Sections 258 and 259
Directors,
increase in number of
[1950]
20 COMP CAS 133 (PC)
v.
Satya Charan Law
LORD GREENE, LORD MACDERMOTT AND SIR MADHAVAN NAIR.
DECEMBER 15, 1949
Sir
Walter Monckton, C.S.
D.N.
Pritt, W.W.K. Page and S. Chaudhari, for the Respondents.
Lord
Greene—This is
an appeal from a judgment and decree of the High Court at Fort William
affirming on appeal a judgment and decree of the same Court in its original
jurisdiction. The questions raised in the litigation relate to the validity of
two resolutions of the respondent company Lothian Jute Mills Ltd., (hereinafter
called "the company"). By the first of these resolutions (which were
passed at a requisitioned general meeting of the company) held on 3rd June
1945), the appellants (other than S.P. Bose), who was one of the
requisitionists), seven in number, were appointed to be directors of the
company in addition to the four existing directors, one of whom was the
respondent Dr. Satya Charan Law. By the second resolution it was resolved that
the termination of the appointment of the
managing agents of the Company, Messrs. Andrew Yule and Co., Ltd., was to be
recorded and in any event that they were thereby forth with removed from their
office. In the action the respondent Dr. Law on behalf of himself and all other
holders of shares in the Company attacked the validity of both resolutions and
sought appropriate relief. The defendants were the eight appellants and the
respondent H.H. Commanding General Hiranya Shamsher Jung Bahadur Rana, another
of the requisitionists, who has taken no part in the proceedings. The ground on
which the validity of both resolutions was attacked was that under the articles
of association of the Company they could only have been passed effectively as
to No. 1 by a special and as to No. 2 by an extraordinary resolution whereas
the majority by which they purported to be passed was admittedly insufficient
for those purposes; and that the rights of the minority had been illegally
infringed accordingly. At the trial McNair, J., held that both resolutions were
invalid; he made declarations to that effect and granted consequential
injunctions. This decision was affirmed on appeal by a Court consisting of
Derbyshire, C.J., and Gentle, J.
The question as to the
validity of resolution No. 1 depends upon the true construction of certain of
the articles of association of the Company. These so far relevant are as
follows:—
“DIRECTORS.
109. The number of the
Directors shall not be less than three nor more than four.
** ** **
111. The Directors shall have
power at any time and from time to time to appoint any person, other than a
person who has been removed from the office of a Director of the Company under
Article 127, as a Director as an addition to the Board but so that the total
number of Directors shall not at any time exceed the maximum number fixed. But
any Director so appointed shall hold office only until the next following
Ordinary General Meeting of the Company and shall then be eligible for
re-election.
112. The qualification of a
Director, other than an ex-officio Director, shall be the holding of, in his
own name or jointly with any person, whether beneficially or as a trustee for
any company or person or otherwise, Ordinary Shares in the Company of the
nominal value of Rs. 5,000.
** ** **
ROTATION
OF DIRECTORS.
121. At the first Ordinary
Meeting of the Company to be held in every 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………….
122. 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.
123. A retiring Director
shall be eligible for re-election.
** ** **
125. If at any meeting at
which an election of Directors ought 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 up, shall be
deemed to have been re-elected at the adjourned meeting.
126. The Company in General
Meeting may from time to time increase or redue the number of Directors subject
to the provisions of Sections 83-A (1) and 83-B (2) of the Act and may alter
their qualification and may also determine in what rotation such increased or
reduced number is to go out of office.
127. The Company may by
Extraordinary Resolution remove any Director, whose period of office is liable
to determination at any time by retirement of Directors in rotation, before the
expiration of his period of office and may by ordinary resolution appoint
another person in his stead………..
128. Any casual vacancy
occurring among the Directors may be filled up by the Directors………."
The judgments in the Indian
Courts were based on the view that the power of the Company by ordinary
resolution to "increase or reduce" the number of directors conferred
by Article 126 is only exercisable within the limits set by the maximum of four
and the minimum of three prescribed by Article 109; and that consequently in
order that there might be more than four a special resolution was required
altering Article 109.
If Article 109 had stood
alone there can be no doubt that this view would have been correct. In order to
avoid the necessity for a special resolution a form has sometimes been used in
which an article of this type is prefaced by words such as "until
otherwise determined by the company in general meeting." These words
enable the stated maximum and minimum limits to be altered by an ordinary
resolution. No such words are used in the present case. But that does not by
any means conclude the matter. In order to interpret Article 109 there are
other articles which require consideration. Their Lordships think that the
learned Judges in India did not attach sufficient importance to this aspect of
the question.
