject to the provisions of the articles of association each member of
the association shall have one vote to be exercised by a person duly authorised
by the members concerned as recorded in the style of article 7 and subject to
the provisions of the election rules framed by the executive committee from
time to time and further subject to the provision of s. 187 of the Companies
Act, 1956, in the case of the company members provided further that in the case
of proprietary concern members, a sole proprietor shall have only one vote.
Article 7 provides that any individual firm, joint stock company or other corporation
eligible under article 3 for admission as a member may become a member in their
conventional or corporate name.
Vide
article 23, all the directors of the association shall be called the members of
the executive committee, the number of which shall be 18 consisting of 9
honorary office bearers, and 9 ordinary members to be elected directly at every
annual general meeting.
Article
24 provides that at every annual general meeting all office bearers, elected at
the previous annual general meeting and the remaining 9 sitting members of the
executive committee shall retire from office, the retiring office bearers and
the retiring members of the executive committee shall be eligible for
re-election in the annual general meeting in which they retire.
Article
28 reads as follows :
"A
member who is not a retiring member of the executive committee shall be
eligible for appointment to the office of a member of the committee at any
general meeting if he or some other member intending to propose him has not
less than fourteen days before the meeting left at the office of the
association notice in writing under his hand signifying his candidature for the
office of the member of the committee or the intention of such member to
propose him as a candidate for that office, as the case may be".
As
provided by article 4(b) election rules have been framed by the executive
committee from time to time. Original election rules were framed and published
on June 2, 1975. One annual general meeting was held at which the executive committee
was elected. Subsequently some amendments were made, especially in rule 6 as
circulated on May 24, 1979, and further on August 6, 1980. The last annual
general meeting was held on August 30, 1980, at which the appellants were
elected office bearers and members of the executive committee. It is these
amendments to the rules and the election which has been invalidated by the
impugned orders resulting in the present appeals.
The
association has not had an easy sailing for the last number of years. It is
enough to mention that some time in 1976, C.P. No. 32/76 was moved in which
objection was taken to the various articles of the association and ultimately
Kapur J., after a great deal of looking into details and with the active
assistance of the parties, framed and approved the present article of the
association. Though the association had held its annual general meeting for the
period ending 1976 without the same having been challenged the further holding
of the general meeting ran into trouble when the company judge by his order
dated May 19, 1978, directed that the meeting fixed for May 27, 1978, for the
financial year ending 1977 should not be held. This bar was, however, removed
by the learned judge on December 20, 1978. The meeting was thereafter held on
that date, i.e., February 28, 1979, and election took place. A few months
thereafter the present C.P. No. 58/79 (under s. 397/398 of the Act), was filed
by respondent No. 1, G.S. Mayawala, though he had himself been elected at the
meeting held on February 28, 1979.
Usual
kind of allegation of oppression, etc., were made. Amongst others, objection
was also taken that the election held on February 28, 1979, was invalid and a
prayer was made that the executive committee should be superseded. C.P. No. 58/79,
is still pending disposal before the company judge. When the matter was before
the learned company judge an application was made being C.A. No. 610/79, with a
prayer for supersession of the committee and for appointment of an interim
board to take over the management during the pendency of the C.P. No. 58/79.
This application was rejected by H.L. Anand J. by his order dated November 19,
1979. Aggrieved by that, Company Appeal No. 3/80 was filed by the present
respondent No. 1, G.S. Mayawala. This company appeal was dismissed by the
Division Bench of this court on April 22, 1980. The Bench did not find any
prima facie good reason to supersede the Board or why a new interim board
should be constituted. S.L.P. was taken against the judgment of the Division
Bench (in C.A. No. 3/80) being S.L.P. No. 6692/80, but the same was dismissed
summarily by the Supreme Court on August 28, 1980. Thereafter, annual general
meeting and elections were held on August 30, 1980.
C.P.
No. 58/79 is still pending before the learned company judge. C.A. No. 94/81 was
filed on February 19, 1981, praying for the immediate appointment of an
administrator and restrained the committee and all the sub-committees from
functioning. Company Appeal No. 23/82 is directed against this order of October
1, 1981. As the learned judge had not given the reason for passing the order
dated October 1, 1981, and the same were given by him subsequently on October
12, 1981, the said order also formed part of the record of this appeal.
It
appears that another application, being C.A. No. 53/81, was moved on January
22, 1981, similarly making a grievance that the election held on August 30,
1980, was held by depriving the representatives firm and the company from being
elected, and that, therefore, as an interim measure the board be restrained
from functioning any longer. The learned judge by his order of October 12,
1981, has found that the amendment made in rule 6 and circulated on May 24,
1979, and August 6, 1980, were illegal and, therefore, the elections held on
August 30, 1980, are vitiated. He, therefore, restrained the office bearers and
executive committee from functioning any further. Company Appeal No. 25/81 is
directed against the said impugned order of October 12, 1981.
The
position indisputably is that prior to the election held on February 28, 1979,
every member, if he was an individual, was entitled to vote; he could also
nominate and/or be nominated for election as an office bearer or member of the
executive committee. Similarly, any one partner of a firm or managing director,
director, etc., of a company authorised in writing by all the partners or by
the board of directors could nominate and be nominated for the election as
office bearers or as members to the committee. It may be noted that there are
about 1,500 total members out of which about half are either partnership firms
or bodies corporate. Rule 6 which was the original election rule published on
June 2, 1975, permitted the authorised representative of the company as well as
a partner authorised by all the partners as being eligible to nominate or be
nominated for election to the executive committee. This rule, however, was
amended on May 15, 1979, (but circulated on May 24, 1979). A further amendment
was also made by the executive committee on August 6, 1980. The admitted result
of the amended rule on the basis of which elections were held on August 30,
1980, was that the partners of firm and the representatives of the companies
could not nominate or be nominated to either the 9 honorary office bearers of
the association or to the membership of the executive committee. The learned judge has held that this rule was ultra vires the
articles of association and also ss. 187 and 253 of the Act. He has also said
that this amendment was motivated and amounts to an act of oppression and,
therefore, has passed the impugned order appointing an administrator.
In the long detailed order
of October 12, 1981, giving the reasons for ordering the appointment of an
administrator on October 1, 1981, the learned judge has given the history of
the various litigations concerning the association between different members
and the various alleged acts of mismanagement and oppression which were alleged
at various points of time in the previous years. We do not consider it
necessary to repeat this exercise for the simple reason that almost all of
these acts, allegations and events refer to the period earlier to moving of
C.A. No. 610/1979, wherein the same prayer for supersession of the board was
made. That application had been rejected and in the further appeal (C.A. No.
3/1980) also, the Division Bench saw no reason to supersede the board. This
view was also approved by the Supreme Court when the S.L.P. against that order
was dismissed. It seems to us and we say so with respect to the learned single
judge that if on the basis of allegations and alleged acts of mismanagement and
acts of oppression made in the earlier application the Division Bench did not
consider it necessary to appoint any administrator as per its order of April
22, 1980 (the Supreme Court refused to give special leave), there would be no
justification for relying on those again in order to appoint an administrator.
This is because once the Division Bench and the Supreme Court had held that
these did not show a prima facie reason for appointing an administrator, the
same could not be again revived merely by filing fresh application. Such a
course will bring uncertainty in the judicial system. That is why we think the
reference to the earlier litigation and the allegations made in C.P. No.
32/1976, in C.A. No. 455/1979 or 610/1979, noticed by the learned single judge
were inapposite and have no relevance for the decision of C.A. No. 94/81 or
C.A. No. 53/81. The learned judge has in the impugned order commented that the
annual general meeting held in January, 1979, was for the year 1977, and the
one held in August, 1980, was for the year 1978, thereby suggesting that the
committee deliberately did not hold in trial the meetings for these years and
that there has also been lapse by not holding the meeting for 1979. It would
appear that the learned judge has taken it that the committee was free to hold
the meeting for these years but has deliberately abstained from so holding.
Apart from the fact that the committee elected in August, 1980, cannot be
faulted for any alleged irregularity committed by the earlier committee, the
facts also do not support the conclusion of the learned single judge. The
record reveals that the annual general meeting for the financial year ending
1977, was fixed for 27th May, 1978. At that time C.P. No. 32/76 was pending and
the learned company judge by his order dated May 19, 1978, directed that the
meeting fixed for May 27, 1978, should be cancelled. This order was passed in
the presence of the respondent, G. S. Mayawala. No appeal was taken against the
direction of the learned single judge cancelling the meeting which had been
fixed for May 27, 1978, which would presumably suggest that the respondent had
no objection to the postponement of the meeting. The meeting was apparently
postponed because the learned company judge was seized in framing articles of
association and it was ultimately on December 20, 1978, that the learned judge
directed the holding of the annual general meeting by February 20, 1979. This
meeting was held on the said date. Evidently the delay for holding the meeting
could not be placed on the shoulders of the committee. Though the annual
general meeting was called for September 27, 1979, yet the same could not be
held because the learned company judge had on August 30, 1979, in C.P. No.
30/79, directed that pending consideration of the matter the company would not
take any step to convene the annual general meeting. Thereafter C.P. No. 58/79
was filed which is still pending and the last meeting was held in August, 1980.
The comment that no steps were taken to hold the meeting though an order had
been passed for holding the annual general meeting overlooks the patent fact
that since December, 1980, the executive committee was involved in litigations
of injunctions, getting them vacated and again getting it revived and obviously
in these state of affairs there was hardly any occasion for it to call the
annual general meeting. It is not, therefore, correct to say that meetings has
not been deliberately held by the committee apart from the fact that the
committee elected on August 30, 1980, is a different committee in law from the
earlier committees, and the fact that some or may be the majority of the
members of the present committee elected on August 30, 1980, are the same as
the earlier ones would not mean that the committee as such would suffer from
any such disqualification because of any alleged action having been done by the
earlier committee. We feel that the approach of the learned single judge in
deciding whether to restrain the committee elected on August 30, 1980, on the
alleged ground of not having earlier held annual meetings in 1978 and 1979
(which in law in any case was the duty of the earlier executive committees) was
proceeding on wrong principles of law, apart from the reason that in fact this
assumption is not correct.
The only new plea available
was about the validity of elections held on August 30, 1980, and it is to this aspect
that we now propose to refer. The fact of the amendments having been made on
May 24, 1979, and August 30, 1980, are not in doubt. The reason given for
making the amendments
by Mr. Mehra, the counsel for the appellant, is stated to be that in the earlier
elections which were held on February 28, 1979, the electoral officer who was a
court official and had been appointed by the court in C.P. No. 32/1976 and C.A.
No. 223/1978, to supervise the elections had objected that under the Indian
Companies Act a body corporate cannot be a director of another company, and
accordingly the nominations of 3 body corporate members was rejected. This plea
is supported on the record. It is apparent that the occasion for amendment was
provided by the observation of the electrol officer appointed by the court.
Whether the committee should have acted on that advice or should not have taken
a more experienced advice from some eminent counsel as urged by Mr. Parekh, the
learned counsel for the respondent, is a different matter. But from the factual
point it is not correct to hold (as the learned single judge has done) that
there was any motive in citing Mr. Saxena the electoral officer's opinion in
this regard. We must, therefore, reject that there was any ulterior motivation in
making the amendments to the Rules. Mr. Mehra had emphasised that the result of
the elections have not been any different whether held under pre or
post-amended Rules. Mr. Mehra had also supplied to us a list of members of the
executive committee who had been elected from 1973 onwards and had emphasised
that even when the Rules were unamended and the bodies corporate and firms
could nominate and be nominated, most of the present members of the executive
committee were being elected even then. This list was seen by the counsel for
the respondent and though we gave them opportunity to point out the factual
errors, none has been pointed out to us. The emphasis was by pointing out that
the respondents are only crying "grapes are sour" and taking cover
under the amended rule and making a grievance of deprivation of right of body
corporate or of partnership firms to be nominated while in fact the position is
that even when this right was admittedly available to them from 1973 to 1979,
the body composition of the association was not much different. We have just
noticed this because it was so mentioned though the actual result of election
has no relevance to the question which we are to answer—whether in law the
bodies corporate or members of the firms could or should be on the executive
committee ?
We
may first clear the misunderstanding which seems to be spelt out from the
judgment of the learned single judge wherein he has given the figures of
elections held in 1979 and 1980 by pointing out that hardly 320 members voted
in the elections held in 1979 and only 136 cast their votes in elections held
in 1980. Though Mr. Mehra said that these figures were not on record but we may
take it that they represent correctly the facts. But what was urged by Mr.
Mehra strongly was that the fact that this number of members voted in the
elections was not due to either the partnership firms or the bodies corporate
being deprived of the right to vote. It was not disputed by Mr. Parekh that
every body corporate and every partnership firm could vote if it so chose, that
is to say, that none of the 1,500 or odd members of the association were
disentitled under any amendment of the rule not to exercise their vote. Of
course, Mr. Parekh suggested that as large number of companies and partnership
firms could not nominate their representatatives for being elected to the
committee they were not interested in casting a vote. That is a different
matter which has relevance to the eligibility of the bodies corporate and the
partnership firms to be members of the executive committee but not to voting
right. We must emphasise that admittedly so far as voting rights are concerned
it is still available to all 1,500 members. In the election, no one is
discriminated by not being allowed to vote. We may also add that it was also
not disputed that many partners of firms or directors of the company are
members in their individual rights and could have contested the elections even
under the amended rules. Thus, if a majority of 1,500 members do not want any of
the appellants to be on the executive committee, the amended rules will not be
able to save the latter. The majority will of 1,500 members to elect their
representatives is in no way thwarted by the amended rules.
But
the question still remains whether the amended rule should operate in future,
and whether the unamended rules were so illegal that they necessarily had to be
amended.
Now,
the justification pleaded by Mr. Mehra for amending the election rules by the
executive committee is said to be that it is in conflict with art. 28 of the
articles of association, which only makes a member to be eligible for
appointment as a member of the executive committee. No doubt company can be a
member of the association and so can be a firm, but Mr. Mehra urges that they
cannot be a member of the executive committee, i.e., on the board of directors
because of the prohibition in s. 253 of the Act, which says that no body
corporate or a firm shall be appointed a director of a company and only an
individual shall be so appointed. The argument proceeds that as only an
individual can be a member of the board of directors and as under art. 28 only
a member is eligible to be appointed on the executive committee the inevitable
result is that only an individual who is a member in his own right can be on
the executive committee and not an authorised representative of the firm or
body corporate.
Now,
under the Act, a body corporate or a firm as such cannot be a member of the
board of directors (i.e., clearly the mandate of s. 253). Though there is no
such prohibition under the English Companies Act (vide In re Bulawayo Market
and Offices Co. Ltd. [1907] 2 Ch D 458) it was still
emphasised that the usual practice has been that limited companies would have
directors as individuals but there is nothing in it which renders it ultra
vires of the company to have another company as a sole manager or to have no
director at all. But, as there is a prohibition under s. 253 of the Act, a body
corporate or a firm, if it is a member of the association (sic). Mr. Mehra made
an attempt to liken the requirement of art. 28 to the requirement of share
qualification for a director laid down by the articles of the company. Though
there is no statutory requirement, the articles can prescribe that a director
will hold a specified share qualification. In such a situation if the articles
provide that no person shall be "eligible" to be a director or
"qualified to become" a director, unless he held so many shares, the
holding of the necessary shares is a condition precedent to election, and the
appointment of a person not already holding such shares will be invalid"
(Gore-Browne on Companies, 42nd edition, page 681). But we must repel
the contention of Mr. Mehra that art. 28 must be equated to the possession of
share qualification. In our view, art. 28 only seeks to give to a member who is
not a retiring member of the executive committee a right that he shall be
eligible for appointment to the office of the committee in the same manner as
the right has been given to the retiring member to seek re-election, vide art.
24. However, the proviso to art. 28 emphasies that in the case of such a
member, who is not a retiring member, the said member has to file with the
Secretary for filing it with the Registrar, his consent in writing to act as a
committee member. This is the limited purpose of art. 28. We cannot accept that
art. 28 as such prohibits firms or bodies corporate to nominate their
authorised representatives to the executive committee. That bodies corporate or
firms as such cannot be appointed directors is a separate matter from the
question before us whether there is any bar on the firms or bodies corporate to
duly authorise their representatives to contest the election. We do not read
art. 28 as creating any such bar to giving representation to the firms and
bodies corporate on the executive committee. As to how that is to be
effectuated is a matter with which we shall now deal. In this connection Mr.
Parekh sought to invoke s. 187 of the Act. But that is of no avail to
him. Section 187 only permits a body corporate if it is a member of the company
by a resolution of the board of directors to 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. Mr. Parekh reiterates the
argument which found favour with the learned judge, who has held that the
meetings referred to are all the meetings and the board of directors also hold
a meeting of the company, and, therefore, s. 187 authorises the body corporate
to be represented in this manner on the Board. We cannot agree. In our view, it is a
misapprehension in law to call a meeting of the board of directors a meeting of
the company". Company " is defined in s. 2(10) to mean a company as
defined in s. 3 and s. 3(1)(i) defines a company to mean a company formed and
registered under the Act or an existing company as defined in clause (ii),
whereas a board of directors is defined in s. 2(6), in relation to a company,
to mean the board of directors. Section 252 further provides that every company
other than a public company shall have at least two directors and the directors
of a company collectively are referred as the board of directors or board.
Thus, a meeting of the board of directors is something totally distinct from
the meeting of the company. The provision for meeting is found in Chap. I, Pt.
VI, while that of the board is to be found in Pt. VI Chap. II also showing the
distinctiveness". There are four types of meetings of members of a company
:
(1) the
statutory meeting;
(2) annual
general meetings:
(3) extraordinary
general meetings;
(4) separate
meetings of classes of shareholders" (Palmer's Company Law, 21st edn., p.
462).
That
s. 187 is only talking of representation at a meeting of the company and not at
that of a board of directors is also clear from s. 187(2) which allows a person
authorised to exercise the same powers (including the right to vote by proxy)
which has obvious reference to s. 176 which entitles a proxy to be appointed,
but only at a meeting of the company There is no question of proxy at the
meeting of the Board. The purpose of s. 187 (which is equivalent to s. 139 of
the English Act is obvious". A corporation, because of its nature, cannot
attend a meeting; it cannot per se vote; it cannot show a hand; it cannot
demand a poll; it cannot address the meeting and speak its mind. It appears to
me that the leading purpose of this section is that it is designed to enable a
corporation owning shares in a company to be in the same situation for the
purpose of meetings of that latter company and voting at such meetings as would
be the corporation if it were an individual "—Hillman v. Crystal Bowl
Amusements Ltd. [1973] 1 All ER 379 at 382; [1973] 1 WLR 162. But all these are
rights at the meeting of the company. Section 187, therefore, cannot
automatically permit a body coporate to send its representatives to the board
of directors of the association because it is not dealing with the right of
representation on the Board. Now the bar of s. 253 is on the firm and a body
corporate being appointed a director. There is, however, no bar in permitting
their duly authorised representatives to stand for election to the executive
Committee.
We
have already negatived the obstacle of art. 28. As a matter of fact, art. 28 is
similarly worded as s. 257 of the Act. But the applicability of s. 257 has been
exempted to the association like the present which provide for elections of
directors by ballot (See r. 14 of election rules), in view of the Notification
of the Central Govt. No. S. O. 578, published in Gazette of India, Pt. II, s.
3(ii) on July 8, 1961. Strictly, therefore, art. 28 is superfluous apart from
the fact that it creates no bar as urged by Mr. Mehra. In our view, the history
of the association also shows that prior to 1979 it did not consider any bar to
the representatives of firms or bodies corporate from nominating or being
nominated for members of the committee. We feel that it was a correct approach.
Articles provide for firms and companies being members. It would be natural to
expect that all members should enjoy not only the right to vote but also to
stand for elections to the membership of the executive committee. It was
obviously in pursuance of this laudable object that the unamended rules
provided for individuals firms and company members (of course, subject to being
duly authorised as per election rules) to stand for elections to the executive
committee. Rules 1, 3, 6 as to who can nominate, who can be nominated and who
Cannot be nominated provided for just rights of all these three categories of
members. That situation would have continued but for the doubt cast on the
legality of these rules by the objection raised by the court observer when the
election took place on February 28, 1979. We are prepared to accept that it was
because of this objection that amendments were made bona Me on May 24, 1979,
and August 6, 1980, and though the amendments cannot be said to have been
motivated by any extraneous considerations, still it is our view that it would
be just and in the interest of the association and the members that a large
number of members like the bodies corporates and the firms should not be denied
the right through their duly authorised representative as per election rules to
nominate or be nominated for election as office bearers or as members of the
executive committee of the association. To that extent, therefore, we feel that
the amendments made on May 24, 1979, and August 6, 1980, though they may not be
illegal in the sense that they do not contravene the provisions of the Act or
the articles of association, yet we feel that in the exercise of our equity
jurisdiction and in the interest of the association the position qua the rights
of body corporates and firms should be restored to what was in the election
rules prior to the amendments made and circulated on May 24, 1979, and August
6, 1980, and we order accordingly. We are less diffident in so ordering because
we have found no material to show that prior to May, 1979, when the old
election rules permitted firms and company members to stand for elections
through their duly authorised representatives, it caused any inconvenience or
complexity or hurdle in the actual working of the association or was harmful to
the interest of either the members or the association because it is well
settled that a company whether limited by shares or guarantee is a legal entity
whose power was to be exercised for the benefit of that entity and those
exercising the powers were bound not merely by their duties towards the other
members but also by their duty towards the company-, vide Gaimanx. National
Association for Mental Health [1971] Ch D 317. In our opinion, though the
objection of the electoral officer at the time of the 1979 elections that (sic)
as such cannot be a member of the board was correct in the limited sense, it
did not automatically need any amendments to be made to the old election rules.
But we also cannot say that because of the objections amendments were needed,
was not a view which could not be bona fide held by the executive committee.
They cannot, therefore, be faulted or found blameworthy for having made these
amendments. It is a different matter that we are directing in the exercise of
our equitable jurisdiction that the position be restored as under the old
election rules. It is true that it is for the shareholder and not the court to
determine whether or not the alteration is for the benefit of the company, and
that the court will not lightly make any alteration, yet it also cannot be
disputed that the power of the court when dealing with an application under s.
397/ 398 read with s. 402 empowers it to provide for any matter for which in
the opinion of the court it is just and equitable that the provision should be
made. Though the powers of the court is very wide it will normally not exercise
it unless it feels it is not only just and equitable but is also in the
interest of the company. It is in recognition of this that we feel that art. 28
which possibly is capable of being read as was read in the report of the
electoral officer when election was held on February 28, 1979, as barring the
duly authorised representatives of the body corporate or the firms to be
members of the committee that we should make slight alteration. This we are
doing more for Clarification though, in our view, even without this it would
have served the purpose of permitting the bodies corporate and firm members to
participate in elections to the executive committee. We would direct that an
explanation be added to article 28 as follows:
Explanation—A
member for the purpose of election only to the office bearers or for members of
the executive committee will mean all those who by election rules can be
nominated for the said elections.
Elections
were last held on August 30, 1980. They cannot be held to be illegal because
they were held on the basis of the existing election rules. We have not found
these amendments illegal, are only directing future elections on the basis of
old election rules because of larger consideration
and in the interest of harmony amongst members. We are doing this in the hope
that election will dissolve many controversies of old. The persons who will be
able to contest elections will be as mentioned above. The learned judge in
appointing the administrator was also influenced by the fact that in any case
the term of the present committee had come to an end on September 30, 1981,
This is not correct because art. 31 provides that the retiring member or members
of the executive committee shall retain office till the dissolution of the
meeting at which his or their successor is/are elected. Thus, until the annual
general meeting is held and elections are held, the existing executive
committee continues. This consideration which weighed with the learned judge
that the present members.have ceased to have any right to continue is thus
based on misapprehension of the legal position. That is another reason why the
impugned order appointing the administration cannot be upheld.
We wish to make it clear
that the procedure that will be followed for the elections to be held for which
we are giving directions should be one which is laid down in the amended rules
of August 6, 1980, from r. 7 onwards excepting that the procedure and
eligibility of members to nominate and be nominated will not be as laid down in
the amended rules 1 to 6 of August 6, 1980, but will be rr. 1 to 6 as they
existed prior to amendment in May, 1979. This direction will permit the
individuals, firms and company members not only to vote but also to exercise
the right of nominating or being nominated as laid down in rr. 1 to 6 of
election rules before the amendment made in May, 1979, or August, 1980.
Eligibility to nominate or being nominated will be determined by the election
rules, as they stood before being amended in May, 1979, or August, 1980. We
have said this because rr. 1 to 6 give substantive right to a person who can
nominate and be nominated and that is what the real controversy is about and
the rest of the procedure as to the conduct and the manner of holding election
and the procedural aspect of which no controversy is raised. We may also
mention that the person who can nominate and be nominated has been prescribed
in the original election rules and it is apparent that the forms prescribed
therein will have to be used. The same, of course, will be provided to all the
members by the association who wish to participate in the election. It may be
mentioned that Mr. Parekh strongly urged that if we were to direct the holding
of an election we should supersede the present committee and appoint an
administrator to carry on the functions of the board in the meanwhile. We are
not inclined to do so. We have already, while staying the operation of the
order of the learned single judge, appointed Mr. S.N. Shankar, a retired judge
of this court, as chairman of the committee. We have given certain directions
therein which we feel would sufficiently safeguard the rights of all the members including the respondents
so as to see that no unfair steps are taken against the interest of any member
or the company. We must, therefore, overrule this plea of the respondents.
In
the result we order as follows :
1 that
the order of the learned single judge appointing the administrator is set
aside,
2 that in place of that order our order
passed on October 6, 1981, as affirmed on October 21, 1980, by which we had
appointed Mr. Shankar as chairman of the board of clirectors and the directions
given therein will be substituted for the order of the learned single judge,
3 that
the elections to the executive committee will be held and completed by March
31, 1982; and
4 that in order to carry on the above directions
the executive committee is directed under the chairmanship of Mr. Shankar to
take necessary and consequential steps so as to effectuate the directions given
herein.
In
this connection we may note that under art. 30(d) the executive committee is to
appoint a chairman who shall not be interested in the election either directly
or indirectly. We have already directed while appointing Mr. Shankar as
chairman that if any decision is taken by the executive committee and if not
agreed to by the Chairman, the same will not be implemented by the chairman
within one week. That direction will continue in the matters other than the
election matters; but with regard to the election matters we direct that no
decision of the executive committee will be implemented unless it is agreed to
by Mr. Shankar, chairman of the executive committee. We are doing this not
because we have any reason to feel that the other members of the executive
committee will not bring to bear on the matter consideration of impartiality and
fairness which is expected of them. On the contrary we have every hope that
their action will be fair and impartial. But in order to remove any kind of
misunderstanding, however unjustified as the parties are having litigation for
long time, it seems to us that the benefit of the final views of the chairman
like Mr. Shankar should prevail in the matter of elections which is to
constitute the executive committee for the next year. As a matter of fact Mr.
Mehra had fairly offered at the earliest stage that the appellant had no
objection if the elections were held under the guidance of any independent
authority and it is on the basis of that assurance so readily and gracefully
and correctly given that we are giving the finality to the decision of Mr.
Shankar in the matter of elections only. With regard to other matters the
earlier order will continue. We are confident that once the elections had been
held the immediate controversy and the tension
should hopefully dissolve. But that is in the lap of future and seeing the
fiercest controversy disclosed during the hearing we can only hope that the
steps indicated will lead to a lessening of the tension and the association
will be able to function in a cooler and calmer atmosphere, and devote itself
more to the objects for which it has been formed.
At the time of passing the
order on October 6, 1981, we had directed that Mr. Shankar will be paid Rs.
1,000 for every meeting of the executive committee that he attends. As we by
our order are requesting Mr. Shankar to take on also the load of elections it
will be natural for him not only to attend the meetings of the executive but
also having to go to the office in connection with the election work or
attending some other sub-committee meetings. We feel that it will be proper if
instead of the earlier directions of payment of Rs. 1,000 for every meeting we
should substitute it by order of payment of consolidated sum. We, therefore,
order that Mr. Shankar will now be paid Rs. 5,000 per mensem as honorarium with
effect from January 1, 1982. However, up to December 31, 1981, the previous
order of payment of Rs. 1,000 for every executive meeting which he has attended
or may attend will stand. Mr. Shankar will continue as chairman till the new
chairman is elected in pursuance of elections ordered by us.
If for any reason the
elections are not completed by March 31, 1982, the matter will be listed before
the court for further directions on April 5, 1982.
We may mention that Suit
No. 438/80 was filed by M/s. Navrung Theatres (Pvt.) Ltd. for permanent
injunction restraining the executive committee and other office bearers from
functioning as such. Mainly the legality of elections held on August 30, 1980,
is challenged in that suit. Originally an interim injunction was issued by the
trial court on December 5, 1980, restraining the members of the executive
committee from functioning. This order, however, was stayed by this court in
CM(M) No. 223/80 on December 8, 1980. Subsequently, a number of orders were
passed and ultimately the order was passed by the learned company judge on
February 20, 1981, the result of which was that the interim injunction passed
by the trial court became inoperative. Appeal No. 1 of 1981 was filed in this
court and it was during the pendency of that that C.A. No. 94/81 and C.A. No.
53/81 were disposed of by the learned single judge. The learned single judge
has observed that as he had appointed an administrator and the executive
committee cannot function it is unnecessary to pass any order in the matter of
interim stay order passed by him on February 20, 1981. As we have dealt with
the matter and as we have also directed fresh election, Suit No. 438/80, which
was filed to restrain the present committee from functioning, has obviously
become infructuous. We wish to make it clear that any injunction given therein
or the revival of that injunction because of the interim stay passed by the
learned single judge on February 20, 1981, will not mean revival of injunction
because the same has lost all purpose in view of the decision given by the
learned single judge and now by us on appeal. We are so clarifying, lest the
parties to Suit No. 438/80 should seek to contend that the power to issue an
injunction to restrain the executive committee or from holding fresh elections
is still open for argument and seek to stall our order. As we have directed
elections to be held obviously, the trial court cannot now pass any order
seeking to injunct the holding of the said elections and all interim orders
passed in Suit No. 438/ 80 seeking to restrain the committee are hereby
vacated.
In the result, the appeal
is disposed of as above. The parties are left to bear their own costs
throughout.
Section 255
Directors,
appointment of
[1986] 60 COMP. CAS. 353 (
v.
Apparels Exports Promotion
Council.
M. K. CHAWLA J.
FEBRUARY 13, 1985
Arun Kumar and S. K. Kaul for the
Plaintiff.
G. L. Rawal and Sunil
Aggarwal for the Defendant.
M.
K. Chawla J.—The
plaintiff, M/s. Maharaja Exports, through its sole proprietor, Ms. Sushma
Gulati, has claimed the following reliefs in her suit for declaration:
(a) A decree for declaration declaring that
the impugned notice dated April 4, 1984, issued by the defendant, M/s. Apparels
Export Pro motion Council, regarding the holding of the fourth annual general
meeting of the defendant on May 14, 1984, is illegal, invalid and inoperative
and that no annual general meeting can be held in pursuance thereof ;
(b) declaring that all the 27 members of the
existing executive committee are not entitled to hold the respective offices in
view of the judgment of Hon'ble Mr. Justice S. S. Chadha referred to above;
(c) declaring that the 18 members of the
executive committee have retired by rotation and are not entitled to continue
in office as members of the executive committee;
(d) declaring that the 9 members of the
executive council whose names are mentioned in the impugned notice have
automatically ceased to be the members of the executive committee and are not
entitled to function as such after May 14/15, 1984 ;
(e) declaring that all the proxy forms lodged with the council
regarding the fourth annual general meeting to be invalid and illegal
particularly those on the forms other than the official forms ;
(f) declaring the fourth annual general meeting purportedly held
on May 14/16, 1984, in so far as it relates to election of 9 executive
committee members who have retired by rotation to be illegal and invalid.
In order to understand the
true scope of the plaintiff's suit, it will be relevant to keep in mind the
salient features as given in the plaint. The plaintiff is carrying on business
as manufacturers and exporters of ready-made garments of which Ms. Sushma
Gulati is the sole proprietor; that M/s. Apparel Exports Promotion Council
(hereinafter referred to as "the council") is a public limited
company registered under the provisions of the Companies Act, 1956 (hereinafter
to be referred to as "the Act"), as per the certificate of incorporation
issued by the Registrar of Companies, Delhi and Haryana; that the defendant is
also licensed under section 25 of the Act by the Central Government; that the
objects for which the defendant company has been established are given in the
memorandum of association which amongst other things includes "to promote,
advance, increase, develop export, of all types of ready-made garments
excluding woollen knitwear, garments of leather, jute and hemp, to undertake
all export promotion measures including appointment of representatives, agents
or correspondents in foreign markets to conduct propaganda and publicity"
; that the plaintiff is a member of the defendant council as provided under
article 5(a) of the articles of association ; that the membership of the
defendant is about 5,000; that as per the articles of association of the
defendant, the executive committee is to be elected to manage the affairs of
the council; that the executive committee can have maximum 30 members besides
four Government nominated members; that the membership of the executive
committee is on regional basis since the council is an all India body ; that as
per the provisions contained in the articles of association, one-third of the
elected members of the executive committee will retire by rotation every year
and the vacancy so caused shall be filled up after the annual general meeting
every year; that a member of the council is entitled to be elected as a member
of the executive committee ; that the articles of association of the defendant
authorise the defendant to frame rules and procedure for election to the
executive council; that the council framed certain rules which were, however,
challenged by certain members through a suit filed in this court being Suit No.
873 of 1981 entitled Pramod Chopra v. Apparels Exports Promotion Council, that
the said suit was ultimately decreed on May 19, 1983, and the impugned rules
were declared to be invalid ; that the appeal against the said single judge's
judgment filed by the council also failed ; that as far as the plaintiff
understands, the council has not framed any rules of procedure for election so
far, though they were required to do so under the amended article 48 of the
articles of association.
That on April 30, 1984, the
plaintiff received a notice regarding the fourth annual general meeting of the
defendant to be held on Monday May 14, 1984, at 11 a.m. at FICCI auditorium,
New Delhi, to transact the business incorporated in the notice ; that though
the notice is purportedly dated April 4, 1984, the same is understood and
reasonably believed by the plaintiff to have been posted only on April 26,
1984. by the defendant to the various members; that this notice is totally
illegal, invalid and mala fide for the grounds mentioned in the plaint; that in
view of these grounds, it is apparent that the fourth annual general meeting
convened through the impugned notice is illegal, invalid and the defendant
cannot be permitted to hold the same. Hence, the present suit.
Along with this suit the
plaintiff also filed an application (I.A. No. 2448 of 1984) under Order 39,
rules 1 and 2, CPC, praying for the issuance of an ad interim restraint order
against the defendant from giving effect to the notice dated April 4, 1984,
which is illegal and void and from holding the annual general meeting in
pursuance thereof.
After the suit was
registered and after hearing the learned counsel for the plaintiff on the
injunction application, S.B. Wad J. passed the following order on May 11, 1984:
"I.
A. No. 2448 of 1984 :
It is stated by the counsel
for the plaintiff that no election rules laying the procedure for the election
are framed by the defendant company. The notice for the annual general meeting
purported to be issued on April 4, 1984, is actually issued on April 26, 1984.
Counsel for the plaintiff states that it was received by the plaintiff on April
30, 1984. The notice was also published in the Economic Times,
The plaintiff preferred to
serve the defendant with the restraint order only 15 minutes before the start
of the annual general meeting. Immediately after the service of the restraint order,
the defendant rushed to the court, filed the reply to the plaintiff's
application and obtained the following order on May 15, 1985:
"Having heard the
counsel for the parties, I find that an order one way or the other will dispose
of the suit itself. The complexity of the matter is such that a full trial with
evidence of both the parties is necessary for the proper disposal of the suit.
However, considering the urgency of the matter, I order that the suit itself be
disposed of expeditiously in the month of July, 1984. Since all the
arrangements for the election are already made and a lot of expenses have
already been incurred, I direct that the election/annual general meeting shall
be held on May 16, 1984, at 2 p.m. However, the result of the election shall
not be declared till the disposal of the suit."
On the same day, the
defendants were further directed to deposit with the Deputy Registrar (0) the
ballot papers, the proxies and other relevant papers relating to the elections
within 2 days after the annual general meeting is held. The venue of the
meeting was also shifted from FICCI auditorium to
"After hearing counsel
for the parties, we are of the opinion that the old arrangement should
continue, but the result of the election shall be declared. The members
declared to have been elected as directors shall not act till the decision is
given by the learned single judge. The learned single judge will hear and
decide the matter on the date fixed by him. We are not expressing any opinion
at this stage since he has not given any decision on the merits of the
controversy.
The F. A. Os. are disposed
of."
Before the defendant could
file the reply, the plaintiff was allowed to amend the plaint.
In the written statement, the defendant took up
a number of preliminary objections, inter alia, alleging that the present suit
of the plaintiff is false, frivolous and vexatious and otherwise the same is a
misuse of the process of law; that the alleged disputes fall within the purview
of the company court jurisdiction and, as such, the suit for declaration is not
maintainable; that no suit without consequential relief is maintainable; that
no suit can be brought in the name of trading name when the same is a sole
proprietorship firm; that the suit is bad for delay and laches. On merits, the defendant
admitted the correctness of the various provisions of the articles of
association under which one-third of the elected members of the executive
committee were to retire at the conclusion of each annual general meeting and
the vacancies so caused were to be filled in. The defendant also admitted the
filing of the suit by one of the members of the council and the issuance of
directions to the defendant for framing of the rules. In compliance with the
directions of the Company Law Board and also the observations made in the
judgment of this court in Suit No. 873 of 1981, necessary amendments were
carried out which ultimately resulted in the dismissal of their appeal. The
defendant also admitted the issuance of a notice for holding the fourth annual
general meeting on May 14, 1984, at FICCI auditorium but denied the fact that
the plaintiff received the notice on April 30, 1984. The notice which was
posted on April 26, 1984, was strictly in accordance with the provisions of
section 53(2) of the Act and its service must be deemed to have been effected
immediately on the expiry of 48 hours from the time of posting. In these
circumstances, in law, service on the plaintiff has been effected on April 28,
1984, which gave full 16 days' notice to the plaintiff whereas she was entitled
(only) to 14 days' notice. The defendant also denied each and every ground
mentioned in paragraph 14 of the plaint which were made the basis for the
issuance of notice and holding of the fourth annual general meeting as illegal.
The fourth annual general meeting has already been held. The defendant also
took up the objection that not only the suit is mala fide but is also bad for
delay and laches. The plaintiff has been taking an active interest in the
election of the members of the executive committee and has been a party to
signing a number of pamphlets in this behalf. Even though the notice was
allegedly served on the plaintiff on April 30, 1984, the plaintiff
intentionally filed the present suit on May 11, 1984, when May 12 and 13, 1984,
were holidays being second Saturday and Sunday. Even after ex parte injunction,
the plaintiff intentionally did not serve the notice on the defendant or on any
of its officers either on May 11, 12 or 13, 1984, even though the office of the
defendant was open for making the arrangements for the holding of the annual
general meeting on May 14, 1984. The plaintiff got the service of the notice
effected only at about 10.45 a.m. on May 14, 1984, when all the arrangements
for the holding of the meeting were complete. Under these circumstances, the
plaintiff has not come to the court with clean hands and is not entitled to the
discretionary relief on this account also. It was prayed that the suit which is
a mala fide one and has been filed with the only motive of stalling the
elections deserves dismissal with special costs.
In the replication, the
plaintiff controverted the pleas raised by the defendant in the written
statement and reiterated the facts as stated in the plaint.
On the pleadings of the
parties, the following issues were framed:
1. Whether the defendant was enjoined in law to frame fresh
rules for holding elections of the defendant council after they were struck
down by a judgment of this court?
2. Whether
this court has the jurisdiction to try this suit?
3. Whether fourteen days' notice of the proposed fourth annual
general meeting of the defendant council was not served on the plaintiff in
accordance with law?
4. Whether the defendant was bound to hold elections to all the
27 posts of executive committee members in view of the judgment of this court
in Suit No. 873 of 1981, when the articles of association and rules for
election of the defendant council were struck down? In any case, was the
defendant enjoined to hold election for at least 18 members of the execucutive
committee as the annual general meeting was being held after two years?
5. Whether the delay in the despatch of the notice shows mala
fides and oblique motives on the part of the defendant council to secure
re-election of the retiring members. If so, to what effect?
6. Whether the list of members as circulated by the defendant
council contained the names of some members from whom certain sums were still
payable to the defendant council and its effect?
7. Whether the suit of the plaintiff is bad for delay and
laches and/or otherwise the conduct of the plaintiff is such as to disentitle
her to any relief in the suit as alleged in paras 13 and 14 of the written
statement?
8. Relief.
Learned counsel for the parties
agreed that the evidence in the case be allowed to be led by filing affidavits
and documents. The plaintiff filed her own affidavit while the defendants
relied upon the affidavit of Shri S. K. C. Mathur, Secretary of the defendant
council. Later on, the learned counsel for the plaintiff agreed to produce the
proprietor of the plaintiff for her cross-examination by the learned counsel
for the defendant. She was cross-examined on September 20, 1984.
I have heard the arguments
of the learned counsel for the parties and with their help gone through the
record carefully. My findings on the above issues are as follows :
Issue
No. 1 :
The onus of this issue has
rightly been placed on the plaintiff. During the course of the arguments, the
learned counsel for the plaintiff did not press this issue nor did he address
any arguments, nor refer to the various provisions of the memorandum and
articles of association of the defendant firm indicating that the defendants
were enjoined in law to frame fresh rules for holding the elections to the
defendant council after the previous rules were struck down by the judgment
dated May 19, 1983, of this court in Suit No. 873 of 1981 titled as Pramod
Chopra v. Apparels Exports Promotion Council. This issue is, therefore, decided
against the plaintiff.