The first of these to be
considered is Article 126 itself. Two points in it fall to be noticed: (a) the
power is expressed to be subject to Section 83-A(1), Companies Act, which provides
that "every company shall have at least three directors"; and (b) the
power extends to altering the qualification and making a change in the order of
rotation of the increased or reduced number. Now if, as the High Court has
held, Article 126 only allows an ordinary resolution to operate between the
limits of four and three prescribed by Article 109, the following consequences
would result: (a) The reference to Section 83-A(1) would, as the articles
stand, be unnecessary. The reason of this is that if, according to the
argument, the minimum of three laid down by Article 109 can only be altered by
a special resolution it could not in any event be altered by an ordinary
resolution which is the kind of resolution with which Article 126 is dealing,
(b) The power to alter qualification and change the order of rotation, if, as
Article 126 provides, it is to be exercised by ordinary resolution, must
involve a departure from the provisions of Articles 112, 121 and 122. Those
articles are not expressed to be "subject to Article 126" nor are
these powers in Article 126 expressed to be given "notwithstanding any
thing in Articles 112, 121 and 122''. Some such words must therefore be implied
in one place or the other in order to remove the inconsistency. The omission to
make such cross references as may be required to reconcile two textually
inconsistent provisions is a common defect of draftsmanship. There is thus no
insuperable difficulty in reconciling Article 109 with Article 126 either by
implying in the former some such opening words as "subject to Article
126" or implying in the latter some such opening words as
"notwithstanding anything contained in Article 109."
Now if, as the Courts in
India have held, the only scope for the operation of Article 126 lies in the
area between the maximum of four and the minimum of three the question arises,
what is the use of Article 126 ? If at a time when there are only three
directors the company wished to appoint a fourth it could do so by ordinary
resolution at a general meeting without the necessity of having a special
article in that behalf. For the purpose therefore of an increase in the actual
number of directors to four there is no need for the article. If, however, the
company wished otherwise than by dismissal (as to which provision is made by
Article 127) to reduce the number to three it could do so under the very terms
of Article 109 itself and that not withstanding Article 125. Article login
effect gives an option to the company to have no more than three directors. It
therefore appears to their Lordships that in order to give effective content to
the opening words of Article 126 it is necessary to make an appropriate
implication as suggested above, either in Article 109 or in Article 126. It is
moreover to be observed that the draftsman of the articles where he wished to
show that the maximum number as fixed is not to be exceeded in exercising a
power to appoint additional directors, says so in terms. Under Article in the
directors have power to appoint additional directors 'but so that the total
number of directors shall not at any time exceed the maximum number
fixed". A limit there fore which is set to the power of the Board is not
repeated in the case of a general meeting.
Lastly, the power to
"increase or reduce the number of directors" in their Lordships'
view, according to the natural meaning of the words, means or at least includes
a power to increase a maximum without necessarily making specific appointments,
or [subject to Section 83-A(1)] to reduce a minimum. Such a power carries with
it the implication that, e.g., the vacancy created by an increase in the
maximum may at the same time or subsequently be filled up by appointing an
individual to fill it. (Salmon v. Quin and Axtens Ltd.; Quin and
Axtens Ltd., v. Salmon). On this
footing, there is a direct textual conflict between Articles 109 and 126 which must
be remedied.
For these reasons their
Lordships are of opinion that resolution No. 1 was valid.
Resolution No. 2 stands in
different position. Articles 131, 132 and 135 so far as relevant provide as
follows :—
"MANAGING
AGENTS.
131. The general management
of the affairs of the company shall be entrusted to managing agents to be
appointed by the company and the manging agents shall, subject to the control
of the directors, conduct the business of the company.
132. At the date of the adoption
of these articles, Andrew Yule & Co. Ltd., are the managing agents of the
company, and they…….shall continue and be the managing agents of the company
(unless otherwise mutually arranged………or unless they shall voluntarily resign
that office) for the period of 15 years certain from 30th October, 1929, and
thereafter until they shall be removed there from by an Extraordinary
Resolution of the company, passed at an Extraordinary General Meeting specially
convened for that purpose, and of which not less than six calendar months'
notice shall be given, and at which persons holding or representing by Proxy or
Power-of-Attorney, not less than three fourths of the issued ordinary capital
of the company for the time being, shall be present.
135. The managing agents
shall have the general management of the company's business………"
The complaint against this
resolution is that under Article 132 the managing agents could only be removed
by an extraordinary resolution as there mentioned and that to attempt to remove
them by an ordinary resolution constituted a violation of the rights of the
minority shareholders. In substance three points were argued by the appellants.
First they referred to Section 87-B of the Companies Act the relevant provision
of which is as follows :—
"87-B.Conditions applicable to managing agents.—Not
with standing anything to the contrary
contained in the articles of the company or in any agreement with the company—
(f) the appointment of a managing agent, the
removal of a managing agent and any variation of managing agent's contract of
management, made after the commencement of the Indian Companies (Amendment)
Act, 1936 (XXII of 1936), shall not be valid unless approved by the company by
a resolution at a general meeting of the company notwithstanding anything to
the contrary in Section 86-E."
This, it was suggested,
empowered the company to remove its managing agents by ordinary resolution. In
their Lordships' opinion this suggestion misinterprets the provision which is
directed solely to securing that a managing agent shall not be validly
appointed, removed or have his contract altered without a resolution of the
company. The next point also lacks substance. It was that to affirm the
continuance in force of the managing agent's appointment amounted to specific
enforcement of a contract of personal service and was a violation of Section
21(b), Specific Relief Act, 1877. The effect of the decree appealed against is
not, however of that nature. It merely prevents dismissal of the managing agents
or termination of their appointment at the instance of a majority in violation
of the articles of association of the company which the minority are entitled
to have observed. As between the company and the managing agents it certainly
has not the effect of enforcing a contract of personal service.
The last point was that the
matter was one concerning the internal management of the company in which the
Court will not on principle interfere. In their Lordships' opinion it is much
more than that. To treat the resolution as effective would mean that the
company could terminate the appointment of the managing agents by ordinary
resolution contrary to the article which requires an extraordinary resolution.
This requirement was obviously intended as a protection to a minority who are
not to have the appointment terminated against their will unless a particular
majority votes in favour of it. Accordingly, their Lordships are in agreement
with the decision of the Indian Courts in regard to resolution No. 2.
The first injunction
granted by the High Court restrained the defendants "from acting as
directors of or dealing with the funds of or using the seal of or otherwise
interfering in the management and affairs of the plaintiff company except when
validly appointed." This injunction which was based on the finding of the
invalidity of resolution No. 1 cannot now stand. The second injunction
restrained the defendants their agents and servants "from interfering or
intermeddling in the management of the plaintiff company (by its managing
agents, Andrew Yule and Company Limited) until the valid termination of their
contract in conformity with the articles of the plaintiff company."
This injunction was granted
in view of the fact that the defendants were acting on the assumption that both
resolutions were valid and were taking a number of steps with a view to putting
into force resolution No. 2. Their Lordships see no necessity for continuing
this injunction. There appears to them to be no reason to suppose that the
defendants will take any action which would be inconsistent with the
declaration as to the invalidity of resolution No. 2. Moreover, this injunction
might impede the board, of which the appellants are in their Lordships' opinion
validly elected members, in exercising the control over the managing agents for
which Art. 131 makes provision.
It remains to mention one
further point. The company was and could be made a plaintiff only on the basis
that the seven appellants were not directors. As in the result they have been held
to be directors the use of its name as plaintiff was unauthorised. Accordingly
the company should, in their Lordships' opinion, be struck out as plaintiff. On
the other hand it is necessary that the company should formally be bound by the
order. Normally in a representative action by a minority shareholders the
company would be made a defendant and their Lordships consider that it should
be added as a defendant. The appellants as the majority of the board formally
by their counsel consent to that course.
Accordingly their Lordships
will humbly advise His Majesty that the appeal should succeed as to resolution
No. 1 but should fail as regards resolution No. 2 : that there should be a
declaration of the validity of resolution No. 1 and the declaration as to the
original four being the only proper directors should be sruck out: that all the
injunctions should be discharged: and that the record should be amended by
striking out the name of the company as plaintiff and adding it as defendant.
The respondents having succeeded in both Courts in
[1973] 43 Comp. Cas. 17 (Bom.)
v.
Lalji B. Desai
S.B. BHASME, J.
First
Appeal No. 262 of 1971
July 26
and 27, 1971
F.S. Nariman for the appellants.
G.A. Thakkar with A.N.
Mody, D.H. Buck with G.K. Munshi for the respondent.
Bhasme, J.—This is an
appeal by defendants Nos. 2 and 3 and is directed against the judgment and decree
passed in the suit filed by respondents Nos. 1 and 2 against the appellants and
respondent No. 3. The suit was for a permanent injunction restraining
respondent No. 3 and its directors, servants and agents from allowing the
appellants to act as directors of the respondent No. 3-company. A similar
injunction was also claimed against the appellants restraining them from acting
in any manner as the directors of the respondent No. 3-company.