Issue
No. 2 :
The objection of the
defendants is that as the disputes raised in the suit fall within the purview
of the company court jurisdiction, the present suit for declaration is not
maintainable. This objection appears to have been raised only for the sake of
raising an objection. Section 10 of the Companies Act defines the jurisdiction
of the court to entertain suits in such like matters. The definition of
"court" in clause (11) of section 2 and section 10 of the Companies Act,
1956, dealing with jurisdiction of courts read together enables the
shareholders to decide as to which court they should approach for remedy in
respect of a particular matter. This provision does not purport to invest the
company court with the jurisdiction over every matter arising under the Act. In
view of the eloborate provisions contained in the 1956 Act in regard to
management and conduct of a company's affairs, including even important
internal matters of administration, the scope for interference by the civil
court may have become more limited, but the power has not at all been taken
away. It has been rightly observed in a case reported as R. Prakasam v. Sree
Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker) that except in
cases where the Companies Act, 1956, confers jurisdiction on the company court
or some other authority like the Central Government or the Company Law Board,
either expressly or by implication, all other disputes pertaining to a company
are to be resolved through the forum of civil court when the disputes are kept
on being resolved by them. Where wrong is done to an individual member, he can
insist, by recourse to a civil suit, on "strict observance of the legal
rules, statutory provisions and provisions in the memorandum and articles of
association which cannot be waived by a bare majority of shareholders".
Similar view was taken in a judgment reported as Panipat Woollen and General
Mills Company Ltd. v. P. L. Kaushik [1969] 39 Comp Cas 249 (Punj). While
interpreting the provisions of section 9 of the Code of Civil Proceduce
vis-a-vis the Companies Act, during the course of the judgment, it was observed
as under (headnote).
"Under section 9 of
the Code of Civil Procedure, 1908, civil courts have jurisdiction to try all suits
of a civil nature excepting suits of which their cognizance is expressly or
impliedly barred. Unlike some statutes, the Companies Act does not contain any
express provision barring the jurisdiction of the ordinary civil courts in
matters covered by the provisions of the Act. In certain cases like winding-up
of companies, the jurisdiction of civil courts is impliedly barred.
Where a person objects to
the election of directors and claims a decree for a declaration that he was one
of the directors, there is no provision which bars the civil court either
expressly or by implication from trying such a suit."
In the present suit also,
besides other reliefs, the plaintiff has sought a declaration that all the 27
members of the existing executive committee are not entitled to hold the
respective offices in view of the judgment of this court and further that the
18 members of the executive committee who have retired by rotation are not
entitled to continue in office as members of the executive committee. The judgment,
referred to above, fairly and squarely applies to the facts of the present case
and there is no reason to oust the jurisdiction of this court to entertain the
present suit. Under these circumstances, this issue is decided in favour of the
plaintiff and against the defendants.
Issue
No. 3 :
This
is the most material issue, the decision of which will decide the fate of the
parties. Before the relevant facts are taken into consideration as to whether
the plaintiff was duly served with a clear 14 days' notice of the proposed
fourth annual general meeting of the defendant council, the relevant provisions
of the Companies Act have to be kept in view. Section 171(1) of the 1956 Act
reads as follows :
"A general meeting of the company may be called by
giving not less than 21 days' notice in writing..."
Admittedly,
the defendant council falls within the categories specified in clause (6) of
section 25 of the Companies Act. In exercise of powers conferred by this
provision, the Central Government notified that under section, 171(1) the
general body meeting may be called by giving a notice in writing of not less
than 14 days instead of 21 days.
The next relevant provision is section 53(2); It reads as
under :
"Where a document is sent by post,—
(a) service thereof shall be deemed to be
effected by properly addressing, pre-paying and posting a letter containing the
document......
(b) such
service shall be deemed to have been effected—...
(i) in the case of a notice of a meeting, at
the expiration of 48 hours after the letter containing the same is posted ; and
(ii) in any other case at the time at which
the letter would be delivered in the ordinary course of post ;
Section 172(3) lays down
that the accidental omission to give notice to, or the non-receipt of notice
by, any member or other person, to whom it should be given shall not invalidate
the proceedings at the meeting.
Section 173 requires the
company to annex along with the notice the explanatory statements sought to be
considered during the meeting.
It is not disputed that the
date of service of notice of the general meeting and the date of the meeting
have to be excluded while counting 14 days, the period of notice prescribed
under section 171 of the Companies Act. The expression "not less than 14
days" used in section 171 (as amended by virtue of the Central Government
Notification) normally implies notice of 14 whole or clear days ; part of the
day, after the hour at which the notice is deemed to have been served, cannot be
combined with the part of the day before the time of the meeting, on the date
of the meeting, to form one day. Each of the 14 days must be a full or a
calendar day so that the notice can be said to be "not less than 14 days'
notice".
With this background, let
us now revert to the facts as have been brought out in the pleadings and the
documents, to determine if the plaintiffs have been served with 14 days' clear
notice of the annual general meeting of the defendant company or not. According
to the learned counsel for the plaintiff, on April 4, 1984, the meeting of the
executive committee of the defendant company was called to fix the date of the
fourth annual general meeting. Before the convening of this meeting, all the
formalities of carrying out the amendments as directed by the Company Law Board
had been complied with. The executive committee decided to hold the annual
general meeting on May 14, 1984, at 11.00 a.m. in the FICCI, Golden Jubilee
Auditorium, New Delhi. The office of the defendant company was required to send
along with the notice, the business relating to (i) the consideration of
accounts, the balance-sheets (which in this case was for a period of two years)
and the reports of the board of directors and auditors ; (ii) the declaration
of dividend ; (iii) the appointment of directors in the place of those
retiring, and (iv) the appointment of and the fixation of the remuneration of
the auditors. This requirement has admittedly been complied with by the
defendant company.
According to the plaintiff,
the impugned notice even though dated April 4, 1984, was posted to the
plaintiff and many other members on April 27, 1984. It was received by the
plaintiff on April 30, 1984, as is clear from the postal stamp affixed on the
envelope, exhibit P-8, which was an officially declared holiday in the area
where the plaintiff carried on business. It is also alleged that April 29,
1984, was a Sunday while May 1, 1984, was again a public holiday and,
therefore, it came to the plaintiff's notice only on May 2, 1984. This notice
did not allow clear 14 days' time before the annual general meeting and, as such, is bad and invalid
and the annual general meeting cannot be held in pursuance thereof. It is also
alleged that even if 48 hours are computed from the date of the despatch of the
notice, then April 29, 1984, being a Sunday has to be excluded and the
plaintiff must be deemed to have been served with notice only on the next date.
The service of the notice, according to the learned counsel, is not a mere
formality and the notice appears to have been posted on April 27, 1984, with a
view to avoid the presence of a large number of persons and deprive them of
their right to vote and to contest the election for the membership of the
executive committee. It is also contended that when a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the court is entitled and rather bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to and full effect
must be given to the statutory fiction and it should be carried to its logical
conclusion. If the purpose of the statutory fiction, mentioned above, is kept
in view, then, according to the learned counsel, it follows, that the purpose
of that fiction would be completely defeated if the defendant company
intentionally and wilfully defaulted in sending the notices on the date which
will deprive most of its members from exercising their statutory duty.
After
giving careful consideration to each and every point urged by the learned
counsel for the plaintiff during the course of the arguments, I do not find any
substance in the same. At the outset, it may be mentioned that in the prayer
clause, the plaintiff has not raised any grievance that she was not given 14
days' clear notice of the holding of the meeting. In sub-para (a) of paragraph
20 of the prayer clause, a declaration has been sought that the impugned notice
dated April 4, 1984, issued by the defendants regarding the holding of the
fourth annual general meeting of the defendants on May 14, 1984, is illegal,
invalid and inoperative and that no annual general meeting can be called in
pursuance thereof. Exhibit P-2 is the notice of the holding of the fourth
annual general meeting on May 14, 1984, at 11 a.m. at FICCI Golden Jubilee
Auditorium, New Delhi, to transact the following ordinary business :
(1) To consider and adopt the audited
balance-sheets and the income and expenditure accounts of the council for the
years ended December 31, 1981 and December 31, 1982, along with reports of the
auditors and the executive committee of the council.
(2) To appoint auditors of the council to
hold the office from the conclusion of this meeting until the conclusion of the
next annual general meeting and to fix their remuneration.
(3) To
appoint members to the
(a) Executive committee in place of Shri........................who
retire by rotation and is eligible for reappointment....
Admittedly, this notice complies
with all the requirements of section 173 of the Companies Act. Prima facie this
notice cannot be said to be illegal.
On the second aspect, the
facts mentioned in the plaint are to be taken at its face value. In paragraph 14
of the unamended plaint, the plaintiff alleged that the impugned notice dated
April 4, 1984, was posted only on April 26, 1984, by the defendant to the
various members. However, in the amended plaint, the plaintiff advanced the
date of posting of the notice as on April 27, 1984, which was received by her
on April 30, 1984. Even assuming that the impugned notice was issued by the
defendant company on April 27, 1984, even then, in my opinion, the company has
complied with the provisions of section 171 of the Companies Act. In this case
48 hours will expire on April 29, 1984. Even if we exclude the date of the
posting of the notice and the date of the receipt of the notice as per the
provisions of clause (b) of sub-section (2) of section 53 of the Companies Act,
even then the notice must be presumed to have been served on the plaintiff 14
days prior to the holding of the meeting. In the corresponding provision in the
1913 Act, the word implied was "time" at which the would be deemed to
be delivered in the ordinary course of post.
"Ordinary course of
post" in a vast country like ours with many far-places at inaccessible
distance, where the time taken for delivery of letters varied from place to
place induced an element of uncertainty. In order to do away with this state of
affairs and to import certainty to such an important matter, as to the length
of notice of general meetings of companies, legal fiction was pressed into
service, by indicating in the 1950 Act, that the notice shall be deemed to have
been served 48 hours after posting. The words "48 hours" are meant to
make the service certain and to fix the date of service as the date on which
the said 48 hours expired. Under these circumstances, as already observed
earlier, the notice issued on April 27, 1984, will expire on April 29, 1984,
which is well within the phrase "14 days' clear notice".
This aspect can also be
looked into from another angle. Sub-section (3) of section 172 of the Companies
Act lays down that even the accidental omission to give notice to, or the
non-receipt of the notice by, any member or other person shall not invalidate
the proceedings at the meeting. The "accidental omission" means that
the omission must be not only not designed but also not deliberate. This
expression implies absence of intention or deliberate design. The word
"or" appearing in this sub-clause is of great significance. The
company has only to prove on record that they have sent the notice to its
members on the addresses furnished by them. The non-receipt of the notice,
under no circumstances, shall invalidate the holding of the meeting or the
proceedings thereof. In this case, it is the admitted case of the parties that
the defendant company did send the notice and it in fact was received by the
plaintiff. Even the non-receipt, as observed earlier, would not have made any
difference.
At this stage, it will be
relevant to mention that the learned counsel for the plaintiff is mixing up the
service of the notice of the holding of the meeting with the filing of the
nomination for the membership of the executive committee of the defendant
company. By virtue of section 257 of the Companies Act, a person who is not a
retiring director shall be eligible for appointment to the office of director
at any general meeting, if he or some other member intending to propose him
has, not less than 14 days before the meeting, left at the office of the
company a notice in writing under his hand signifying his candidature for the
office of director or the intention of such member to propose him as a
candidate for that office. Mere knowledge of the holding of the meeting is
sufficient. The plaintiff has nowhere alleged in the plaint or in her affidavit
that she was not aware of the holding of the fourth annual general meeting on
May 14, 1984. It is also not alleged that the notice of the meeting was served
on her on the night of April 30, 1984, or that she made efforts in securing the
signature of a proposer and that she was not able to contact them. On the other
hand, the defendants have placed on record the numerous advertisements which
have been appearing from time to time, in the various newspapers and in
different parts of the country, intimating the members, to intimate the change
in address, if any, latest by April 12, 1984, and to clear the annual
subscription so that they may be eligible to vote at the forthcoming annual
general meeting of the council. Such notices were issued from April 5, 1984,
till April 15, 1984. The notices for the holding of the annual general meeting
on May 14, 1984, were also advertised in the various newspapers from April 14,
1984. The defendant council also took care to publish the list of the
nominations which had been received from the members signifying their
candidature for the appointment to the office of the defendants in the fourth
annual general meeting. Furthermore, the plaintiff has been taking an active
part in the affairs of the defendant council, inasmuch as it is a party to the
issuance of posters/pamphlets opposing the candidature of Shri Mohanjit Singh
and his associates as they are alleged to have committed some malpractices,
etc. All these facts go to show that the plaintiff was fully aware of the
holding of the fourth annual general meeting on May 14, 1984, and was well
within time to have filed her nomination, if she was desirous of contesting the
election. It has nothing to do with the notice of the holding of the meeting
which too has been held to have been properly served on the plaintiff.
In view of these
circumstances, is it open to the court to extend the period of 48 hours in
order to give more time to the members enabling them to file the nominations?
The simple answer to this query raised by the learned counsel for the plaintiff
is in the negative. The Legislature in its wisdom reduced the period of 21 days
to 14 days by virtue of sub-section (6) of section 25 of the Companies Act. The
Legislature was also aware of the 14 days' notice as contemplated in section
257 of the Companies Act. It is not desirable for the courts to say that the period
of service of the notice should be reasonable. By doing this the court will be
extending the period which has purposely been limited to minimise the scope of
the mischief which used to be created in the holding of the annual general
meetings. In view of the fact that the plaintiff was fully aware of the date of
the meeting prior to the receipt of the notice, the plaintiff cannot come
forward and throw the blame on the defendant company. Taking an overall view of
the circumstances brought out on record and discussed earlier, there is no
hesitation for this court to hold that the plaintiff was duly served with 14
days' clear notice of the holding of the fourth annual general meeting of the
defendant council. This issue, therefore, is decided against the plaintiff.
Issue
No. 4 :
In order to appreciate the
scope of this issue, one has only to refer to the various dates admitted by the
parties. On October 29, 1981, the third annual general meeting was held. On
June 12, 1982, notice was issued to the members for the correction of
addresses, etc., so that the fourth annual general meeting is held within the
stipulated period. One of the members filed an application and obtained the
stay of the holding of the annual general meeting and for taking steps in this
direction, from this court on June 28, 1982. This ad interim stay dated August
25, 1982, was confirmed till the disposal of the suit. The plaintiff ultimately
succeeded in the suit and a decree was passed by S. S. Chadha J. on May 19,
1983. The respondent company preferred to file an appeal before a Division
Bench. This appeal was admitted on August 8, 1983, but they refused to vacate
the injunction. Being not satisfied with the dismissal of their miscellaneous
application, the defendant company filed a special leave petition. The order
dated May 19, 1983, was stayed by the Hon'ble Supreme Court but the court made
it clear that it would not have any effect on the Central Government (Company
Law Board) if they proposed to take any steps for the amendment of the rules.
Finally, the Company Law Board directed the defendant company to amend their
rules in order to bring them in conformity with the judgment of S.S. Chadha J.
dated May 19, 1983. On January 5, 1984, the defendant company held an
extraordinary general meeting and approved the amended rules and immediately
thereafter sought the approval of the Central Government. Within thirty days of
the Central Government's approval, the rules were submitted before the
Registrar of Companies at Kanpur and got the same approved. After having
completed the formalities, the respondent company held the executive committee
meeting on April 4, 1984, and fixed the holding of the fourth annual general
meeting for May 14, 1984. During this process, a period of two years has expired
inasmuch as the annual general meetings have not taken place for the years 1982
to 1984.
The contention of the
learned counsel for the plaintiff is that the election be now held for all the
27 posts the holders which were to retire after the holding of the third annual
general meeting in the year 1981, in case the convening of the fourth annual
general meeting is held to be in order. It is not disputed that the defendant
council has on its board 27 elected members and four Government officials.
One-third of such directors have to retire every year by virtue of the
provisions of section 256 of the Companies Act. The plaintiff is not one of the
retiring directors. It may be that by virtue of the judgment of S. S. Chadha
J., the rules of the defendant company were held invalid and they were directed
to amend the same. At this stage, I do not propose to interpret the judgment of
S. S. Chadha J. but the fact remains that it will have prospective effect. The
defendant company cannot be held negligent or blamed for not holding the annual
general meetings. In fact, they were helpless in view of the circumstances
created by the filing of the various suits. As per the order sheet dated May
15, 1984, during the pendency of the suit, the defendant council was directed
to hold the elections of the executive committee members on May 16, 1984, at 2
p.m. but the result of the election was not to be declared. This order was
modified by the Division Bench of this court, wherein the council was directed
to declare the result of the election but the members declared elected were
required not to act till the decision of the present suit. It comes to this
that the 9 members of the executive committee have already been declared
elected. It is not denied that the fifth annual general meeting has already
been held except for the election of the executive committee members because of
the order of the Division Bench. Learned counsel for the defendant states at
the Bar that immediately after the decision of this case, they propose to hold
the election of the 9 members for the fifth annual general meeting in the month
of February, 1985, and they will hold the next annual general meeting and in
this way all the 27 members will be declared elected. For the reasons explained
above, I am not inclined to issue any directions to the defendant council for
holding the election for at least 18 members as urged by the learned counsel
for the plaintiff because this direction will not only be a harsh one, but will
also create lot of complications. The law must take its own course. Under no
circumstances, the defendant council can be blamed for not holding the annual
general meetings or electing one-third members. At this stage, I am not
inclined to grant this discretionary relief in favour of the plaintiff. Ordered
accordingly.
Issue
No. 5 :
Learned counsel for the
plaintiff in support of this issue contended that the defendant council acted
mala fide and with oblique motive to despatch the notices for the holding of
the fourth annual general meeting on a day which will deprive the members for
contesting the election for the membership of the executive committee of the
council. According to him, if the executive committee of the council had held
the meeting on April 4, 1984, and decided to hold the fourth annual general
meeting on May 15, 1984, there was no occasion for them to have despatched the
notices at such a late stage. Their intention obviously is to keep the people
in dark about the holding of the annual general meeting and deprive the eligible
members to contest the election.
Prima facie none of these
arguments has any substance. To start with, the plaintiff unfortunately has not
named the officer of the defendant company or the office bearers who could be
said to be in league for not despatching the notices within reasonable time.
Mala fides have to be alleged against some person. The defendant in this case
is the council. The particulars about the fraud or mala fides or motive are
missing. The general allegations of mala fides/motive, however strong the words
in which they are stated may be, if unaccompanied by particulars, are
insufficient to amount to an averment of the fraud or mala fides or motive of
which any court can take notice. Even otherwise, as observed earlier, section
53(2) of the Companies Act gives the right to the defendant council to serve
the members with the notice of the meeting at the expiration of 48 hours after
the letter containing the same is posted. This legal obligation has been duly
complied with by the defendant council. Furthermore, as already discussed
earlier, the council started issuing notices by citations in the various
newspapers throughout India, intimating the date of the meeting, requiring the
members to furnish their correct addresses and to send their nominations within
the statutory period. These publications continued appearing from April 5,
1984, to April 15, 1984. The defendant also started despatching the letters to
individual members supplying information about the holding of the fourth annual
general meeting. In compliance of the service of the individual notices as well
as the publication in the various newspapers, the defendant council was able to
correct the list of the members by April 20, 1984. By this time they also
started receiving the nominations for the post of executive committee members
the lists of which were published from time to time. While in the witness box,
even the plaintiff has not led any evidence showing the mala fides/motive on
the part of the defendant council to secure the re-election of the retiring
members by not sending notices. Unfortunately, she also did not mention the
name of any person/office-bearer or the member of the executive committee
alleging mala fide intention. The plaintiff having failed to furnish the
necessary particulars either in the plaint or in the form of evidence, this
issue has to be decided against the plaintiff.
Issue
No. 6:
Learned
counsel for the plaintiff has not pressed this issue and the same is hereby
decided against the plaintiff.
Issue
No. 7 :
It is the case of the
defendant that the plaintiff even after having been duly served with the notice
giving her clear 14 days, preferred to file the present suit on May 11, 1984,
when May 12, 13, 1984, were holidays for the courts, being Second Saturday and
Sunday. After having obtained the ad interim injunction on May 11, 1984, the
same was not got served intentionally immediately thereafter. The defendants
made all arrangements for the holding of the annual general meeting on May 14,
1984. Many members have reached Delhi from distant parts of the country to
attend the meeting. The plaintiff intentionally served the notice of the ad
interim injunction at 11 a.m. on May 14, 1984, whereas the meeting was fixed
for 11.30 a.m. According to the learned counsel, the plaintiff was fully aware
of the fact that the office of the defendant council was functioning on May 12,
13, 1984, as they were expected to receive proxies, 48 hours before the time of
commencement of the annual general meeting, as well as were also required to
give the inspection of the proxies as per the provisions of the Companies Act,
before the closing hours on May 13, 1984. This fact was known to the plaintiff
and she was also aware of the name of the counsel for the defendant. The
conduct of the plaintiff, according to the learned counsel for the defendant,
disentitled her to any relief in the suit.
Learned counsel for the
plaintiff, on the other hand, submits that May 11, 1984, was a Friday and 12th
and 13th being holidays, the plaintiff had no other option but to serve the
defendant with the ad interim order on May 14, 1984, which she did in the early
hours of the next working day.
The defendant cannot impute
motive or hold the plaintiff responsible for the delay or laches in the filing
of the present suit.
On a consideration of the
material on record, in my opinion, the defendant has something to say on this
aspect. As already observed, the plaintiff not only was served with a notice of
the holding of the annual general meeting but she was also aware of the annual
general meeting from other sources, including that of publication in the
various newspapers. In her cross-examination, she had also admitted that by
writing the letter, exhibit D-1, that Shri Mohanjit Singh had betrayed their
association (GEA), she meant to say that Mohanjit Singh had betrayed the
association by his entering into an agreement with another association of
garment exporters, other than the defendant council. She has also been
participating in the affairs of defendant No. 1 council by issuing pamphlets
and taking up the cause of the members of the council. If she had any
grievance, the cause of action had arisen immediately after the service of the
notice of the holding of the annual general meeting. There was no reason for her
to have delayed the action and disturb the annual general meeting at the last
moment thereby causing inconvenience not only to the defendant council but also
to the various members who had reached Delhi from distant parts of the country.
Even if she had been successful in obtaining the ex parte ad interim injunction
on May 11, 1984, it was her bounden duty to have served the officers of the
defendant council on that very day or at least on the next day, so that the
council may have taken steps either for the vacation of the ex parte ad interim
order or informing its members not to attend the meeting. She was also fully
aware of the fact that Shri G.L. Rawal, advocate, is the retainer of the
defendant council and even if she was under a wrong impression that the office
of the defendant council will remain closed on May 12, 13, 1984, an attempt
should have been made to serve on the advocate at his residence/office. No
explanation is forthcoming as to why she did not care to take steps in this
direction. The only inference that can be gathered is that she had the
intention to disturb the annual general meeting and, as such she can be held
responsible for the delay and laches for the filing of the present suit which
disentitles her to the relief claimed in the present suit. This issue is,
therefore, decided against the plaintiff.
Relief:
As a
result of the above discussion, I see no force in the suit and the same is
hereby dismissed with costs.
[1981]
51 COMP. CAS. 475 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Edward Ganj Public Welfare Association
S.S.
SANDHAWALIA, C.J.
AND
J.V. GUPTA, J.
APRIL
30, 1980
J.S. Narang for the
Appellant.
R.C. Dogra and S.K. Galhotra for the
Respondent.
S.S. Sandhawalia, C.J.—This appeal, under cl. 10 of the Letters Patent, is
directed against the judgment of the learned single judge whereby he dismissed
a petition under s. 257 read with ss. 629A and 171 of the the Companies Act,
1956, read with r. 9 of the Companies (Court) Rules, 1959.
It is unnecessary to advert
to the facts in any great detail. It suffices to mention that the primary and
indeed the sole relief claimed in the aforesaid petition was that the company's
election held on September 8, 1975, be declared illegal and void. A reference
to the petition, the reply filed on behalf of the respondents and the
replication filed thereto would plainly indicate that a contentious dispute on
facts has been raised. The learned single judge, relying on two earlier
authorities of this court, dismissed the petition on the ground that the civil
court had the jurisdiction to go into the matter and relegated the petitioners
to file a civil suit.
Perhaps unable to raise any
meaningful challenge, to the judgment of the learned single judge, the learned
counsel for the appellants pinned himself on the use of the word
"competent" by the learned single judge in disposing of the petition.
In the present case, we are disinclined to advert to this aspect of the case
because undeniably an intricate dispute on facts had been raised and the
learned single judge, therefore, declined to go into the same and leave the
appellants to their ordinary and the more appropriate remedy by way of civil
suit. As we read the judgment, the clear tenor thereof is that the appellants
should resort to the ordinary jurisdiction which is obviously more suitable to
the resolving of issues of fact. Mr. J. S. Narang for the appellant was himself
very fair in conceding that undoubtedly the civil courts had the jurisdiction
to go into the nature of the disputes sought to be raised in the petition and
grant the relief which was primarily claimed therein.
In this view of the matter, we do not find any merit
in this appeal, which is hereby dismissed. Parties are, however, left to bear
their own costs.
[1986] 60 COMP. CAS. 14 (
HIGH COURT OF
v.
R. K. KAPUR AND D.
P. WADHWA JJ.
MAY 9, 1984
K. K. Mehra and Miss Poonatn Wadhwa
for the petitioner.
S. N. Kumar and Man
Mohan Krishan for the Respondent.
D.
K. Kapur J.—Company
Petition No. 58 of 1979, which is a petition under sections 397 and 398 of the
Companies Act, 1956, is pending before the company judge. Company Application
(C. A. No. 111 of 1983) was moved by the petitioners seeking directions
regarding the year ending March 31, 1982. The application was filed on February
7, 1983. It was claimed in the application that the existing executive
committee of the company became functus officio on September 30, 1982, and
could not legally function beyond that date. The annual general meeting had
already been delayed and it was prayed that certain articles and rules should
be changed or amended to bring about a fair and legal meeting and elections. It
was also prayed that the register of members should be corrected
first and bogus members be removed. Furthermore, it was claimed, the elections
should be held under the supervision of the court with an impartial and independent
chairman.
This application was
decided on July 22, 1983, by the impugned order. The appellants have challenged
the various directions made in the order as well as the changes made in the
articles of association and election rules of the company.
It must here be stated that disputes relating to
the motion pictures association have been before the court almost continuously
since the year 1973 and various orders of various company judges have been
passed during the pendency of these petitions and other proceedings before the
company court regarding the holding of the annual general meeting. The order
under appeal is, however, somewhat different from orders made in the past,
because in the past, either directors have been appointed to the company or an
observer, has been appointed regarding the meeting. In the present case, a
committee has been appointed to hold the elections and also drastic changes
have been made in the election rules and also the method of elections, which
have been challenged on various grounds before us on the footing that the court
cannot depart from the Companies Act with regard to the holding of the annual
general meeting and also complaining that the election procedure cannot be
changed so as to deprive a number of members of their right to stand for
elections, and also, complaining that the elections are almost impossible to be
held under the directions made by the company court.
It must here be said that
the court has not been very successful regarding the conduct of elections in the
past. The company petition has been pending from 1979 and notwithstanding the
orders of the Supreme Court passed in 1982 that the case should be heard day to
day and decided in two months, it is still far from a decision even in 1984. At
the same time, it appears that subsequent elections and the annual general
meeting and so on are also under challenge in various sub-proceedings. It is,
therefore, imperative to re-think over this matter in a practical manner rather
than create a situation in which every election is liable to be challenged in
proceedings before the company judge, thus making it impossible to decide the
main petition.
Now, the various
alterations made by the company judge in the order under appeal can be set out
and analysed. The court has given its reasons in one order and then, as two
sub-annexures to this order, has given directions regarding the holding of the
meeting and changes to the election rules.
It is necessary now to
analyse the directions first. It is stated therein that the elections were to
be held on May 30, 1983, but in view of the changes in the election rules and
procedure, the same have been postponed. The actual dates and programme have
now to be decided by the committee appointed by the court. The court has then
appointed three persons, namely, Shri Shyam Behari Mehra, Shri K. M. S. Khan
and Shri R. K. Kaul, Joint Registrar, of this court, to be the committee of
which Shri R.K. Kaul is to be the chairman with a casting vote. The committee
can take assistance of other officials of the court. The elections are to be
conducted by this committee at
The next set of directions
in the judgment are the amendments to the election rules. The changes are with
regard to how a representative of a company or a representative of a
partnership firm can vote or stand for election. According to the first
amendment, such representatives can stand for election, but this was not
permitted under the existing election rules. The second amendment is that the
authorisation to the representatives of firms or companies should be in the
prescribed form and a copy of the resolution of the firm or company should be
sent to the association. The third amendment is that annexure II to the
articles of association is deleted. The fourth amendment is that no person, who
has been a member of the executive committee for two years is entitled to
contest unless there is a gap of one year. The fifth amendment is that natural
persons cannot vote more than once. The sixth amendment is that a firm can be a
candidate and the seventh amendment is that a director, secretary or manager of
a company can be a candidate. The next amendment is that the elections should
be held at three places,
In order to understand these
amendments, it is also necessary to understand the set up of the company. The
company can have as its members, natural members, company members and
partnership firm members. These persons must either be exhibitors or
distributors of motion pictures in
The other changes made in
the election rules are such that it is difficult to see how the elections can
be held. For instance, rule 6 of the existing election rules provides that
non-members or attorneys or agents or representatives of any type of member
cannot be a candidate. According to the proposed changes, directors of
companies, secretaries or managers can also be candidates. At the same time,
members of firms are also debarred under the existing rule which is as follows
:
"Partners
of partnership firms, members and representatives of body corporates, even
though authorised under section 187 of the Companies Act, 1956, cannot nominate
or be nominated."
The purpose of the existing
rule was to ensure that only persons who were members in their own right could
be candidates and not persons who were either partners or directors or
employees or partnership firms or companies. We do not see why there should be
any departure from the existing rules regarding who can stand for elections and
none have been pointed out in the judgment. In fact, there is nothing about
this in the application. We do not know why the company judge has differed from
the existing rules regarding who can stand for election and become a member of
the executive committee. As the rules stand at present, only natural members
can stand and only natural members can nominate.
Then there is the question
of voting. As far as the companies are concerned, there is no difficulty
because all that the company has to do is to send its resolution under section
187 of the Companies Act, 1956, regarding who is the person authorised to vote.
This is also set out in annexure "F" to the election rules. The case
of partnership firms presents special difficulty which will be dealt with later
on in the judgment.
The next amendment is that
a person who has been a member of the executive committee for two years is not
entitled to contest without a gap of one year. This has been introduced because
it appears that the counsel stated that an amendment of this type could be made
on the lines of the Bar Association of the Supreme Court. We fail to understand
how the Companies Act can debar a person from standing for elections, if he
wants to. There has to be a specific decision of the members to introduce a
special article to create such a bar. If a meeting of the company amends the
article to this effect, it will be a moot point whether the amendment will be
valid. But, assuming it is valid, it must have the support of the requisite
majority of the members. This is a drastic alteration of the democratic right
of every member to stand for election. In the case of companies and partnership
firms, the bar is created by the fact that the firm is the member and not the
partner and in the case of the companies, the company is the member and not its
director or manager. To explain this, section 187 of the Companies Act, 1956,
has only to be referred to. It states that a body corporate whether a company
under the Act or not can authorise such persons as it thinks fit to act as its
representative at the meeting and such person can exercise the power of vote as
if he was an individual member. This section is limited to companies and body
corpo-rates and does not apply to partnership firms. It, therefore, comes about
that a partner, who is a member of a firm which is itself a member, cannot
stand for election and nor can a director or an employee of a company member.
Any departure from this is a drastic change in the Companies Act and cannot be
directed by the company judge. It is a legislative Act.
The next amendment is that
one person can only vote once, i.e., if he votes in his own right, he cannot
vote for any partnership firm or any company. This amendment is
ununderstandable and seems to be inconsistent with the fact that a person can
be a member in his own right and also a representative of a company or
partnership firm. No partnership firm can vote except through a representative
and the same applies to companies. This amendment is, therefore, totally
unnecessary and seems to be inconsistent with the articles and the election
rules. The next two amendments regarding the authority of firm members to be
candidates or company members to have their own directors, secretaries or
managers as candidates has already been dealt with.
Coming now to the two
remaining amendments, namely, that the elections should be held at three
places, Delhi, Kanpur and Allahabad and that the articles of association of the
election rules inconsistent with the amendments shall stand amended, we think
that the direction regarding the holding of the annual general meeting at three
places cannot be given in law as it is inconsistent with the Companies Act, and
this means that virtually all the proposed changes to the election rules have
to be held to be unnecessary except the one relating to partnership firm
members con-concerning which we will give separate directions.
It is now necessary to
analyse the directions regarding the holding of the annual general meeting.
These directions were challenged on a large number of points by learned
counsel, but it seems unnecessary to analyse this matter too deeply as the
scheme of the Companies Act is that there should be an annual general meeting
each year at which the accounts are presented and are passed with or without
modification, the report of the directors is presented, the auditors are
appointed and the retiring directors are replaced by others. In most companies,
only a few directors retire at the annual general meeting. In the case of this
particular company, which is a section 25 company, all the executive members
including the office bearers retire and have to be replaced by a new executive
committee. In a company which has a share capital, the fate of the elections is
determined by a majority of the votes determined from the shareholding. Thus,
even if there is one member owning a large number of shares, he can outvote
every person holding lesser shares because each share has one vote. In a
company, like the present, there is only one vote per member because there are
no shares. Thus, the annual general meeting to be held under the Act has to
include not only the elections of the new executive committee but also the
other ingredients of an annual general meeting. Various provisions of the
Companies Act, like sections 166, 167 and 168, indicate that the annual general
meeting has to be held and the consequences of not holding it may be a criminal
offence. Section 173 indicates that the annual general meeting has to have its
normal business, the consideration of the accounts, the balance-sheet and
reports of the board of directors and auditors, the declaration of dividend,
the appointment of directors and the appointment of auditors. The appointment
of directors has, therefore, to be done at an annual general meeting and not
otherwise.
The most important
provision as far as the directions regarding the meeting are concerned are
contained in sections 166(2) and 168 of the Act. Sub-section (2) of section 166
provides that the annual general meeting has to be called at a time or place
during business hours on a day not being a public holiday and the meeting has
to be held either at the registered office or at some other place within the
same city, town or village where the registered office is situate. Thus, the
annual general meeting has to be held at Delhi and cannot be held elsewhere.
The direction regarding the meeting to be held at Delhi, Kanpur and Allahabad
is, therefore, invalid as far as the Act is concerned.
Then section 167 allows the
Central Government to call the annual general meeting. This shows that the
court has not been given any power regarding the annual general meeting. The
only power of the court was to call a meeting under section 186, but that was a
meeting other than the annual general meeting. Even that power has been taken
away by the Amendment Act of 1974. Thus, at present, the court has no power to
hold an annual general meeting or even any other meeting of the company. On
this ground, it is submitted that the directions of the court are ultra vires
the Act. We would prefer not to go into this question because we do not think
it necessary to direct that the meeting should be held at three places.
There are also other
reasons for this. In the case of election for this particular company, there
are no proxy votes allowed, so the member has to come in person or not to vote
at all. The existing election rules show that the candidates and their
representatives can object to the identity of the voters which has to be
decided by the chairman of the meeting. This is rule 13. The chairman has to be
an independent man as provided in rule 19. If the election is held at three
places, the possibility of substitute voters, which is one of the problems, is
likely to arise. As, in the case of any dispute, a reference to the records of
the company may be necessary for purposes of identification, the most
convenient place to hold the meeting is at the registered office or at some
other place where the records can easily be brought.
Then we have to refer to
section 168 which provides for prosecution in case of delay in holding the
annual general meeting. The directions of the court are that the meeting"
is to be conducted by three persons who are not directors. It is open to the
court to appoint these three persons as directors of the company when they will
be liable for the default if any. We fail to understand how they can be made
responsible for holding a meeting which under law has to be held by the
existing board of directors. There are two possibilities. Either the executive
committee as existing cannot hold the elections in which case an order has to
be sought from the Central Government under section 167, or it is the executive
committee which has to hold the meeting, as they are the persons who are liable
for any default under section 168. It is, therefore, essential that the
executive committee should hold the elections. But, the court can make
provision for the proper conduct of the elections by nominating a chairman as
visualised by rule 19. We think that we should replace the direction by
appointing a person to be the chairman of the actual meeting as far as the
election part is concerned as visualised by rule 19 of the election rules of
the company. The chairman so nominated will take over after the other business
of the annual general meeting has been completed for the purpose of the
elections. We will also give directions regarding assistance to the chairman by
the officials of the court.
Turning now to the question
of settling the register of members and the voters list, we are faced with a
formidable set of objections and a great practical difficulty in complying with
the order passed by the company judge. The only purpose of the directions was
to hold the meeting, i.e., the annual general meeting. The register of members
of the company for past years is quite immaterial. An investigation into how
persons have become members or have ceased to be members is an endless process.
There are too many ways in which a person ceases to be a member, to justify
investigation prior to the meeting and this is a too long drawn out process for
holding an annual general meeting. We would, therefore, be of the view that it
is unnecessary for the committee to first make an investigation as to how many
members have been removed from the membership. As the meeting has to be held
within the statutory period, any delay is unjustified. The effect of the order
has been to continue the executive board for nearly a year because the meeting
was to be held in May, 1983, and as a result of the directions, it has been
unnecessarily postponed. We have examined the report submitted by the board
which shows that 498 persons have been removed from the membership of the
association and only 142 members have joined from January 13, 1982, to July 31,
1983. Also, the membership as on January 12, 1982, was 1,359. Also, 400 persons
had applied for membership between January 1, 1975, to July 31, 1983, which are
still pending. As far as persons who have not become members are concerned, we
do not think anything can be done by the company judge. As far as the persons
who have been removed from membership are concerned, they have every right to
move the court under section 155 of the Companies Act. If each of these cases
is investigated independently, we doubt that the result recorded by the
committee would have any legal backing or would have the effect of bringing
them back. When there is an express provision of law, namely, section 155,
enabling the company court to rectify the register, only the court has to act
under that section or it can refuse relief. But, a general power of this type
cannot be handed over to a committee. It is a judicial matter as to whether a
person has been rightly or wrongly removed from membership. None of those persons
appear to have moved the court by way of a petition under section 155 or by
recourse to the civil court. We do not see why the court should make any
investigation into this matter thus creating a lot of further complications in
what would otherwise have been quite a simple procedure. We, therefore, think
that there is no purpose in the court trying to rectify the register of members
on its own initiative by a procedure which is somewhat different to that laid
down in the Companies Act.
This brings us to the
question as to how the voters list has to be settled. There is a procedure laid
down in the election rules of the company. This states in rule 18 that the
register of members shall remain closed eight clear days before the holding of
the annual general meeting and no person will be admitted to membership
thereafter. This means that when the date of the annual general meeting is
announced, more members can be enlisted or allowed to join till eight clear
days before the date of the meeting. Normally, such persons would be entitled
to vote at that meeting, so there is no purpose in settling the voters' list in
advance.
Then there is rule 17, which states that the
secretary of the company shall prepare a role of members entitled to vote.
These persons will be all proprietary firm members in their own right giving
the name of the member who is entitled to vote ; the names of partnership firm
members together with the name of the authorised partner in whose favour an
authorisation has been given and, thirdly, the name of the authorised
representative of company members in whose favour valid resolutions have been
filed. Thus, the list consists of natural members and representatives, i.e.,
partners of firms who are entitled to vote and authorised members of company
members. This rule further shows that persons in arrears of subscription are
not included in the voters list.
So, the procedure
visualised by the election rules is that the voters list will consist of
members who are borne on the register of members which may consist of natural
members, and partners of firms who have been authorised to vote. We see nothing
wrong in this method of settling the voters list. It is designed to facilitate
voting.
Now, we can visualise the
worst situation that persons who are otherwise entitled to vote are removed
from the voters list with a view to manipulate the elections. The chairman
appointed by us will take into consideration any objections against wrongful
removal from the voters list and allow the vote to be cast under objection
separately if he thinks that there is some substance in the allegation of
wrongful removal. We will give directions in this respect at the end of the
judgment.
In the result, all the
directions and amendments to the election rules as given by the learned single
judge are set aside except to the extent indicated above. But, directions have
now to be given regarding: (a) a chairman to be appointed for the elections as
discussed above, (b) the procedure to be adopted by him regarding persons wrongly
removed from the voters list, and (c) regarding the election rules, an
amendment has to be made to enable partnership firms and companies for casting
their votes in accordance with the said election rules.
Taking up the amendment to
the election rules first, the relevant rule is rule 10, which provides as
follows :
"10.
Who can vote :
A member of the
association, who is :—
(a) the proprietor of
a proprietorship firm member ;
(b) Any one of the partners of a partnership firm member duly authorised
by all other partners of such partnership firm to cast vote on behalf of the
firms in writing, as per authority letter issued by the association in terms of
annexure II of the articles of association passed by the Hon'ble High Court ;
(c) the managing director or any one of the directors or the
secretary or any other officer of a company member duly authorised under a
resolution passed by the board of directors of the company-member concerned, in
terms of section 187 of the Companies Act, 1956, to cast vote on behalf of the
company-member concerned (specimen copy of the resolution is attached in
annexure 'F' hereto) can cast vote, provided, however, that :
(i) the required certified copy of the resolution and/or letter
of authority in regard to the category of members under clause Nos. (b) and (c)
above, in favour of the person authorised to cast vote, shall be filed in the
office of the association at least 4 (four) clear days (excluding the due date
of receipt of such resolution and/or letters of. authority and the date of the
general meeting) before the date of the relevant general meeting at which the
election is to take place, and if that day happens to be a holiday, on the day
preceding it ;
(ii) the name of the member on whose behalf the authorisation/
resolution is being filed, is on the register of members of the association on
the date of filing of such authorisation/resolution and continue to be so,
until the date on which the register of members is closed, prior to the general
meeting at which the election is to take place ;
(iii) a member, who has not paid the membership
subscription in terms of article 20 of the articles of association, or any
other dues to the association, and continues to be a defaulter, is not eligible
to vote, in terms of article 62(ii) of the articles of association,
notwithstanding the fact that the name of such a member appears on the register
of members of the association on the date of filing of the required
authorisation/resolution and continues to be so until the date of closure of
the register of members prior to the election ;
(iv) in the case of partnership firm members with only one major
partner, no authorisation will be necessary, as such a major partner will be
deemed to be in the position of a sole proprietor for the purpose of voting
only ; provided, however, a declaration has been already made about the age of
the second minor partner in the membership application form itself, while
membership application form was filed by the partnership firm.
If there is any constitutional defect in the
concern of any member, the record of the association so maintained, shall be
final for the decision of the chairman and no member shall raise any objection
for his own fault for not correcting his/her record in the association."