Respondent No. 3 is a
public limited company registered under the Indian Companies Act and carries on
business, inter alia, as manufacturer of rayon yarn and has its registered
office at
The plaintiffs by the suit
challenged the legality of the appointment of the appellants on certain
grounds. According to the plaintiffs the number of directors on the board can
be increased by the company under section 258 of the Indian Companies Act by
passing a resolution. No such resolution was ever duly notified, proposed and
passed. In the absence of any such resolution, respondent No. 3-company had not
the power to appoint the appellants as directors. The plaintiffs submit that
resolution Nos. 5 and 6 are, therefore, invalid, void and of no effect.
The plaintiffs also submit
that without prejudice to the aforesaid ground, the appointment of the
appellants as directors was illegal, void and of no effect as they had not
filed letters of consent under section 264(1) of the Act in respect of their
proposed appointment as directors at the annual general meeting. The
plaintiffs, as shareholders of respondent No. 3-company, have the right to
property in respondent No. 3-company. It is for this reason that they had filed
the suit restraining the appellants from acting as directors of respondent No.
3-company.
Respondent No. 3-company
filed its written statement and submitted that the appointment of the
appellants as directors was valid and legal. It has stated that a separate
resolution to increase the number of directors was not required under the
provisions of the law. The company also stated in paragraph 12(a) of the
written statement that on 9th April, 1969, the appellants had filed their
letters of consent to act as directors, if appointed. After receipt of these
letters the appellants were appointed as directors. It is mentioned in the
written statement that after their appointment as additional directors on 10th
April, 1969, two shareholders delivered to the company notices under section
257 of the Act intending to propose the appellants as candidates for the office
of the directors of respondent No. 3-company at the next annual general meeting
of the company. The appellants were not required to file any letters of consent
under section 264(1) of the Act before their election as directors at the 22nd
annual general meeting. According to the company the appellants were validly
proposed and elected as directors.
The appellants between
themselves filed one written statement and supported the validity of their
appointment on all the grounds alleged by respondent No. 3-company. In addition
the appellants stated that on their appointment as additional directors, the
strength of the board was increased to 10 directors. In paragraph 8 of the
written statement it is submitted that they were not required to file any
letters of consent under section 264(1) of the Act before their appointment as
directors at the meeting. Without prejudice to this defence it is also pleaded
that they did file the letters of consent on 9th April, 1969, with respondent
No. 3-company. They argued that, as additional directors, they were persons to
whom section 264(1) of the Act did not apply. Assuming that there was any such
requirement, it is asserted that it was a mere irregularity and that did not
disable them from acting or functioning as directors. The made it clear that it
was implicit in the two resolutions appointing them as directors that the
number of directors was, if necessary, being increased. According to them no
separate resolution under section 258 or article 169 of the articles of
association of the company was necessary for increasing the number of directors
from 8 to 10. At any rate, the absence of any separate resolution will not
affect the validity of the resolution appointing them as directors of
respondent No. 3-company. They denied that it is mandatory under section 258 of
the Companies Act or under article 169 of the articles of association of the
company that before the number of directors is increased, a resolution
increasing the number of directors ought to have been duly notified or proposed
or passed. There were other allegations made by the appellants against the
plaintiffs but for deciding the points raised in this appeal they are not at
all relevant. As the parties had not sought any issues on the basis of those
allegations, the learned judge was not called upon to consider whether they
were true or false. The substance of those allegations was that according to
the appellants the plaintiffs had filed the suit mala fide at a late stage at
the instance of one Rasiklal J. Chinai who was defeated in the contest for
election of directors at the general meeting of the shareholders of respondent
No. 3-company.
At the trial the learned
judge framed the relevant issues. Parties did not lead any oral evidence. By
consent of the parties only documents were exhibited. The defendants had also
resisted the suit on the ground that the plaintiffs being shareholders cannot
have any grievance against respondent No. 3-company as the matter in dispute
was concerning the internal management of the company and the suit by the two
shareholders was not maintainable. Perhaps it was felt by the parties that the
issues arising in the suit are purely questions of law and it was not necessary
to adduce any oral evidence.
The learned judge, on a
consideration of the evidence on record and the submissions of the parties, has
recorded his findings. He held that the present suit is maintainable. He came
to the conclusion that the letters of consent under section 264(1) of the Act
for the appointment of the appellants as directors at the annual general meeting
were not necessary. In view of this finding he held that whether or not such
letters were filed need not be considered. According to him the impugned
resolutions Nos. 5 and 6 passed at the annual general meeting of the company on
June 11, 1969, appointing the appellants as directors of the company were
illegal. Consistent with this finding the learned judge decreed the plaintiff’s
suit and granted the injunctions against respondent No. 3-company and the
appellants.