In respect of this rule,
there can be no doubt that there is no difficulty about proprietors, i.e.,
members, who are not partnership firms or companies. In the case of a
partnership firm, all that is objected to is the issue of an authority letter
by the association. We propose that annexure II of the articles of association
should be treated as deleted and order accordingly and the unnecessary words in
clause (b) should be deleted. This sub-clause will now read :
"(b) any one of the
partners of a partnership firm member duly authorised by all other partners of
such partnership firm to cast vote on behalf of the firms in writing."
As far as sub-clause (c) is
concerned, there is no real objection to the same. It is retained. As far as
sub-clause (i) of the proviso is concerned, it will remain as it is with the
addition of the following words :
"the
resolutions or letters of authority filed in accordance with this rule shall
continue to operate in all subsequent annual general meetings unless varied by
a specific resolution or letter of authority, as the case may be."
This change is in
accordance with section 187 of the Companies Act, which provides that the
resolution entitles the representative to vote. The section does not
contemplate a fresh resolution being filed for every meeting. There is also
sub-clause (iv) which deals with partnership firms where there is one major
partner and a minor partner which we think may be retained as it is. But, as
this rule visualises objections before the chairman, it is noted here for this
purpose. We think that this amendment in the election rules will facilitate the
voting by the company members and partnership members which is one of the main
points of objection.
Turning now to the appointment
of the chairman, we think that Mr. R. K. Kaul, Joint Registrar of this court,
who has been appointed chairman of the committee can be nominated by us to be
the chairman of the meeting. He will be given a fee of Rs. 2,500 and he will be
assisted by Shri S. M. Saxena, superintendent, who has been associated in the
past with the committee in the previous elections and such other members of the
court staff as the company judge may nominate. The fees of these persons
including Shri S. M. Saxena will be settled by the company judge. The payment
will be made by the company.
Turning now to the question
of objections to the register of members and voters list, as far as the
register of members is concerned, the chairman may for the purpose of the
meeting treat it as conclusive. Unless rectified by an order of the court, the
register of members is effective, and will be used as such at the annual
general meeting for the purposes of voting. However, as a variety of questions
and problems may arise at the meeting when the voting takes place, we would
like to set out a set of directions to meet some contingencies that may arise.
We have kept in view the allegations in the main petition regarding the
possibility of the elections being manipulated :—
(1) It is posssible that a person is entered in the register of
members but is not entitled to be a member. This is a case of possible bogus
voters. In such a case, the chairman may note the objection, but will allow the
person to vote if the name is in the register of members and the voters list.
The court will consider such objection later, if necessary.
(2) It is possible for a person's name to appear on the register
of members and yet not be on the voters list. In such a case, the chairman will
note the nature of the objection and allow the vote to be cast as an object ed
vote. However, the objected vote will not be taken into consideration when
result is declared, but should be kept separate. In case the objection
regarding exclusion is upheld by the court, such vote may have to be in cluded
in the recount, if any, is directed.
(3) There are disputes regarding the identity of a voter or of a
representative which might arise. In such a case, the objection should be
settled on the basis of the record, i.e., the signatures of the voter and those
on the record of the company, or any other method which the chairman thinks
appropriate to the situation.
(4) If there is a person claiming to be a member whose name is
neither on the register of members nor on the voters list, such a person should
not be permitted to vote, but it will be open to the chairman to record the
person's objection, if he is so advised.
(5) These directions only relate to situations we can visualise
and if there are others, the chairman may exercise his discretion.
Before parting with this
appeal, it is useful to say that section 403 of the Companies Act visualises an
interim order of the type that can be passed under section 402, with a view to
bring to an end the oppression or mismanagement visualised by sections 397 and
398 of the Act. The holding of a future annual general meeting under the
provisions of the Companies Act hardly qualifies to be classified as
mismanagement or oppression under section 397 or 398 of the Act. So, it might
be asked, how the court can pass orders altering the election rules or other
procedure relating to the annual general meeting? In this case, it so happens
that the type of oppression or mismanagement alleged in the petition is
connected with the elections because the case of the petitioners is that fair
and impartial elections are not held and the same people come back to power as
members of the executive board from time to time. This may be the result of two
possibilities. Either the elected persons are supported by the majority of the
members, or there is something wrong in the election procedure. With a view to
minimising the possibility of the elections being held in a manipulated manner
or in some manner which prevents a fair and impartial result, we have been
compelled to give the aforementioned directions. We hope that as a result of
the changes, a fair and impartial election can be held.
In the result, we accept this appeal partly and
direct the annual general meeting to be held within the shortest possible time.
The annual general meeting in question relates to the period ending March 31,
1982, and consequently the accounts and reports for that period alone have to
be placed before the meeting. The company court may as soon as these elections
have been held give any directions that may be necessary for holding the annual
general meeting for the subsequent periods, i.e., March 31, 1983, and March 31,
1984, as those periods have also expired in the meanwhile. In view of the
nature of the case and the controversy as well as the result of the appeal, we
allow the parties to bear their own costs.
[1981]
51 COMP. CAS. 487 (
HIGH COURT OF
Oriental Industrial Investment Corporation Ltd.
v.
AVADH
BEHARI ROHATGI AND S.B. WAD, JJ.
JULY
28, 1980
F.S. Nariman, P.N.
Amin, Atul Munim and D.N. Misra for the Petitioner.
S.N. Chopra, C.L. Chaudhary and Sarat Chandra
for the Respondent.
Avadh Behari Rohatgi, J.—This petition under art. 226 of the Constitution raises a
short point. The question is whether the petitioner-company is the holding
company and whether Poonam Hotels Ltd. its subsidiary. The facts giving rise to
the question were as follows:
The petitioner, Oriental
Industrial Investment Corporation Ltd. (Oriental Ltd.) is a public limited
company incorporated under the provisions of the Indian Companies Act, 1913,
and shall be deemed to be incorporated under the provisions of the Companies
Act, 1956 (the Act). Poonam Hotels Ltd. (Poonam Hotels) is also a company
incorporated under the Act for carrying on business of hoteliers. They have a
paid up capital of Rs. 24,70,000 divided into 24,700 equity shares of Rs. 100
each. In March, 1974, Oriental Ltd. acquired 2,490 equity shares of the face
value of Rs. 100 each of Poonam Hotels for the aggregate price of Rs. 2,08,900,
that is, at the average rate of Rs. 89 per
share. This investment was within the limit of 10 per cent. prescribed under s.
372 of the Act.
By an agreement, in
writing, dated August 19, 1975, made between Oriental Ltd. on the one hand and
Poonam Hotels on the other, the Oriental Ltd. was given full and absolute right
to appoint five directors on the board of directors of Poonam Hotels. This gave
power to Oriental Ltd. to appoint a majority of the board of directors of
Poonam Hotels with power to remove any such director and to appoint another in
his place. Poonam Hotels agreed to make necessary changes in its articles of
association and to incorporate therein the agreed rights of Oriental Ltd. to
appoint five directors.
Pursuant to the agreement
dated August 19, 1975, the shareholders of Poonam Hotels, at an extraordinary
general meeting held on August 29, 1975, passed a special resolution amending
the articles of association of Poonam Hotels. The newly added art. 139A reads
as follows:
"139A. The Oriental
Industrial Investment Corporation Ltd. shall have full and absolute right and
power exercisable by it at its discretion without the consent or concurrence of
any other person, to appoint five directors on the board of directors of the
company so as to constitute majority on the board of directors of the company
with power to remove any such director from office on a vacancy being caused
whether by retirement, by rotation, death, resignation, removal or otherwise,
to appoint another and such directors shall not be bound to hold any
qualification shares".
By virtue of the power
given under art. 139A of the articles of association, Oriental Ltd. appointed
five persons as directors of Poonam Hotels pursuant to the resolution of the
board of directors dated August 29, 1975. Having thus established the
relationship of a holding company and subsidiary company, Oriental Ltd.
acquired further 19,447 fully paid up equity shares of Poonam Hotels at an
aggregate price of Rs. 19,56,434.91. Thus, the total equity shares which
Oriental Ltd. held in Poonam Hotels aggregated to 21,847 shares representing
approximately 88 per cent. of the total paid up capital of Poonam Hotels. The
purchase price paid by Oriental Ltd. for 21,847 shares was Rs. 21,334.91.
The accounting year of
Oriental Ltd. is from October 1 to September 30 and that of Poonam Hotels from
January 1 to December 31. On September 19, 1975, Oriental Ltd. made an
application to the respondent, Department of Company Affairs of the Govt. of
India, for necessary permission under s. 213(2) of the Act for extension of the
financial year of Oriental Ltd. so as to bring the same and that of its
subsidiary, Poonam Hotels, in conformity with the provisions of s. 212 of the
Act. The idea was to extend the financial year
of Oriental Ltd. ending on September 30, 1975, to March, 1976. This naturally
meant permission to extend the time for calling the annual general meeting and
time for making the annual return for the relevant period.
Now, the trouble arose. The
Department of Company Affairs of the Govt. of India at once objected to the
claim that Oriental Ltd. was the holding company of its subsidiary, Poonam
Hotels. By their letter dated December 6, 1975, the department took the view
that art. 139-A of the articles of association of Poonam Hotels was contrary to
the provisions of ss. 255, 256 and 257 of the Act and that the said article and
the resolution in this behalf were void in view of the provisions of s. 9 of
the Act. In a word the department held that Poonam Hotels was not a subsidiary
of Oriental Ltd. They, therefore, directed Oriental Ltd. to
"disinvest" the excess shareholding in Poonam Hotels and to comply
with the provisions of s. 372 of the Act.
By way of abundant caution
Oriental Ltd. sought by letter dated March 5, 1976, ex post facto sanction
under s. 372 of the Act in regard to the investment in shares of Poonam Hotels
in excess of the ceiling prescribed by the said section. The department by
their letter dated February 15, 1977, rejected this request and once again
directed Oriental Ltd. to dispose of the excess shareholding within a period of
six months from the date of the order.
The Oriental Ltd. addressed
another letter dated January 13, 1976, to the department requesting them to
reconsider their previous order. By order dated July 5, 1977, the department
reiterated their previous view and held that Oriental Ltd. had contravened the
provisions of s. 372(4) of the Act in acquiring shares of Poonam Hotels. They
once again directed Oriental Ltd. to dispose of the shares within the time
allowed failing which they threatened to take action for the contravention of
the provisions of s. 372 of the Act.
The single question for
decision is whether the relationship of holding and subsidiary company exists
between Oriental Ltd. on the one hand and Poonam Hotels on the other. If the
answer to the question is in the affirmative then it must be held that s.
372(4) does not apply to investment made by the holding company on its
subsidiary.
The case of the department
is that the amendment of the articles of association of Poonam Hotels offends
the provisions of ss. 255, 256 and 257 of the Act and, therefore, Poonam Hotels
cannot be deemed to be a subsidiary of Oriental Ltd. On the view that Poonam
Hotels was not a subsidiary they directed Oriental Ltd. to
"disinvest" their shareholding.
The terms "holding
company" and "subsidiary" are defined by s. 4 of the Act which
proceeds initially to establish the circumstances under which a company shall be deemed to be the subsidiary of
another. If these circumstances of subsidiary relationship are found to apply,
then the other company is deemed to be a holding company.
In general, a company is
deemed to be a subsidiary company of another if,—
(1) the other
controls the composition of its board of directors, or
(2) the other
holds more than half in nominal value of its "equity share capital";
or
(3) a company
is a subsidiary of any company which is in turn a subsidiary of another
company. (s. 4)
The definition is based on
the ability to control the composition of a majority of the board of the
subsidiary. Control involves the power to appoint all or a majority of the board
without the consent or concurrence of some other person. It might arise either
from a holding of shares giving sufficient voting rights or from special rights
conferred by the company's articles. (Gore-Browne on Companies, 42nd Edn., p.
586).
In a commercial sense one
company is considered to be the parent or holding company of another if it
controls the composition of the other's board of directors by being able to
appoint or direct the appointment of a majority of their number. The other
company is then known as the subsidiary of the parent or holding company.
Control over the composition of the subsidiary's board is almost invariably
derived from the voting rights enjoyed by the holding company by virtue of
shares in the subsidiary held by it or its nominees, but it could also arise
from the provisions of the subsidiary's memorandum or articles, or from a
contract with the subsidiary which empowers the holding company to appoint
directors to the subsidiary's board. (Pennington's Company Law, 4th Edn., p.
639).
Section 4 adopts a dual
test: a body corporate is to be regarded as a subsidiary of another (holding
company) if the holding company, (1) controls the composition of its board of
directors in the sense that it has power to appoint or remove a majority of the
board, or (2) holds more than half of its "equity share capital". (See Gower's Principles
of Modern Company Law, 4th Edn., pp. 118-119).
This section is adopted from s. 154 of the English Companies Act, 1948. The
difference between the Indian and English law is that while under the English
section it is necessary for a company to be treated as having the legal status
of a holding company of another that it must both be a member of that other
company and also control the composition of its board of directors, it is
enough under the Indian Act to have control over the composition of the board
of directors of the other company. That is to say, a company will be treated as
holding company of a subsidiary company under the Indian Act even though it may
not be a member of the subsidiary company and does not hold any shares in it.
A company shall be deemed
to be a subsidiary of another if that other controls the composition of the
board of directors. This is one mode of creating the relationship of holding
and subsidiary companies as provided in s. 4(1) of the Act. New s. 4(2) says
that the composition of a company's board of directors shall be deemed to be
controlled by another company if, but only if, that other company by the
exercise of some power exercise-able by it at its discretion without the
consent or concurrence of any other person, can appoint or remove the holders
of all or a majority of the directorships. In the present case, the addition of
a new art. 139A in the articles of association of Poonam Hotels gives absolute
power to Oriental Ltd. to appoint or remove a majority of the directorships of
Poonam Hotels "at its discretion without the consent or concurrence of any
other person". As has been observed by Pennington, control over the composition
of the subsidiary's board can also arise "from the provisions of the
subsidiary's memorandum or articles, or from a contract with the subsidiary
which empowers the holding company to appoint directors to the subsidiary's
board". In this case, there is a clear provision in the articles of
association of Poonam Hotels which empowers Oriental Ltd. to appoint directors
to Poonam Hotels' board. This power was given by virtue of the agreement dated
August 19, 1975, made between Oriental Ltd. and Poonam Hotels. Pursuant to this
agreement, Poonam Hotels passed a special resolution and amended the articles
of association by adding art. 139A. By resolution dated August 29, 1975, passed
by the board of directors of Oriental Ltd. the holding company appointed five
directors on the board of Poonam Hotels. Thus, Poonam Hotels became a
subsidiary of Oriental Ltd. in terms of s. 4(1)(a) read with s. 4(2) of the
Act. This being the conclusion it must be held that s. 372(4) does not apply to
Oriental Ltd. because s. 372(14)(d) clearly says that that section shall not
apply to investments by a holding company in its subsidiary. There is,
therefore, no contravention of the provisions of s. 372 and the view of the
department must be held to be wrong.
Counsel for the department
contended that the control of Oriental Ltd. over the composition of the board
of Poonam Hotels which they exercise by virtue of the agreement dated August
19, 1975, is in contravention of the provisions of ss. 255, 256 and 257 of the
Act. This argument overlooks the important fact that s. 255 excludes from its
purview cases which have been otherwise expressly provided in the Act. The
words "save as otherwise expressly provided in this Act" used in s.
255(1)(b) are of commanding significance. Section 4(2) is an express provision
for the appointment of the directors on the board of the subsidiary. That
provision is not subject to s. 255 because it is expressly excluded. It is true
that s. 255 does not expressly refer to s. 4. But that is not necessary. All
that is necessary is that the excluded
provision must be express, that is clear, definite and explicit. It must be declared in terms by the statute. It
must be set forth in words. It must not be left to inference or implication.
The express provision is a
provision the applicability of which does not arise by inference; it arises
directly from the language used. To be an "express provision" with
regard to something it is not necessary that that thing should be specially
mentioned; it is sufficient that it is directly covered by the language,
however broad the language may be which covers it, so long as the applicability
arises directly from the language used and not by inference therefrom. (Nalla
Karumburu Kayambu Shanmugam v. Commissioner for Registration of Indian and
Pakistani Residents [1962] AC 515, 527 per Lord Radcliffe).
Counsel for the department
argued that the existence of holding-subsidiary relationship in the present
case is not covered by the terms of s. 4(2) because the exercise of the power
is not exercisable by the holding company at its discretion "without the
consent or concurrence of any other person". He said that it was dependent
on the consent of Poonam Hotels. We do not agree. As regards the control of the
composition of the board of directors, this requirement is established only if
the holding company has the independent power to appoint or remove the holders
of all or a majority of the directors, and the Act states three circumstances
in which the requisite power to appoint is considered to exist [s. 4(2)]. (See
Palmer's Company Law, Vol. I, p. 746, 22nd Edn.). By virtue of the agreement
dated August 19, 1975, the exercise of the power to appoint directors is not
subject to the consent or concurrence of any other person. Though that power
originated in contract it was embodied in the articles of association. Poonam
Hotels fulfils the above condition so as to make it a subsidiary of Oriental
Ltd. The Department of Company Affairs cannot deny the relationship of a
holding and subsidiary company existing between them.
In the counter-affidavit of
the department, it was said that an illustration where the directors may be
appointed other than at the annual general meeting by virtue of the saving cl.
(b) of sub-s. (1) of s. 255 of the Act is the appointment of directors by the
Government under s. 408 of the Act. This argument is based on a misreading of
s. 408. That section opens with the words "notwithstanding anything
contained in this Act". This is a non obstante clause which vests overriding
powers in the Government to nominate directors to prevent mismanagement or
oppression.
There is no denying the
fact that the right of the members of a public company to appoint directors of
their choice at a general meeting is greatly abridged when there comes into
being a relationship of a holding and a subsidiary company. But this
restriction inheres in the definition of the holding company. It is firmly
embedded in s. 4. The ability to control the
conduct of the subsidiary is the hallmark of the holding company. The holding
company is the controlling company. The controlled company is called a
subsidiary.
Counsel for the department
finally argued that there was a delay in filing the petition. We are not
impressed by this argument. At the request of Oriental Ltd., the Government
"reconsidered" the matter and the department finally came to the
conclusion in their letter dated 5th July, 1977, that Oriental Ltd. had
contravened the provisions of s. 372(4) of the Act in acquiring the shares of Poonam
Hotels. To contest this view of the department the present writ petition was
filed on September 17, 1977.
For these reasons, the writ petition is accepted
and the decision of the Department of Company Affairs contained in their letter
dated July 5, 1977, including their prior decision dated December 6, 1975, is
quashed. The parties are, however, left to bear their own costs.
[1988] 64 COMP. CAS. 562 (
HIGH COURT OF
v.
Navin Chand Suchanti
DIPAK KUMAR SEN, ACTG., C.J.
AND SHYMAL KUMAR SEN, J.
JANUARY 12, 1988
Dipak Kumar Sen, ACTG.,
CJ.—The material facts on record and the
proceedings leading up to this appeal are, inter alia, that Sinclair Freight and
Chartering Consultants P. Ltd. (hereinafter referred to as "the freight
company") was incorporated under the Companies Act, 1956, on June 20,
1968. Swapan Dasgupta, the appellant, was a subscriber to the memorandum of the freight company
and under article 11 of the articles of association of the freight company the
appellant became and was named as one of its first directors. The appellant was
also appointed a managing director of the freight company and continued as such
till the time as hereinafter stated.
On
December 2, 1971, Sinclair Hotels P. Ltd. (hereinafter referred to as "the
hotels company") was incorporated under the Companies Act, 1956. The
appellant was also one of the subscribers to the memorandum of the hotels
company and under article 11 of the articles of association of the hotels
company, the appellant became and was named as one of the first directors
thereof.
On
July 14, 1978, a scheme of amalgamation was approved and sanctioned by this
court in Company Petition No. 196 of 1978 connected with Company Application
No. 39 of 1978 whereby the business and undertaking including all property,
assets and liabilities of the freight company was directed to be transferred
and vested in the hotels company on the terms and conditions of the said scheme.
After such transfer and vesting, the freight company was directed to be
dissolved.
It
was provided in the said scheme that the hotels company would take over the
services of the existing managing director of the freight company, i. e., the
appellant, on the same terms and conditions.
The
name of the hotels company was subsequently altered to
Subsequent
to the amalgamation, the appellant continued as a managing director of the
hotels company. On May 1, 1981, the appellant was reappointed as the managing
director of the hotels company for a period of five years. On November 4, 1981,
the hotels company was converted into a public limited company and named as
The
appointment of the appellant as the managing director of the said company was
approved by the Central Government by its letters dated September 13, 1982, and
May 17, 1983.
At
an extraordinary general meeting of the shareholders of the said company held
on January 11, 1983, the appointment of the appellant as the managing director
for live years was approved with effect from May 1, 1981.
On
April 30, 1986, the appellant ceased to be the managing director of the said
company but continued to act as a director and the chairman of the board of
directors thereof.
On
August 16, 1986, there was a meeting of the board of directors of the said
company which was presided over by the appellant. At this meeting, a committee
of management was constituted with the appellant as the chairman. Certain
additional duties in respect of the affairs of the said company were allotted
to the appellant and it was decided to issue a power of attorney in his favour.
It was recorded in the minutes of its meeting, inter alia, that the appointment
of the appellant as the chairman-director of the said company had been and was
thereby reaffirmed until the next annual general meeting of the said company.
In the return of the said company filed with the Registrar of Companies on
September 8, 1986, it was recorded that the appellant had been appointed the
chairman-director and the constituted attorney of the said company on August
16, 1986.
On
November 24, 1986, a notice was issued convening the annual general meeting of
the said company to be held on December 29, 1986. Under item No. 6 of the
agenda, an ordinary resolution was proposed to be passed that the appellant be
appointed as a director of the said company on a notice under section 257 of
the Companies Act, 1956, by a member of the company. In the explanatory
statement to the said notice, it was further stated that on August 16, 1986, at
a meeting of the board of directors of the said company, the appellant had been
appointed as the chairman-director and constituted attorney of the. said
company until the next annual general meeting and that the appellant will hold
his office as such additional director up to the date of the said meeting.
In
the directors' report it was also stated that the appellant had retired as the
managing director of the said company on April 30, 1986, but had continued as
the chairman. Pursuant to article 111 of the articles of association of the
said company, the appellant will hold his office up to the date of the next
annual general meeting.
At
a meeting of the board of directors of the company held on November 24, 1986, a
resolution was passed again appointing the appellant as the managing director
and chairman of the said company for a period of three years with effect from January
1, 1987.
On
or about December 22, 1986, one Gopal Vyas, a shareholder of the company,
instituted a suit in this court against the said company and others, being Suit
No. 934 of 1986, entitled Gopal Vyas v. Sinclairs Hotels and Transportation
Ltd. (Suit No. 934 of 1986—22-12-1986), challenging, inter alia, the proposed
appointment of the appellant and others as directors of the said company and
the annual general meeting proposed to be held on December 29, 1986. On the
same date, an ad interim order was passed in the said suit whereby it was
directed that the said meeting would be held on December 22, 1986, only for the
purpose of adjournment and a learned advocate of this court was appointed as
the chairman to preside over the said meeting. On an appeal from the said ad
interim order, on December 23, 1986, the appeal court modified the said ad
interim order and directed that the said annual general meeting would be held
on December 29, 1986, as scheduled but items Nos. 3, 4, 6, 7 and 8 of the
agenda which related to the appointment of directors would stand adjourned till
January 20, 1987. By subsequent directions of the court, the said meeting still
stands adjourned.
On
February 6, 1987, a further order was passed by the appeal court whereby it was
made clear that the order passed by the appeal court on December 23, 1986, was
not intended to affect the position of the existing directors of the said
company by reason of the directions to hold the said annual general meeting in
part and adjourning the other items of the agenda. The parties were, however,
left free to contend that the status of the existing directors of the said
company were affected for reasons apart from the said meeting.
Some
time in June, 1986, Navin Chand Suchanti, respondent No. 1, acquired some
shares of the said company and became a shareholder. On January 7, 1987,
respondent No. 1 filed the above suit, being Suit No. 5 of 1987, against the
appellant and respondents Nos. 2 to 9 with leave under Order 1, rule 8 of the
Code of Civil Procedure claiming, inter alia, a declaration that appellant No.
1 was never appointed as an additional director of the said company and that
the appellant and Sanat Kumar Mukherjee, respondent No. 2, were not directors
of the said company after December 29, 1986. Respondent No. 1 also claimed a
permanent injunction restraining the appellant and respondent No. 2 from
representing or holding themselves out or acting or functioning as directors of
the said company in any way and from interfering with the management and
affairs thereof. A permanent injunction was also sought restraining the
appellant and respondent No. 2 from entering into or attending the offices of
the said company. On the same date, that is, January 7, 1987, respondent No. 1
moved an application in the said suit for the following interim orders:
(a) An injunction restraining the appellant
and respondent No. 2 from representing or holding themselves out or acting or
functioning as directors of the said company in any way and from interfering or
inter meddling in the management and affairs of the latter.
(b) An injunction restraining the appellant
and the respondent No. 2 from entering or attending the offices of the said
company.
The
Case of respondent No. 1 in his pleadings was, inter alia, that the appellant
was appointed as a managing director of the said company for a period of five
years from May 1, 1981. On April 30, 1986, the appellant ceased to be the
managing director of the said company.
On
the basis of the minutes of the meeting of the board of directors held on
August 18, 1986, and the said notice of the annual general meeting of the said
company dated November 24, 1986, the appellant was claiming to have been
appointed as an additional director of the said company on August 16 1986. It would
be apparent from the minutes of the said meeting of the board of directors held
on August 16, 1986, that the appellant was not appointed as an additional
director of the said company at the said meeting.
In
any event, the appointment of the appellant as an additional director, if at
all, could continue only until the next annual general meeting of the said
company. In the agenda of the said annual general meeting under item No. 6, it
was proposed to appoint the appellant as a director of the said company. In the
explanatory statement annexed to the said notice, it was stated that the
appellant continued to hold office as an additional director of the said
company only up to the date of the said annual general meeting.
Under
section 260 of the Companies Act, 1956, and also under article 111 of the
articles of association of the said company, the appellant, as an additional
director, could hold his office only up to the date of the next annual general
meeting of the said company. In the premises, on the date of the next annual
general meeting, i.e., December 29, 1986, the appellant ceased to be a director
of the said company. In spite thereof, the appellant has continued to represent
and had held himself out to be a director of the said company, was acting as
such and interfering and intermeddling in the management of the affairs of the
said company.
The
appellant affirmed on affidavit on January 10, 1987, which was filed in
opposition to the petition of respondent No. 1. It was contended in the said affidavit
that the suit filed by respondent No. 1 as framed was not maintainable as the
said company had not been made a party thereto. It was contended further that
the said company should have been the proper plaintiff and there was no
explanation why it was not impleaded. The suit was liable to be dismissed on
the ground of nonjoinder of the said company. In any event, respondent No. 1
was not entitled to any interlocutory relief and leave granted under Order 1,
rule 8 of the Code of Civil Procedure should be revoked. It was further
contended that he had been a director of the hotels company and the freight
company which were private limited companies since their inception and was also
the managing director of the freight company. After the merger of the said
companies, the appellant was appointed the managing director of the hotels
company in terms of the scheme sanctioned by this court. He was thereafter
reappointed as the managing director of the said company by its board of
directors with effect from May 1, 1981, for five years.
The
appointment of the appellant as the managing director of the said company was
approved by its shareholders at an extraordinary general meeting held on
January 11, 1983. The said appointment was also approved by the Central Government.
It
was contended that the appellant was not appointed as a director, additional or
otherwise, at the general meeting of the board of directors of the said company
held on August 16, 1986. The appellant was already a director on that date.
After the expiry of his appointment as the managing director of the said
company, the appellant continued as a director thereof. The termination of the
office of the managing director did not bring to an end the office of the
appellant as a director. This position was reiterated and reaffirmed at the
said meeting of the board.
The
notice of the annual general meeting to be held on November 24, 1986, the
explanatory statement thereto and the relevant portions of the directors'
report for the said meeting had to be construed in the context of the aforesaid
and to the extent the same were inconsistent with the aforesaid would be of no
consequence. The same would be subject to suitable correction and the said
meeting had been adjourned under orders of this court.
It
was contended in the alternative that the description of the appellant as an
additional director appointed on August 16, 1986, was a mis-description or a
misnomer and did not affect the factual position that the appellant was a
director of the said company and was entitled to continue as such till the next
annual general meeting of the company was held. The said annual general meeting
has not yet been concluded and after transaction of some business had been
adjourned under orders of court.
Respondent
No. 1 affirmed on affidavit on January 12, 1987, which was filed in reply to
the aforesaid affidavit of the appellant. It was alleged in the said affidavit,
inter alia, that the appellant was never appointed as a director of the said
company. In any event, the appellant could not continue to act as a director or
managing director of the said company after April 30, 1986. In the alternative,
it was contended that the appellant was only entitled to hold office as a
director up to the date of the next annual general meeting of the said company
to be held on December 29, 1986, after which he would cease to be a director of
the said company.
The
said application of respondent No. 1 was allowed as against the appellant by a
judgment and order dated November 19, 1987, of the first court. It was held by
the learned judge, inter alia, that the application of respondent No. 1 was
prima facie maintainable as respondent No. 1 was not asserting any corporate
right. The said company might be a proper party but it could not be held prima
facie that it was a necessary party in whose absence no interim order could be
passed.
The
learned judge noted that the appellant was not quite clear about his case and
that there was some confusion in his pleadings. It was held that it was not established
that the appellant was appointed as an additional director on August 16, 1986,
though he was described as such in the records. It was also not shown that the
appellant has been appointed a director by the shareholders of the said company
at any annual general meeting. On the facts, it was necessary for the court to
construe the scope and effect of section 260 of the Companies Act, 1956, in the
case of the appellant. The learned judge noted that the appellant had made out
a contrary case before the Company Law Board contending that he was appointed
as an additional director of the said company on August 16, 1986, and that
there was no evidence that the appellant was ever appointed a director by the
shareholders. The learned judge recorded that the articles of association of
the said company as also those of its predecessors in force at the relevant
time in 1971 were not produced. The subsequent articles of association adopted
by the said company, it was held, were not relevant. The learned judge came to
the conclusion that the appellant had failed to establish that he was a
director appointed by the shareholders or that he had been appointed as an
additional director of the said company on August 16, 1986, or at any other
meeting.
The
present appeal is from the said judgment and order dated November 19, 1987. At
the instance of the parties, the appeal was treated as in the day's list and
was heard along with the application filed in the appeal. The appearing
respondents waived service of the notice of the appeal. Service of such notice
on the non-appearing respondent was dispensed with. By consent of the appearing
parties, filing of paper book was dispensed with and the undertaking given in
that behalf was directed to stand discharged. The records and pleadings before
the first court were produced and considered.
At
the hearing, learned advocate for the appellant produced before us the original
memoranda and articles of association of the hotels company and the freight
company as at the time of their incorporation. The memorandum and articles
which were adopted after the freight company merged into the hotels company and
which were again adopted when the amalgamated company was converted into a
public limited company were already on record.
Learned
advocate for the appellant submitted that the appellant had been duly appointed
as one of the first directors of the hotels company as also of the freight
company under their respective articles and that the appellant had continued in
his office as such director all along. After the freight company merged into
the hotels company, the appellant continued to be a director of the amalgamated
company by reason of his original appointment as a director in both the
original companies. The hotels company and the freight company, till their
amalgamation, remained private companies. After the merger, the amalgamated
company also remained a private company till November 4, 1981. It was submitted
that till November 4, 1981, there was no question of retirement of the appellant
from his office as a director under sections 255 and 256 of the Companies Act,
1956, inasmuch as till that date the companies involved remained private
companies.
It
was submitted that after the amalgamated company became a public company, the
question of retirement of the appellant from his office as a director thereof
arose for the first time. But on May 1, 1981, the appellant was duly
reappointed as the managing director of the said company for a period of five
years. Under article 144 of the articles of association of the said company, as
long as the appellant continued to hold the office of the managing director, he
was not subject to retirement by rotation and as such the appellant continued
to be a director as also the managing director of the said company till April
30, 1986, when the tenure of the appellant as the managing director of the said
company came to an end. On and from May, 1986, the appellant ceased to be the
managing director of the said company but continued to retain his office as a
director thereof and would be liable to retire at the next annual general
meeting of the said company but not before that. The next annual general
meeting which was initially scheduled to be held on December 29, 1986, has not
yet been concluded. By reason of the orders passed in the said Suit No. 934 of
1986 instituted by Gopal Vyas, the meeting stands adjourned from time to time
and the appellant continues to be a director of the said company.
Learned
advocate for the appellant also submitted that at a meeting of the board of
directors of the said company held on November 24, 1986, the appellant has been
reappointed as the managing director and chairman of the board of directors of
the said company for a further period of three years with effect from January
J, 1987.
Learned
advocate submitted further that in the facts and circumstances, no prima facie
case has been made out by respondent No. 1 that the appellant has ceased to be
a director of the said company and as such respondent No. 1 was not entitled to
the interim order in his suit under appeal. This interim order has resulted in
the ouster of the appellant from his office. By the said interim order, the
suit of respondent No. 1 stands decreed in part at the initial stage. On the
ground of balance of convenience also, such an interim order should not have
been passed.
Learned
advocate for the appellant also submitted that no interim order should have
been passed in the suit instituted by respondent No. 1 in the absence of the
said company. The said company was vitally interested as to who were its
directors and the interim order passed in the suit of respondent No. 1
seriously affects the administration of the said company. The said company is a
necessary party to the suit and in its absence the suit was liable to be
dismissed. It was also submitted that the pleadings of respondent No. 1
contained categoric admissions that the appellant had continued as a director
of the said company till its next annual general meeting and it could not be
contended by respondent No. 1 that the appellant was never appointed as a
director at all.
Learned
advocate for Sudhir Kumar Bhattacharyya, respondent No. 7, supported the
appellant.
In
support of his contentions, learned advocate for the appellant relied on and
cited the following decisions.
(a) Richard B.T.H. Chow v. James Chow Wakin
[1970] 75 CWN 173. In this se, it was laid down by a Division Bench of this
court that in an application for an injunction restraining persons from acting
as directors, one of the considerations was whether the case of the applicant
was manifestly clear and free from doubt so as to entitle him to an injunction
in an interlocutory proceeding. Where the appointment of the directors had not
been disputed but they were sought to be restrained by an injunction on other
grounds which could not be said to be free from doubt, other questions such as
delay, acquiescence, balance of convenience and waiver were required to be
considered. It was observed as follows:
"In the case of
an illegality arising out of clear and manifest violation of statutory
provisions, the court has the power, and indeed it is the duty of the court, to
restrain a person from acting as a director of a company, and insuch cases,
delay, acquiescence, balance of convenience and waiver would be no bar to the
issue of an injunction".
(b) Catesby v. Burnett [1916] 2 Ch 325. In this case, the
articles of association of a company provided that a member would be qualified
to be elected a director of the company on a written notice of his intention in
that behalf to be given to the company not less than 14 clear days before the
date of election of directors. An ordinary general meeting of the company was
held on December 10, 1959, when two of the directors retired but there was no
election of new directors. A committee of shareholders was appointed to
investigate into the affairs of the company and submit a report to the general
meeting which was adjourned to a future date. In the meantime, notice was given
to the company by a member stating that at the adjourned meeting he proposed to
move for election of four directors. At the adjourned meeting, it was held by
the chairman that the subsequent notice for election of directors was invalid
and he left the meeting. Thereafter, the shareholders appointed a new chairman
and elected four new directors. On an application by the shareholders for an
interim injunction to restrain the former two directors, who had retired
earlier, from continuing to act as directors, it was held that the date of the
election of the directors within the meaning of the said article was the date
of the adjourned meeting and that the notice for election of the four new
directors was in compliance with the articles. It was held that the said
directors had been duly elected at the adjourned meeting and the directors who
had retired on the earlier occasion were not entitled to act as directors.
(c) United
Commercial Batik v. Bank of India, AIR 1981 SC 1426; [1982] 52 Comp Cas 186
(SC). This decision of the Supreme Court was cited for the following
observations (at page 209 of 52 Comp Cas):
"In the instant case, the High Court has
assumed that the plaintiffs had a prima facie case. It has not touched upon the
question where the balance of convenience lay, nor has it dealt with the
question whether or not the plaintiffs would be put to irreparable loss if
there was no injunction granted. In dealing with the prima facie case, the High
Court assumes that the appellant was in breach. There is no basis for this
assumption at all ... The question whether the appellant was in breach is an
issue to be tried in the suit".
Learned advocate for the
appellant also cited an unreported judgment dated November 22, 1985, in Appeal
No. 260 of 1984, entitled Ambari Tea Co. Ltd. v. Manjushree Saha. I was a party to this
judgment where it was held, inter alia,
construing the provisions of section 256 of the Companies Act, 1956, that
directors appointed by the shareholders in an annual general meeting of a
company do not retire ipso facto from their office if no further annual general
meetings of the company are held. It was only at the subsequent annual general meetings that
the retirement of the erstwhile directors and their re-election as also
election of new directors would have to be decided. A different construction of
section 256 of the Act would result in a vacuum in the management of a company
which is not the object of the statute. The retirement of the directors
appointed earlier would take place at the actual meeting held.
Learned
advocate for respondent No. J contended to the contrary and submitted that it
was the admitted position that the appellant was neither an additional director
appointed by the board of directors of the said company nor was he a director
appointed by the shareholders of the said company or its predecessors at any
annual general meeting. The appellant could at best be deemed to be a director
of the companies involved as a subscriber to the memoranda of association under
section 254 of the Companies Act, 1956. In any event, as such a deemed
director, the appellant could not have been continued as a director of the said
company or its predecessors for all time. Such a deemed office would
necessarily come to an end when directors would be duly appointed by the
companies involved at their annual general meeting under section 255 of the
Companies Act, 1956.
Learned
advocate for respondent No. 1 next submitted that even though the appellant was
nominated as one of the first directors in the hotels company as also the
freight company, he could not continue in his office as a director in the said
companies indefinitely on the strength of his nominations. Construing sections
254, 255 and 256 of the Companies Act, 1956, learned advocate for respondent
No. 1 submitted that even in a private company, as a rule, directors were meant
to be appointed in general meetings. The first directors of a private company
nominated in the articles would be in the same position as the deemed directors
of such a company under section 254 of the Companies Act, 1956, and they would
cease to hold their office at the first general meeting where regular directors
were to be appointed. If the first directors were not reappointed or re-elected
as directors at the annual general meeting of the company held after its
incorporation, they would cease to hold their office. It was submitted that the
above appeared to be the scheme of the statute.
Learned
advocate for respondent No. 1 conceded that section 255 of the Companies Act,
1956, provided an exception in the case of private companies to the general
rule that the directors of a company other than additional directors should be
appointed in a general meeting. If the articles of association of a private
company provided for appointment of directors otherwise than in a general
meeting, the same would override the general rule laid down in the section. In
the instant case, the articles of the hotels company from which the office
claimed by the appellant originated only provided that the appellant would be
one of the first directors. It was not stated that the appellant would continue
as such first director for any particular or definite period, limited or
unlimited. In the absence of any provision for period of office of the first
directors, the articles could not and did not override the general rule in
section 255 of the Act and the directors of the hotels company as also of the
freight company were required to be appointed in the usual course under section
255 of the said Act at the first general meeting of the said companies held
after their incorporation. The appellant was admittedly never appointed as a
director of any of the companies involved at any general meeting and as such
the appellant could not continue to hold his office as a director only by
virtue of his initial appointment as a first director in the hotels company or
the freight company under their respective articles.
It
was next submitted that the fact that the appellant has continued as a director
and also a managing director of the companies involved since their inception
would not make any difference to the legal position. The appellant ceased to
hold his office as a director of the companies involved long ago and thereafter
he was never reappointed by the shareholders of the companies involved at any
annual general meeting. There was no other basis on which the appellant could
claim or was claiming that he had been appointed and remained a director of the
said company.
It
was submitted that more than a prima facie case had been established by
respondent No. 1 that the appellant has ceased to have any locus standi to
continue to act as a director of the said company. The interim order passed by
the first court under appeal was a proper and valid order and should be
sustained.
It
was submitted last that the said company might be a proper party in the
proceedings but it could not be held that it was a necessary party in the
absence of which the suit of respondent No. 1 was bound to fail. In the instant
case, an effective order could be made restraining the appellant from
continuing to act as a director of the said company in the absence of the
latter.
In
support of his contentions, learned advocate for respondent No. 1, relied on
what he stated to be an official circular published in Company News and Notes,
dated July 1, 1963, on section 256 of the Companies Act, 1956, as follows:
Section
256 : Retirement of directors :
(b) It is open to a private company which is
not a subsidiary of any public company to provide in its articles, the manner
of appointment and the vacation of office of all its directors. Thus it is
permissible for such a private company to provide in its articles that none of
its directors is liable to retire by rotation. In the absence of anything to the
contrary in the articles of association, however, all the first directors of
such a private company who have been appointed under the articles may hold
office till the directors are appointed in accordance with the provisions of
section 255(2) at the first general meeting held after incorporation but before
the holding of the first annual general meeting.
Learned
advocate for respondents Nos. 1 and 7 also relied on and cited the following
decisions:
(a) Eyre v. Milton Proprietary Limited
[1936] 1 Ch I) 244. In this case, the relevant article of association of a
company provided that an additional director of the company could hold office
only until the next following ordinary general meeting of the company.
Construing the said article, the English Court of Appeal held that at the
ordinary general meeting of the company, the additional directors will not be
in office. That is, at the moment when the next following ordinary general
meeting of the company would begin, the said directors would no longer be in
office whereas the other directors who were not additional directors but under
the relevant articles of association were scheduled to retire at the said
ordinary general meeting would continue to act as directors throughout the
meeting.
(b) Udit Narain Singh Malpaharia v.
Additional Member, Board of Revenue, Bihar, AIR 1963 SC 786. This decision of
the Supreme Court was cited for the following observations (at p. 788):
"A necessary
party is one without whom no order can be made effectively; a proper party is
one in whose absence an effective order can be made but whose presence is
necessary for a complete and final decision on the question involved in the
proceeding".
(c) Joseph v. Jos [1964] 34 Comp Cas 931.
This decision of a learned judge of the Kerala High Court was cited for the
proposition that where infringement of a corporate membership right was
alleged, the remedy of a shareholder of a company was by way of a
representative action on behalf of himself and other shareholders or in some
instance by an action in the name of the company. But if such a corporate
membership right was subject to the will of the majority expressly, in
accordance with law and the articles of the company, then the same would be a
matter of internal management and could not be questioned except in very
limited cases. But where the wrong complained of was one which could not be
ratified by the majority as the same would be against the provisions of the
articles of association or otherwise illegal, any shareholder of the company could
insist on strict observance of the legal rules, statutory provisions and the
provisions of the memorandum and articles which could not be waived even by a
majority of the shareholders. In such a case, a suit and action initiated by
the shareholders would be maintainable.
(d) Comptroller of Customs v. Western
Lectric Co. Ltd. [1966] AC 367 (PC). This decision was cited for the
proposition laid down by the Privy Council that an admission by a man, of
something of which he knew nothing was of no real evidential value and the
admission made by a person on the basis of documents on record was of no more
evidential value than the record itself.
(e) Ram Autar Jalan v. Coal Products P. Ltd.
[1970] 40 Comp Cas 715 (SC). In this case, a suit was instituted by a company
alleging that the defendant was wrongfully and without authority purporting to
act as one of its directors. An application was filed in the suit for an
injunction restraining the defendant from acting as director and from operating
a bank account of the company. The company produced its share registers,
minutes books and other documents which established that the defendant was
neither a shareholder of the company nor had he been appointed as a director.
The first court refused to grant any injunction, inter alia, on the ground that
the defendant was. functioning as a director de facto. On an appeal, the said
decision was reversed and an interim injunction was granted against the
defendant on a consideration of the records of the company. On further appeal
to the Supreme Court, the order of the first appeal court was upheld. The
Supreme Court observed that the whole question was whether the defendant was
entitled to function as a director in law and the first court instead of
considering this important aspect decided the matter mainly on the basis that
the defendant was functioning as a director de facto. The first court was also
not justified in ignoring the records produced by the company to establish that
the defendant was neither a shareholder nor had been appointed a director.
(f) Desk Bandhu Gupta and Co. v. Delhi
Stock Exchange Association Ltd., AIR 1979 SC 1049. In this case, the Supreme
Court in construing a notification issued by the Central Government under
section 18 of the Securities Contracts (Regulation) Act, 1956, dated June 27,
1969, took note of and considered a press statement issued by the Ministry of
Finance immediately upon the issuance of the notification and also a
communication dated June 28, 1969, from the Joint Director of the Ministry of
Finance, Department of Economic Affairs. The Supreme Court observed as follows
(at p. 1054):
"It may be stated that it was not disputed
before us that these two documents which came into existence almost
simultaneously with the issuance of the notification could be looked at for
finding out the true intention of the Government in issuing the notification in
question, particularly in regard to the manner in which the outstanding
transactions were to be closed or liquidated. The principle of contemporanea
expositio (interpreting a statute or any other document by reference to the
exposition it has received from contemporary authority) can be invoked though
the same will not always be decisive of the question of construction. (Maxwell,
12th edition, page 268). In Crawford on Statutory Construction, 1940 edition,
in para. 219, at pages 393-395, it has been stated that administrative
construction (i.e., contemporaneous construction placed by administrative or
executive officers charged with executing a statute) generally should be
clearly wrong before it is overturned; such a construction, commonly referred
to as a practical construction although not controlling, is nevertheless
entitled to considerable weight as it is highly persuasive".
In reply, learned advocates
for the appellant and respondent No. 7 submitted that under section 255 of the
Companies Act, 1956, directors could be appointed by the shareholders of a
private company at a general meeting. This might be the general rule. But, in
the section itself, an exception was provided that in a private company the
articles of association could provide for appointment of directors otherwise
than in a general meeting by the shareholders and if such a provision was made,
the articles would override the section.
In the instant case, the
articles of association of the freight company as also the hotels company not
only provided for but actually appointed the appellant as a director of both
the companies by nomination. The articles did not provide as to how long the
appointment of such first directors would continue and, therefore, it must be
held that the first directors would continue in their office indefinitely. The
articles did not provide that the first directors would continue only till the
next general meeting of the said companies.
Construing sections 255 and
256 of the Companies Act, 1956, learned advocates for the appellant and
respondent No. 7 submitted that the said sections specifically provided for
appointment of directors of a public Company as also of a private company.
Retirement of directors of a public company was also provided for. The said
sections did not provide for termination of the office of a director of a
private company. Section 283 of the Companies Act, 1956, provided for vacation of
office by directors of a company in certain contingencies. In that section, it
was not provided that the first directors of a private company appointed by its
articles would vacate their offices at the next general meeting.
To appreciate the controversies
involved, it is convenient to refer to the relevant provisions of the Companies
Act, 1956:
"Section
2(26): 'Managing director' means a
director who, by virtue of an agreement with the company or of a resolution
passed by the company in general meeting or by its board of directors or, by
virtue of its memorandum or articles of association, is entrusted with
substantial powers of management which would not otherwise be exercisable by
him, and includes a director occupying the position of a managing director, by
whatever name called".
"Section
26 : There may in the case of a
public company limited by shares, and there shall in the case of an unlimited
company or a company limited by guarantee or a private company limited by
shares, be registered with the memorandum, articles of association signed by
the subscribers of the memorandum, prescribing regulations for the
company".
"Section
254 : In default of and subject to
any regulations in the articles of a company, subscribers of the memorandum who
are individuals, shall be deemed to be the directors of the company, until the
directors are duly appointed in accordance with section 255".
"Section
255(1) : Unless the articles provide for
the retirement of all the directors at every annual general meeting, not less
than two thirds of the total number of directors of a public company, or of a
private company which is a subsidiary of a public company, shall—
(a) be persons whose period of office is liable to determination
by retirement of directors by rotation; and
(b) save as otherwise expressly provided in this Act, be
appointed by the company in general meeting.
(2) The remaining directors in the case of
any such company, and the directors generally in the case of a private company
which is not a subsidiary of a public company, shall, in default of and subject
to any regulations in the articles of the company, also be appointed by the
company in general meeting".
"Section
256(1) : At the first annual general
meeting of a public company, or a private company which is a subsidiary of a
public company, held next after the date of the general meeting at which the
first directors are appointed in accordance with section 255 and at every
subsequent annual general meeting, one-third of such of the directors for the
time being as are liable to retire by rotation, or if their number is not three
or a multiple of three, then, the number nearest to one-third, shall retire
from office".
"Section
260 : Nothing in section 255, 258
or 259 shall affect any power conferred on the board of directors by the
articles to appoint additional directors:
Provided that such
additional directors shall hold office only up to the date of the next annual
general meeting of the company:..".
We also note the provisions
of articles 111 and 144 of the articles of association which were adopted by
the said company.
Article
111 : The board is empowered, at any
time and from time to time, to appoint any other person to be a director of the
company,... as an addition to the board, but so that the total number of
directors shall not exceed the maximum for the time being prescribed. A
person.......who is appointed as an additional director shall hold office only
up to the date of the next annual general meeting, but such person shall, in
either case, be eligible for re-election.
Article
144 : Subject as hereinafter provided,
a managing director (which expression shall include a joint managing director)
shall not, while he continues to hold that office, be subject to retirement by rotation
of directors or be taken into account in determining the number of directors
liable to retire by rotation of directors; but if he ceases for any cause to
hold the office of director, he shall, ipso facto and immediately, cease to be
managing director.
In this appeal, the scope
of the enquiry is limited to the prima facie determination of the initial
appointment of the appellant as a director of the companies involved and his
continuation in such office up to the relevant time. On such prima facie determination
will depend whether the appellant was a lawful director of the said company at
the date of the institution of the suit.
It being the common case
that the appellant had not been appointed as an additional director in any of the
companies involved and that the appellant was not claiming to hold the post of
such additional director, the question whether the appellant ceased to hold
such office as an additional director at the date of the annual general meeting
to be held on December 29, 1986, need not be considered further.
We note that the case of
the appellant made in his pleadings is contradictory to certain statements in
the records of the said company, namely, the notice dated November 24, 1986,
convening the said annual general meeting and the explanatory statement thereto
as also the directors' report. We also note that the stand taken by the
appellant before the
Company Law Board is also contradictory to the pleadings of the appellant in
this suit. Such contradictory stands of the appellant as to his office and
status cannot in our view affect the actual legal position which is to be
ascertained prima facie from the entire facts and circumstances.
It
stands established from article 111 of the articles of association of the
hotels company that the appellant was initially appointed as one of its first
directors. Such appointment was not as an additional director. The said article
also did not prescribe any time limit up to which the appellant would continue
in his office.
The
appointment of the appellant as a director of the freight company was made by
and recorded in the articles of association of the said company in an identical
manner.
When
the freight company was amalgamated with the hotels company, the appellant
continued to be a director of the amalgamated company.
Both
the hotels company and the freight company were private companies and their
articles did not provide for retirement of their directors and as such there
was no question of retirement of the appellant from his office at any
subsequent annual general meeting. Furthermore, the appellant, at the material
time, had been appointed as the managing director of the freight company and
continued as managing director of the amalgamated company. Under article 144 of
the articles of association adopted by the amalgamated company, the appellant
was not liable to retire from his office of director as long as he continued to
hold the post of managing director.
On
April 30, 1987, when the appointment of the appellant as the managing director
of the said company came to an end, the said company had become a public
company and only then the question of retirement of the appellant from his
office as director arose for the first time on May 1, 1986. In the ordinary
course, the appellant, after the termination of his office as a managing
director, would continue in his office as a director but would be liable to
retire at the next annual general meeting of the said company which was
scheduled to be held on December 29, 1986.
Respondent
No. 1 does not dispute that the appellant had been appointed as one of the
first directors of the hotels company as also of the freight company under
their respective articles of association. The contention of respondent No. 1 is
that the office of appellant No. 1 as first director came to an end at the next
general meetings of the two companies inasmuch as under sections 255 and 256 of
the Companies Act, 1956, the directors of a private company, apart from the
additional directors, were generally required to be appointed at a general
meeting by the shareholders unless the articles provided otherwise. The
articles of the said private companies being silent as to the term of office of
their first directors, it was contended that the first directors would continue
in their office till the next general meeting of the said private companies.
We
are unable to accept this contention of respondent No. 1. The expression
"first director" appears only in section 256 of the Companies Act,
1956, noted hereinabove and the said section applies only to public companies.
The section provides for retirement of the first directors by rotation at every
annual general meeting from the meeting held next after the general meeting at
which they were appointed.
It
is to be noted that this section does not deal with the appointment of first
directors in a private company.
Section
255 of the Companies Act, 1956, provides, inter alia, also for retirement of
directors of a public company. The section also provides for appointment of directors
in both public companies and private companies.
So
far as a private company is concerned, which is not a subsidiary of a public
company, the section provides that the directors of such a company are to be
appointed in a general meeting as in a public company but such appointment
would be subject to the articles which may provide otherwise.
It
appears to us on a plain reading of the section that if the articles are silent
as to the appointment of directors in a private company, or do not specifically
provide for appointment of directors otherwise than in a general meeting, then
the directors of a private company are to be appointed by the shareholders at
general meeting.
In
the instant case, article 111 of the articles of association of the hotels company
and freight company provided for and appointed the appellant as one of its
first directors. Under section 256 of the said Act read with section 26
thereof, such an article may be held to prescribe, and constitute a regulation.
This article, in our view, constituted an exception to the general rule laid
down under section 255 of the Act. Under the article, the appellant was
appointed as one of the first directors of the private company under the
provisions of section 255 of the Companies Act, 1956. The article also did not
provide for retirement or termination of office of such first directors at any
point of time. Accordingly, in our view, as long as the said two companies
continued to be private companies and after their amalgamation remained a private
company, there was no question of retirement
of the appellant from his office as a director or such office coming to an end.
We are unable to accept the
interpretation of sections 255 and 256 of the Companies Act, 1956, as contained
in the so called circular, which has been relied on by learned advocate for
respondent No. 1. We are not sure as to who is the author of this so called
circular. Apparently, this alleged circular is an excerpt from Company News and
Notes, presumably a journal. In any event, this document is not a
contemporaneous exposition or interpretation of sections 255 and 256. As such,
this document cannot be treated in the same manner as a clarification or
exposition issued by a competent authority. In our view, the principles laid
down by the Supreme Court in Desh Bandhu Gupta and Co., AIR 1979 SC 1099, do
not apply to this document. In any event, the said document cannot be a
conclusive exposition.
From the facts on record,
it appears to us prima facie that the appellant was appointed as a director of
the hotels company under its articles under section 255 of the Companies Act,
1956, and continued in his office as a director after the freight company was
amalgamated with the hotels company. The amalgamated company continued as a
private company till November 4, 1981. On May 1, 1981, the appellant was
appointed as a managing director of the amalgamated company with the approval
of the Central Government and the shareholders for a period of five years. As
such, under article 144 of the said companies, there was also no question of
the appellant retiring from his office as a director till April 30, 1986, even
though the amalgamated company became a public company on and from November 4,
1981.
We also hold prima facie
that on the termination of his office as a managing director, the appellant did
not automatically lose his office as a director in the said company. We accept
the contention of the appellant that the appellant continued to be a director
of the said company which had become a public company by November 4, 1981, and
was liable to be retired at the next annual general meeting scheduled to be
held on December 29, 1986. This meeting was held partially on December 29,
1986, but was not concluded and the meeting was restrained from considering or
passing resolutions pertaining to retirement, appointment or reappointment of
directors which were directed to be considered at an adjourned date. Following
the principles laid down in Ambari Tea Co. Ltd. (Appeal No. 260 of
1984—22-11-85 (Cal)), we hold that the question of retirement of the appellant
would only arise at the adjourned date of the said annual general meeting of
the company when the said meeting is held and not before that.
It follows that on the date
when the present suit was instituted, the appellant prima facie was a director
of the said company and was entitled to act as such. This prima facie position
arises from the undisputed facts on record and cannot be affected or detracted
by statements or declarations to the contrary by the parties concerned or the
said company. A legal position or status cannot be affected by a wrong or
erroneous description. Admission, if any, by respondent No. 1 that the
appellant had continued as a director or as an additional director would also
be equally irrelevant.
It is unfortunate that the
memorandum and articles of association of the hotels company or the freight
company were not produced or relied on before the learned judge in the first
court nor was a clear stand taken before the first court as to how the
appellant initially came to be appointed as a director of the companies
involved. If this was done, proceedings before the first court might have been
shortened and the correct position in law and fact would have emerged.
We next consider whether
the present proceedings are maintainable in the absence of the said company. As
we have held that it has been prima facie established that the appellant is
continuing as a director of the said company and is liable to retire at the
next annual general meeting, it is not necessary to determine this question at
the interlocutory stage. Under the amended Civil Procedure Code, the suit
instituted by respondent No. 1 may ultimately fail by reason of non-joinder of
the said company which may be held to be a necessary party. It is open to
respondent No. 1 to apply for impleading the said company in the suit at any
time before the same is finally disposed of. It is also open to the court to
implead the said company in the suit suo motu at any stage. In that view, we
are not inclined to hold that by reason of non-joinder of the said company in
the suit at this stage, an interlocutory application in the suit will
necessarily fail.
For the above reasons, this
appeal is allowed. The judgment and order dated November 19, 1987, are set
aside so far as the appellant is concerned. The appeal and the application are
disposed of accordingly. Costs of the proceedings before us would be costs in
the suit.
We note that in the
proposed annual general meeting of the said company which stands adjourned by
orders of court, no resolution has been proposed recording the retirement of
the appellant or for his re-election as a director. This is a question which
would arise at the meeting and we express no opinion on the same.
Shyamal K. Sen J.—I agree.
[1972] 42 COMP. CAS. 197 (BOM)
HIGH COURT OF
v.
British Burma Petroleum Co. Ltd.
NAIN, J.
JUNE 30, 1971
P.M. Mukhi, M.P. Laud, S.J. Sorabjee and V.R. Chatrapati for the Petitioners.
Porus A. Mehta, M.R.
Parpia and R.J. Bhatt for the Respondents.
Nain,
J.—This is a
petition by three of the shareholders of the British Burma Petroleum Co. Ltd.
(hereinafter referred to as “the company”) for winding up the company. There
three shareholders hold between them about 14shares of the company of the fa
value of about Rs. 300. They are however supported by 210 other shareholders
who hold shares of the value of over one lakh of rupees. The petition is
opposed by the company and 1,682 shareholders holding shares of the value of
about 30 lakhs of rupees. The petition has come up before me for admission, but
has been argued in great detail and as if it were fixed for final hearing.
Most
of the facts relevant to this petition are not in controversy and may be
briefly stated. The company was incorporated in
The
main and dominant object for which the company appears to have been started is
set out in clause 3(1) of its memorandum and is prospecting for, refining,
production of and dealing in petroleum and other mineral oils and in particular
to acquire three existing Indian companies carrying on that business in Burma,
viz., Aungaban Oil Co. Ltd., Rangoon Refinery Co. Ltd. and Rangoon Oil Co. Ltd.
There were prior to 8th December, 19, in the memorandum other object clauses
some of which were ancillary to the main object, some were powers to enable the
company to achieve the main object, many were such as would in any case be
implied and some were inflated objects which it has become customary for
draftsmen to insert, which were never needed by the company. Draftsmen resort
to this device to avoid the cumbersome procedure of subsequently amending the
object clauses. I shall consider some of the object clauses a little later.
There was no clause
providing that the various clauses were to be construed as independent main
object clauses or that the construction would not be limited by the name of the
company. I shall for the sake of brevity refer to such clauses as “independent construction
clause”.
The
company carried on the business of prospecting for, refining, producing and
dealing in petroleum and other mineral oils in
The
fourth annual general meeting of the company was held at
By
the end of March, 1966, the company had cash assets of about R. 70 lakhs mostly
invested in fed deposits with Indian companies. After 13 December, 19, Jagdish
J. Kapadia and his associates started acquiring more shares of the company. On
5th April, 1966, the then directors of the company except the said Jagdish
Kapadia resigned and, in their place, B.L. Kapadia, T.L. Shah and M.C. Kapadia
were appointed as directors under article 106 of the articles of association of
the company. On that day, the newly appointed directors did not hold
qualification shares, viz., 2,500 shares each. They did not acquire the
qualification shares within two months from the date of their appointment.
They, however, acquired the qualification shares after the said period of two
months. They however continued to function as directors and appeared to have
got themselves re-elected from time to time not as newly proposed directors
after a proper notice that they would be so proposed, but without any notice as
if they were validly elected directors who had retired and were eligible for
re-election. The appointment of these three
newly elected directors has been challenged by the petitioners in this petition
as well as in Suit No. 862 of 19, which is pending in this court.
The petitioners allege that
after taking control of the company on 5th April, 1966, Jagdish Kapadia, B.L. Kapadia,
T.L. Shah and M.C. Kapadia began to utilise the funds of the company for
granting badli loans to shareholders of various other companies against the
pledge of shares and in purchase of shares of other limited companies. It is
alleged that they made these investments not only with the funds of the company
but also by borrowing about Rs. 10 lakhs. With the funds of the company these
directors have acquired the shares of National Rayon Corporation Ltd. and
Killick Industries Ltd. and have acquired the control of these two companies.
The Killick Industries Ltd., in turn, were the managing agents of about 7 other
companies and had 7 more companies as subsidiaries. The petitioners allege that
Jagdish Kapadia and his group have acquired the control of these companies by
means of ultra vires business carried on by the company. It is alleged that
this has been done for self-aggrandizement and to gain personal advantage for
Jagdish Kapadia and his group. I may perhaps mention that the facts contained
in these allegations are not denied. It is only the contentions based on the
facts, which are in controversy. The petitioners also allege that Jagdish
Kapadia and his group have “bled the company by taking excessive fees,
remuneration and administrative expenses and dissipated its funds”.
On 22nd May, 1970, the
petitioners filed the present petition for winding up mainly on the following
two grounds (a) that the company has ceased to carry on business and (b) that
it is just and equitable that the company should be wound up, as its substratum
is gone and there is no practical possibility of the company carrying on
business under the main or dominant object for which it was formed.
This petition came up for
admisson before my brother, Vimadalal J., on 12th October, 1970,and was heard
on 13th, 14th and 15th October, 1970. The company then applied for adjournment
of the peition for two months on the ground that the shareholders desired to
call an extraordinary general meeting to consider and, if necessary, to amend
the objects clauses. The adjournment was refused. The company appealed against
the said order. The said appeal was allowed by consent. Thereafter, at the
extraordinary general meeting of the company on 8th December, 1970, a special
resolution was passed altering the memorandum of association of the company by
deleting the dominant and main objects clauses and introducing a number of
other objects clauses which would enable the company not only to carry on the
prospecting for, producing, refining and dealing in petroleum but also to carry
on other manufacturing businesses and the business of import and export and
dealing in shares. The company also introduced the usual “independent
construction clause” and provided that the several objects clauses shall be
deemed to be substantive and independent main objects clauses and that their
construction will not be restricted by the name of the company. We shall
consider the effect of these alterations a little later. It must, however, be
mentioned that the company being a British company under section 5 of the
English Companies Act, 1948, the resolution of alteration was not required to
be confirmed by court and came into effect without such confirmation.
Thereafter, on 30th November, 1970, some of the shareholders of the company
other than the petitioners filed a suit in this court being Suit No. 862 of
1970, inter alia, for declarations: (a) that the alteration of memorandum of
association at the meeting of 8th December, 1970, was void, and (b) that
Jagdish Kapadia, M.C. Kapadia, B.L. Kapadia and S.N. Kapadia were not validly
elected directors. The plaintiffs also sought the necessary injunctions in the
suit. . The said suit is pending.
I shall first deal with a
preliminary objection as to the jurisdiction of this court taken by the
company. The company contends that it is a foreign company registered in the
United Kingdom and has its office in London and, therefore, this court has no
jurisdiction to entertain the petition. Under section 2(7) of the Companies
Act, 1956 (hereinafter referred to as “the Companies Act”), a “body corporate”
or a “corporation” includes a company incorporated outside India. The company
is, therefore, undoubtedly a “body corporate” and a “corporation”. Part X of
the Companies Act pertains to winding-up of unregistered companies. Section 582
of the Companies Act provides that, for the purposes of Part X, the expression
“unregistered company” shall not include a company registered under the
existing or previous Indian law but shall include any other association or
company consisting of more than 7 members at the time when a petition for
winding up is presented. The company not being registered under Indian law and
undoubtedly being an association of persons consisting of more than 7 members
falls within the meaning of “unregistered company” in section 582. Section 583
contains provision for winding up of unregistered companies. Section 584
provides that where a body corporate incorporated outside India which has been
carrying on business in India ceases to carry on business in India, it may be
wound up as an unregistered company under Part X. The company is a body
corporate incorporated outside India. Even prior to 1942 it had a place of
business and its head office in Bombay. It has therefore been carrying on
business in Bombay and has ceased to carry on its business in India. It does
not matter that the oil installations of the company were in Burma, nonetheless
it was carrying on business in India. It is, therefore, liable to be wound up
as an unregistered company under the
provisions of section 583. I find no substance in the contention that this
court has no jurisdiction to wind up the. company. I reject the said
contention.
Now, I come to the
principal contention of the petitioners that the company has ceased to carry on
business and is therefore liable to be wound up under the provisions of section
583(4)(a) of the Companies Act. From its inception in 1910 to 1942 the company
carried on the business of prospecting for, producing, refining and dealing in
petroleum and other mineral oils. In 1942 due to exigencies of war and
destruction of the company’s properties in Burma that business came to an end.
From 1942 to 1965 the company carried on no business. It was engaged in
litigation and other efforts for recovery of compensation for destruction of
its property. This was a necessary and useful activity and would have been a
good ground for not winding up the company during that period. But, in my
opinion, this was not a business falling within the objects clauses of the
company. It can, therefore, be said that from 1942 to 1965 the company did not
carry on any business. After 1965 up to 1967 the company admittedly carried on
badli business of advancing money on security of shares of other companies.
From 1967 to 1970 the company has invested its capital principally in the
shares of National Rayon Corporation Ltd. and Killick Industries Ltd. We have
to consider whether badli business and the business of investing in shares of
other companies was intra vires the company or ultra vires the company If the
said business was intra vires, it cannot be said that the company has ceased to
carry on business. If on the other hand the said business was ultra vires, it
was not business within the meaning of the objects clauses in the memorandum of
the company and it will mean that the company had not carried on business
during that period and perhaps what is worse that it had carried on ultra vires
business. This requires construction of the objects clauses of the company.
As I have stated
hereinabove, the first objects clause of the company as it stood prior to 8th
December, 1970, was to prospect for, refine, produce and deal in petroleum and
other mineral oils and for this it owned the undertakings of three companies in
Burma mentioned in its first objects clause. The name of the company itself
suggests that it was formed for carrying on petroleum business. From 1910 to
1942 the company carried on no other business than that provided for in its
first objects clause. The memorandum of the company did not contain the usual
“independent construction clause” providing that each objects clause was to be
construed as the main or dominant objects clause and was not to be restricted
by the name of the company. For all these reasons I have no hesitation in
coming to the conclusion that the main and dominant object of the company was contained in its first
sub-clause and was that of prospecting for, refining, producing and dealing in
petroleum and other mineral oils. On behalf of the company reliance has been
placed on sub-clauses (3), (5), (6), (12), (14), (19) and (22) of clause 3.
Clause 3 permits a variety of businesses including the business of running
railways and other transport, construction business, engineering, foundries, running
hotels, breweries, churches, chapels. This clause would permit the company to
“fly balloons from the earth to the moon” as the cynical English judge remarked
in the Crown Bank case,
referred to later. Clause 5 permits the company to carry on any trade, business
or manufacture. Clause 6 permits the company to manufacture all kinds of
articles, but this is qualified by the provision that the articles must be
required for the purposes of the business of the company which would, in my
opinion, be the business specified in the first sub-clause. Clause 12 gives
power to the company to lend money on shares or otherwise, but this sub-clause
is also qualified by the condition that it must be directly or indirectly for
furtherance of the objects of the company. Clause 14 also permits investments
in shares but is qualified by the condition that it must be for carrying out
the objects of the company. Clause 19 permits investment of moneys of the
company not immediately required for its general purposes. This contemplates
the existence of its principal business and obviously a power for investment of
surplus funds and not an objects clause enabling the company to invest its
entire funds in other companies with a view to control them. Clause 22 is an
ancillary clause providing for doing all things incidental to the objects of
the company.
In
order to avoid the cumbersome procedure for subsequent alteration of the
objects of companies, it has become customary for companies to inflate the
objects clause by adding to their principal objects a large number of objects
many of which would in any case be implied and many of which are never needed
by the company. Added to this catalogue of possible or conceivable objects is
normally a sub-clause which provides that each of the objects specified in the
clause would be regarded as independent objects, and shall not be limited or
restricted either by reference to any other objects clause or the name of the company.
Such an independent clause does not, however, exist in the memorandum of the
company. The practice of inserting inflated objects has been criticised by the
House of Lords in the case of Cotman v. Brougham.
However, as in that case there was an independent construction clause their
Lordships held that effect would have to be given to it and the independent
construction clause excluded the “main objects” rule of construction. The “main
objects” rule of construction is a special rule of construction and is applied
where the objects of a company are expressed in a series of paragraphs and one
paragraph, commonly the first, appears to
embody the main or dominant object of the company. In such a case, all the
other paragraphs are to be treated as merely ancillary to the main object and
as limited and controlled thereby.
The “main objects” rule was
expressed by Lindley L. J. in In re German Date Coffee Company as
follows:
“In
construing........any........memorandum of association in which there are general words, care must be taken to construe
those general words so as not to make them a
trap for unwary people. General words........must be taken in connection with what are shewn by the context
to be the dominant or main objects (of the company). It will not do under
general words to turn a company for manufacturing one thing into a company for
importing something else, however general the words are.”
In the above case the
memorandum of association of the company stated that it was formed for working
a German patent which had been or would be granted for manufacturing coffee
from dates, and also for obtaining other patents for improvements and
extensions of the said inventions or any modifications thereof or incidental
thereto, and to acquire or purchase any other inventions for similar purposes,
and to import and export all descriptions of produce for the purpose of food,
and to acquire or lease buildings either in connection with the abovementioned
purposes or otherwise, for the purposes of the company. The intended German
patent was never granted, but the Company purchased a Swedish patent, and also
established works in Hamburg, where they made and sold coffee made from dates
without a patent. Many of the shareholders withdrew from the company on
ascertaining that the German patent could not be obtained, but the large
majority of those who remained desired to continue the company which was in
solvent circumstances. It was held that the substratum of the company had
failed and it was impossible to carry out the objects for which it was formed
and therefore that it was just and equitable that the company should be wound up
although the petition was presented within a year of its incorporation.
In In re Haven Gold Mining
Company
the company was established for working a gold mine in New Zealand, and it turned
out that the company had no title to the mine and had no prospect of obtaining
possession of it except as to a small portion for a few months. The court was
satisfied that the subject-matter of the business for which the company was
formed had substantially ceased to exist although there were general words in
the memorandum of association enabling the company to purchase and work other
mines in New Zealand and large majority of the shareholders wished to continue
the company. The court made an order of winding-up. In both the cases of German Date Coffee and
Haven Gold Mining, the
court referred to the name of the company for
determining its dominant or main object.
In In re Crown Bank the
company was registered under the name of Mid-Northsamptonshire Bank Ltd. In
addition to wide and general objects, the memorandum of association stated
particularly numerous objects of diverse character in fifteen paragraphs. The
first three paragraphs related to, banking, discounting, and money-lending and
borrowing, respectively others referred to purchasing and developing land,
investing and dealing in shares and securities, and promoting companies. The
company commenced business as a country bank in Northamptonshire, with an
office in London. After a short time its name was changed to the Crown Bank Ltd.
It gave up its country offices, ceased to do banking business, and carried on
in London, in addition to some land speculation, business of investing in
shares and securities. On a petition by a shareholder to wind up the company on
the ground that its main objects had failed, it was held that the name of a
company is important in construing the objects defined in the memorandum of
association and that the company was not carrying on business authorised by the
memorandum of association and it was just and equitable that it should be wound
up.
The “main objects” rule of
construction has been followed in India in numerous cases where independent
construction clause has not appeared in the memorandum. In this state of law, I
have no hesitation in holding that the main and dominant object of the company
as ascertained from its name, the first objects clause, the business actually
done by the company from 1910 to 1942 was to prospect for, refine, produce and
deal in petroleum and mineral oils. I am further of the view that badli
business of advancing money on shares carried on by the company from 1965 to
1967 and the business of investing money in shares of National Rayon
Corporation Ltd. and Killick Industries Ltd. was ultra vires the objects of the
company. It was, therefore, no business at all. What the company did was
perhaps worse than ceasing to carry on business.
On behalf of the company,
my attention was invited to the case of In re Kitson and Co. Ltd. In
this case the main and paramount object of the company was to carry on an
engineering business of a general nature. It had disposed of one engineering
business and before and order on winding-up petition could be made, it had
shown the intention of carrying on another engineering business. The court
refused to make a winding-up order. In my opinion, this case has no
application. The company has not shown that it has acquired other oil
installations with which it could continue the business for which the company
was started.
Another
case cited was In re Taldua Rubber Co. Ltd In
that case the court found that the paramount object of the company was to carry
on the business of rubber estates and that it was not limited to the business
of carrying on the particular estate. The memorandum also contained the
independent construction clause. The company had disposed of a particular estate
and showed an intention to carry on business by acquiring another estate.
Although the company had no concrete scheme before the court for dealing with
the proceeds of the sale of the first estate, the court refused to make a
winding-up order. In the case of In re Eastern Telegraph Co. Ltd the
company was formed for acquiring the undertakings of telegraph lines. In 1929
its telegraph lines were acquired by a Government owned corporation. The
company, however, had power to and had thereafter continued to carry on one of
the main forms of the business authorised by its memorandum. Although not
operating a telegraph or cable business itself, it had participated through the
medium of its shareholding, in the proceeds of operation of the business
carried on by another similar company, the court refused to make a winding-up
order. In my opinion, none of the above three cases has any application to the
facts of the present case. The present case is governed by the decisions in In
re German Date Coffee Co., In
re Haven Gold Mining Co and
In re Crown Bank.
Now,
I come to the alteration of the objects clause on 8th December, 1970, during
the pendency of this petition. This enables the company to carry on a variety
of businesses and also introduces the independent construction clause. This
petition was partly argued before the vacation in April last. The arguments
have been continued on the reopening of courts in June. The company has filed
an affidavit stating that during the vacation it has entered into three
transactions for purchases or sales of miner’al oils. I am not at all impressed
with the bona fides of the new business and propose to ignore the same for the
purpose of this petition. Apart from the new business purporting to have been
done under the altered clause, the alteration of the object clauses in the
memorandum was itself effected during the pendency of this petition and its
validity is under challenge in a pending suit.
In
England it was held in Stephens v. Mysore Reefs Mining Co. Ltd,
that, notwithstanding an independent construction clause, the first few
sub-clauses in the memorandum would contain the primary business of the company
and the remaining sub-clauses would be ancillary sub-clauses or powers. But in
the case of Cotman v. Brougham the
House of Lords gave
effect to the independent construction clause. The House of Lords did not refer
to the Mysore Reefs’ case but
text books such as Palmer have treated Mysore Reefs’ case as no longer good law. In the case of Anglo
Overseas Agencies Ltd. v. Green
Salmon J. took the view that Mysore Reefs’ case was no longer good law. I must, however, point
out that in Cotman v. Broughamm as
well as in the case before Salmon J. the question was of ultra vires of certain
acts of the company and not the question of substratum. There is considerable
difference in construction when one is considering whether a particular act is
ultra vires the company’and when one is considering whether the substratum of
the company is gone. It may perhaps yet be argued in England either in the
Court of Appeal or before the House of Lords that the Mysore Reefs’ case; is still good law.
In
India in the case of Lawang Tshang v. Goenka Commercial Bank Ltd. G. K.
Mitter J. (later a judge of the Supreme Court of India) took a view quite
contrary to the view of Salmon J. and he held that, notwithstanding the
independent construction clause, the main and paramount object of the company
in that case was still contained in the first few clauses. P.N. Bhagwati J. has
taken a view contrary to the Calcutta view in Mohanlal Dhanjihhai Mehta v.
Chunilal B. Mehta. In
the case of Akola Electric Supply Co. Pvt. Ltd. Naik
J. took a view similar to the one taken by Bhagwati J., but in that case the
observations of the learned judge are obiter dicta and the point did not arise.
It
would, therefore, appear that this rule of construction based on independent
construction clause is not free from doubt. I must also mention that this
alteration is being challenged as invalid in Suit No. 862 of 1970. Such a suit
is maintainable under the very provisions of section 5(9) of the English
Companies Act, 1948. I do not think, therefore, that because of the subsequent
alteration this petition should be summarily dismissed without further inquiry
at the regular hearing.
Now,
I come to the allegation that the directors of the company are not properly
appointed. This contention is the subject-matter of Suit No. 862 of 1970 in
which a declaration to that effect is sought. There being other remedies
available to the petitioners I would not wind up the company on this ground
alone. However, as I have come to the conclusion that the business carried on
by the company between 1965 and 1970 is ultra vires its memorandum, the fact
that such business is carried on by directors improperly appointed becomes
relevant for the purpose of coming to the conclusion
whether it is just and equitable that the company should be wound up apart from
the fact that its substratum is gone. The three directors other than Jagdish
Kapadia were appointed on 5th April, 1966. At the date of appointment they
admittedly did not ‘have qualification shares nor did they acquire such
qualification within two months. In my opinion, their offices fell vacant on
5th June, 1966. Thereafter, these three persons functioned without being
validly appointed director. The qualification of directors is prescribed by
article 88. It is the owning of 2,500 shares of the company. Article 89 provides
that the office of a director shall be vacated if a director does not obtain
his qualification within two months after his appointment. It is alleged by the
petitioners that in the register of directors, the directors falsely showed
that they held qualification shares. This allegation is not denied. Article 105
provides that no person other than a director retiring at the meeting shall,
unless recommended by the directors for election, be eligible for the office of
a director at any general meeting unless not less than seven nor more than
forty-two clear days before the day appointed for the meeting, a notice in
writing is given by a qualified member of his intention to propose such person.
This previous notice does not apply to a retiring director who is eligible for
re-election. It appears that at all subsequent general meetings, the three
directors other than Jagdish Kapadia have been elected without any notice given
under article 105 on the footing that at the date of the general meeting, they
were retiring directors. In view of the fact that I have come to the conclusion
that these persons ceased to be directors on 5th June, 1966, and were not
directors at any subsequent general meeting, they were, in my opinion, not
retiring directors and were not entitled to be elected without a previous
notice in writing prescribed by article 105. Prima facie it appears to me that
directors other than Jagdish Kapadia were invalidly elected from time to time.
The only validly elected director was Jagdish Kapadia and he alone could not
function as the board of directors. It would, therefore, appear that he could
function only under article 111 for the purpose of summoning general meetings
of the company, but not for any other purpose. His acts other than those of
calling general meeting would therefore be invalid. This may affect the
question of the validity of the resolution altering the memorandum on 8th
December, 1970. This will have to be considered at the hearing of the petition.
During the hearing of the
petition, the shareholders supporting the company offered to purchase the
shares of the petitioners either at the rate of Rs. 3 per share or at the rate
of their own purchase or at the rate of break-up value of shares to be fixed by
any chartered accountant appointed by the court. They also offered to purchase
the shares of other dissentient shareholders at the rate of break-up value of
the shares to be fixed by any chartered accountant appointed by the court. The
petitioners and their supporters in turn offered to buy at these prices the
shares of the present directors and the shareholders supporting them. It is
true that the shareholders supporting the petitioners are very few and that the
majority of the shareholders support the company. The offers and counter-offers
were made to show that the other party was not acting bona fide Reference was
made on behalf of the company to the cases of George v. Athimattam Rubber Co. Ltd and
A.P. Pothen v. Hindustan Trading Corporation Ltd. and
it was argued that the petition was mala fide
because if the petitioners were interested in retrieving their money and not
wrecking the company, they could sell their shares at fair rate and get out. I
am, however, not impressed by the fact that the petitioners are minority
shareholders. If the business carried on by the company is ultra vires its
memorandum and the said business is carried on by meddlers who are not validly
elected directors, the petitioners, though in minority, are entitled to say
that they would have the company wound up. In In re Haven Gold Mining Co.’s
case
the winding-up order was made at the instance of the minority shareholders.
During his arguments, Mr.
Parpia, on behalf of the shareholders supporting the company, applied for
adjournment of the petition to enable his clients to put the offer of his clients
to buy up the minority before a general meeting to be convened for the purpose.
I refused this adjournment. The application was made at a late stage. Besides,
after the petition is admitted and advertised, all the shareholders would be
before the court. It will be open to them to consider the offer at the final
hearing.
The petitioners alleged
that the acquisition of shares of National Rayon Corporation Ltd. and/or
Killick Industries Ltd. by Kapadia group is for ulterior purposes. In my
opinion, an act of a company within the scope of powers expressed in its
memorandum is not ultra vires, because its directors had a foreign purpose in
mind when on the company’s behalf they performed the act in question. This has
been held in Charterbridge Corporation v. Lloyds Bank Ltd. In
view of the fact that I have taken the view that the business carried on by the
company from 1965 to 1970 was ultra vires, the question of ulterior purpose in
carrying on such business is also a matter that will have to be inquired into
at the final hearing of the petition.
It appears to me prima
facie that the company has ceased to carry on business, its substratum is gone,
it has carried on ultra vires business and that the said business has been
carried on by meddlers and that it will be just and equitable that the company
should be wound up. These are, however, prima facie views. I do not think that
this is a petition which should be summarily dismissed without further inquiry into the
allegations. It must be admitted. I am prima facie satisfied that the matter is
fit to be inquired into. At the stage of admission normally only contentions of
a preliminary nature ought to be considered. I have, however, heard the matter
for several days and come to the above conclusion.
On
behalf of the company it was contended that the admission and advertisement
will affect the business of the company. Apart from the alleged 3 transactions
in oil entered into by the company a few days back, which do not appear to be
bona fide, the company carries on no business. Its capital is invested in
shares of National Rayon Corporation Ltd. and Killick Industries Ltd. which are
both controlled by the company. There will, therefore, be no adverse effect on
any business of the company.
In
the result, I admit the petition. The company will pay to the petitioners the
costs of the petition up to the stage of admission. Counsel certified. The petition
will be advertised in the Maharashtra Government Gazette, The Times of India
and The Maharashtra Times. The petition will not be advertised for a period of
one week from today. The petition shall be heard on 2nd August, 1971.
[1953] 23 Comp Cas 29
(MAD)
v.
Rajamannar C.J. and
Venkatarama Aiyar J.
Original Side Appeal No. 56 of 1952
October 16, 1952
K. Rajah Ayyar, R. Swaminatha Ayyar, K.S. Ramamurthy and P.S. Seshadri for the Appellants.
O. Radhakrishnan, G.
Vasanta Pai, S. Mohan Kumaramangalam, V. Venkatraman, for the Respondents.
Venkatarama
Ayyar J. — The question that
arises for determination in this appeal is the validity of the election of the
respondents as directors of a company called
Balakrishna Aiyar J. who heard the suit disagreed with the contentions put forward on behalf of the plaintiffs and dismissed the suit with costs. Against that decision the plaintiffs have preferred this appeal.
Several contentions were urged by Mr. K. Rajah Ayyar in support of this appeal. It was firstly argued that the power which the general body has under the articles of the company is only to appoint directors in place of those who retire at the annual meeting; only one director actually retired at the meeting held on February 26, 1951, and that therefore the election of six directors was beyond the competence of the meeting; that there was no proper notice that six directors were to be elected at the meeting and that there was not even a resolution to that effect. Hence, it is urged, the election of defendants 2 to 7 is void. The complaint that there was not clear notice to the members that six directors were going to be elected is without substance. Exhibit P. 6 is the notice of the meeting to be held on February 18, 1951, and item 2 therein is as follows:—"To elect directors. Mr. A.S. Padmanabhan retires at the meeting." It was argued that read as a whole Exhibit P. 6 would mean that a director is to be appointed in place of A.S. Padmanabhan who was to retire and that it would not convey the meaning that six directors were to be elected. We are unable to agree with this contention. The retirement of A.S. Padmanabhan is stated as a fact and the notice does not state as is usual "to elect a director in place of Padmanabhan who retires." The business to be transacted under item No. 2 is generally to elect directors and not to elect a director. This objection is, therefore, overruled.
A more substantial objection to the validity of the election of the defendants is that the power of the general body is limited to electing a director in the place of one who retires at the annual meeting under article 53 that the power to appoint other directors vests under article 58 exclusively with the board of directors and that in consequence the general body could appoint only one director in the place of A.S. Padmanabhan who retired at the meeting. The articles of the company material for the purpose of this contention are 47, 53 and 58. They are as follows:
Article 47:— "The number of directors inclusive of the director (ex-officio) shall not exceed 10 nor be less than 3. The quorum for a directors' meeting is 3. The quorum of a committee meeting shall be determined by the directors."
Article 53:— "The directors nominated by the agents and secretaries shall be ex-officio directors of the company and shall not be subject to retirement by rotation nor shall the clause relating to directors' share qualifications be applicable to him. The first directors of the company (except the ex-officio directors) shall hold office till the annual general meeting in 1946 when the whole of the directors shall retire from office and is every subsequent year one-third of the directors for the time being or if their number is not three or a multiple of three, then the number nearest to one-third shall retire from office. The directors to retire in every year shall be those who have been longest in office since their last election but as between persons who became directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by lot. A retiring director shall be eligible for re-election."
Article 58:— " If there be any vacancy in the directorate or if it is found necessary to increase the directorate so as not to exceed the maximum number the board may from time to time fill such vacancies by co-opting others as directors."
On these articles it is argued for the appellants that the power to appoint directors had been delegated to the board of directors under article 58 subject only to article 53 and that the exercise of that power by the general body was in contravention of the articles and was therefore void. Reliance is placed on the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart. In that case, at an extraordinary meeting of the company, resolutions were passed increasing the number of directors and electing two additional directors. The company filed a suit for a declaration that under the articles of association the general body had no power to appoint the two additional directors, and that the election of the defendants was, therefore, illegal. Article 82 of the company's articles provided that the number of directors shall not be less than two or more than seven. Article 85 provided that at the ordinary meeting every year one director shall retire and the meeting at which any director shall retire shall fill up his place. Article 93 provided "Any casual vacancy in the office of director may at all times be filled up by the board by the appointment of a director. The directors may from time to time appoint additional directors but so that the total number of directors shall not exceed the prescribed maximum." On a construction of these articles it was held that the company had delegated its power of appointment of directors to the board and that it could not itself exercise it. The ground for the decision is thus stated by Eve J.:—
"I think the express power contained in article 93 excludes the possibility of implying a concurrent power under article 82 and in my opinion the company has by its constitution delegated to those of its members who for the moment constitute the board the sole right of appointing additional directors and that is so whether such additional directors are necessary to make up the number to the maximum number fixed by the original article or to any other number which the company may from time to time determine on as the maximum. As a matter of construction, therefore, I think that the plaintiffs are right and that it was not within the power of the company to do that which it purports to have done at the meeting of the 14th March and on this ground alone the relief sought on the motion must, in my opinion, be granted."
Articles 82, 85 and 93 which were construed in Blair Open Hearth Furnace Company Ltd. v. Reigart are substantially identical with articles 47, 53 and 58 in the present case and the appellants accordingly argued that the reasoning and the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart would directly apply to the instant case.
Now it is doubtful how far the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart can still be considered to be good law. Its correctness was doubted in Worscester Corsetry v. Witting in which the articles were similar to those in Blair Open Hearth Furnace Company Ltd. v. Reigart with the difference that the company had also adopted articles 83 and 85 in Table A in the Companies Act of 1908. Article 83 runs as follows:—
"The
company may from time to time in general meeting increase or reduce the number
of directors, and may also determine in what rotation the increased or reduced
number is to go out of office."
Article 85 provided that "the directors shall have power at any time, and from time to time, to appoint a person as an additional director who shall retire from office at the next following ordinary general meeting, but shall be eligible for election by the company at that meeting as an additional director." On these articles the question arose whether the appointment of two more directors at an extraordinary meeting of the general body was ultra vires of the powers of the general body. Farwell J. held, following the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart, that the general body had no power to appoint the additional directors. On appeal this decision was reversed on the ground that in Blair Open Hearth Furnace Company Ltd. v. Reigart, there was nothing in the articles corresponding to article 83 in Table A and that that article conferred on the general a general power to elect additional directors. In this view it became necessary to pronounce on the correctness of the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart. But Lord Hanworth M.R, remarked: "I am bound to say that I find some little difficulty in seeing that the power must be either in the one or in the other; but be that as it may, we have to interpret the articles of association as we find them." Lawrence L.J. observed: "This court is not concerned upon the present occasion to say whether the construction put upon the articles in the Blair case by Eve J. was right or not; we have here to see what is the true meaning of the articles of the plaintiff company."
In Ram Kissendas v. Satya Charan the general body passed a resolution appointing seven new directors in addition to the existing four. The validity of this resolution was disputed in an action by the shareholders. Articles 109, 111 and 128 of the company were in substance similar to articles 82 and 93 which were considered in the Blair case. There was also an additional article 126 corresponding to article 83 in Table A which had been adopted by the company in Worcester Corsetry v. Witting. The Privy Council held on a construction of the articles that the election of new directors by the general body was valid. The decision in Blair Open Hearth Furnace Company Ltd. v. Reigart does not appear to have been cited before the Board but in view of the fact that the articles in Ram Kissendas v. Satya Charan are similar to those in Worcester Corsetry v. Witting and that Blair Open Hearth Furnace Company Ltd. v. Reigart differed from both in not having anything corresponding to article 83 of Table A in Worcester Corsetry v. Witting or article 126 in Ram Kissendas v. Satya Charan it is not possible to hold that Blair Open Hearth Furnace Company Ltd. v. Reigart is opposed to the decision in Ram Kissendas v. Satya Charan.
In Palmer's Company Precedents (16th edn., p. 573) it is stated that "the articles may, however, be so expressed as to delegate the power of appointing new directors to the directors to the exclusion of a general meeting." And the Blair case is quoted as authority for this position with a note that the correctness of the decision had been doubted in Worcester Corsetry v. Witting. In Buckley on Companies Acts (12th edn., p. 885) the position is thus stated:—"It has been held that an article in similar form amounts (in the absence of an article corresponding to article 84 ante,) to such a delegation to the directors of the power of appointing additional directors as to preclude the company in general meeting from appointing such directors." The authority quoted again is the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart but the decision in Worcester Corsetry v. Witting is noted against it. Article 94 referred to in the above quotation corresponds to article 83 in Table A. The position, therefore, is that the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart is of doubtful authority though it has not been overruled.
In this case it has to be noted that the articles of the company provide that "the regulations of Table A of Schedule I of the Indian Companies Act of 1913 shall apply to this company except in so far as otherwise provided for hereunder." Regulation 83 in Table A of Schedule I runs as follows:—"Subject to the provisions of Sections 83-A and 83-B of the Indian Companies Act, 1913, the company may from time to time in general meeting increase or reduce the number of directors and may also determine in what rotation the increased or reduced number is to go out of office." This regulation, must, therefore, be read as part of the articles of the company. In Worcester Corsetry v. Witting it was the existence of this article which was held to distinguish it from the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart where there was no such article. In Ram Kissendas v. Satya Charan also there was an article 126 corresponding to regulation 83 and the power of the general body to elect additional directors was confirmed. The decisions in Worcester Corsetry v. Witting and Ram Kissendas v. Satya Charan rather than the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart will apply to the present case.
It was further argued by Mr. Vasantha Pai on behalf of the respondents that even if the power to appoint additional directors is exclusively vested in the board of directors under Regulation 58 the resolution of the general body appointing defendants 2 to 7 as directors should be upheld because there was at the time of the meeting no board of directors which could validity function under the article and the general body had inherent power, which it could then exercise, to appoint directors for enabling the company to function. In support of this contention he cited the decisions in Isle of Wight Railway Co. v. Tahourdin, Barron v. Potter, Foster v. Foster and Munster v. Cammell Company. In Isle of Wight Railway Co. v. Tahourdin the shareholders of a company sent a requisition for the convening of a general body meeting to remove the directors and to appoint fresh directors in the vacancies. The 89th section corresponding to article 68 in the present case conferred on the directors the power to fill up vacancies in the directorate. The question was whether this power could be exercised by the members of the company at its general meeting. In answering it in the affirmative Cotton L.J. observed:—"Then it is said that there is no power in the meeting of shareholders to elect new directors for that under the 89th section the power would be in the remaining directors. The remaining directors would, no doubt, have that power if there was a quorum left. But suppose the meeting were to remove so many directors that a quorum was not left, what then follows ? It has been argued that in that case, there being no board which could act, there would be no power of filling up the board so as to enable it to work. In my opinion that is utterly wrong. A power is given by the 89th section to the remaining directors 'if they think proper so to do, to elect persons to fill up the vacancies.' I do not see how it is possible for a non-existent body to think proper to fill up vacancies. In such a case a general meeting duly summoned for the purpose must have power to elect a new board so as not to let the business of the company be at a deadlock." With this opinion Lindley L.J. agreed Fry L.J. observed:—
"In my judgment it is quite impossible to read the 89th section as the only section relating to the filling up of vacancies in the office of directors. That applies only where there are remaining directors, and those remaining directors think proper to exercise their powers. That does not in my judgment deprive the general meeting of the power to elect directors, where there are no directors or where the directors do not think fit to exercise their powers."
In Barron v. Potter, Potter v. Berry, the facts were that the board, of directors of a company consisted of two persons, Mr. Potter and, Mr. Barron. Owing to their differences no meeting of the board could be held and nothing transacted. Then at an extraordinary meeting of the shareholders two additional directors were appointed. The question was whether this was valid. The articles of the company provided that the number of directors should be not less than two and not more than ten and that the directors should have the power to appoint additional directors but there was no article corresponding to article 83 conferring on the company a power to increase or decrease the number of directors. In this respect the articles of this company were similar to those in Blair Open Hearth Furnace Company Ltd. v. Reigart. It was, accordingly contended on the strength of that decision that the general body had no authority to appoint additional directors. This contention was overruled and it was held that as there was a dead-lock in the administration resulting from the fact that the directors were unwilling to exercise their powers the company had the inherent power to take necessary steps to ensure the working of the company and to appoint additional directors for that purpose. Warringtgn J. observed: "The argument against the validity of the appointment is that the articles of association of the company gave to the board of directors the power of appointing additional directors, that the company has accordingly surrendered the power, and that the directors alone can exercise it. It is true that the general point was so decided by Eve J. in Blair Open Hearth Furnace Co. Ltd. v. Reigart and I am not concerned to say that in ordinary cases where there is a board ready and willing to act it would be competent for the company to override the power conferred on the directors by the articles except by way of special resolution for the purpose of altering the articles. But the case which I have to deal with is a different one. For practical purposes there is no board of directors at all. The only directors are two persons, one of whom refuses to act with the other and the question is, what is to be done under these circumstances. . . If directors having certain powers are unable or unwilling to exercise them—are in fact a non-existent body for the purpose—there must be some power in the company to do itself that which under other circumstances would be otherwise done. The directors in the present case being unwilling to appoint additional directors under the power conferred on them by the articles, in my opinion, the company in general meeting has power to make the appointment. The company has passed a resolution for that purpose." This decision was followed in Foster v. Foster where the general body had appointed a managing director which power was vested under article 99 in the board of directors. The court found that there were only two persons who could be appointed as managing directors and owing to disagreement between them the board had been "reduced to the position that it was unable owing to internal friction and faction to appoint anybody as managing director." Following the decision in Barron v. Potter, Potter v. Berry the court held that the question relating to the appointment of the managing director was one with which the general meeting of the company could deal and that having regard to the circumstances recourse must be had to the general meeting and the appointment by the general body must accordingly be upheld. In Munster v. Cammell Company certain vacancies which had occurred in the directorate before the annual general meeting were filled by the directors after that meeting and this appointment was attacked as illegal on the ground that the power of the board to fill vacancies could be exercised only before the next annual meeting and if not so exercised it lapsed and became incapable of exercise thereafter. Article 80 of the company corresponding to article 53 in the present case provided that the general meeting should have the power to fill vacancies arising by reason of the annual retirement of directors and article 84 conferred on the board power to fill vacancies. On a construction of these articles it was held that the appointment of directors by the general body was valid. The decision by itself, therefore, has no bearing on this point. But the following observations of Fry J. are relied on in support of the position that the company has a general and inherent power to appoint directors. He observed: "I am far from saying that a general meeting might not have filled up the casual vacancy, although, as I have pointed out the 80th clause only requires the general meeting to fill up the vacancies created by the retirement in rotation but nevertheless the general power of a general meeting are so large that I certainly do not mean to determine that if they had been so minded, they might not have filled up the casual vacancy." In this connection the following observations of Lawrence L.J. in Worcester Corsetry Ltd. v. Witting might also be quoted: "The company has an inherent power to nominate and appoint its own directors unless that is in any way restricted by the contract confined in the articles of association. Unless you can find that that inherent power has been handed over by the company to the directors, I think they retain that power as a natural result of their having the power to increase their board of directors." According to Buckley on Companies Act, p. 885, the result of the authorities is that the decision in Blair Open Hearth Furnace Company Ltd. v. Reigart will not apply "if owing to a deadlock or otherwise there is no board capable of making the necessary appointment."
In Palmer's Company Precedents (p. 673) it is stated that the company has the power to appoint additional directors "where owing to differences between the directors no board meeting could be held for the purpose." The principles laid down in the authorities discussed above may be summed up thus :—A company has inherent power to take all steps to ensure its proper working and that, of course, includes the power to appoint directors. It can delegate this power to appoint directors to the board of directors and such delegation will be binding upon it but if there is no legally constituted board which could function or if there is a board but that is unable or unwilling to act then the authority delegated to the board lapses and the members can exercise the right inherent in them of appointing directors.
In this view the question arises whether at the time of the annual meeting there was legally in existence a board of directors who could act. The appellants contend that there was, while the respondents deny it. The facts material for this contention may now be stated. It has already been mentioned that the first directors of the company were five persons named in article 49 which number was raised to six by the co-option of Veeramani under that article, that all of them retired at the annual meeting held on June 24, 1946, and were re-elected. Under article 53 a third of the directors had to retire at every annual meeting. Before the next annual meeting which was held on August 27, 1947, three of them had resigned. Of the remaining three, two directors Padmanabhan and Veeramani retired at the meeting and were re-elected. The third director resigned at that meeting and thus the strength of the directorate became reduced to two. Section 83-A of the Companies Act is as follows:—
"Every
company shall have at least three directors."
Article 47 provides that the number of directors inclusive of the director (ex-officio) shall not be less than three and that was also the number prescribed as quorum for a meeting of the directors. Thus after August 27, 1947, there was no board which could act except for the purpose of filling up vacancies under article 62. Admittedly no directors were co-opted in 1948 and the position on December 30, 1948, when the last annual meeting was held was that there were only two directors; both of them had been elected at the annual meeting held on August 27, 1947, and one of them had to retire at that meeting. Veeramani retired at that meeting and was re-elected. Thereafter there was no annual meeting.
The plaintiffs contended that on December 30, 1949, one Dekshinamurthy was co-opted as a director, Exhibit P-9, that he resigned on June 18, 1950, Exhibit P-10, and that on August 12, 1950, one Murugappa Chettiar was co-opted in his place, Exhibit P-11, and that there were thus three directors, Padmanabhan, Veeramani and Murugappa Chettiar who could act at the time of the annual meeting in 1951. But if the annual meeting had been convened in 1949 as it should have been Padmanabhan would have been bound to retire under article 53. But it is argued on behalf of the appellants firstly that article 53 contemplates the existence of at least three directors and it could not apply when their number fell below that minimum. The decision in David Moseley and Sons Ltd., In re was quoted in support of this position. There article 94 provided that "at every succeeding ordinary general meeting one-third of the directors or if their number is not a multiple of three, then the number nearest to but not exceeding one-third, shall retire from office." The strength of the directorate became reduced to two and the question was whether either of them ceased to be a director under this article. In holding that neither of them vacated the office Simonds J. observed: "The article in my judgment does not provide for the retirement of a director unless one of two conditions is satisfied: either there must be a number which is one-third of the directors, or there must be a number which is nearest to but does not exceed one-third. Here it is clear that neither of those conditions is satisfied. There are two directors and, therefore, you cannot find a number which is one-third. There are two directors and, therefore, you cannot find a number which is nearest to but does not exceed one-third."
It will be seen that this decision was based on the words "but not exceeding one-third" and in the absence of similar language in article 53 it must be held that even one of the two directors should have retired at the meeting. It is next argued that as no meeting was actually held in 1949 article 53 would not apply and Padmanabhan would continue to be a director. The respondents contend on the other hand that the directors could not take advantage of their own default and continue in office beyond the period when they would have retired, if they had done their duty and called for a meeting in accordance with article 29. This contention is supported by the decisions in In re Consolidated Nickel Mines Ltd.; Srinivasan v. Watrap Subramania Iyer; Kanssen v. Rialto and Morris v. Kanssen. These decisions were followed by this court in O.S.A. Nos. 120 of 1951 and 15 of 1952: Ananthalakshmi Animal v. The Indian Trades and Investments. It must accordingly be held that Padmanabhan ceased to be a director at the end of 1949. On the same reasoning it must also be held that Veeramani ceased to be a director by the end of 1950. This conclusion furnishes also the answer to a contention of the appellants that at least Veeramani was in office as director on February 26, 1951, and there could have been an election at the most of only five directors.
Then there is the case of Murugappa Chettiar who is put forward as the third director. It is stated that Dakshinamurthy was co-opted on December 30, 1949, but it does not appear in whose place he was co-opted and as four directors who retired in 1946 and 1947 had all been elected at the annual meeting held on June 24, 1946, their term of office would have expired under article 53 during the year 1949 and Dakshinamurthy whose co-option must have been in their place could not hold office beyond 1949. At any rate as he resigned on June 18, 1950, his rights do not merit any further consideration. It would follow from this that the co-option of Murugappa Chettiar in the place of Dakshinamurthy on August 12, 1950, must be held to be inoperative because the vacancy in which Dakshinamurthy could have been co-opted had itself come to an end under article 53. It is unnecessary to refer to the various infirmities in the appointment of Murugappa Chettiar as a director which are referred to in the judgment of Balakbishna Iyer J. We agree with him that Murugappa Chettiar was never validly co-opted as director, and it was not merely a case of defective appointment as director but of no appointment at all. We must accordingly hold that there was at the time of the annual meeting on February 26, 1951, no director validly in office and on the principle laid down in Isle of Wight Railway Co. v. Tahourdin and Barren v. Potter, Potter v. Berry the members had the right to elect the directors at the annual meeting.
One other contention relating to this part of the case remains to be considered. It was contended that by the time the annual meeting was held on February 26, 1951, the place of Murugappa Chettiar as a director was no longer vacant and therefore the election of six directors was invalid. The argument of the appellants may thus be stated: the general meeting was convened for February 18, 1951. On that day it was adjourned to February 26, 1951. Article 43 provides that if at any meeting at which an election is to take place, the places of the vacating directors are not filled up, the meeting shall stand adjourned till the Same day in the next week at the same time and place and if at the adjourned meeting the places of the vacating directors are not filled up the vacating directors or such of them as have not had their places filled shall be deemed to have been re-elected at the adjourned meeting. The contention is that under this article the meeting should have been adjourned from February 18, 1951, to February 25, 1951, and if on that date there was no election the vacating directors must be deemed to have been re-elected; therefore on February 25, 1951, Murugappa Chettiar became re-elected as director. We do not agree with this contention. Article 43 will apply only when there is a meeting held and as none was held before February 26, 1961, it has no application. Moreover in the view we have taken that there was no director who was in office on the date of the meeting there is no scope for applying article 43.
It was also urged that regulation 50 in Table A of Schedule I of the Companies Act provides that the election of directors other than those who retire, that is under article 63, must be by a special resolution, there was none such in this case and that, therefore, the election is illegal. But under article 33 of the articles of the company, which prevails over Regulation 50 no special resolution is required for election of directors. In the result we hold that the election of defendants 2 to 7 as directors is valid and not open to any objection.
It is next contended that members who were entitled to vote at the meeting had been excluded from exercising their right and that, therefore, the proceedings are illegal. In Application No. 139 of 1951 as part of the order adjourning the meeting originally fixed for January 28, 1951, to February 18, 1952, Krishnaswamy Nayudu J. gave the following directions:—
"But I consider that if it is made clear that the register as on November 28, 1950, will be the register that will be taken into consideration for the purpose of finding out the members who are entitled to vote or to be reckoned in a quorum, the apprehension on behalf of the respondent will disappear. To this course the company could have no objection." (Exhibit P. 4). It was in pursuance of this direction that the chairman declined to permit members who were not on the register of the company on November 28, 1950, to vote at the meeting. The contention of the appellants is that this direction is opposed to Section 79(1)(e) of the Companies Act which provides "any shareholder whose name is entered in the register of shareholders of the company shall enjoy the same rights and be subject to the same liabilities as all other shareholders of the same class."
Article 46 of the articles of the company runs as follows:—
"No member shall be entitled to vote nor be reckoned in a quorum when his name has not been in the register for a continuous period of two months immediately preceding the date of the meeting." The direction made in Exhibit P. 4 is obviously in accordance with this article. But Section 79(1) provides that the provision contained therein shall have effect "notwithstanding any provision made in the articles of the company in this behalf" and the contention of the appellants that article 46 is illegal must be accepted. It is contended on behalf of the respondents that the order in Application No. 139 of 1951 was made at the instance of the company and that the order has become final and that, therefore, its validity cannot now be questioned. The appellants reply that the shareholders were not as such parties to this application and that their rights could not be concluded by an order to which they were not parties. We are inclined to agree with this contention. But the question is whether this contention is open to the plaintiffs. They were on the register of the company on November 28, 1950, and they were allowed to exercise their right of voting. Therefore they are not persons adversely affected by the direction contained in Exhibit P. 4. Their complaint is that two members Srinivasam Pillai and Narasimharn whose names had been placed on the register after November 28, 1960, had sent their proxies on January 25, 1951, and that those proxies had been wrongly rejected. Assuming that Srinivasam Pillai and Narasimham had validly been admitted as members, a point on which Balakrishna Iyer J. had held against them, it is obvious that when their proxies were rejected they were the persons who were wronged and that, therefore, they are the only persons who can make a complaint of it and not other shareholders.
In Pulbrook v. Richmond Consolidated Mining Company the plaintiff who had been elected as a director complained that he had been excluded by the company from taking part in the management and sued for an injunction. The company contended that the action was not maintainable except in the name of the company. Overruling this contention Jessel M.R. held that when the wrong complained against is individual to the shareholder he was the person who was entitled to maintain the action and observed: "But in a case of an individual wrong, another shareholder cannot on behalf of himself and others, not being the individuals to whom the wrong is done, maintain an action for that wrong." That is precisely what the plaintiffs seek to do in this action. They are not themselves wronged and they seek to sue on behalf of themselves and others.
It may also be mentioned that even if the votes of Srinivasam Pillai and Narasimham are counted in favour of the plaintiff's group and against defendants 2 to 7 the result of the election would not be affected and on this ground also this objection must be overruled.
Another contention passed on behalf of the appellants is that at the general meeting held on February 26, 1951, two persons Ramachandran and Narayanaswami who were not members were allowed to take part in the proceedings and record votes, on the strength of powers of attorney which they had obtained from two members, Mrs. Ananthalakshmi Ammal and Sri N. Sri Ram respectively, and that the same was illegal and vitiated the entire proceedings. It is well settled that the right of a member of a company to vote by proxy is not a common law right and that it is determined solely by its articles which constitute a contract between him and the company.
In Haroen v. Phillips where the nature of the right which a member possessed to vote by proxy was discussed, Cotton L.J. observed: "But the whole of Mr. Benjamin's argument really depended on this, that there was a right independently of contract to vote by proxy. I cannot accede to that." Bowbn L.J. observed, "that there is no common law right on the part of a member of a corporation to vote by proxy. We know, of course, that in many cases a man may do through another person what he may lawfully do himself………But when persons agree to act together in the conduct of a business the way in which that business is to be carried on must depend in each case on the contract, express or implied which exists between them as to the way of carrying it on."
In MacLaren v. Thompson Astbury J. observed: "There is no inherent or equitable right in any shareholder to vote by proxy; such right, if it exists, must be found in the contract binding the shareholders generally, that is, in the company's regulations or constitution and it then exists only in the form and subject to the limitations therein appearing."
Vide Halsbury's Laws of England Vol. 8 (2nd edn.) page 61 paragraph 108.
The question then simply is what do the articles say on this matter? Article 38 is as follows:— "On a demand of poll every member present in person or by proxy or by attorney shall have one vote." Under Section 79(2)(g) of the Companies Act "a proxy must be a member of the company," and article 44 in Table A provides "No person shall be appointed a proxy who is not a shareholder," and these provisions are applicable to the present case there being nothing in the articles of the company inconsistent therewith. Therefore, there is no doubt that a proxy can validly be given only to a member. But the respondents argue that article 38 clearly recognises that a member can be present in person or by proxy or by attorney and that, therefore, the attorneys form a class distinct from proxies and as to them there is no limitation that they should be members. Mr. K. Rajah Ayyar contends on behalf of the appellants that in law the status of a proxy is only that of an agent, that no distinction can be made between a proxy and an attorney and that they are synonymous words. He refers to item 48 in Schedule I to the Stamp Act which deals with the power of attorney not being a proxy and item 52 which deals with proxy and argues that this is a recognition that proxies are only a form of power of attorney. He also relies on the observations of Lindley J. in English Scottish and Australian Chartered Bank In re that a "proxy there means some agent properly appointed" and the decision of Satyanarayana Rao and Chandra Reddi JJ. in Narayanan Chettiar v. Kaleswarar Mills where it was held that the relationship between a shareholder and a proxy is that of a principal and an agent. That undoubtedly is so but the question is what do the words "by proxy or by attorney" in article 38 mean? Clearly they cannot be held to be synonymous because the words actually used are "by proxy or by attorney", and not "by proxy or attorney". The argument of the appellants involves the rejection of the words "by attorney" as meaningless surplusage. But it is unnecessary to pursue this matter further because there is a clear ground on which this contention of the appellants must fail. It appears from the voting list appended to the commissioner's report that even excluding the votes cast by the two non-members Narayanaswami and Ramachandran the defendants get 10,120 votes as against 4,078 obtained by the plaintiffs' group. The result of the election has not been affected by this irregularity and, therefore, it cannot be set aside.
Objection is next taken to the inclusion of proxies which were deposited on the 14th and 15th of February 1951. These proxies were cast in favour of the defendants. The contention is that as the meeting was originally fixed for January 28, 1951, as per Exhibit P. 3 the proxies should have been deposited under article 68 in Table A at least 72 hours before the meeting and, therefore those deposited on the 14th and 15th should be rejected. Article 42 of the company's articles provides that the instrument appointing proxy shall be deposited at the registered office of the company not less than 72 hours in advance of the meeting or the adjourned meeting; else it is invalid.
It is argued that this article is opposed to regulation 66 which is obligatory and therefore void. Reliance was also placed on the decision in McLaren v. Thompson that an adjourned meeting was only a continuation of the original meeting and that proxies which could not be used at the date of the original meeting could not be used at the adjourned meeting. But the short answer to this contention is that though the date of the meeting was originally fixed for January 28, 1951, it was not actually held on that date by reason of the order dated January 16, 1951, Exhibit P-3; that there was no notice even given of that meeting and that the meeting which was held on February 18, 1951, can in no sense be said to be an adjourned meeting.
The contention that there had been no valid nomination of the defendants 2 to 7 as directors because it was not made seven days before the meeting is again based on the assumption that there was a meeting on January 28, 1951, and that the meeting held on February 18, 1951, is the continuance thereof. There was no meeting on January 28, 1951, and therefore there can be no question of an adjourned meeting on February 18, 1951. It is conceded that the nominations are in time if the date of the meeting is February 18, 1951, and not January 28, 1951.
It is finally contended that Sanjeevi Naidu the commissioner who was appointed to preside over the meeting which was fixed for February 18, 1951, had no authority to adjourn it to February 26, 1951,and that, therefore, the proceedings of the meeting held on February 26, 1951, are void.
In Halsbury's Laws of England, Vol. V, page 359, paragraph 588, (2nd Edn.) the law is thus stated:—"Except where empowered by the regulations of the company, the chairman cannot adjourn the meeting nor dissolve it while any of the business for which it was called remains untransacted." In this case article 35 provides that the chairman may with the consent of the meeting adjourn it from time to time. It is not now disputed that Mr. Sanjeevi Naidu obtained the consent of the meeting to adjourn it. It is suggested that the order appointing him does not confer upon him power to adjourn the meeting. But the meeting is to be conducted in accordance with the articles of association and the chairman had the authority to adjourn the meeting under article 35. Moreover the plaintiffs themselves pressed for adjournment and it is not open to them to make a complaint of it. In Burt v. The British Nation Life Assurance Association it was held that "a plaintiff who has a right to complain of an act done to a numerous society of which he is a member, is entitled to sue on behalf of himself and all others similarly interested though no other may wish to sue; so although there are a hundred who wish and are entitled to sue, still, if they sue by a plaintiff who is personally precluded from suing, the suit cannot proceed although other persons on whose behalf the suit was instituted might maintain the action as plaintiffs." This principle was applied in this court by Satyanarayana Rao and Panchapagesa Sastri JJ. in Nagappa Chettiar v. Madras Race Club. The plaintiffs having moved for an adjournment of the meeting cannot be heard to object to it. They do not even state that they have been prejudiced in any manner. This objection also must be overruled. In the result the appeal fails and is dismissed with costs.
[1959]
29COMP. CAS. 305 (CA)
JENKINS
ROMER AND WILLMER L,.JJ.
NOVEMBER
10, 11, 12, 13, 14, 17 OF 1958
Appeal
from Roxburgh, J. - This was
an appeal by Henry Revell Harmer, the chairman of H. R. Harmer Ltd., from an order
made by Roxburgh J. on May 12, 1958, under section 210 of the Companies Act,
1948, on a petition presented by Cyril Henry Carrington Harmer
("Cyril") and Bernard Bertram Dorkin Harmer ("Bernard"),
two directors of the company who were sons of the chairman. The respondents to
the petition were the company and the chairman and his wife, but neither the
company nor Mrs. Harmer appeared or was represented at the hearing of the
petition before Roxburgh J.
The chairman
(hereinafter referred to as "the father") was born in 1869. He
founded the business, subsequently acquired by the company, of philatelic
auctioneers and valuers in 1918 according to the evidence of the petitioners,
and in 1894, according to his own evidence, and carried it on with the assistance
of Cyril and Bernard, Cyril having been employed in the business continuously
since 1921 and Bernard since 1931. By 1935 Cyril had become responsible for the
day-to-day management of the
The respondent
company was incorporated on July 1, 1947, with a view to acquiring, and shortly
after its incorporation did acquire, the business of philatelic auctioneers and
valuers formerly carried on by the father, including the issued share capital
of the American company which belonged to him.
By the
articles of association, the first directors were the father, Cyril, Bernard
and another son (who resigned in 1950), and they were to be life directors not
subject to retirement at annual general meetings of the company. The father was
to be chairman of the board of directors for life and he was also to be
governing director, but the article contained to provision conferring any
powers on the governing director or restricting the powers of the other
directors. Regulation 68 of Table A in the First Schedule to the Companies Act,
1929 (which applied to the company), was modified by omitting therefrom all the
words therein after the words "from any cause to be a director," so
that a director appointed to the office of managing director, or manager, was
not liable to have his tenure of office as managing director or manager
determined by a resolution of the company in general meeting. The quorum of
directors, unless otherwise fixed (which had not happened), was two. The
shareholding in the company at the date of the petition was as follows :
|
“A” |
“B” |
|
|
ordinary |
ordinary |
Preference |
the father |
1,028 |
491 |
11,029 |
Cyril |
4,611 |
4 |
5,291 |
Bernard |
4,361 |
4 |
3,230 |
the father's wife |
|
295 |
|
Cyril's wife |
|
103 |
150 |
Bernard's wife |
|
103 |
150 |
|
------------------------------------------ |
||
|
10,000 |
1,000 |
19,850 |
The
remaining 14,152 of the issued preference shares were held by other members of
the family, by directors and former director of the company, and by the
American company. The preference shares and the "A" ordinary shares
conferred no voting rights and only the holders of "B" ordinary
shares were entitled to vote at general meetings of the company. Accordingly,
the equity of the company was held as to a little over 10 per cent. by the
father and as to the remainder by Cyril and Bernard approximately equally, but
the voting control of the company was held approximately as to 49 per cent. by
the father, as to 21 per cent. by Cyril and Bernard and their wives and as to
29 per cent. by the father's wife. Accordingly, the father was, down to the
date of Roxburgh J.'s order, in a position to control the company by the use of
his own and his wife's votes, their combined preponderance of voting power
being sufficient to procure the passing of extraordinary and special as well as
ordinary resolutions. Roxburgh J. found that Mrs. Harmer agreed with her
husband, when her holding of "B"shares was transferred to her, to
vote in accordance with his directions, and it was to be assumed that she would
in fact always do so.
The
following is a summary of the matters of which the petitioners complained and
which were referred to in the judgments as examples of the father's conduct in
relation to the affairs of the company. (a) In 1947 the father went to
The
petitioners prayed for the following relief : (1) that the regulations of the
company might be altered so as to confer upon the holders of ordinary shares
the right to one vote per share. (2) Alternatively, that the father should be
ordered to sell to the petitioners all his "A" and "B"
ordinary shares, or alternatively all his "B" ordinary shares at
named figures, or at such other price as the court should think proper. (3)
That the father should be relieved from his office as a director of the
company, and that the company's articles of association should be altered
accordingly, on the company's undertaking to pay to the father and his wife
such pension (if any) as the court might think proper. (4) Or that such other
order might be made in the premises as might be just.
Roxburgh
J. granted relief under section 210 but (with the agreement of the petitioners)
not in the terms of the prayer of the petition. His Lordship ordered, inter
alia, that the company should contract for the services of the father as
philatelic consultant at a named salary, that the father should not interfere
in the affairs of the company otherwise than in accordance with the valid
decisions of the board of directors, and that he should be appointed president
of the company for life, but that this office should not impose any duties or
rights or powers.
The
father appealed.
Harold
Brown Q.C. and J.L.E. MacManus for the chairman of the company, the father.
E.
Milner Holland Q.C. and Denys Buckley for the petitioners, the sons.
All
the case cited in argument are referred to in the judgments.
JENKINS
L.J. This truly lamentable litigation concerns a company called H. R. Harmer
Ltd., and comes before us on appeal from an order of Roxburgh J. dated May 12,
1958, whereby he granted relief under section 210 of the Companies Act, 1948,
at the instance of two sons of H. R. Harmer, the founder of the business. The
two sons are life directors. The father, Harmer senior, is also a life director
and, as will later be seen, in point of voting power controls the company. The
company carries on in succession to Harmer senior [hereinafter referred to as
"the father"] a large and, one might say, world renowned business of
philatelic auctioneering and dealing in and valuing stamps. The father, who is
upwards of 88 years of age, has been concerned in this class of business all
his life, and according to him he commenced the business, which he later
transferred to the company, as long ago as 1894. One finds the date 1918 given
in some parts of the evidence as the actual date when he set up the present
business, but it is clear that he was in fact doing business of this kind at a
much earlier date. I think he said his first dealing in stamps took place as
long ago as 1886. The father, from whatever the exact date may have been,
carried on this business on his own account and he was sole proprietor of it
down to the year 1947, when the company was formed to take over the business.
There were three sons, of whom one, Leslie, was concerned in the business only
from 1947 until 1951. The other two are Cyril and Bernard; Cyril left school in
1921 and went into the business; Bernard left school in 1931 and likewise
entered the business; Leslie entered the Colonial service and left that service
for the purpose of joining the company when it was formed. According to Cyril,
by 1935 the day-to-day management of the business in
On
July 11, 1947, a sale agreement was entered into between the father and the
company. Under that agreement the father sold to the company the whole of the
assets of the business, including the shares in the United States company, for
the sum of Pounds 33,325. That consideration was to be satisfied by the issue
to him or nominees of his of 22,325 preference shares, all the 10,000
"A" shares and all the 1,000 "B" shares. The father nominated
the sons as allottees in equal shares of 6,750 of the "A" shares and
240 of the "B" shares. There was further an agreement that on his
death the remaining 3,250 "A" shares and 760 "B" shares
allotted to the father were to be offered to the three sons. Under the articles
of association the father was to be chairman of the board of directors and as
such was entitled to a casting vote in the event of equality of votes. Further,
by the articles the father was appointed governing director for life but no special
rights were attached to that office. He also had a service agreement appointing
him managing director for 10 years from August 31, 1946, at a salary of Pounds
3,000 a year. That agreement expired in 1956 and was not renewed but I
understand no special powers were delegated to him in his capacity as managing
director. Cyril was appointed a director for life and London executive manager
at a salary of Pounds 2,500. His post of London executive manager was likewise
for 10 years from August, 1946, and that was renewed in 1956 for a further
seven years at salary of Pounds 3,500. Bernard was likewise appointed a
director for life, and he, too, had a service agreement under which he was an
executive manager at a salary of Pounds 2,250 per annum likewise for 10 years
from August, 1946. Leslie gave up his career in the Colonial service and was
appointed a life director and executive manager for a similar period of 10
years from August, 1946, at a salary of Pounds 2,000. Under the arrangements
made the three sons were to purchase certain preference shares at par. Cyril
was to take 5,000 of these shares, Bernard 4,000 and Leslie 2,000. I have
already referred to the option given to the sons to purchase their father's
shares on his death. After the formation of the company various changes took
place in the shareholdings which are not altogether easy to follow. It appears
that in 1949 advice was taken as to the position in regard to estate duty, and
I think also income tax, and it was pointed out that the father's position of
absolute control might create difficulty, and as a result the father
transferred to the three sons 3,250 "A" shares in equal shares, that
is, 1,083 "A" shares each to Cyril and Bernard, and 1,084, including
the one odd share, to Leslie. He also transferred 270 of his "B"
shares to his wife. That situation was modified when Leslie left the company in
1951. On the occasion of his leaving an agreement was entered into under which
he gave up his employment and his shareholding and the benefit of the option.
He was suitably compensated for these matters. His "A" shares were
transferred in equal shares to the father, Cyril and Bernard and his
"B" shares were transferred to the father, Cyril, Bernard and
father's wife. At some stage Cyril and Bernard, each transferred 103 of their
respective holdings of "B" shares to their wives, and the result of
these somewhat complicated readjustments was to make the present capital
situation as set out in paragraph 7 of the petition by which Cyril's and Bernard's
application to the court was initiated. Paragraph 7 is in these terms :
"The present shareholding of the company is as follows", and then
there are three columns : "A" ordinary, "B" ordinary and
preference. As to the "A" ordinary, the father holds 1,028 - those
are the shares he took when Leslie left - Cyril 4,611, Bernard 4,361. As to the
"B" ordinary shares, the father holds 491, Cyril four, Bernard four,
the father's wife 295, Cyril's wife 103 and Bernard's wife 103. Then as to the
preference shares, 11,029 are held by the father, 5,291 by Cyril, 3,230 by
Bernard and 150 each by Cyril's wife and Bernard's wife. That accounts for the
whole of the "A" ordinary and "B" ordinary, and 19,850 of
the preference, shares.
Then
paragraph 7 of the petition goes on : "The remaining 14,152 of the issued
preference shares are held by other members of the [father's] family and by
directors and former directors of the company and its subsidiary company
hereinafter mentioned". In those circumstances the position as regards the
control of the company, ignoring the slight differences while Leslie was with
the company, was this. The father and his wife held respectively 491 and 295
"B" shares, making a combined holding of 786 of such shares. The two
sons held four "B" shares each and their respective wives held 103
"B" shares each. The "B" shares, as I have said, are the
only shares in the capital of the company carrying any right to vote. On the
other hand, the two sons held approximately nine-tenths to the father's
one-tenth of the "A" shares which carry substantially the whole of
what is now conveniently though erroneously termed the equity of the company.
The holdings of preference shares can, I think, for present purposes be
ignored.
So
far as the directorate was concerned, the father and the two sons were all life
directors, the father being chairman with a casting vote. The father, as I have
said, is also styled governing director, but no special powers or duties are
assigned to that office. It follows that the father was, down to the date of
Roxburgh J.'s order, in a position to control the company by the use of his own
and his wife's votes, their combined preponderance of voting power being
sufficient to procure the passing of extraordinary and special as well as
ordinary resolutions. The judge has found, and there is evidence to show, that
Mrs. Harmer agreed with her husband, when her holding of "B" shares
was transferred to her, to vote in accordance with his directions, and it is to
be assumed that she would in fact always do so. The sons, Cyril and Bernard,
claim that the father has repeatedly abused his controlling power in the
conduct of the company's affairs to a point which has left them no option but
to apply to the court for relief under section 210, and this they have
accordingly done by presenting to the court on October 1, 1957, the petition on
which the order under appeal was made, the respondents to such petition being
the father and the company.
The
gist of the sons' complaint is stated in paragraph 16 of the petition in these
comprehensive terms : "Notwithstanding the incorporation of the company
and its acquisition from him of the said business the [father] has continued to
regard the business of the company as though it was still his own absolute
property and to ignore the interests of the shareholders of the company and in
particular of your petitioners, the wishes of his co-directors and the
resolutions of the board of directors of the company. He asserts that he is
entitled to adopt this attitude towards the company and its members and
directors by virtue of his shareholding and that of [his wife], in the
knowledge that [his wife] is likely always to exercise the voting rights
attaching to her 'B' ordinary shares as the [father] directs. He also asserts
(contrary to the fact) that he is so entitled by virtue of his being named as
governing director in the company's articles of association." I should at
this point also refer to the first few lines of paragraph 17 : "The
[father] has always acted as though the sole right of appointing and dismissing
the senior staff of the company is vested in himself and he extends this
attitude to embrace the directors of the company claiming that his views alone
are to be considered as to who shall be appointed or elected a director and
whether or not a director should be removed from office or be not re-elected.
He also considers that no director should express a contrary view to had
expressed by himself."
The
question in the case is whether these general complaints, exemplified and
supported as they are by reference to a number of particular matters to which I
will return, suffice, on the footing that they are established by the evidence,
to make out a case for relief under section 210. It should be stated at the
outset that Roxburgh J. accepted in substance the whole of the evidence adduced
in support of the petition, about which there is really very little dispute,
and having seen and heard the father giving evidence before him, he said :
"The father is undoubtedly a man of international reputation of a high
order, and let nobody think that I do not regard him even now as an asset to
this company. Unfortunately, in common with all of us, he gets older and older.
The purpose of this action is not so much to rake up the past as to redeem the
future; and therefore I cannot deny my anxiety from the mere physical
circumstance that every day the father is getting older and older, because as
events, which I shall have to record in detail, will painfully show, his
conduct is perhaps characteristic of very old men, shows no sign of
improvement, and might in the normal course be expected to deteriorate. He is
in fact more than 88 years of age now. He suffers from one of the familiar
disabilities of old age, namely, deafness. He is very deaf. He is so deaf that
he can only hear what is said to him if he stands at a suitable distance from,
and I think actually facing, the person speaking to him. I mention that at an
early stage. As a witness he was most unsatisfactory, mainly I think because of
his deafness, but partly on account of his age and slower comprehension of what
was put to him, when, with difficulty, he understood what was being said. There
will be many matters in the course of this judgment in which I shall not have
accepted his evidence. I feel in duty bound to mention that in case some
ingenious argument is ventilated elsewhere that something appears on some
shorthand note which the judge did not say he did not believe. I am going to
say at every stage why I have found the facts exactly as I find them even if it
appears to some extent from what the father said either in his affidavit or in
his cross-examination. I must say that as in duty bound; but I wish to make it
quite plain that this is not in my view the type of case in which someone has
come here to deceive the court. I use no offensive word about the father's
evidence. I attribute his shortcomings to things to which we are all subject,
age and infirmity. None the less, when I am considering autocratic interference
in the day-to-day affairs of a business, the havoc which can be wrought by age
and infirmity is self-evident. I hope that I have done justice to the father,
who is undoubtedly a very great man in the world of stamps, and it is just
because he is such a great man that some of his wholly indefensible actions in
connexion with the company's business must have done damage to the reputation
of the company not in this country but all the world over."
I
should also refer to this passage in the judgment of Roxburgh J. : From the
very moment of the incorporation of the company the [father] has acted, and
acted consistently, not merely down to but even since the presentation of the
petition, upon the footing that he can whenever he likes override any decision
of the board, or regulate any matter of the company's business exactly as he
wishes without any formality, even by the method of giving instructions direct
to the staff behind the backs of his co-directors. If at the outset he believed
that he had power to do this - a point upon which I do not find it necessary to
make any finding - he certainly became aware at an early stage that he had not,
and his reaction was not to change his conduct or attitude in the light of the
newly acquired knowledge (if new it was) but to endeavour to pack to the board
with voters on whom he could rely, an attempt which in fact failed miserably as
the sequel will show. The result is that for a long time he has been
deliberately interfering with the company's business and overriding the board in
a manner which he knew to be beyond his powers. This has had and is still
having a detrimental effect on the company's business, and accordingly upon all
its 'A' ordinary shareholders, of which shares he holds, as I have said, about
one-tenth, and the petitioners hold the rest".
Next
I must note the very important circumstance that it was agreed before Roxburgh
J. that the facts proved or admitted would suffice to make out a case for a
winding-up order under the "just and equitable" rule. I should also call
attention to these passages from the father's evidence. The first is from his
first affidavit, paragraph 21 : "I deny that the affairs of the company
are being conducted in a manner oppressive to a part of the members of the
company and the allegation contained in paragraph 27 of Cyril's affidavit that
my actions have done nothing but harm to the company is not only untrue but one
which I very much resent. The company has been largely dependent since its
incorporation on my long experience in and knowledge of philately which is and
has been, in my humble opinion, of very great value to the company. I have
never taken any step or done any thing which has been harmful to the company in
any way, neither have I ever done anything which has resulted in the affairs of
the company being conducted in a manner oppressive to any part of the members.
I now realise that I am no longer in a position to dictate the policy of the
company or to control completely the running of its business and I am prepared
for the future to exercise only the ordinary powers of a director and to act in
accordance with resolutions of the board. The reason why I have in the past
acted as I have is that I have been under a misapprehension as to my powers
which was brought about by reason of the matters referred to in paragraphs 5
and 13 of this affidavit".
Then
there is his oral evidence during his cross-examination by Mr. Milner Holland :
"His Lordship was speaking at the same time as you with the result that I
heard neither. Will you answer the question once more. Did you believe that you
were entitled to disregard the decisions of the board of directors ? (A) My
answer is that as long as I held the control shares I considered I had and it
was agreed with my sons that I should have it." Then a little later : Mr.
Milner Holland : "He said : 'As long as I hold the control shares, the
answer is Yes'." Roxburgh J. : "I will write it down and hand it to
him : 'As long as I hold the control shares' - then what did he say ?" Mr.
Milner Holland : "The answer in Yes". Then a little later Mr. Milner
Holland said to the father : "Do sign it. Sign it by all means."
Roxburgh J. : "I did not ask him to. I should not feel entitled to ask him
to do that". Then the father signed the passage in the judge's notebook.
Then the judge said : "I will read it out so that it can go on the
shorthand note. The written answer which he has given me is as follows : 'I
still believe that I am entitled to disregard resolutions of the board so long
as I hold the requisite proportion of the control shares.'"
Then,
in the last paragraph of his second affidavit, the father said : "With
reference to paragraph 6 of Mr. Hunter's affidavit I was never advised by Mr.
Hunter to the effect that without the addition of specific powers the mere
conferring on me of the office of governing director had no effect, and did not
give me power to control the board, and until so advised during the course of
these proceedings I had always thought that my position as such did confer on
me such a power".
These
passages appear to me to contain admissions by the father which are of great
importance in this case. The judge seems to have considered, as appears from
the passage in the judgment to which I have referred, that the father was aware
of the true position at an earlier date than he was prepared to admit.
I
should next say word or two as to the scope and effect of section 210 of the
Act. It is in these terms, so far as material for the present purpose : [His
Lordship read section 210(1) and (2) and continued :] I think that is all I
need read for the present purpose. It is to be observed, first that the person
permitted to apply to the court under section 210 is "any member of the
company", and he must show "that the affairs of the company are being
conducted in a manner oppressive to some part of the members (including
himself)". This indicates that the oppression complained of must be
complained of by a member of the company and must be oppression of some part of
the members (including himself) in their or his capacity as a member or members
of the company as such. Secondly, it is to be noted that the section does not
purport to apply to every case in which the facts would justify the making of a
winding-up order under the "just and equitable" rule, but only to
those cases of that character which have in them the requisite element of
oppression. Thirdly, the phrase "the affairs of the company are being
conducted" suggests prima facie a continuing process and is wide enough to
cover oppression by anyone who is taking part in the conduct of the affairs of
the company whether de facto or de jure. Fourthly, the section gives no
guidance as to the meaning of the word "oppressive", although it
does, as already mentioned, indicate that the victim or victims of the
oppressive conduct must be a member or members of the company as such. Prima
facie, therefore, the word "oppressive" must be given its ordinary
sense and the question must be whether in that sense the conduct complained of
is oppressive to a member or members as such. Inasmuch as in the present case
it is not in dispute that the facts would justify a winding-up order under the
"just and equitable" rule and it is recognized that such an order
would unfairly prejudice the complaining members, this would appear to be in
effect the only question in issue.
There
is no English case before this one in which an order has been made under the
section, but there have been two such cases in Scotland, one of which has been
the subject of an appeal to the House of Lords. The first of the Scottish cases
is Elder v. Elder & Watson, Ltd. Inevitably the result of applications
under section 210 in different cases much depend on the particular facts of
each case the circumstances in which oppression may arise being so infinitely
various that it is impossible to define them with precision. In Elder v. Elder
& Watson, Ltd. according to the headnote the nature of the case was this -
I read the second paragraph of the headnote : "In a petition presented
under section 210 it was averred that two of the petitioners, shareholders in a
private limited company which was in effect a small family concern, had
suffered oppression at the hands of other shareholders who had used their
combined voting powers to remove these petitioners from their offices as
directors and from their employment as secretary and factory manager
respectively. It was further averred that this action had been taken against
them at the instigation of a director who had serious differences with one of
them and who had sought successfully in this way to obtain control of the
company for himself and his nominees. There was no averment that the business
had been mismanaged to the detriment of the shareholders. Before presenting the
petition, the petitioners had sought unsuccessfully to dispose of their shares
in the company at a price to be fixed by arbitration.
"Held
(1) that section 210 was intended to meet the case of oppression of members of
a company in their character as such; (2) that the matters complained of by the
petitioners affected them solely in the character of director or employee of
the company, and there were thus no relevant averments of oppression for the
purposes of the section; and (3) that there were no facts averred which would
justify a winding-up order on 'just and equitable' grounds; and the petition
dismissed as irrelevant."
The
Lord President, Lord Cooper said : "The applicant for relief is thus
envisaged as one of an oppressed minority of shareholders. On such a petition
the court can only act under the section on being satisfied of three matters :
(i) that the company's affairs are being conducted in a manner oppressive to
some part of the members (including the petitioner); (ii) that to wind up the
company would unfairly prejudice that part of the members; and (iii) that
otherwise the facts would justify the making of a winding-up order under the
'just and equitable' clause.
"In
the present case it is conceded that it would be quite unjustifiable to
liquidate the company and that condition (ii) is satisfied. It remains to
consider conditions (i) and (iii), which can best be examined together. The
introduction into section 210 of condition (iii) refers us back to the pre-1947
practice under the 'just and equitable' clause, and is a salutary reminder of
the fact that the new remedy is not lightly to be accorded. Under the former
practice winding up has been ordered in many types of case which involved no
true element of oppression to shareholders, for example, where the substratum
of the company had vanished, and such cases will doubtless continue to arise.
On the other hand the justice and equity which led to the grant of a winding-up
order have often been found in conduct reasonably capable of being described as
'oppressive' to some part of the company's members, the oppression being
usually exerted by a person with predominating voting power which was employed
for his own advantage to the detriment of a helpless minority. The decisions
indicate that conduct which is technically legal and correct may nevertheless
be such as to justify the application of the 'just and equitable' jurisdiction,
and, conversely, that conduct involving illegality and contravention of the Act
may not suffice to warrant the remedy of winging up, especially where
alternative remedies are available. Where the 'just and equitable' jurisdiction
has been applied in cases of this type, the circumstances have always, I think,
been such as to warrant the inference that there has been, at least, an unfair
abuse of powers and in impairment of confidence in the probity with which the
company's affairs are being conducted, as distinguished from mere resentment on
the part of a minority at being outvoted on some issue of domestic policy. The
phrase 'oppressive to some part of the members' acquires a certain colour from
its collocation in section 165 with such stronger expressions as 'intent to
defraud', 'fraud', 'misfeasance', or 'other misconduct', and the essence of the
matter seems to be that the conduct complained of should at the lowest involve
a visible departure from the standards of fair dealing, and a violation of the
conditions of fair play on which every shareholders who entrusts his money to a
company is entitled to rely. This, broadly speaking, was the class of case
which the draftsman of section 210 evidently had in mind, and the question is
whether the petitioners have brought themselves within the scope of the
section". A little later Lord Copper said : "I also accept it that in
the familiar 'deadlock' type of case the partnership and the small company may
be virtually indistinguishable, and identical principles may fall to be applied
to both alike. But this is not to say that we can import the detailed
provisions of the Partnership Act into the Companies Act, still less that we
can ignore the specific requirement of section 210 that before applying that
section we must be able to affirm 'oppression' of some part of the members of
the company. While therefore I give full weight to the circumstance that we
have here to deal with a small domestic concern, I do not feel free to deal
with the case otherwise than under the terms of section 210 alone". Then
Lord Cooper said : "It does not assist the petitioners to assert that the
shareholders took sides in the dispute, for they had no option but to take
sides, and the real complaint is that more of them sided with Walter Elder than
with the petitioners. Moreover I search the petition in vain for any relevant
averment that the petitioners have suffered in their character as members of
the company. Qua members, their position does not seem to me to differ
significantly from that of any other shareholder. The true grievance is that
two of them, George Elder and James Glass, have lost the positions which they
formerly held as directors and officers of the company. I do not consider that
section 210 was intended to meet any such case, the 'oppression' required by
the section being oppression of members in their character as such. I do not
think that a 'just and equitable' winding up has ever yet been ordered merely
because of changes effected in the board of directors or the dismissal of
officers, and very strong grounds would be needed to justify such a step".
Lord
Keith said : "The difficulty is perhaps to define the limits within which
section 210 shall apply. It does not apply to all cases in which it would be
just and equitable to wind up a company, because some of these are cases in
which it could not be said that there is oppression of any part of the members
in the conduct of the affairs of the company. Apart from the Board of Trade, to
whom I shall refer later, it is only a member who can invoke the section, and,
in my opinion, this means a member in his capacity as a member, and further, in
my opinion, has only relevant ground of complaint is oppression of his rights
as a members". A little later in his judgment Lord Keith said : "But,
apart from this, the question of absence of mutual confidence per se between
partners, or between two sets of shareholders, however relevant to a
winding-up, seems to me to have no direct relevance to the remedy granted by
section 210. It is oppression of some part of the shareholders by the manner in
which the affairs of the company are being conducted that must be averred and
proved. Mere loss of confidence or pure deadlock does not, I think, come within
section 210". Then Lord Keith said : "It is not lack of confidence
between shareholders per se that brings section 210 into play, but lack of
confidence springing from oppression of a minority by a majority in the
management of the company's affairs and oppression involves, I think, at least
an element of lack of probity or fair dealing to a member in the matter of his
proprietary right as a shareholder. Cases like that of Loch v. John Blackwood
Ltd. and Thomson v. Drysdale might, I think, readily have come under section
210. I doubt whether a case like In re Yenidje Tobacco Co. could be brought
under the section". I think what is said in that case as to the scope of
section 210 is, if I may respectfully say so, well founded, and the caution
administered in regard to it should be borne constantly in mind when any
application under section 210 falls to be considered.
The
other Scottish case is Meyer v. Scottish Co-operative Wholesale Society Ltd.
which came on first on the question of the relevance of the averments before
the matters complained of had been proved in evidence, and was further heard
before the First Division after the facts had been proved. The report is an
exceedingly long one owing to the complication of the transactions involved,
but it was a case even more remotely related to the present case on its facts
than was Elder v. Elder & Watson. Meyer v. Scottish Co-operative Wholesale
Society Ltd. appears to have been a case in which a parent company was in
control of a subsidiary company which also had a minority of independent
members. A time came when trading conditions were such that it would be to the
advantage of the parent company to do away with the subsidiary company, and the
question, which the court answered in the affirmative, was whether the conduct
of the parent company in seeking to achieve that result amounted to oppression
or oppressive conduct of the affairs of the company within section 210. I do
not propose to take up time by citing at length from this case; I will content
myself by taking this from the judgment of the Lord President, Lord Cooper :
"I am not prepared to state on the basis of mere averments that the
company's affairs were not being conducted in a manner oppressive to the
petitioners within the meaning of the section. In my view, the section warrants
the court in looking at the business realities of a situation and does not
confine them to a narrow legalistic view".
Then
when Meyer v. Scottish Co-operative Wholesale Society, Ltd. came before the
House of Lords, where the decision was affirmed, some observations were made by
Viscount Simonds and Lord Morton of Henryton to which I would refer. Viscount
Simonds said : "My Lords, upon the facts, as I have outlined them and as
they appear in greater detail in the judgments of their Lordships of the First
Division, it appears to me incontrovertible that the society have behaved to
the minority shareholders of the company in a manner which can justly be described
as 'oppressive'. They had the majority power and they exercised their authority
in a manner 'burdensome, harsh and wrongful' - I take the dictionary meaning of
the word. But, it is said, let it be assumed that the society acted in an
oppressive manner : yet they did not conduct the affairs of the company in an
oppressive manner." That last sentence referred to the question whether in
that case the conduct of the parent company amounted to conducting the affairs
of the subsidiary company, as distinct from those of the parent company, in an
oppressive manner. No such complication enters into the present case. I attach
importance to Viscount Simonds' adoption of the meaning of
"oppression" as "burdensome, harsh and wrongful". Lord
Morton felt difficulty on the point I have mentioned as one which does not
arise in the present case, but he was able to agree with the decision of the
House, as appears from this passage in his speech : "Suffice it to say
that in the end I have reached the conclusion that there is evidence to justify
the view that the affairs of the company were 'conducted in a manner
oppressive' to the respondents. I am not disposed to give a narrow meaning to
these words, having regard to the manifest object of section 210. I am
naturally assisted in my conclusion by the fact that the decision of the four
learned judges of that Division (including Lord Carmont, who had the advantage
of seeing and hearing the witness) was unanimous, and by the fact that your
Lordships are all of the same opinion".
Finally,
as regards the cases I would refer to two of those concerned with the
application of the "just and equitable" principle as not without
assistance in the present case. The first is Thomson v. Drysdale. Lord Clyde
said : "Now, in any case in which the shareholders who hold a
preponderating interest in a company make it manifest that they intend to set
at naught the security provided by company procedure, and to treat the company
and its affairs as if they were their own property, it is impossible that the
minority should retain any confidence in the impartiality or probity of the
company's administration, and - according to the circumstances of each
particular case - it becomes a question whether the minority are not entitled,
as a matter of 'justice and equity' within the meaning of sub-section (vi) of
section 129 of the Companies (Consolidation) Act, 1908, to have the company
wound up. It is always true that the majority are entitled to use their voting
power in what they believe to be the interests of the company; and the
petitioner's fellow-shareholder had no doubt been allowed to acquire an
overwhelmingly preponderant power so far as votes were concerned. But whether
he could have used that power, not only to annul the arrangements made in the
directors' minutes - I assume he could - but also to acquire for himself the
petitioner's touring business (for which the company had never paid a single
penny) is a very different matter. In any case, he never attempted to use his
voting power in the only legitimate way". Lord Skerrington said : "It
must, however, be kept in view that this state of matters did not result from
any underhand manoeuvring on the part of the respondent (who holds the 1,501
shares) nor yet from any accidental circumstances. It resulted from the
deliberate actings and contracts of the two shareholders, each of whom
originally held a single share. Accordingly, in considering whether it is just
and equitable that the company should be now wound up, the court must be
careful not to allow itself to be made an instrument for relieving the
petitioner from the natural and lawful consequences of his own actings and
contracts. On the other hand, in circumstances like the present, it behoves the
shareholder who has the 1,501 votes to avoid any conduct which would reasonably
lead to the inference that he fails to appreciate the fact that it is his duty
to use his voting power in the interests of the company as a whole, and that he
must not ignore the interests of the other shareholder or treat the company and
its assets as if they were his own private property. Further, he must avoid
acting in such a way as might reasonably be held to make it impossible for the
other shareholder to co-operate with him in the management of the
company".
The
other case bearing on the just and equitable rule to which I would refer is the
Privy Council case of Loch v. John Blackwood Ltd. In that case Lord Shaw of
Dunfermline gave the opinion of the Judicial Committee, and I would refer to
this passage : "The present Lord President of the Court of session (Lord
Clyde) in Baird v. Lees discusses the section and the ejusdem generis doctrine
in exactly the same spirit. His words are as follows : '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 provide
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 arises, in my opinion, a situation in which it may be just and
equitable for the court to wind up the company.'"
Having
now dealt so far I am able with the law to be applied, I turn to the particular
matters of complaint alleged by the two sons in their petition. It should be
remembered that they are to some extent in the nature of illustrations of the
general course of conduct complained of in paragraph 16 of the petition. [His
Lordship then referred to the father's conduct in relation to the Australian
business and the purported dismissal of Edwards and continued :] There were in
the course of the history of this unfortunate matter a remarkable number of
appointments of directors and retirements of directors brought about in one way
or another by the father. This is an aspect of the case one must approach with
caution. It cannot be denied that the holder of the majority in voting power of
the shares in a company may, broadly speaking, appoint any person he thinks fit
as director, and the appointment cannot be challenged merely on the ground that
he might have found some more suitable person than the person he selected, or
that the person he selected was his friend; but I take it that the majority
shareholder's power of appointing directors must within broad limits be
exercised for the benefit of the company as a whole and not to secure some
ulterior advantage. With that caution, I would observe that as part of the
history of this matter, and considered in conjunction with the father's whole
course of conduct in relation to the company, the changes in the directorate
from November, 1954, onwards are, to my mind, not without their materiality.
[His
Lordship then referred to the evidence in relation to changes in the
directorate of the company, and continued :] That is the story of the
directorate, and it does seem to me to support the conclusion that the father
was guided in making his appointments by the question whether they could be
expected with certainty always to vote in accordance with his wishes. But, as I
have said, the facts of this case are by no means usual, and I would not have
it go forth that every time a majority shareholder appoints directors of his
own choosing, he has done something wrong, or something which can be challenged
by a dissatisfied minority, but if he goes on, having seen to it that the
requisite majority is obtained, to state his motives for having Mr. A rather
than Mr. B. and says : "Mr. A will always vote in the way I tell him
to," then it seems to me it is impinging on dangerous ground. I pass from
this matter of the directorate simply with the observation that it does appear
to me to afford some support for the petitioners' case when looked at in
conjunction with the whole course of the father's conduct.
[His
Lordship then referred to the other facts and examples of the father's conduct
on which the petitioner relied, and continued :] The question remains whether,
on these facts, the petitioners were rightly granted the relief which Roxburgh
J. thought fit to grant under section 210. Upon this issue Mr. Harold Brown,
for the father, made in effect these submissions - I am not attempting to quote
his words; I merely give the general effect of his argument, as I understood
it. First he said that the sons should not be heard to complain since they
acquired their shares through the generosity of their father, who having built
up the business, proceeded to turn it into a company and to hand over a major
part of the beneficial interest in the form of shares to his sons virtually by
way of gift. As to this, the sons did at all events pay for their preference
shares, and if they had not paid anything, two of them at all events had long
been working in the business, while the third gave up his career in the
Colonial Office in order to take up employment in the business. Moreover, the
question of consideration appears to me to be irrelevant, a mere matter of
prejudice. Suppose the transaction was a mere matter of gift, the gift, if
valid (and there is no suggestion it was not) must surely have conferred the
same rights as if the transaction had been for full consideration.
Mr.
Harold Brown's second point was that the sons knew full well when the company
was formed that the father was to retain control by means of his predominant
holding of "B" shares so long as he lived. I agree, but I cannot
concur with Mr. Brown in adducing from this that the sons must be taken to have
assumed that the father would exercise his control irregularly by doing what he
thought fit without reference to the board or in defiance of the board's
decisions.
Then
the third submission of Mr. Harold Brown was that what was done by the father
was not oppressive of the rights of the sons as members, but merely oppressive
of their rights as directors. I cannot accept this. It appears to me that the
sons as members and not merely as directors were oppressed by the singular
conduct of the father. The oppression must no doubt be oppression of members as
such, but it does not follow that the fact that the oppressed members are also
directors is a disqualifying circumstance when the question of relief under
section 210 arises. I think there may well be oppression from the point of view
of member-directors where a majority shareholder (that is to say, a shareholder
with a preponderance of voting power) proceeds, on the strength of his control,
to act contrary to the decisions of, or without the authority of, the duly
constituted board of directors of the company.
Fourthly,
Mr. Harold Brown said that the acts complained of might have been restrained by
injunction in son far as they were acts done without the authority of the
board. As to this, I do not think a wrongdoer in this field can well complain
that the person wronged might have chosen another remedy.
Then
fifthly, Mr. Harold Brown said that the acts complained of were not in their
result oppressive, because it cannot be demonstrated that the company suffered
any loss from any of them. I cannot agree. The acts complained of were, I
should say for the most part, calculated to damage the company in one way or
the other.
Sixthly,
Mr. Harold Brown said that the acts complained of might have been lawfully done
by calling a general meeting and passing the requisite resolutions, ordinary or
special. As to this, I think the sons were at least entitled to require that
the proper procedure should be applied.
Then
seventhly, Mr. Harold Brown said that this is not a case of discrimination
between different shareholders or classes of shareholders. I agree, but see no
reason for holding that section 210 is necessarily confined to cases of discrimination,
though it is to be expected that cases calling for its application would most
usually take that form.
Finally,
he submitted that the father got no pecuniary benefit out of what he did. That
is not literally true, but even if it was, I do not think it is essential to a
case of oppression that the alleged oppressor is oppressing in order to obtain
pecuniary benefit. If there is oppression, it remains oppression even though
the oppression is due simply to the controlling shareholder's overwhelming
desire for power and control, and not with a view to his own advantage in the
pecuniary sense. It seems to me the result rather than the motive is the
material thing.
Then
on the other side, Mr. Milner Holland's submissions were to this effect : (1) The
question is whether the course of conduct complained of was "burdensome,
harsh or wrongful" to shareholders, that is to say, a part of the
shareholders, including the petitioners.
(2)
If a person, relying on majority control in point of voting power, dispenses
with the proper procedure for producing the result he desires to achieve, and
simply insists on this or that being done or omitted, his conduct is oppressive
because it deprives the minority of shareholders of their rights as members of
the company to have its affairs conducted in accordance with its articles of
association.
(3)
It is not shown that if the father had acted strictly in accordance with the
articles of association, he could have achieved is object. The proper procedure
cannot be put on one side as mere machinery. It is the duty of the board to
consider any proposal. If a majority shareholder desires to override the board,
there musts be a proper meeting, whether of the board or the company, and at
least an opportunity of discussion. Moreover, if a majority shareholder sets
about asserting his power in accordance with the articles and succeeds in point
of numbers, he may be faced with questions as to frauds on the minority and so
forth, which are burked by the expedient of simply doing what he chooses
without ceremony on the ground that if it came to a vote he could outvote
anyone.
In
his judgment, Roxburgh J., after saying that he adopted the reasoning of the
Lord President, Lord Cooper, in Meyer v. Scottish Co-operative Wholesale Society
Ltd., said : "That being so, for my part the section seems to admit of no
ambiguity. The word 'oppression' is a word in common use and understanding in
the English language. But I would just observe in passing that it does not say
'who complains of acts of oppression'; it says 'that the affairs of the company
are being conducted in a manner oppressive.' In other words, I think it invites
attention not to events considered in isolation, but to events considered as
part of a consecutive story; and it is because I take that view that I have not
dealt (and do not purpose to deal) with each of the items which I have
enumerated one by one. But I must pause to dismiss, so far as I am concerned,
the submission made by Mr. Russell [leading counsel for the father before
Roxburgh J.] to the effect, as I understood it, that the nature of the
oppression that the section requires could be in some way affected by the use
of the word 'minorities'. To start with, I can see no need to introduce any
modification into the words of the statute, which seem to me to be sufficiently
plain. Secondly, I do not think that the word 'minorities' was intended to be
introduced at that point. I think the point about the word 'minorities' is that
it is only where the voting control is elsewhere that a case for the
application of the section arises. To take this case, if the voting control had
resided where the beneficial interest in the ordinary shares resides, there
would have been no need to invoke the section. The [father] would have been
eradicated root and branch by this time. It is only because of the beneficial
voting interest and his having voting control that it is necessary to invoke
the section at all. I cannot think of any case where it would be possible to
invoke the section if the voting control was in the hands of the persons who
are alleged to have been oppressed; and that, I think, is the only and natural
explanation of the wore 'minorities' being there." Then he says; "It
remains, in my view, a question for the court to decide on the whole story, as
revealed in the evidence, whether the affairs of the company are being - it has
to be a state of affairs continuing at the date of the petition - conducted in
a manner oppressive to some part of the members. I do not know that it has any
particular bearing on the case, but this case is curious in that it is not a
minority beneficial interest that is being oppressed, and that would be the
normal case; it is a majority beneficial interest which is being oppressed
because the voting control is placed in the hands of a minority beneficial
interest. In my judgment, I reach the opinion - because that is what I have to
do - that at the date of the presentation of this petition the affairs of the
company were being conducted in a manner oppressive to the petitioners."
Having
given the best consideration I can to this not altogether easy case, I have
come to the same conclusion, preferring the reasoning of Mr. Milner Holland to
that of Mr. Harold Brown, and accepting the reasoning and conclusion of the
judge. I am fortified in this view by the consideration that it has obviously
become increasingly difficult, may really impossible, for the business of this
company to be carried on successfully as matters stood before Roxburgh J.'s
order, and that it is plainly in the best interests of all parties that an
order in these terms, or substantially in these terms, should be made. No
criticism of any importance of the form of Roxburgh J.'s order has been made
good before us.
For
these reasons I would dismiss this appeal.
ROMER
L.J. I agree. At an early stage of Mr. Harold Brown's opening in this case he
suggested that even if the father had been shown to have been conducting the
affairs of the company in an oppressive way, which Mr. Harold Brown strenuously
denied, nevertheless it was not open to the sons to base a petition under
section 210 on that footing, because he said the sons had been given the bulk
of their shares by the father and owed everything to his bounty, and they could
not complain even though other people in similar circumstances might. But I
think that leaves entirely out of account the fact that the father did in fact
create the company. He created proprietary interests in this business, and he
cannot now disregard the legal entity which was brought into being and the
shares which were created therein. I do not know how long, on that argument,
the sons would have to wait until they were permitted to complain.
The
second point was that the sons agreed that their father should govern the
company, and, therefore, they must put up with it. I cannot myself believe that
the agreement to his appointment as governing director was wholly unconditional
on the way he was to govern, and surely they were entitled to assume that their
father would exercise his power moderately and reasonably and give some effect,
at least, to their own life directorships to which he had agreed.
Viewing
the evidence as a whole, no one could doubt but that the father acted
oppressively in the sense in which that word is ordinarily used. He rode
roughshod over his sons and everybody else, and dictated the general conduct of
the company's affairs and its policy with an intolerant disregard of the wishes
of his co-directors, and, indeed, in some instances, in disregard of the best
interests of the company itself. The question, however, is whether it has been
shown within section 210 of the Act that the affairs of the company were being
conducted by the father in a manner oppressive to the shareholders, including
the petitioners, who are in a voting minority. Mr. Harold Brown said that Cyril
and not the father was conducting the affairs of the company in London. I
cannot accept that suggestion. It is quite true that Cyril was, as he said in
evidence, conducting the day-to-day routine work in the London office, but it
is quite obvious that the affairs in general of the company were conducted by
the father and no one else, and I should imagine the father himself would be
the last person in the world to deny that.
In
considering whether the way in which he did conduct the company's affairs was
oppressive, I agree with the judge that although naturally attention must be
paid to the various incidents of which the petitioners complain taken by
themselves, the court is concerned really to consider the history of the matter
as a whole, and to see whether a course of conduct by the father has been
established which constitutes an oppression of the other shareholders. The word
"oppression" was defined by Viscount Simonds, as my Lord has pointed
out, in Scottish Co-operative Wholesale Society Ltd. v. Meyer, where he
accepted the dictionary meaning "burdensome, harsh and wrongful", and
I respectfully would adopt that definition of the word to be found in section
210. With regard to that section, Lord Morton in his speech said that he was
not disposed to give a narrow meaning to the word "oppression" having
regard to the manifest object of section 210. It is true that the mere use of
voting power at board meetings or at a general meeting to secure the passing of
resolutions, which the other members of the board or shareholders oppose, would
not in general constitute oppression for the purpose of the section or for any
other purpose. For a petition to succeed it must be shown that there has been
oppression in a real sense of members qua shareholders, and not merely a
subordination of their wishes to the power of a voting majority.
As
to this, however, I accept Mr. Milner Holland's submission that shareholders
are entitled to have the affairs of a company conducted in the way laid down by
the company's constitution. Members are entitled to expect that their board
shall perform its functions as a board, and that the proceedings of the
directors shall be carried out in a normal and orthodox manner. They are
entitled to the benefit of the collective experience of the directors and to
expect that the directors and each of them can freely express their views at
board meetings, and that regard shall be had to what they say and to
resolutions properly passed. If the board is browbeaten and either ignored or
overruled by one of its number, in this case the father, in reliance on his
superior voting power, the proprietary interests of the minority shareholders
cannot fail to be affected, and a case of oppression within section 210 is, in
my judgment, made out. That such has been the policy of the father since the
inception of the company has been established by the evidence, in my view,
beyond a shadow of doubt. The petitioners' grievance on this matter is stated
generally in paragraph 16 of the petition which my Lord has read, and I do not
read again. An illuminating statement with regard to it is found in the
father's first affidavit, where he said : "I believe that the basis on
which the company was formed entitled me to run the business and it was a
breach of faith for my sons to deny it."
Of
all the instances or illustrations of the father's attitude as chairman, with
which my Lord had dealt, I will only refer very shortly to two. [His Lordship
then referred to (a) the father's instructions to the secretary of the company
that no board meetings were to be called without his agreement; (b) the
question of the lease of the company's premises. His Lordship then referred to
a transcript of one of the board meetings, to show the atmosphere which
prevailed there (the father and the sons each having a solicitor present), and
continued :] We were told that Mr. Charles Russell, who appeared for the father
in the court below, conceded that affairs had got to such a pass that a
contributory's petition to wind up the company on the ground that it was just
and equitable to wind it up would have succeeded. I think this concession was
very rightly made, and none the less so because the shareholders might in
connexion with some, at least, of the father's activities have obtained relief
by resorting to a different jurisdiction. It is true enough that the mere fact
that it is just and equitable to wind up a company on a contributory's petition
does not in itself necessarily bring a case within section 210, but when the
ground for winding up is oppression, it may well amount also to a ground for
bringing section 210 into play, as Lord Keith pointed out in Elder v. Elder
& Watson Ltd. I am at all events abundantly satisfied that it does in the
present case.
I
would wish in conclusion to adopt a passage from the judgement of Roxburgh J.
in this case where he said : "If the [father] assumed powers that he did
not posses (and he certainly did that) and exercised them against the wishes of
the shareholders who had major beneficial interests, but a minority of votes
(and he certainly did that) that, in my opinion, is prima facie oppression. It
is sufficient prima facie oppression to shift the burden of proof; and,
therefore, as it seems to me, the burden of avoiding that conclusion rests upon
the usurper. So far from discharging that burden, the argument has left me with
the firm conclusion that, looking over the whole story, the chairman had been
so dominated by one or other of two collateral motives - either just lack of
temper, or the motive of asserting and attempting to sustain an absolute
overriding power of control in the face of opposition - that he has on many
occasions acted in complete disregard of the interest of the company as a
whole".
I
agree with that passage from the judge's judgment, and I agree that the appeal
should be dismissed.
WILLMER
L.J. I agree that the appeal fails, and if it were not for the importance of
the case I should have been content merely to express that view and say no
more, but as the matters in issue here have been very fully debated and are of
such serious consequence, particularly for Harmer senior, I think it is right
that I should endeavour to state, in as few words as I can, the reasons which
have led me to my conclusion.
The
only question which in the event has to be decided in the case is whether or
not the affairs of H. R. Harmer Ltd. were being conducted in a manner
oppressive to some part of the members, including the petitioners. The judge in
giving judgment pointed out that the word "oppression" is a word in
common use and understanding in the English language. He did not have the
advantage, which we have had, of the subsequent decision of the House of Lords
in Scottish Co-operative Wholesale Society Ltd. v. Meyer, but I think it is
fair to say that the decision of the House of Lords in that case has abundantly
justified what the judge in this case said with regard to the meaning of the
word "oppression". Viscount Simonds was content to take its ordinary
dictionary sense, that is to say, what the ordinary man would understand is the
meaning of the word, and Lord Morton of Henryton said that he was not disposed
to give a narrow meaning to the word.
That
being so, it seems to me that the question which arises in this case, as indeed
in almost any other case of this character, is a pure question of fact to be
determined in accordance with the circumstances of the particular case. In the
course of the argument it was suggested that the approach to this issue of fact
was in some ways analogous to the approach to the question of fact which arises
in a matrimonial cause where the petition is on the grounds of cruelty. I am
disposed to think there is some force in the suggestion that there is a
similarity between the two proceedings, and I venture to make these two
comments on the correct way to approach the question of fact which arises in a
case such as this. The first is that in my judgment it is quite impossible to
lay down a priori certain categories of conduct which in all circumstances
either are or are not capable in law of amounting to conduct which is
oppressive within the meaning of the section; in other words, each case has to
be examined in the light of its own particular facts and, I would venture to
add, in the light of the personality of the individual persons concerned. The
second matter to which I want to refer has really been dealt with by the judge
and has been referred to by my Lords, and it is this, that one must be careful
to study the course of conduct complained of as a whole. I would like to refer
to what the judge said in his judgment in a passage which has already been
read, and which I venture to read again : "But I would just observe in passing
that it does not say 'who complains of acts of oppression'; it says 'that the
affairs of the company are being conducted in a manner oppressive.' In other
words, I think it invites attention not to events considered in isolation, but
to events considered as part of a consecutive story." I respectfully
venture to adopt that as the correct approach, and that is the approach which
the judge made in this case.
Now
approaching the case, as I think, in the right way, the judge had the
inestimable advantage of hearing oral evidence from the two persons most
immediately concerned with the dispute ["the father"], and his son
Cyril, one of the petitioners. Where the judge below has had the advantage of
actually seeing witnesses and hearing them cross-examined, we should naturally
be slow to interfere with the conclusions of fact at which he has arrived. In
this case seeing those two witnesses and hearing their evidence was important,
as I think, for two reasons. First, it was important in this case, as in all
others, for the purpose of assessing their credibility as witnesses. As to that
the judge has told us something (the passage to which I refer has already been
read) about what he thought of the credibility of the father. Secondly, in a
case like this, where so much depends on the personality of the principal
persons concerned and on the way in which those personalities reacted on each
other, it seems to me that judge, who actually saw the persons concerned and
saw them under stress in cross-examination, had abundant opportunity of
weighing up the personality of the people concerned, a matter which I think is
of vital importance in deciding whether the conduct of one was oppressive in
relation to the other. Having those inestimable advantages and having, as I
have said, approached the question in the right way, the judge came to the
conclusion that the petitioners' case was made out, and the father had been
guilty of conducting the affairs of the company in an oppressive manner.
I
have no intention of going into detail in regard to any of the particular
incidents to which my Lord has already referred, but viewing the conduct
complained of as a whole, i.e., as a course of conduct extending over the
years, it appears to me that there was abundant evidence to justify the judge
in his conclusion of fact. Ever since what I may call the Australia incident in
1948, the evidence shows that by one means or another the father has sought to
impose his will in the conduct of the affairs of the company to the exclusion
of the wishes of other people who might be concerned. Mr. Miller Holland
pointed out in his address that the various matters complained of fall into
different categories, according to the method adopted by the father. One method
complained of was his use or abuse of his voting power, primarily to secure the
election to the board of people who where his nominees. Another method which he
adopted was to use the mere threat of his voting power to impose his wishes on
the rest of the board. The third method adopted was simply to go behind the
backs of the board and, after a decision had been taken by the board, to take
it upon himself to countermand it on his own authority and to give his own
instructions. So far as the election of members of the board were concerned, I
would like to express my agreement with what has already fallen from my Lord.
It is not the mere fact that the father in this case sought to get his own
friends on the board; what is objected to, and as I think rightly objected to,
was securing the election of the particular people concerned with the avowed
object of securing people who would be "certainties", to use the word
which the father himself used. But the most dangerous and most oppressive form
of conduct is, I think, the habit that the father had of going behind properly
constituted decisions of the board and taking it upon himself to countermand
them. It seems to me that such conduct cuts at the very root of proper company
procedure and makes it virtually impossible for the business of a company to be
carried on. The result which it led to can well be seen in some of the
transcripts of meeting which have been placed before us. I venture to think it
is an illuminating comment on the state of affairs which has arisen if it
becomes necessary, whenever any meeting is held, to have a recording machine
which will take down every word that is said by anybody, and to have solicitors
sitting at the elbows of the various parties. How it can be expected that a
company's affairs will be properly conducted in that atmosphere, I do not
understand. I am abundantly satisfied that all this led inevitably to damage to
the interests of the company. There was some evidence of actual financial loss,
for instance, in connexion with the failure to renew the lease with which my Lord
has already dealt. But of far more importance than that, as it seems to me, was
this very fact to which I have referred, that it was becoming increasingly
difficult to carry on business at all; and I would add to that the damaging
effect that the acrimonious discussions between the father and the other
directors was having upon the members of the staff particularly the senior
member of the staff. In this connexion I think it is not altogether without
significance that both the senior cashier and the secretary of the company
should have sworn the affidavits which have been filed in support of the
petition.
It
may be thought, possibly, that the best evidence of oppressive conduct in this
case is to be found in the answer which the father himself gave in the course
of his cross-examination and which, to make sure it was in accordance with what
he wished to say, was written down in the judge's notebook. I venture to repeat
the answer which was then given and recorded. "I still believe that I am
entitled to disregard resolutions of the board so long as I hold the requisite
proportion of the control shares." That of course was quite different from
what he had said in the concluding paragraph of the affidavit which he had
previously sworn. I do not pause to quote it, but the effect of it was to say
that by that time he had recognised that it was not always possible for him to
have his own way, and that his previous efforts to do so had been under a
misapprehension. Mr. Milner Holland has argued before us that at any rate since
1949 the father, for all that he said in his affidavit, has in fact known
perfectly well, or at least has had the means of knowing, that he was no longer
entitled to control the company. Reference has been made to advice given by a
solicitor 1949, and again to the repetitive advice given by the solicitor who
sat by the father at the board meetings in 1955, 1956 and 1957. As has been
pointed out already, the judge appears to have accepted Mr. Milner Holland's
contention and to have come to the conclusion that the father did know
perfectly well that he was going outside his powers. For myself I doubt very
much whether it makes very much difference whether the father did or did not
know that he was exceeding his powers, because, in the view which I take,
oppressive conduct would not cease to be oppressive merely if it were
unconscious, though of course it may be said - If I may be forgiven for once
more borrowing a phrase used in connexion with a matrimonial cause - that which
is done consciously strikes with a sharper edge. It seems to me that the
question whether the conduct complained of was conscious or unconscious is more
material on the question of what relief ought to be accorded. If, as the judge
thought, the father persisted in his conduct well knowing it to be wrong, there
can or course be less assurance of the discontinuance of such conduct in
future, and therefore possibly all the more need for a stringent order to
protect the interests of the shareholders. In conclusion, without discussing it
in detail, I desire to associate myself with what my Lord has said with regard
to the submissions made to us by Mr. Harold Brown, and I refer particularly to
the submission that he made to us that it does not lie in the mouth of these
petitioners to complain, having regard to the facts, first, that they acquired
their shareholding very largely by way of gift in the first instance from their
father himself and, secondly, that from the outset of the formation of the
company it was recognised that the father himself intended to retain control.
For
these reasons, and for those which my Lords have already given, I do not think
there is any other course open to us but to dismiss the appeal. I am satisfied
that this company was suffering damage, and is in danger of suffering further
damage from the oppressive manner in which its affairs were conducted by the
father; and I am satisfied that the petitioners, as shareholder (and I stress
the words "as shareholders") and not merely as directors, were
suffering and are in danger of suffering further from the damage inflicted on
the company.
Appeal
dismissed.
[1960] 30 COMP CAS 200 (PAT.)
V.
RAMASWAMI, C.J.
AND KANHAIYA SINGH, J.
MISCELLANEOUS JUDICIAL CASE NO. 252 OF 1958
FEBRUARY 17, 1960
RAMASWAMI,
C. J. - In this case the assesseeis a public limited company carrying on
business in the mining of copper ore and manufacture of copper and brass in
Ghatsila in the State of Bihar. For the assessment year 1953- 54 the assessee
claimed that a sum of £20,000 equivalent to Rs. 2,66,677 should be deducted as
business expense under the provisions of section 10(2) (xv) of the Indian
Income-tax Act. The sum of £20,000 was paid by the assessee to the
Sir Godfrey B.H. Fell (Chairman ) .... £ 5,800
H. R. Mackillingin
.... £ 2,840
The Hon. R. M. P. Preston ....
£ 2,840
Captian H. Vivian
.... £ 2,840
D.
A. R. O. Williams
.... £ 2,840
In
pursuance of the resolution the amounts were paid to the respective directors.
It was claimed by the assessee that these amounts should be deducted for the
purpose of income-tax under section 10 (2) (XV) of the Indian Income-tax Act.
The Income-tax Officer disallowed the claim on the ground that the expenditure
was not laid out wholly and exclusively for the purpose of business. The matter
was taken in appeal before the Appellate Assistant Commissioner who affirmed
the view of the Income -tax Officer and dismissed the appeal. The assessee took
the matter in appeal to the Income-tax Appellate Tribunal, but the appeal was
dismissed on the ground that the expander was not laid out wholly and
exclusively for the purpose of the business, and there was no contract between
the company and the directors for the payment of the amount.
Under
section 66(1) of the Indian Income-tax Act, the Income-tax Appellate Tribunal
has submitted the following question of law for the opinion of the High Court :
"Whether
on the facts and in the circumstances of the case, the sum of £ 20,000 equivalent to Rs. 2,66,677 paid as
compensation for loss of office to the London directors was an admissible
deduction under section 10(2) (XV) of the Indian Income-tax Act ?"
It
was submitted by learned counsel on behalf of the assessee that the appellate
Tribunal was wrong in holding that there was no contract between the directors
and the company with regard to payment of remuneration. It was submitted that
the directors were entitled by the articles of association to a certain amount
of fixed remuneration, and as the directors had a fixed term of office and as
the term was cut short the company was legally justified in making the payment
to the outgoing directors. In my opinion the argument of learned counsel is
will founded and must be accepted as correct. Article 83, 84 and 85 of the
articles of association of the company are to the following effect :
"83. The
qualification of a director shall be the holding of 2,000 shares in the
company. A director may act before acquiring his qualification, but shall, if
he accepts office, be bound to become the registered holder of the same within
two months after his appointment, failing which he shall vacate office.
84. At
each ordinary meeting one-third of the directors for the time being
respectively, or if their number is not a multiple of three, then the number
nearest to but not exceeding one-third shall retire from office, and the
meeting at which any director or directs shall retire may fill up his or their
places .
85. The
directors to retire shall be the directors who have been longest in office
since the last election. As between directors of equal seniority, the directors
to retire shall (unless such directors of equal seniority shall agree among
themselves) be selected from among them by lot. A retiring director shall be
eligible for re-election."
Article
94 states as follows :
"94. The
directors shall be paid out of the funds of the company as remuneration for
their services an amount at the rate of 250 per annum for each director, with
an additional sum at the rate of 150 per annum for the chairman. The directors
shall also be entitled to relieve by way of further remuneration in each year
in which the net profits of the company (including any sum or sums carried to
any reserve account) shall be more than sufficient to pay a dividend at the
rate of 10 per cent. on the average amount of the capital paid up on the issued
shares of the company during such year, an amount equal to 5 per cent. of the
profits remaining after calculating such dividend as aforesaid. The directors
shall also be entitled to such further sums as the company may in general
meeting determine. The certificate of the auditors of the company as to the amount
of such net profits shall be conclusive and binding on all members of the
company. The further remuneration payable under this clause shall be divided
amongst the directors proportionately to the period of office held by them
respectively during such year, and to the amounts here in before menaced as
remuneration payable to the directors and chairman."
Article
95 is to the following effect :
"95. The
directors shall be paid all their travailing and other expenses, properly and
necessarily expended by them in and about the business of the company, and if
any director shall be required to perform extra services, or to go or to reside
abroad, or shall otherwise be especially occupied about the company's business,
he shall be entitled to receive a remuneration to be fixed by the board or at
the option of such director, by the company in general meeting, and such
remuneration may be either in addition to or in substitution for his
remuneration provided in the last precedent article."
It
is manifest under these articles that the directors are entitled to certain
fixed remuneration and that the directors are also entitled to a fixed term of
office ; and as the term was cut short due to the transfer of the seat of
control and management to India, the company had legal justification to
compensate the outgoing directors for loss of office. Its is a will established
principle that the articles of association of a company form part of the
contract between the shareholders inter se; and if on the basis of these articles
the directors were employed by the company, the terms of the articles are
embodied in and form part of the contract between the company and its
directors. In In re New British Iron Co. ; Ex parte Beckwith , the article of
association of a company required its directors to possess a share
qualification, and also provided that the remuneration of the board "shall
be an annual sum of £1,000 to be paid out of the funds of the company." It
was held by WRIGHT J. that although the provisions in the articles were only
part of the contract between the shareholders inter se, the provisions were, on
the directors being employed and accept in office on the footing of them,
embodided in the contract between the company and the directors, and that the
remuneration was not due to the directors in their character of members, but
under the contract so embodying the provisions, and that, in the winding up of
the company, the directors were entitled to rank as ordinary creditors in
respect of the remuneration due to them at the commencement of the winding up.
Reference should also be made to In re Dover Coalfield Extension Ltd., where it
was held that the remuneration paid by a company under powers in its articles
of association to a director was not profit derived from the use of his
qualification shares, but payment for work done by him under his contract with
the company. I accept, therefore, the submission made by learned counsel on
behalf of the assessee that there was a contract between the company and its
directors, and the compensation of £20,000 paid by the company to the directors
for the loss of office was made under the terms of that contract. It was argued
by the standing counsel of the Income-tax Department that under article 98 the
company could have dismissed the directors by an extraordinary resolution even
before the expiry of the period of office Article 98 states that "the
company may by extraordinary resolution remove any one or more of the directors
before expiration of his or their period of office, and may by an ordinary
resolution appoint any other qualified person or persons in this or their
stead." But we cannot proceed on the assumption that the company may have
removed the directors by an extraordinary resolution, thought the company has
not done so. in the present case the directors have not been dismissed by the
company by an extraordinary resolution and the question of tax liability cannot
be decided upon by any such assumption. As I have already stated, the payment
of compensation to the outgoing directors for the loss of office is legally
justified under the terms of the contract between the company and its outgoing
directors, and the company is entitled to claim a deduction under section 10
(2) (XV) of the Indian Income-tax Act.
An
alternative argument was put forward by learned counsel on behalf of the
assessee that even if there was no contract between the company and its
outgoing directors, the payment of compensation was dictated by commercial
expediency. It was pointed out by learned counsel that the amount was voted by
the general body of shareholders at an extraordinary meeting. There was a
special resolution voted by the shareholders at the extraordinary meeting,
namely, the decision for the transfer of the seat of control and management of
the company from the United Kingdom to India. At the same meeting there was an
ordinary resolution that the London directors should be paid by way of
compensation for loss of office a sum of £20,000. It was submitted on behalf of
the assessee that the company was benefited in four different ways by the
transfer of the seat of control and management from United Kingdom to India. It
was pointed out that the expenses of remuneration of directors was halved
because of the transfer of the seat of control and management to India. It was
also pointed out that the travell in by expenses of the managing directors
attending meetings in India would be saved by putting an end to the term of
their office of the London directors. it was said by learned counsel for the assessee
that a sum of £48,000 represented the aeroplane fare of the London directors
for attending meetings for each year, and by retirement of the London directors
this amount was saved to the company. It was also submitted that the company's
business has prospered very much after the transfer of the seat of control to
India. This fact was admitted in the order of the Tribunal in paragraph 5 at
page 47 of the paper book. It is also manifest that there is better supervision
and control of business after the transfer of the seat of management to India.
It was also pointed out by the learned counsel for the assessee that the London
directors had been in office for a long term of years and because of their
experience and technical qualifications it was likely that they would be
re-elected in future for an uncertain number of years. By asking the London
directors to retire and paying them compensation the company was putting an end
to an expensive method of carrying on business. It was an advantage from the
commercial point of view for the company to ask its London directors was,
therefore, payment made wholly and exclusively in the interest of business. In
my opinion, the argument put forward on behalf of the assessee is correct. Even
assuming that there was no contract, I am of opinion that the payment of
compensation made to the London directors in the circumstances of this case was
payment made for commercial expediency and would fall within the ambit of
section 10 (2) (XV) of the Indian Income-tax Act. This view is borne out by a
decision in Anglo-Persian Oil Co. Ltd. v. Dale (H. M. Inspector of Taxes ). In
that case the appellant company had entered into an agreement in 1910 and 1914
by which it appointed another limited company as its managing agents to manage
its business in Persia and in the East, for a period of years, upon the
condition that the agents should be remunerated by commission at specified
rates. With the passage of time the amounts payable to the agents by way of
remuneration increased far beyond the amounts originally contemplate by the
company, and, after negotiation between the parties, the agreements were
canceled in 1922, and the aged company agreed to go into voluntary liquidation
and the company agreed to pay to the agents £3,00,000 in cash. This sum was in.
act paid and the appellant company contended before the Special Commissioners
of Income Tax that it was an admissible deduction in computing the companies
profits for purposes of income tax and corporation profits tax. The special commissioners
rejected the contention, but it was held by the court of appeal, that the
payment to the agents was an admissible deduction for purposes of income tax
and corporation profits tax. At page 269 of the report LAWRENCE L.I. observed
as follows.
'It
is not open to doubt that under ordinary circumstances where a trader, in order
to effect saving in his working expenses, dispenses with the services of a
particular agent or servant, and makes a payment for the cancellation of the
agency or service agreements, such a payment is properly chargeable to revenue;
it does not involve any addition to or withdrawal from fixed capital; it is
purely working expense. The fact that the payment includes a sum in
consideration of the agent or servant agreeing not to compete with his
principal or employer after determination of his employment (a stipulation
frequently met with in these cases) does not alter the character of payment.
In
the present case, the sum paid to,the agent for the cancellation of his
agreement, and the winding up of his concern was very large; but it has to be
remembered that the annual profits of the company were enormous. Thus, in the
year in which the payment was made, the profits amounted to just under
£3,00,000 and the £3,00,000 in question was charged to revenue at the rate of
£60,000 a year for five years. Moreover, according to the evidence, a
considerable economy and saving in working expenses resulted to the company from
the cancellation of the agency agreement, and therefore it is not unreasonable
to suppose that the increased revenue of the company will more than cover the
expenditure in question. But whether that be so or not does not affect the
principle that such a payment is an income expenditure. Even if the company had
been mistaken in its policy, and by getting rid of its agent had increased the
working expenses instead of diminishing them, the payment would still have been
a mere working expense, and as such chargeable to revenue.
The
principle to be applied to a case of this description has been stated by the
VISCOUNT CAVE in Atherton v. British Insulated and helsby Cables Ltd as
follows:
My
Lords, I think it clear that the deduction from the profits of the above
mentioned sum of £31,784 is not prohibited by the first rule applicable to
cases I and II which prohibits the deduction of a disbursement not being money
wholly and exclusively laid out or expended for the purpose of the trade. It
was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce
and smith v. incorporated council of law reporting that a sum of money
expended, not of necessity and with a view to direct and immediate benefit to
the trade, but voluntarily and on the grounds of commercial expediency, and in
order indirectly to facilitate the carrying on of the business, may yet be
expended wholly or exclusively for the purposes of the trade, and it appears to
me that the findings of the commissioners in the present case bring the payment
in question within that description.
For
the reasons expressed by me I hold that in the circumstances of this case the
payment made by the company to the london Directors was made to put an end to
an expensive method of carrying on business and so it was a payment made for
commercial expediency and can be properly deducted under the provisions of
section 10(2)(xv) of the Indian Income tax Act.
It
was, however, submitted by the learned standing counsel that if the payment was
to be deducted under section 10(2)(xv) of the Indian Income-tax Act, it must be
made for the purpose of earning the profits and there must be a direct nexus
between the payment of the amount and the earning of the profits. It is,
however, necessary to notice that is section 10(2)(xv) of the India Income-tax
Act the expression used is "any expenditure laid out or expended wholly
and exclusively for the purpose of such business". This expression was
introduced by the Amendment Act of 1939, and before the amendment the
expression used was "incurred solely for the purpose of earning such
profits". The formula now used in section 10(2)(xv) is wider than the
formula used for the 1939 amendment. In my opinion it is not necessary that
there should be any direct correlation in point of time between the expenditure
and the earning of any profits. I have already stated that a sum of money may
be spent not because of necessity or with a view made on the ground of
commercial expediency and indirectly to facilitate the carrying on of the business,
it may still be expenditure made wholly and exclusively for the purpose of the
business and so fall within the ambit of section 10(2)(xv) of the Indian
Income-tax Act. This view is borne out by the decision of the Australian High
Court in Nevill and Co. Ltd. v. Federal Commissioner of Taxation where LATHAM
C.J. observed at page 301 as following:
"No
expenditure, strictly and narrowly considered, in itself actually gains or
produces income. It is an outgoing, not an incoming. Its character can be determined
only in relation to the object which the person making the expenditure has in
view. If the actual object is the conduct of the business on a profitable basis
with that due regard to economy which is essential in any well conducted
business, then the expenditure (if not a capital expenditure) is an expenditure
incurred in gaining or producing the assessable income. If it is not a capital
expenditure it should be deducted in ascertaining the taxable income of the
taxpayer."
The
same view has been expressed by the Madras High Court in P. Orr & Sons v.
Commissioner of Income-tax.
On
behalf of the Income-tax Department reliance was placed upon two decisions,
Overy (H.M.Inspector of Taxes) v. Ashford Dunn & Co. Ltd. and James Snook
& Co. Ltd. v. Blasdale (H.M.Inspector of Taxes). These cases are, however,
distinguishable and the principle laid down in those cases does not govern the
present case. In Overy (H.M.Inspector of Taxes) v. Ashford Dunn & Co. Ltd.
the respondent company, whose three directors were also sole shareholders was
engaged in a trade in which the control of the raw materials and of markets had
passed into the hands of another company. By an agreement dated the19th
December, 1929, the latter company agreed to purchase from the shareholders of
the respondent company all their shares and, in accordance with the provisions
in the articles of association of the respondent company, the vendors, on
completion of the sale, vacated their offices as directors. The agreement
provided that the vendors were not within ten years to engage in a competing
business, that they were to be entitled to all book debts and were to discharge
all liabilities of the respondent company up to the 30th November, 1929, and,
in particular, were to keep indemnified both the respondent company and the
purchasers against all claims by the directors, officers or servants of the
company for loss of fees or profits arising out of the agreement. At an
extraordinary meeting of the respondent company held immediately before the completion
of the sale of the shares, a resolution was passed providing for the payment to
the retiring directors of a specified sum as compensation for loss of office.
It was contended for the respondent company that the payment made in
compensation for loss of office was a proper deduction in computing its profits
for income-tax purposes, on the ground that its was a sum expended with a view
to a direct and immediate benefit to the company's trade. It was held by the
Court of Appeal that the deduction could not be allowed as the payment was
distribution of the company's profits. It was observed by FINLAY, J. that
instead of receiving the money as compensation for loss of office the directors
could have well resolved and determined that the amount should be allowed as
dividend. It could, therefore, make no difference if the same result was
reached by declaring the sum as being compensation for loss of office. The
substance of the thing remained exactly the same, namely, that it was a payment
made out of profits and was not a deduction to be made before the profits were
arrived at. The material facts of this case are wholly different and the ratio
of Overy (H.M.Inspector of Taxes) v. Ashford Dunn & Co. Ltd. cannot apply
to the present case. In James Snook & Co. Ltd. v. Blasdale (H.M.Inspector
of Taxes) there was an agreement for the sale of shares of the appellant
company in which there was a clause that the purchasers would procure the
appellant company to pay compensation for loss of office to the directors and the
auditor of the company, who under the agreement, were to resign. It was held by
the Court of Appeal that the compensation for loss of office was part of the
bargain between the incoming shareholders and the outgoing shareholders and
that there was no payment made in the trading of the company. It was,
therefore, held that the compensation paid was not an allowable deduction in
computing the company's profits. In the present case the material facts are
manifestly different and the principle laid down in James Snook & Co. Ltd.
v. Blasdale (H.M.Inspector of Taxes) has no application.
The
argument was stressed by the learned standing counsel for the Income- tax
Department that the question at issue in this case is a question of fact and
the High Court has no jurisdiction to interfere with the finding of the
Income-tax Appellate Tribunal on this question. It was contended by learned
causal that the question whether the payment was an admissible deduction under
section 10(2)(xv) of the Indian Income-tax Act is purely a question of fact and
the finding of the Income-tax Appellate Tribunal on this point ought not to be
disturbed. I do not accept this argument as correct. The question is whether
upon the facts found by the Appellate Tribunal the case comes within the ambit
of section 10(2)(xv) of the Indian Income-tax Act. In a case of this
description the High Court has jurisdiction to interfere if it appears that the
Tribunal has misunderstood the statutory language of section 10(2)(xv), because
a proper construction of the statutory language is a matter of law. The High
Court has also the jurisdiction to interfere if the Tribunal has come to a
finding of fact for which there is no evidence, or the finding of fact is
inconsistent with the evidence or if it is contrary to it. In Edwards
(Inspector Of Taxes) v. Bairstow, it was held by the General Commissioners, in
the circumstances of that case, that there was not an adventure in the nature
of trade to justify an assessment to income-tax under Case I of Schedule D to
the Income Tax Act, 1918. The finding of the General Commissioners was reversed
by the House of Lords, whom took the view that the facts found led inevitably
to the conclusion that the transaction was an adventure in the nature of trade
and that the Commissioners inference to the contrary should be set aside. It
was observed by Lord Radcliffe in the course of judgment that without any
misconception of law appearing on the face of the case stated the facts found
may be such that no person acting judicial and properly instructed as to the
relevant law could have come to the determination reached : the court may then
intervene, having no option but to assume that some misconception of law is
responsible for the decision. At page 594 of the report LORD RADCLIFFE has
observed as follows:
"I
think it possible that the English courts have been led to be rather over-ready
to treat these questions as `pure questions of fact' by some observations of
WARRINGTON and ATKIN L. JJ., in Cooper v. Stubbs. If so, I would say, with very
great respect, that I think it a pity that such a tendency should persist. As I
see it, the reason why the courts do not interfere with the Commissioners
findings or determinations when they really do involve nothing but questions of
fact is not any supposed advantage in the Commissioners of greater experience
in matters of business or any other matters. The reasons is simply that by the
system that has been set up the Commissioners are the first tribunal to try an
appeal, and in the interests of the efficient administration of justice their
decisions can only be upset on appeal it they have been positively wrong in
law. The court is not a second opinion, where there is reasonable ground for
the first. But there is no reason to make a mystery about the subject that
Commissioner's deal with or to invite the courts to impose any exceptional
restraints upon themselves because they are dealing with cases that arise out
of facts found by commissioners. Their duty is no more than to examine those
facts with a decent respect for the tribunal appealed from and if they think
that the only reasonable conclusion on the facts found is inconsistent with the
determination come to, to say so without more ado."
It
was also observed by learned counsel in the course of this argument that the
Appellate Tribunal has misdirected itself in several matters before reaching
its conclusion. In the first place, the Appellate Tribunal was wrong in holding
that there was no contract between the directors and the company with regard to
be term of office and the payment of remuneration. It was also pointed out that
the Appellate Tribunal was wrong in saying that the business stopped in the
United Kingdom and payments to the outgoing directors were made in view of
cessation of business and so the payments could not be allowed as trading
expenses. It was also pointed out by learned counsel that the Appellate
Tribunal was wrong in holding that the transfer of the seat of control of the
company from the United Kingdom to India had benefited only the shareholders
and there was no benefit to the company. I think that the summation of learned
counsel is right, and in my opinion all the circumstances appearing in the case
lead to one conclusion, namely that the payment of compensation to the outgoing
London directors was a payment made for commercial expediency and that the
finding of the Appellate Tribunal to the contrary is inconsistent with the
evidence and contradictory to the evidence and so it must be held that the
Appellate Tribunal has misdirected itself in law in reaching that conclusion.
In my opinion the present case is governed by the principle laid down by the
House of Lords in Edwards (Inspector of Taxes) v. Bairstow , to which I have
already referred.
For
the reasons I have expressed I hold that the payment of £20,000, equivalent to
Rs. 2,66,677, paid as compensation for loss of office to the London directors
is an admissible deduction under section 10(2)(xv) of the Indian Income-tax
Act. I would, therefore, answer the question of law referred by the Appellate
Tribunal in favour of the assessee and against the Income-tax Department. The
assessee is entitled to the costs of this reference. Hearing fee Rs. 250.
KANHAIYA
SINGH, J.- I agree.
reference
answered accordingly.
[1961] 31 COMP. CAS. 143 (SC)
Oriental Metal
Pressing Works (P.) Ltd.
v.
SYED JAFER IMAM, A. K. SARKAR AND RAGHUBAR DAYAL, JJ.
CIVIL APEAL NO. 10 OF 1960
DECEMBER 16, 1960
SARKAR,
J. - Dadoba Tukaram Thakoor carried on a business under the name and style
of oriental metal pressing works. On May 26, 1955, a private company was
incorporated under the name of Oriental metal Pressing works Ltd. hereafter
called the company, to take over the aforesaid business. On July 7, 1955.
Dadoba transferred his business to the company. On the same date, an agreement
was made between him and the company by which he was appointed the managing
director of the company for life and was given the power. “by deed inter vives
or by will or codicil to appoint any person to be a managing director in his
place and stead.” Regulation 109 of the articles of the company reproduced
these provisions. The shareholders of the company were Dadoba his brother, the
respondent Bhaskar, and his two sons, the appellant Govind and the respondent
Harsih of whom the first three were the directors, Dadoba being the managing
director. This constitution of the company continued till Dadoba death on
January 14, 1957.
Dadoba
had died leaving a will whereby he purported to appoint the appellant, Govind
the managing director of the company in his place from the date of his death.
Shortly after Dadoba’s death, disputes arose between the appellant, Govind and
the respondent, Bhaskar, the appellant Govind, was contending that the
respondent, Bhuskar, had ceased to be a director on account of his failure to
attend the directors meettings. He also purported to co-opt the appellant,
Bhalchandra , as a director. The respondent, Bhaskar, contended that he had not
ceased to be a director and challenged the legality of the appointment of the
appellant, Bhalchandra, as a director. He further contended that the
appointment of the appellant, Govind, as the managing director of the company
by the will of Dadoba was void. On November 22,1957, the respondent, Bhaskar,
filed a suit in the city civil court of Bombay against the company, the
appellants, Govind and Bhalchandra, and the respondent Harish for the following
declarations and for reliefs incidental thereto:
(a) the appointment of the appellant Govind
as the managing director was void:
(b) the appointment of the appellant,
bhalchandra, as director was illegal and inoperative; and
(c) he (the respondent, Bhaskar) was and
continued to be a director.
The
learned judge of the City civil court accepted all the contentions of the
respondent, Bhaskar and made the declarations claimed.
The
company and the appellands, Govind and Bhalchandra appealed from his decision
to the High court at
It
appears that while the appeal was pending in this court, the respondent,
Bhaskar sold his holding in the Company to the appellant, Govind and has now no
interest in the company or the appeal. No one has consequently appeared to
contest the appeal in this court, the respondent, Harish, apparently not being
interested in doing so. In these circumstances, the questions whether the
respondent, Bhaskar, continues to be director and whether the appellant,
Bhalchandra was legally co-opted as a director are no longer liege issues and
have not been canvassed in this appeal. On those questions, therefore, we
express no opinion. Another result, rather unfortunate, has been that we have
not had the advantage of arguments against the appeal.
The
courts below held that the appointment of the appellant, Govind, as managing
directory by the will of Dadoba was void in view of the provisions of section
312 of the Companies Act, 1956. That section reads thus:
“Any
assignment of his office made after the commencement of this act by any
director of a company shall be void.”
The
Act came into force on April 1, 1956, and Dadoba had both made his will and
died after that date. The appointment of the appellant, Govind as managing
director was, therefore, made after the commencement of the Act.
Now,
section 312 makes the assignment of his office by a director void. It does not
on the face of it say that an appointment by a director of another person as
the director in his place would be void. The High court, however, took the view
that the word ‘Assignment’ in the section included appointment and so such an
appointment would also be void under the section. What we have to decide is
whether the High court was right in this view.
Before
we proceed to examine this question, we have to point out one thing. It appears
that the High court thought that the appellants had conceded that an
appointment by a director of another in his place by act inter vires would be
an assignment of the office of a director within section 312, and had only
contended that such an appointment by will, which is what had been done by
Dadoba would not be an assignment and would not, therefore, be rendered void by
the section. The learned Attorney General, appearing for the appellants, said
that in this the High court was in error and no such concession had been made.
He further expressly withdrew that concession. This he was clearly entitled to
do. It, therefore, becomes unnecessary for us to deal with the reasoning of the
High court in support of the view accepted by it, which were based on the
concession.
We
have given the views of the High court a most respectful and anxious
consideration but we do not find ourselves able to agree with them. We will
personally state our reasons for this conclusion, but now we wish to point out
that in the view that we have taken of the matter it will not be necessary for
us to deal with the argument advanced in the High court that the section only
forbade a director from appointing his successor, assuming assignment included
appointment, but it did not prevent a managing director from assigning his
office or appointing his successor which was what Dadoba had done. It the
section did not prevent a director from appointing his successor, which we do
not think it did, then, clearly, there is nothing in it which can justify the
view that a managing director cannot appoint his successor.
The
section says that a director shall not be able to assign his office. it may be,
as the High court pointed out, that apart form transfer another meaning of the
word assignment is, appointment. But on plain reading of the language used in
the section, it does not seem to us possible to hold that the word “
assignment” in it, can mean appointment.
First,
the section talks of assignment of his office by a director. The word his would
indicate that the office contemplated was one held by the director at the time
of assignment. An appointment to an office can be made only if the office is
vacant. it is legitimate therefore, to infer that by using the word his the
Legislature indicated that an appointment by a director to the office which he
previously held but did not hold at the date of the appointment, was not, to be
included within the word assignment. Again, there can be no doubt that the
section was intended to render void a transfer of his office by a director for,
it the section had intended only to avoid an appointment by a director of his
successor, it would have clearly said so and would not have used the word
assignment. Therefore, even if it is possible for the word assignment to have
the meaning of appointment then it would have to be given both the meanings of
transfer and appointment in the section. This is what the High court did. That
would produce a curious result. Transfer and appointment are clearly entirely
different things. Even apart from considerations arising from the law of
conveyance, which the High court was unable to entertain in connection with the
transfer of an officer, a transfer from its very nature inevitably imports the
passing of the thing from one to another; a transfer without the passing of the
thing transferred even when that thing is an office, cannot be conceived. An
appointment, on the other hand, has nothing to do with anything p[assign from
one to another; it connotes the putting in of someone in a vacancy. The acts
constituting a transfer and an appointment are, therefore, wholly dissimilar.
It would be an unusual statute which by the use of a single word intended to
prohibit a the same time, two wholly different acts. We do not think that a construction
leading to such a result is permissible.
Secondly,
section 255 of the Act permits one third of the total number of directors of a
public company and all the directors of a private company to be appointed
otherwise than by the company at a general meeting, if the articles make
provision in this regard. The Act, therefore, expressly permits directors to be
appointed otherwise than by the company. It follows that within the limit as to
the number prescribed by the section. It follows that within the limit as to
the number prescribed by the section, a power of appointment of directors can
be legitimately conferred by the articles on any person including one who holds
the office of a director. The Act expressly permit such power being conferred.
In order, however, that a director may exercise this power of appointment,
there must be a vacant office of a director. He may himself bring about that
vacancy by resignation of his office. The vacancy would again be caused by his
death or by the expiry of the term of his office. It would flow that the act
contemplates an appointment by a director of another person as director to take
his office, when made vacant by his resignation or death or the expiry of the
term of his office. There will be nothing illegal, if the power is exercised in
the case of the death of the director, by an appointment made by his will. It
will not be rights to interpret section 312, when its language does not comply
it, as to bring in conflict with the provisions of section 255. This would
happen, if the word assignment in section 312 was interpreted as including
appointment and thereby making it prevent a director from appointing his
successor when section 255 permits him to do that. Therefore, again we think
that in section 312 the word assignment does not mean appointment.
The
High court was of the view that unless assignment included appointment, the
object of the act would be defeated. It was said that the intention and the
object of the section was to restrain and prevent a director from putting some
one in his place and stead by any act on his part. This point was further
expressed more clearly in the following words. It is now well understood that
the new Companies Act aims ateradicating many serious mischiefs which the
principle of perpetual management of companies had caused n the past. The High
court felt that it would be defeating that aim by reading section 312 as if the
words assignment of his office only meant a transfer of office and did not
include the appointment of his successor by a director. Apparently the High
court thought that by making it possible for a director to choose his
successor, the management of the company would be permitted to remain all along
in one hand and this the act wanted to prevent. It does not seem to us that the
act wanted to prevent this. The act by enacting section 255 shows that it does
not disapprove of a person having power to appoint a succession of directors
and in the case of a private company, a succession even of all the directors.
Such a person would have what has been described as perpetual management. It
would follow that the Act did not consider this as an evil which required
prevention. If perpetual management. by an outsider is not an evil, nor should
such management by one who is a director of the company be so. This aspect is
very clearly illustrated by the case in hand. Dadoba had this perpetual
management. But the whole of the company’s undertaking was really a largess
form him. In fact he held nearly 43% of the shares of the company. It is
inconceivable that perpetual management by him would have worked to the
detriment of the company. We are therefore, unable to agree that it was the
object of the Act or of section 312 to prevent a director form the appointing
his successor.
In
view of the clear provisions of section 255 we do not thing that it can be
said, as was done in the High court, that sections 254 and 317 of the Act
impliedly indicate that there should be no perpetual management. Section 254
says that a corporation or an association of persons shall not be eligible as a
director. But this is not because, otherwise, there would be perpetual
management. The persons comprising the corporation or the association must
change from time to time and so, even if they were appointed directors, there
would be no perpetual management. We rather think that the idea behind section
254 is that as the office of a director is to some extent an office of trust,
there should be somebody readily available who can be held responsible for the failure
to carry out the trust and it might be difficult to fix that responsibility if
the director was a corporation of an association of persons. Turning to section
317, we find that it provides that a managing director cannot be appointed for
a term exceeding five years at a time. Section 315, however, makes section 317
inapplicable to a private company. Therefore, section 317 is not available to
support an argument that the act does not want a private company and we are
concerned with that type of a company to be under perpetual management. But
indeed section 317 does not support that argument in the case of a public
company either. it forbids an appointment of a managing director for more than
five years at a time. It permits the managing director to be reappointed after
a term is over. If he is so reappointed, then there would be perpetual
management by him. The act does not, therefore, intend by section 317, to
prevent that. lastly, section 317 is not concerned with directors, which
section 312 is.
Another
argument that has to be dealt with is that if section 312 does not prohibit an
appointment by a director of his successor, that section can easily be rendered
infructuous by a director adopting the simple device of appointing a person as
his successor in office instead of transferring the office to him. It seems to
us that the question does not rely arise. A director can legally and
effectively appoint his successor only to the extent the articles permit this
subject of course, to the limit prescribed in section 255 in the case of a
public company. An appointment so legally made does not result in an evasion of
section 312 for, as we have earlier said, the section could not have intended
to prevent what another section in the same act made legal. An appointment made
outside the powers legally conferred by the articles is wholly ineffective,
and, therefore, is not an appointment at all and hence again does not result in
an evasion of section 312.
We
have now to consider an argument based on the first proviso to section 86B of
the companies act of 1913. The main part of section 86B contained a provision
analogous to that of section 312 of the new Act. It made an assignment of his
office by a director to another person, under an agreement with the company, void
unless such assignment was approved by a special resolution of the company.
Under the new act the assignment has been made altogether void and would not
become valid even if approved by a special resolution of the company. Now, the
proviso laid down that the exercise by a director of a power to appoint an
alternate director to act for him during an absence of not less than three
months form the district in which meetings of the directors are ordinarily
held, if done with the approval of the board of directors, would not be deemed
to be an assignment of the office within the meaning of this section. The High
court took the view that this proviso showed that in certain circumstances an
appointment by a director of another in his place might be deemed to be an
assignment of his office and that since the new act is a consolidating act, it
must be deemed to have continued the policy of the earlier act and, therefore,
for the purpose of section 312, an assignment must include an appointment.
The
learned Attorney General pointed out that in the new act there is no proviso,
and, therefore, the rule of construction applied by the High court which
enables, by raising a presumption somethings to be included in the main part of
a section by reason of a provision in a proviso to it, has been enacted in the
form of an independent section, namely, section 313. According to him, his
departure from the old arrangement of the provisions in the new act shows that
it was not intended to continue the policy of the old act. He also said that
the proviso in substance sated that the appointment by a director of an
alternate director might, in certain circumstances, be deemed to be an
assignment. He pointed out that by suing the word deemed the proviso made it
clear that the appointment of an alternate director was not a real assignment
of office but was only to be fictionally taken as one. His contention was that
such fiction could arise in a case coming strictly within the proviso but could
not by extension be made to arise in any other case. These seem to us to be
arguments of weight. Further in section 313 of the new act, which has taken the
place of the first proviso to section 86B of the old Act, the power to appoint
an alternate director has been given to the board and not to the director who
intends to absent himself. No scope for any deeming provision as in the act of
1913 remains. Therefore, again an argument based on the proviso to section 86B
would not be available for the purposes of the present act.
It
further seems to us that the proviso to section 86B does not indicate that it
was intended that the word assignment in the main part of the section would
include appointment. The rule of construction on which the high court relied in
arriving at the view that it did, was put in these words; it is a well
established principle of construction that when one finds a proviso to a
section, the presumption is that but for the proviso the enacting part of the
section would have included the subject matter of the proviso . This rule would
enable the court to hold in regard to section 86B at the most that an
appointment of an alternate director by a director intending to absent himself
would have been an assignment of his office but for the proviso. It would be an
unwarranted extension of this principle to hold that all appointments of their
successors by directors would be assignments within the main part of the
section. In any case, in our view, as in section 312 of the new act so under
the main part of section 86B of the old act, an appointment of a successor to
his office by a director was not an assignment of his office by him for the old
act contained in section 83B provisions substantially similar to those
contained in section 255 of the new act, and the reasons which have inclined us
to the view that in section 312 the word assignment does not included
appointment would equally lead to the same conclusion in regard to section 86B.
If the enacting part did not prohibit the appointment of his successor by a
director, such prohibition cannot be read into it in reliance upon a proviso.
We may read here the observations of Lord Watson in Guardians of the poor of
the west Derby Union v. Metropolitan life Assurance Society [1897] A.C. 647,
652.
I,
am perfectly clear that if the language of the enacting part of the statute
does not contain the provisions which are said to occur in it, you cannot
derive these provisions by implication from a proviso.
It
my be that the proviso was enacted ex abundant cautela or it may be again, to
prevent a possible argument that by the appointment of alternate directors an
evasion of the main part of section 86B was being attempted. In view of the
fact that the power to appoint alternate directors was not given by the old
act, but had to be given by the articles, such an argument might not have been
unlikely. Therefore, it seems to us that the proviso to section 86B of the old
act does not assist the argument that in section 312 of new Act, the word
assignment would include appointment.
We
think we ought to say something about what strikes us to be the policy behind
section 312 of the new Act. We have earlier said that under section 255 of that
act a certain number of directors in a public company has to be appointed by
the company in a general meeting. In the case of a private company likewise,
the directors have to be appointed similarly except to the extent the articles
otherwise provide. it would, therefore, appear to be the policy of the act that
to a certain extent the appointment of the directors have to be made by the
shareholders. It is intended that a certain number of directors would be the
chosen representatives of the shareholders. If a director appointed by the
company was permitted to assign his office, then the new incumbent would not be
the chosen representative of the shareholders, and the intention of the act
would be defeated. It seems to us that it is to prevent this result that the
act forbids a director by section 312 from assigning his office. Where however
a director has been appointed otherwise than by the company in a general
meeting, the shareholders have nothing to do with his appointment. Such a
director is not the chosen representative of the shareholders and the
shareholders cannot claim to have a say in the appointment of his successor. We
can discern no policy in the act which can be said to be liable to be defeated
by the appointment of the successor of such a director by him. Therefore,
section 312 was not concerned with such an appointment.
In
the present case Dadoba had power under the articles to appoint a person to be
the managing director in succession to him, and in exercise of that power he
had appointed the appellant Govind as the managing director to hold the office
after his death. such power was clearly recognised by, and legal under section
255 of the new Act. For the reasons earlier stated, the exercise of such power
does not offend section 312. It follows that the appellant Govind had been
lawfully and validly appointed the managing director of the company.
We,
therefore, declare that the appellant Govind had been validly appointed the
managing director of the company, and set aside the decisions of the courts
below that he had not been so appointed. We have not been asked to interfere
with the rest of the judgment under appeal and we do not do so. We also make no
order for costs as no costs have been asked.
[1974] 44 COMP. CAS. 228 (
v.
Delhi
Flour Mills Co. Ltd.
S. RANGARAJAN, J.
C.P. NO. 96 OF 1972
MAY 10, 1973
B. K. Shivcharan Singh,
A. L. Kapur and Deepak Chaudhri for the petitioner.
Ved Vyas, A. N. Khanna, A. N. Khanna and C. S. Duggal for
the respondent.
Satish Chandra for a shareholder of the company.
P. A. Behl for the general manager and secretary of the company.
Rangarajan, J.—This
order will also dispose of Company Petition Nos. 1 and 2 of 1973, which have
been filed by the husband of the petitioner and another shareholder,
respectively, of the Delhi Flour Mills Co Ltd. (hereafter referred to as "the
company") for calling a meeting of the company (the calling of which
"otherwise" has become "impracticable"), and for certain
other directions (which are not uniform in all the three petitions) without
which the petitioner's purpose in calling such a meeting may not be served.
Under section 186 of the Companies Act of 1956 (hereafter called "the
Act"), the court has been given power to call a meeting other than an
annual general meeting; section 167 of the Act enables general meeting. To the
details of these I shall revert later. It is necessary, to start with, to
notice briefly the facts which have led to these petitions.
The company was registered in
the year 1916 as a public limited company, but is stated to have been
controlled by the husband of the petitioner, R. K. Jain (petitioner in C. P.
No. 1 of 1973) and some of their family members; Oudhbir Prasad (petitioner in
C. P. No. 2 of 1973) who holds 63 ordinary shares of Rs. 10 each, is the
son-in-law of the petitioner and was also a senior executive of the company.
The petitioner and her husband had no male issue and had, therefore, adopted R.
P. Jain, the brother-in-law of Sheel Chandra. Yogesh C. Gupta is said to be a
friend of Sheel Chandra and R. P. Jain. There seems to have been considerable animosity
between the petitioner and her husband on one side and their adopted son, R. P.
Jain, as well as Sheel Chandra and Yogesh C. Gupta on the other.
The articles of association of
the company (article 96) provide for eight directors, but there were actually
three i (1) R. K. Jain, (2) Sheel Chandra, and (3) Yogesh C. Gupta. It is
common ground that R. K. Jain had been appointed a managing director of the
company for five years under an agreement to take effect from October 5, 1967,
i.e. , till October 4, 1972. Nonetheless, he had also been in fact re-elected
at least once in 1969 as a director, even subsequent to the said agreement.
Sheel Chandra, who had retired by rotation was re-elected on April 30, 1968.
Yogesh C. Gupta who had to retire by rotation next, according to the
petitioner, was not in fact re-elected and had to retire at the farthest when
the annual general meeting had to be held, namely, April 30, 1971. The
accounting year of the company ends on the 31st October of each year. The
accounts for the year ending October 31, 1969, were passed at the annual
general meeting held on April 30, 1970. There has been no annual general
meeting thereafter.
Article 106 provides for the
continuing directors acting notwithstanding any vacancy in their body; the
interpretation article (article 2) says that words importing the singular
number include, where the context administers or requires, the plural number
and vice versa. Article 115 provides for a quorum of three directors; but this
is seen to be contrary to section 287 of the Act, which provides for one-third
the number or two, whichever is higher; this section does not permit any
article provision to the contrary, as some other sections of the Act seem to
permit. The retirement of directors by rotation is provided by sections 255 and
256 of the Act and articles 109-112. To these details also I shall revert
later.
Before the impugned right
shares under section 81 of the Act were issued and allotted (on December 4,
1972), the petitioner held about 46% of the shares out of a total of Rs.
8,06,380 units of shares, the claim by the contesting respondents being that by
the impugned issue and allotments the shares were increased to Rs. 12,27,100
thus reducing the proportion of the petitioner's holdings to about 25%. It
would be sufficient to notice this broad feature but not the details of the
holdings. The decision to increase the share capital (under section 81) is said
to have been taken at a meeting of the board at which R. K. Jain is said to
have been present, but R. K. Jain denies that he was present then. The validity
of the said meeting is also denied. More importantly, a notice is said to have
been given by the company to the petitioner (and others) concerning the issue
of right shares (on November 17, 1972). There is some controversy as to whether
an application for allotting right shares was in fact made and even whether one
is necessary to be made in writing; it is, however, asserted for the petitioner
that a sum of Rs. 2,12,540 was deposited in the company's bank by the
petitioner on December 4, 1972 (3rd December being a Sunday), when she came to
know of the issue from Bombay through some other source. The money is said to
have been either loaned or arranged by Bk. Shivcharan Singh, learned counsel for
the petitioner. According to the contesting respondents, the petitioners knew
and were also informed in time about the issue of right shares, but they made
no application because they did not raise the money and the money which was
paid only on the afternoon of the 4th (after the allotments of the shares on
the 4th morning) represents the money which R. K. Jain had secreted from out of
the company's funds during his management. Applications Nos. 725 of 1972 and 73
of 1973 were filed for the petitioner, her husband, etc., being cross-examined
on the said matters.
To complete the narrative it
may also be noticed at this stage that S. L. Verma, yet another shareholder, a
stranger, holding 3,054 ordinary shares, had applied to this court (in C.A.
481/72 in C.P. 71/72) for an order restraining the company from issuing right
shares and Bk. Shivcharan Singh, appearing himself for the company, an order
was passed restraining the issue of such shares. It is stated for the
petitioners that in view of this restraint order, passed on 5th December, 1972,
the contesting respondents have been put to a Hobson's choice, as it were, of
either taking the allotments later, in violation of the restraint order, or
land themselves in another difficulty by having to assert that the shares had
been allotted even on the 4th December, 1972 (it is contended for the
petitioner that this was short of the requisite period of notice under section
81). SL. Verma has since filed a suit in this court (No. 23 of 1972) making all
the parties in this proceeding also as parties to that suit, alleging that in a
petition under section 186 of the Act (these three petitions) the question of
the validity of these allotments could not be gone into and asking for a
declaration that the issue and allotment of 42,070 right shares (of Rs. 10
each) were illegal, that there was no legally constituted board after 30th
April, 1971, that the directors who now purport to function (Sheel Chandra,
Yogesh C. Gupta, Balbir Singh and Pritam Singh—the last two being co-opted on
9th and 4th of December, 1972, respectively) are not the directors and that
they should be restrained from acting as such.
It was not found necessary to
record evidence or allow the request made as aforesaid for cross-examining Mr.
and Mrs. R. K. Jain in particular, because Bk. Shivcharan Singh stated that he
was willing to argue these applications on facts which were admitted and the
legal consequences arising therefrom.
Both sides, however, covered
very wide ground touching various aspects in controversy between the parties.
Before discussing at least the
important among them it is necessary to read section 186 of the Act:
"186.
(1) If for any reason it is impracticable to
call a meeting of a company other than an annual general meeting, in any manner
in which meetings of the company may be called, or to hold or conduct the
meeting of the company in the manner prescribed by this Act or the articles,
the court may, either of its own motion or on the application of any director
of the company, or of any member of the company who would be entitled to vote
at the meeting,—
(a) order a meeting of the company to be called, held and conducted in such manner as the court thinks fit; and
(b) give such ancillary or consequential directions as the court thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions of this Act and of the company's articles.
Explanation.—The directions
that may be given under this sub-section may include a direction that one
member of the company present in person or by proxy shall be deemed to
constitute a meeting.
(2) Any meeting called, held and conducted
in accordance with any such order shall, for all purposes, be deemed to be a
meeting of the company duly called, held and conducted".
Section 79(3) of the Act of
1913 enabled the court to order even an annual general meeting of the company.
The present provision (section 186) only enables the court to call a meeting of
the company, other than annual general meeting. The English Companies Act of
1929 provided (section 112(3)) that the court may call a general meeting of the
company. But there was an amendment of the English Companies Act as a result of
the report of a committee headed by Justice Cohen in the year 1945 recommending
that it would save expense if the power of calling an annual general meeting
should be transferred from the court to a Board of Trade. It was this later
position that was made applicable to India by section 186 of the Act of 1956
which restricted the court's power in the matter of Calling an annual general
meeting, the same being vested in the Central Government alone.
Every company shall hold every year,
in addition to any other meeting, a general meeting. It is called the annual
general meeting. Not more than 15 months shall elapse between the date of the
general meeting and the next; the first general meeting of the company has to
be held within 18 months after incorporation (section 166). At the annual
general meeting the following items of business (which shall be deemed to be
special) have to be put on the agenda :
(1) consideration of accounts, balance-sheet and reports of the board of directors and auditors;
(2) declaration of dividend;
(3) appointment of directors in the place of those retiring;
(4) appointment and fixing the remuneration of auditors (section 173).
The above items are within the exclusive domain of the
annual general meetings.
Section 257 enables a person to
stand for directorship at any general meeting, which may be held, and not
necessarily only at an annual general meeting. So long as the company is not
having the maximum number of directors fixed by its articles, additional
directors may be appointed at general meetings up to the maximum limit. The
only effect of introducing sub-section (1A) to section 257 seems to be that no
one other than a director can stand as a candidate for appointment unless not
less than 14 days' notice is given to the company, the company not having the
power to waive such notice.
Concerning the retirement of
directors by rotation section 255 of the Act provides that, unless the articles
provide for retirement of all directors at every annual general meeting, not
less than two-thirds of the total number of directors of a public company, or
of a private company which is a subsidiary of a public company shall, (a) be
persons whose period of office is liable to determination by retirement of
directors by rotation, and (b) save as otherwise expressly provided in the Act,
be appointed by the company at its general meeting. The remaining directors in
the case of any such company shall, in default of and subject to any
regulations in the articles of the company, also be appointed by the company in
general meeting.
Section 256 deals with
ascertainment of rotational retirement of directors at annual general meetings;
one-third of the directors of a public limited company retire at every annual
general meeting.
There is a conflict of judicial opinion on the question whether those directors who have to retire by rotation also vacate their offices by reason of their own failure to call a general meeting. Venkatarama Aiyar J. (as his Lordship then was), speaking for the Division- Bench of the Madras High Court in A. Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. held that they must be deemed to have vacated their offices. That case arose under sections 76 and 79 of the Act of 1913. This view was followed by a Division Bench of the Bombay High Court in Krishna Prasad v. Colaba Land and Mills Co. Ltd. and by a single judge in In re Hindustan Co-operative Insurance Society Ltd. The single judge of the Calcutta High Court had not noticed an earlier Division Bench decision of the same High Court in Kailash Chandra Dutt v. Jogesh Chandra Majumdar , which had taken a contrary view. The Bombay decision did not specifically discuss the effect of, though it did notice, section 256(4) of the Act, which reads as follows :
"256. (4)
(a) [f the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place,
(b) If at the adjourned meeting also, the place of
the retiring director is not filled up and that meeting also has not expressly
resolved not to fill the vacancy, the retiring director shall be deemed to have
been re-appointed at the adjourned meeting, unless—
(i) at that meeting or at the previous meeting a resolution for
the re-appointment of such director has been put to the meeting and lost;
(ii) the retiring director has, by a notice in writing addressed
to the company or its board of directors, expressed his unwillingness to be so
re-appointed;
(iii) he is not qualified or is disqualified
for appointment;
(iv) a resolution, whether special or ordinary, is required for his
appointment or re-appointment in virtue of any provisions of this Act; or
(v) the
proviso to sub-section (2) of section 263 is applicable to the case.
Explanation.—In this section
and in section 257, the expression ' retiring director ' means a director
retiring by rotation".
In a later decision in Lalchand Mengraj v. Shree Ram Mills Ltd.,
Vimadalal J. discussed the above-said newly added provision from an
unusual angle, namely, the impact of the order of the Companies Tribunal (as it
then was) restraining the company from considering an item on the agenda
relating to the offer by the director retiring by rotation for re-election, but
allowing the said item to be adjourned pending further orders of the Tribunal.
Vimadalal J. held that there was nothing in subsection (4)(b) of section 256 to
lead to the conclusion that the deeming provision was to apply only when a
company had the choice of fulfilling its conditions or not. Reliance was placed
on Grundt v. Great Boulder Proprietary Mines Ltd.
concerning an article provision somewhat similar to section 256(4)(b)(i). The
concerned article provision in that case reads as follows:
"If at any general meeting
at which an election of directors ought to take place the place of any director
retiring by rotation is not filled up, he shall, if willing, continue in office
until the ordinary meeting in the next year, and so on from year to year until
his place is filled up, unless it shall be determined at any such meeting on
due notice to reduce the number of directors in office".
At the annual general meeting
held in July, 1947, Grundt retired by rotation but a resolution for re-electing
him was lost by show of hands. There was no resolution, however, to reduce the
number of directors. It was held that despite what happened Grundt continued in
office in terms of the above-mentioned article provision. Lord Greene M. R. was
not led to come to a different result merely on account of the absurdity of
deeming Grundt to be re-elected despite his re-election having been lost by
show of hands "Absurdity", observed Lord Greene M. R., "I cannot
help thinking, like public policy, is a very unruly horse". What is of
greater significance is that a previous decision in Robert Batcheller &
Sons Ltd. v. Batcheller,
which came to an opposite conclusion in identical circumstances, was
disapproved. In Robert
also the articles contained a similar provision and the retiring directors were
not re-elected on a show of hands. A poll was demanded and the meeting was
adjourned to take the poll, but due notice was not given as required by the
articles for the adjourned meeting. At the illegally convened meeting the
shareholders purported to elect other directors. Romer J. held that the
retiring directors could not be deemed to have been re-elected thus enforcing
what was exactly the opposite of what had in fact happened. Cohen L.J., with
whom Lord Greene M. R. concurred in Grundt,
disapproved of Robert
as not being consistent with still an earlier decision by Maugham J. in Holt v.
Catterall.
The decision in Grundt
was nullified by a change made in the Companies Act of 1948 (Schedule I, Table
A, article 92) providing that the deeming provision would not apply in a case
where a resolution for the re-election of such director had been put to the
meeting and lost. Vimadalal J. observed that any statutory change made in
England would not affect the validity of Grundt
in the matter of interpreting an article of association. Ananthalakshmi Ammal
having been a decision rendered under the Act of 1913, did not have to concern
itself with section 256(4). Without referring to the same, which was a Division
Bench decision, a single judge of the Madras High Court held a contrary view in V. Selvaraj v. Mylapore Hindu Permanent Fund
Ltd.
and observed that the directors retired at the annual general meeting
which was convened but the meeting had not commenced at all owing to the
confusion which prevailed; it was held that the previous directors must be
deemed to continue in office. The contrary holdings of each of the two High
Courts, Madras and Calcutta, introduce an additional element of uncertainty
about the true legal position. In the view I take of this petition it seems
unnecessary to express an opinion on this rather difficult question which may
require fuller consideration when it arises.
The Indian decisions which hold
that a retiring director vacates office if he fails to hold the annual general
meeting seem to be based upon the view taken by the English court in In re
Consolidated Nickel Mines Ltd.
and the statement in Buckley on the Companies Acts (12th edition, page 882).
Probably the decision of the House of Lords in Morris v. Kanssen
is also material. In that case the question was whether the allotment of shares
by some who purported to act as directors was valid when it was found that there
was no appointment at all, the observations were expressly applicable to the
case of there being no appointment at all or the original appointment itself
being fraudulent. In Consolidated Nickel Mines Ltd.
the question for consideration was whether the two directors were entitled to
remuneration in spite of the obligation laid down on them by section 497 of the
Act that the directors had to summon a general meeting every year and the
articles of association providing that all the directors retire from office at
the ordinary meeting.
Shri Ved Vyas, learned counsel
for the respondent-company, referred to the uncertainty regarding the legal
position in support of his contention that in the circumstances it could not be
stated that the directors who were at least functioning de facto had notice of
any defect in their appointment and for that reason the allotment of the right
shares issued by them could not be questioned on the ground of their lacking
the necessary authority to do so.
The articles of association of
this company provide that at the second ordinary general meeting and at every
succeeding ordinary general meeting, two of the directors, exclusive of the
ex-officio directors and the debenture director (if any), shall retire from
office; the provisions of this article are subject to the terms of any
agreement between the company and a director (article 109). Articles 110 to 112
are also material and they read as follows:
"110. The directors to retire at the second
ordinary general meeting shall, unless the directors concerned agree among
themselves, be determined by lot, in every subsequent year the directors to
retire shall be those who have been longest in office. As between directors who
have been in office for an equal length of time, the directors to retire shall
be determined by lot. The length of time a director has been in office shall be
computed from his last election or appointment where he has previously vacated
office. A retiring director shall be eligible for re-election.
111. The company at any general meeting at which any directors retire in manner aforesaid shall fill up the vacated offices by electing a like number of persons to be directors; provided that it shall not be obligatory upon the company to fill up any vacancy or vacancies not necessary to be filled up in order to make up the minimum number of directors required under article 96.
112. If at any general meeting at which an election of directors ought to take place, the place of any retiring director is not filled up, such director shall, if willing to continue in office, be deemed to have been re-elected at such meeting, unless it shall be determined at such meeting to reduce the number of directors, or to leave any vacancy unfilled".
It may be recalled that article
106 provides that the continuing directors may act notwithstanding any vacancy
in their body and that article 2 (interpretation clause) states that "
words importing the plural number also include the singular number".
Venkatarama Aiyar J. in A.
Ananthalakshmi Ammal
quoted the observations of Swinfen Eady L.J. in Channel Collieries Trust Ltd.
v. Dover, St. Margaret's and Martin
Mill Light Railway Co.:
"I think that the context
requires that the word ' remaining directors ' should include the case of a
remaining director..........and so long as there is any remaining director he
may proceed to fill up the board by appointing persons when casual vacancies
occur".
Venkatarama Aiyar J. applied
those principles and held that the power to co-opt directors can be exercised
even though the strength of the directors falls below the minimum and even when
there was only one director capable of acting. Where there was at least one
director he was capable of co-opting other directors. Pritam Singh and Balbir
Singh are stated to have been co-opted on December 4, 1972, by Sheel Chandra
and Yogesh C. Gupta. R. K. Jain (husband of the petitioner) retired in 1969,
and he was re-elected despite the agreement according to which he was to be a
managing director till October 4, 1972 (five years from October 4, 1967). That
agreement does not expressly say that R. K. Jain did not have to retire as a
director. In none of the model forms which have been suggested by Palmer's
Company Precedents is there any particular form to suggest that by reason of an
agreement alone the director could be a managing director for a period of 5
years without his also having to continue as director. It seems reasonable that
the agreement would be operative if the person concerned was a director
throughout the period mentioned in the agreement; in other words, if he ceased
to be a director earlier than that period he may not by virtue of that
agreement alone claim to be a managing director. As a fact, however, he seems
to have been taken as continuing.
In the view that out of a total
of three directors, Sheel Chandra and Yogesh C. Gupta alone continued as
directors, article 109 would be relevant. It provides that at the second
ordinary general meeting of the company and at every succeeding ordinary
general meeting two of the directors, exclusive of the ex-officio director and
debenture directors (if any), shall retire from office, but the provisions of
this article are subject to an agreement between the company and the director.
The expression in article 109 "two of the directors" itself suggests
that the retirement by rotation of directors would take place only when there
are more than two directors, that is to say, only if there are more than two
directors, two, out of them, can retire by rotation. It is instructive to refer
to In re David Moseley and Sons Ltd.,
where the concerned article provided for one-third of the directors retiring
and also that, if the number is not a multiple of three, then the number nearer
to but " not exceeding one-third" to retire from office. At the
material date there were only two directors. Simonds J. observed (at page 723)
as follows :
"The article, in my judgment,
does not provide for the retirement of a director unless one of two conditions
is satisfied : either there must be a number which is one-third of the
directors, or there must be a number which is nearer to, but does not exceed,
one-third. Here it is clear that neither of those conditions is satisfied.
There are two directors and, therefore, you cannot find a number which is
one-third. There are two directors and, therefore, you cannot find a number
which is nearer to but does not exceed, one-third".
This case was referred to and
distinguished by Venkatarama Aiyar J. in B. N. Viswanathan v. Tiffin's Barytes,
Asbestos and Paints Ltd.
on the basis of the language employed in David Moseley
and the absence of analogous language in Viswanathan;
it was held that even one of two directors should retire at the meeting. The
language of article 109 is analogous to that employed in David Moseley.
Even if this view is not
correct, Sheel Chandra must be taken to have retired not earlier than July 31,
1971, the last annual general meeting having been held on April 30, 1970 (there
can be an interval of 15 months between two general meetings). Then, Yogesh C.
Gupta, having become a director later than Sheel Chandra, he could continue as
director till the next day on which the annual general meeting was to be held
and in this sense did have the potentiality, according to Shri Veda Vyas, of
co-opting other directors. I have referred to these aspects which may possibly
have to be considered not for the purpose of deciding them but only for the
purpose of indicating that these extremely difficult and complex questions
cannot be satisfactorily and properly decided, collaterally, for the purpose of
finding out whether it is "impracticable" for the company to conduct
a meeting.
The expression
"impracticable" is not, however, to be construed as
"impossible". Sinha J. observed in Lothian Jute Mills Co. Ltd.
that section 79(3) of the Companies Act of 1913 contemplated that the court
should exercise its powers where it cannot say with reasonable approach to
certainty, or even prima facie, that the meeting called in exercise of the
powers contained in the regulations will be valid. This was to ensure that the
shareholders should not be exposed to uncertainty flowing from the situation
and the consequent litigation. Banerjee J. also held in In re Malhati Tea
Syndicate
that the word "impracticable" means "impracticable from a
reasonable point of view". The court must take a "common-sense
view" of the matter and must act as a prudent person of business.
Following the observations of the Judicial Committee in Commissioner, Lucknow Division v. Deputy Commissioner of
Pratabgarh,
Banerjee J. observed in In re Malhati Tea Syndicate Ltd.
that when there is doubt as to the existence of a board of validly appointed
directors and there is possibility of interminable troubles and prejudice to
the interest of the company if a meeting is held otherwise than under the
direction of the court, it will be expedient for the court to call a meeting of
the company. The observations of the same court in Indian Spinning Mills Ltd.
v. His Excellency Lt. General Madan Shumshere Jang Bahadur .
An appeal against an order of Mooker jee J. calling a meeting was dismissed by
the Division Bench, to which Banerjee J. also was a party, when it was felt
that the calling of a meeting by the requisitionists would lead to endless
litigation and where matters may arise for debate and decision which were
already the subject-matter of suits. The Division Bench had no difficulty in
holding in such circumstances that a meeting of the company would be "
impracticable". In a still later decision of the same High Court in Bengal
and Assam Investors Ltd. v. J. K. Eastern Industries P. Ltd.,
P. B. Mukharji J. (as he then was) reviewed the case law in question and agreed
with the principles decided by the aforesaid cases but still declined to order
a meeting in that case. He observed that a discretion granted under section 186
should be sparingly used and with great caution so that the court does not
become either a shareholder or a
director of the company trying to participate in internecine squabbles of a
company. In a still later case before the same High Court S. P. Mitra J.
reviewed all the authorities in United Breweries Ltd. v. Ruttonjee & Co.
Ltd.
and summarised the principles to be borne in mind in an application under
section 186. It seems to me that the following principles were re-stated :
(1) the court would not
ordinarily interfere with the domestic management of a company which should be
conducted in accordance with the articles;
(2) the discretion granted
under section 186 should be used sparingly and with caution so that the court
does not become either a share holder or a director of the company; in other
words, the court will ordinarily keep itself aloof and not participate in
quarrels of rival groups of directors or companies;
(3) the word " impracticable " has
to be construed from a practical point of view;
(4) but where the meeting
can be called only by the directors and there are serious doubts and
controversies as to who are directors or there is a possibility that one or two
or both the meetings called by rival groups have been invalid, the court ought
not to expose the shareholders to un certainty and should hold that a position
has arisen which makes it "impracticable" to convene a meeting in any
manner in which the meeting may be called;
(5) the court should
exercise its powers under section 186 when on considering all the facts and
circumstances of a case it can with reasonable approach to certainty and even
prima facie say that the manner in which meetings are previously called under
the Act and/or under the articles would be invalid;
(6) before exercising
discretion under section 186 the court must be satisfied that a director or a
member moved an application bona fide in the larger interests of the company
for removing a deadlock which is otherwise irremovable.
Mitra J., referred to In re El Sombrero Ltd.,
which was a somewhat extraordinary case. The applicant held 90% of the shares
of a private company and each of the two directors held 5%. According to the
company's articles of association, the quorum for the general meeting was 2,
present in person or by proxy; if within half an hour from the time appointed
for a meeting the quorum was not present, the meeting, if convened on the
requisition of members, would stand dissolved. No general meeting of the
company had ever been held. On March 11, 1958, the applicant
requisitioned an extraordinary general meeting under section 132 of the
Companies Act, 1948, for the purpose of passing resolutions removing the two
directors and appointing two other persons as directors. The directors having
failed to comply with the requisition the applicant himself convened an
extraordinary general meeting for April 21, 1958. The directors did not attend
the meeting either in person or by proxy; the quorum not being there the
meeting stood dissolved. On April 29, 1958, the applicant served a special
notice under section 142 of the Act of 1948 of his intention to move the same
resolutions at the next extraordinary general meeting; on the same day he took
summons asking for a meeting to be called by the court under section 135(1) of
the Act of 1948 for the purpose of passing the resolutions, and for a direction
that one member of the company should be deemed to constitute a quorum at such
meeting. The application was opposed by the directors. An order directing a
meeting to be held and that one member
present should constitute a quorum was made in the circumstances. This
case illustrates the exercise of such power in order to suit the exigency of
each situation. It is also of interest to note that there was no reference here
to the previous decision of the English Court of Appeal in MacDougall v.
Gardiner.
It was held in that case that where by the articles of association of a
company, the directors, and in the alternative, a certain portion of the
shareholders can summon a meeting of the company, the court will not order the
directors to summon a meeting for the general purposes of the company.
Reliance was placed by the
petitioner upon a Full Bench decision of the Allahabad High Court in Balkrishna
Maheshwari v. Uma Shankar Mehrotra,
a case arising under the old sections 76 and 79 of the Companies Act of 1913.
The District Judge of Kanpur had passed an ex parte order directing an annual
general meeting of the company which was later on confirmed. The dispute
related to the annual general meeting of the company for the year 1946, the
last one having taken place on February 3, 1945, According to the articles of
association the annual general meeting of the company for the year 1946 had to
be called on some date before 31st March of that year. The management of the
affairs of the company lay in the hands of a council of 21 members, including a
president and a vice president; the duty of calling the annual general meeting
of the company in every calendar year lay upon that council. It was contended
on one side that 14 days' clear notice had been given for the meeting in 1945,
It was contended, on the other hand, that though a notice was directed to issue
fixing a date, no notice had been issued and posted with the result that there
could be no clear 14 days' notice as required. An objection had been raised by
one of the members to whom a notice had been sent that the notice had been
invalid. The District Judge had held that a meeting of some sort was held on
March 28, 1946, though it was without a clear margin of 14 days' and was
invalid. The Full Bench of the Allahabad High Court observed that the District
Judge should also have held that he had the competence to find out whether
there had been a previous valid meeting as a necessary step in the matter of
calling the meeting sought for under section 186 of the Act. Mootham J.,
speaking for the Full Bench, observed :
"It was strenuously
contended by learned counsel that the determination of such an issue might
often involve the decision of complicated questions of fact and law and it
must, therefore, be inferred that the law did not contemplate the determination
of such a question in a miscellaneous proceeding under section 79(3). We are
not impressed at all by this argument because we do not think that in the large
majority of cases any complicated questions of law and fact will arise for
consideration. The question of the validity or otherwise of a meeting will, in
a vast majority of cases, turn upon the interpretation of the company's
articles of association and some general provisions of the law".
The Full Bench decision is,
therefore, of no assistance to the petitioner; this is not a simple case, free
from complexity.
Shri Ved Vyas, on the other
hand, contended that the present petitions not having been brought in the name
of the company they are not maintainable according to the well-known rule in
Foss v. Harbottle.
As an important facet of the principle of majority rule, it was held that if a
wrong has been done to a company only the company could sue. To this rule
itself there are exceptions like the act or resolution complained of being
itself illegal or ultra vires, the controllers of the company acting in breach
of the articles of association and fraud on the minority being committed. This
case was followed in a number of cases including Mozley v. Alston,
where two shareholders in their individual capacity brought proceedings against
the company and members of the board of directors seeking to restrain the
directors from acting as such until four of their members had retired by
rotation, as required by the company's constitution, and four new directors had
been elected in their place. The action failed in the view that if injury was
not one personally to the plaintiffs but to the company—an usurpation of the
office of directors—being an invasion of the rights of the corporation; yet no
reason had been assigned why the corporation had not put itself in motion to
seek the remedy. The "pre-eminently procedural character" as
described by Palmer (vide Company Law, 21st edition, page 503) of this rule was
explained by Jenkins L.J. in Edwards v. Halliwell,
as follows :
"The rule in Foss v.
Harbottle,
as I understand it, comes to no more than this. First, the proper plaintiff in
an action in respect of a wrong alleged to be done to a company or association
of persons is prima facie the company or the association of persons itself.
Secondly, where the alleged wrong is a transaction which might be made binding
on the company or association and on all its members by a simple majority of
the members, no individual member of the company is allowed to maintain an
action in respect of that matter for the simple reason that, if a mere majority
of the members of the company or association is in favour of what has been
done, then cadit quaestio, no wrong had been done to the company or association
and there is nothing in respect of which any one can sue. If, on the other
hand, a simple majority of members of the company or association is against
what has been done, then there is no valid reason why the company or
association itself should not sue. In my judgment, it is implicit in the rule
that the matter relied on as constituting the cause of action should be a cause
of action properly belonging to the general body of cooperators or members of
the company or association as opposed to a cause of action which some
individual member can assert in his own right".
In Edwards v. Halliwell
two members of a trade union successfully sued two members of the executive
committee of a trade union and the union itself for a declaration of illegality
regarding a resolution passed by a delegate meeting of the union, without
taking a ballot, increasing the contributions of members contrary to the
constitution of the union—that it was not to be altered until a ballot of the
members had been taken and a two-thirds majority obtained.
The submission of Shri Ved Vyas
in this regard is seen to be without much force in so far as a petition under
section 186 need not be on behalf of the company for the very language of that
section even permits the court suo motu to call a meeting of the company if it
has become impracticable to call a meeting, other than an annual general
meeting. But the submission of Shri Ved Vyas may have force if this petition,
under section 186, is sought to be used mainly for obtaining reliefs pertaining
to the alleged usurpation of office by directors. However, an action need not
be in the name of the company for actions concerning injuries personal to the
petitioner. There is also one other aspect of the rule in Foss v. Harbottle,
and the line of cases following it, namely, that the English court of equity
had constantly and consistently refused to interfere on behalf of share holders
until they have done their best to set right the matter of which they complain,
by calling general meetings (vide Lindley L. J. in Isle of Wight Railway
Company v. Tahourdin).
The ground has now been
prepared for discussing some of the even more important aspects of this case.
The English cases pertaining to
what is known as the rule in Royal British Bank v. Turquand,
have been described by Gower as "Something of a jungle of irreconcilable
decisions" (Principles of Modern Company Law, 3rd edition, page 158). The
question which arose in that case, whether a third party dealing with a company
is bound to ensure that all the internal regulations of the company have in
fact been complied with as regards the exercise and delegation of authority was
answered in the negative. In other words, third parties need not enquire into
regularity of indoor proceedings and may assume that everything was validly
done. Despite this rule having been laid down in such simple terms, as Gower
(page 158) points out, the tendency during the last thirty years has been
"to whittle it away notwithstanding the vigorous opposition by judges more
familiar with company practice". It is most confusing to go into the
English cases which have either applied the said rule in Royal British Bank v.
Turquand,
or did not apply it. Another standard author, Palmer (Company Law, list
edition, pages 249-50) thinks that there is an exception to the said rule,
namely, where the persons concerned have knowledge of the irregularity or even
when those persons are put on enquiry. The effort not to apply the said rule is
really based on the theory of protecting the shareholders; the further question,
however, is whether there can be any unwarrantable protection given to the
shareholders where the interests of the whole community is made to suffer ? It
does not appear to be necessary to go into these difficult and nice questions
in the present case because counsel for both sides did not endeavour to go into
them.
Shri Ved Vyas relied upon
section 290 of the Indian Act in support of his contention that the directors
who were functioning in this case, even in the view contended for by the
petitioner that they were not de jure directors, were at least de facto
directors who functioned without any knowledge of the defect in their
continuance or functioning as directors. To appreciate this contention it would
be necessary in the first instance to read section 290:
"290. Acts done by a
person as a director shall be valid, notwithstanding that it may afterwards be
discovered that his appointment was invalid by reason of any defect or
disqualification or had terminated by virtue of any provision contained in this
Act or in the articles :
Provided that nothing in this
section shall be deemed to give validity to acts done by a director after his
appointment has been shown to the company to be invalid or to have
terminated".
The corresponding section of
the Indian Act of 1913 was section 86 and of the English Act section 180. The
principle obviously is that there should be no vacuum in the affairs of a
company and that all acts done bona fide should be fully protected not only
between third parties and the company but also between the company and its
members and between members and members.
While considering an article
providing for the validity of acts of directors, notwithstanding the discovery
later of some defect in the appointment of such directors, Chitty L.J. observed
as follows in Dawson v. African
Consolidated Land and Trading Co. :
"It
is not framed so as to render valid a resolution passed by any persons who
without a shadow of title assume to act as directors of a company .... The
clause is addressed..........to cases of defective appointment or
disqualification".
Dawson
was followed in British Asbestos Co. v. Boyd.
Until Dawson
the object of such article and the concerned provision of the Act was
understood as only protecting honest acts of de facto directors in relation to
outsiders bat not as between members of the company and the company. In British
Asbestos Co. Ltd. v. Boyd,
Farwell J. had held that the above view of law to be incorrect; bona fide acts
of de facto directors were also good between members of the company inter se
and members of the company and the company. The same principle was reiterated
in Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light
Railway Co.
It was pointed out by Lord Cozens Hardy M.R., when dismissing the appeal
against the judgment of Sargant J. that the concerned statutory provision,
which had to be construed broadly not only between the company and outsiders
but also between the company and the members, validated the bona fide allotment
of the shares in question. The view of Farwell J. in Dawson
, that the subsequent discovery of a defect did not merely mean the discovery
of facts but of the defect itself, was approved. Swinfen Eady L.J. referred to
the defects not being present in the minds of the parties who so acted.
The said principle was affirmed
by the House of Lords in Morris v. Kanssen also but the observations were confined to
acts of defective appointment but not extending to cases of no appointment at
all or a fraudulent usurpation of authority from the outset.
This distinction between
discovery of facts and discovery of defects was also made by Dua J. (as he then
was), speaking for a Division Bench of the Punjab High Court in Karnal
Distillery Co. Ltd. v. Ladli Parshad Jaiswal .
There is a full discussion of this aspect by Mallick J. in Albert Judah Judah
v. Rampada Gupta.
Referring not only to standard text writers but also to Indian cases, Mallick
J. observed at pages 735-36 as follows:
"In all the authorities,
however, cited before me and noticed before the term de facto directors has
been restricted to directors with defective appointment. No case has been cited
in which the court has upheld the act of a ' pretended director ' without any
appointment. In other words, in no case the term de facto director has been
applied to a mere usurper without any appointment whatsoever".
To the same effect is also the
decision of a Division Bench of the Allahabad High Court in Shiromani Sugar
Mills Ltd. v. Debi Prasad,
where Desai J., speaking for the Division Bench, considered some of the cases
and held that the actions of de facto directors are protected when brought to
their minds. A similar view was also taken by Chopra J. in Fateh Chand Kad v. Hindsons (Patiala) Ltd.
Without recording evidence it
is hardly proper to go into the facts bearing on this contention. The materials
on record do not show any consciousness on the part of those concerned, before
the controversies arose, that all or any of the retiring (?) directors could
not legally continue. When by letter dated 6th December, 1972 (annexure
"C" to the petition), Yogesh C. Gupta informed Bk. Shivcharan Singh
(in reply to his letter of the 5th informing the company of the restraint order
(annexure "B" to the petition) that the allotment of right shares had
been made on 4th December, 1972, Bk. Shivcharan Singh wrote a long letter on
9th December, 1972 (annexure "D"), informing Yogesh C. Gupta about
his various legal contentions, also citing some decisions in support. My
attention has not been drawn to any communication prior to 4th December, 1972,
drawing the attention of the company to the fact that the right shares could
not be issued on the ground that there was no validly constituted Board. For
this reason alone it does not seem possible for the petitioner, without bringing
in more evidence if the same is available on this question to contend that the
directors, if they were only de facto, did have notice of the alleged defects,
and could not have validly allotted those right shares. Probably realising this
difficulty Bk. Shivcharan Singh mounted
his attack upon the invalidity pertaining to the decision to issue right shares
and to the illegality of the notice issued in this behalf.
The invalidity of the decision to issue the right shares is only a part
of the general question, discussed already, whether there were de jure or de
facto directors and even if they were only de facto, they had notice of the
alleged defects. Any other attack, on how the meeting, at which the decision to
increase the capital was taken, was conducted would be possible only if
detailed evidence is led on this question. In these circumstances Bk.
Shivcharan Singh vigorously concentrated on the sufficiency of the notice that
was issued to the petitioner (and others) concerning the issue of right shares.
According to article 10 of the articles of association :
"Where the board of directors of a company decides to increase the
subscribed capital of the company by allotment of further shares, then unless
the requirements of sub-section (1 A) of section 81 of the said Act are
complied with, (a) such further shares shall be offered to the persons who, at
the date of the offer, are holders of the equity shares of the company, in
proportion as nearly as circumstances admit, to the capital paid up on those
shares at the date; (b) the offer aforesaid shall be made by notice specifying
the number of shares offered and limiting a time, not being less than fifteen
days from the date of offer, within which the offer, if not accepted, will be
deemed to have been declined".
The notice is said to have been issued on November 17, 1972, and on the
date of receipt the petitioner and her husband should have 15 clear days which
would take us to December 3, 1972, but the issue in this case is stated to have
been made on December 4, 1972; December 3, 1972, was a Sunday.
Section 81 of the Act provides for the issue of further capital; such
further shares shall be offered to the persons who, at the date of the offer,
are holders of the equity shares of the company in proportion, as nearly as
circumstances admit, to the capital paid up on those shares at that date. This
offer should be made by notice specifying the number of shares offered and
limiting the time "not being less than fifteen days" from the date of
the offer within which the offer, if not accepted, will be deemed to have been
declined. In construing the expression "not less than 15 days" it is
urged by the petitioner that the date of issuing the notice and receiving the
notice must be excluded. It is at par with the expression "7 clear days'
notice", which was interpreted in King v. Turner as exclusive of the dates of dispatch and
receipt. The same was followed in In re Hector Whaling Ltd
as exclusive of the date of service of the notice and exclusive of the day on
which the meeting is to be held. The same view was taken by a Division Bench of
the Madras High Court in N. V. R. Nagappa Chettiar v. Madras Race Club,
where a number of English decisions were also considered. A Division Bench of
this court consisting of P. N. Khanna and Prakash Narain JJ. in Bharat Kumar
Dilwali v. Bharat Carbon and Ribbon Manufacturing Co. Ltd.,
interpreted the expression "not less than 21 days' notice" used in
section 171 of the Act as notice of 21 whole or clear days. Part of the day,
after the hour at which the notice is deemed to have been served, cannot be
combined with the part of the day before the time of the meeting on the day of
the meeting, to form one day.
The offer of right shares is stated to have been made by a letter dated
November 17, 1972. The right shares are said to have been allotted on December
4, 1972; December 3, 1972, was a Sunday. 17 days notice inclusive of the date
of issue and date of receipt of the letter will take us to December 3, 1972.
Notice of not less than 15 days alone is necessary to be given; that will take
us to December 3, 1972, alone exclusive of the day of the despatch and day of
receipt of letter. A letter posted in Delhi ordinarily reaches another in Delhi
the next day. It is contended that the notice asked the offeree to accept the
notice "within 17 days from the date of this offer" and, therefore,
there is an extension of time for that reason beyond what the statute
prescribes. 17 days "from the date of offer", namely, November 17,
1972, will not take it beyond December 3, 1972. Prima facie the notice does not
appear to be shorter than what is required by section 81. Even assuming that
the notice was short a declaration cannot be granted against the allottees of
those shares in their absence. This would be plainly opposed to the rule of
natural justice. It will be sufficient to cite the latest decision of the
Supreme Court on this question, i e., Smt. fatan Kanwar Golcha v. Golcha
Properties Pvt. Ltd.
in which both the official liquidator and the company court were held to be bound
by the rules of natural justice. Even an application for the rectification of
the share register could not be disposed of without notice to the parties
affected. The court may even decline to grant rectification on an application
made under section 155 if it involves any complicated questions and the parties
could properly be referred to a suit in such a case. The following passage from
Halsbury's Laws of England, third edition, page 218, may be usefully referred
to :
"If the court thinks that the case, by reason of its complexity or
on the ground that there are matters requiring investigation or otherwise, could
more satisfactorily be dealt with by an action, the court will decline to make
an order on a motion, without prejudice to the right of the applicant to
institute an action for rectification".
A similar approach has been
adopted by the Indian courts also (vide In
re Dhelakhat Tea Co. Ltd.,
and Mahendra Kumar Jain v. Federal Chemical Works Ltd.).
There is also great force in the contention that a suit having been filed,
though not by the petitioner but by S. L. Verma (another shareholder) to which
the petitioner and her husband are parties, specifically raising the question
of the invalidity of the allotment of the right shares and rectification of the
register of members concerning the entries made on the basis of the said
allotments, it would not be proper to adjudicate on this question summarily.
A right of a shareholder of a
company to vote is a right to property, vide
Lord Maugham in Carruth v. Imperial Chemical Industries Ltd. .
It has been repeatedly held by the Supreme Court that when civil
consequences are involved an order having such consequences should comply with
the rules of natural justice. The Supreme Court has recently pointed out in Smt. Jatan Kanwar Golcha v. Golcha Properties
Private Ltd.
that the company court will not pass orders affecting the rights of
parties without notice to them; this is nothing but a rule of natural justice.
It is instructive to also refer to In
re Greater Britain Insurance Corporation Ltd.: ex parte Brockdorff.
The Court of Appeal dismissed the appeal against an order passed by Russel J.
throwing out an action praying for rectification of the register of members of
the company on the ground that the interests of third parties were concerned
and that it was not for the court to exercise jurisdiction conferred upon it by
article 32 of the Companies (Consolidation) Act, 1908, in the absence of a
party affected, even if satisfied, and that it must be enforced in an action to
which affected persons are parties.
It remains to notice one other
contention of Shri Ved Vyas that article 115, fixing the quorum for the meeting
of the board of directors at three, is ultra vires in view of section 287(2),
prescribing the maximum as two, not permitting an article provision to the
contrary. It is true that there are some provisions contrary to what has been
laid down (section 174 is one such) and that section 9 provides that save as
otherwise expressly provided in the Act the provisions of the Act shall have
effect notwithstanding anything to the contrary in the memorandum or articles
of association. I wonder whether it has any relevance here. I have also not
been referred to any decided case where such an article provision as the
present (though it seems to be common enough) was ever questioned merely on the
ground that it provides for a greater quorum than what the Act insists—it may
be another matter if the articles provide for less. It seems unnecessary to
express an opinion on this question also. Even if the decision to issue right
shares was invalid a declaration concerning its invalidity cannot be granted in
the absence of those who would be affected by it.
Bk. Shivcharan Singh drew my
attention to In re Sly, Spink & Co.
where rectification of register of members was granted when the shares were
allotted by directors who were less than the quorum. (This argument subsumes
that Pritam Singh and Balbir Singh were not properly co-opted and that even if
Sheel Chandra and Yogesh C. Gupta were validly continuing as directors they
could not by themselves (two of them alone) decide to raise the capital of the
company. But then R.K. Jain is said to have been present at a meeting when such
a decision was taken; R. K. Jain disputes this and this leads to a controversy
concerning facts also). Assuming that everything contended for by Bk.
Shivcharan Singh is true and valid we are confronted here with a somewhat extraordinary
request to cancel the allotment of right shares without even an application to
rectify the register of members, without even having all those who would be
affected by that decision as parties before the court and when a suit for such
a relief is pending in this very court. Perhaps the greatest difficulty faced
by the petitioner is on the above score.
Bk. Shivcharan Singh wanted the
sympathy of the court for the petitioner in the view that the adopted son was
trying to displace his adoptive parents supported by his own brother-in-law and
friends. But sympathy by itself would be hardly enough. The petitioner would
have at least to show that there is no other option than to apply under section
186. Even this has not been done. Shri Ved Vyas contends, and with some force,
that the members themselves may apply for an extraordinary general meeting
under section, 169 and articles 64 to 66; if that were so it would not be for
this court to call such a meeting. The petitioner can also apply to the Central
Government to convene an annual general meeting under section 167. The
petitioner has not obviously considered it sufficient to apply under section
167 to the Central Government because no relief in regard to the issue of right
shares could be obtained. That is why these petitions have been filed for
getting a declaration concerning the invalidity of the issue and allotment of
right shares under the guise of the court having to give directions pertaining
to who should vote at such a meeting if one is to be called by this court. I
have endeavoured to study myself the reported decisions on this subject and I
have not been able to come across a single case—none has been cited to me—where
the court went to the extent of rectifying the register of members for the
purpose of giving directions as to who should vote.
There was an exceptional
situation arising out of the register of members and other records, maintained
under the Building Societies Act, 1874, being destroyed due to enemy action,
when Vaisey J. (in Payne v. Coe)
gave a direction to hold a meeting in accordance with the rules for
ascertaining the names and addresses of the members by means of public
advertisement. No question of rectifying the register of members for the
purpose of giving such directions arose in that case.
Krishnaswamy Nayudu J. of the
Madras High Court
had given a direction that those whose names appeared in the register of
members on a certain date would vote at the meeting called under the old
section 39(3), before the present section 186 was placed on the statute book.
Venkatarama Aiyar J. in Viswanathan v. Tiffin's Barytes, Asbestos and Paints
Ltd.
has referred to this direction by Krishnaswamy Nayudu J. as follows : "to
this course the company could have no objection". In the case on hand,
however, there are several objections (they have been already noticed) to a
direction being given that there should be no voting on the basis of the right
shares. The petitioner's purpose would not be served if such a direction is not
given. What was originally 46% had been reduced to about 25% after the said
issue; even if the petitioner is supported by the other two petitioners and
S.L. Verma it would be of no avail.
The circumstances discussed at
length do not justify the court using its discretion under section 186 of the
Act to call a meeting as prayed for.
C. A. Nos. 725 of 1972 and 73
of 1973 are accordingly dismissed. The separate application filed (C.A. No. 119
of 1973) to dismiss the main petition on the admissions contained therein has
also become unnecessary. It is also needless to be detained by the question who
is the proper person to represent the company, a point raised in C.A. No. 700
of 1972. All these interlocutory applications as well as the main petition
(C.P. No. 96 of 1972) are dismissed. There will be no order as to costs in any
of them in the circumstances.