As stated above the
appellants, aggrieved by the decree, have come to this court with the present
appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody,
instructed by M/s. Haridas & Co., appears for respondents Nos. 1 and 2, the
original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi, instructed by M/s.
Bhaishankar Kanga and Girdharilal,
appears for respondent No. 3-company. It must be stated at the outset that
respondents Nos. 1 and 2 have purported to file cross-objections against the
finding recorded by the learned judge about the consent letters under section
264(1) of the Act. Mr. Thakkar conceded that the cross-objections are
misconceived but mentioned that he had the right, as an advocate appearing for
the respondents, to assail the decree under appeal on any of the grounds
decided against him. Therefore, the points for determination in this appeal
are:
(1) Whether the board of directors of
the company before and after the annual’ general meeting consisted of ten
members or whether at the annual general meeting the strength of the board of
directors was increased from 8 to 10.
(2) Whether the company can increase the
strength of the board of directors only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts.
(3) Has the board of directors
contravened the mandatory provisions of section 173 of the Act by not
furnishing any information about the proposed special business or by furnishing
information, which is hopelessly inadequate or misleading?
(4) Can the plaintiffs rely on the above
contraventions in any form without specific averments in the plaint?
(5) Has the learned judge erred in
holding that the additional directors, like the retiring directors, are not
required to file written consent duly signed before their reappointment as
directors by the company?
(6) Is the suit not competent as the
alleged irregularities arise in the course of the internal management of the
company?
Before
I proceed to consider the various points urged before me, it is desirable to
refer to the relevant provisions of the Companies Act, 1956, and the articles
of association of respondent No. 3-company.
Section
2(13) of the Companies Act defines “director” as any person occupying the
position of director, by whatever name called. Section 255 provides for the
appointment of directors and the proportion of those who are to retire by
rotation. Section 256 contains provisions for ascertainment of directors retiring
by rotation and filling up of the vacancies. Under section 257 a person who is
not a retiring director shall be eligible for appointment to the office of
director if he or some member intending to propose him has, not less than
fourteen days before the meeting, left at the office of the company a notice in
writing under his hand signifying his candidature for the office of director or
the intention of such member to propose him as a candidate for that office. The
other provisions of section 257 are not quite relevant and need not be referred
to here.
Under section 358 of the
Act, subject to the provisions of sections 252 255 and 259, a company in
general meeting may, by ordinary resolution, increase or reduce the number of
its directors within the limits fixed in that behalf by its articles. Section
259 in certain cases requires the sanction or approval of the Central
Government for any increase in the number of its directors. Section 260
provides that the board of directors, if permitted by the articles of association,
can appoint additional directors. The board is to exercise that power so as not
to exceed the maximum strength fixed for the board by the articles. The first
proviso to section 260 makes it clear that such additional directors shall hold
office only up to the date of the next annual general meeting of the company.
Section 262 deals with the filling of casual vacancies amongst directors. Under
section 263(1) ordinarily there will be only one resolution for the appointment
of one director at the annual general meeting of the company. A single
resolution is permitted under certain special circumstances for appointing more
than one director. Section 263(2) provides that a resolution moved in
contravention of sub-section (1) shall be void, whether or not objection was
taken at the time to its being so moved. Section 264(1) under certain
circumstances requires that the candidate for directorship should file his
written consent with the company before his appointment as director at the
meeting. Section 264(2) requires that a person appointed as a director shall
not act as a director unless he has within the prescribed time signed and filed
his consent with the Registrar to act as such director.
Apart from the group of
these sections, there are two more sections, which assume importance while
deciding the points, which arise in this appeal. Section 172 requires that
every notice of a meeting of a company shall contain certain relevant
particulars. Leaving the other details, I must only mention that under section
172(1) such notice shall contain a statement of business to be transacted at
the meeting. Under section 173(1)(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of the business relating to four specified items. Item No 3 deals
with the appointment of directors in the place of those retiring. Section 173
(1)(b) makes it clear that in the case of any other meeting, all business shall
be deemed special. Section 173(2) contains a direction that where any items of
business to be transacted at the meeting are deemed to be special under
sub-section (1), there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each such item of business,
including in particular the nature of the concern or interest, if any, therein
of every director, the managing agent, if any, the secretaries and treasurers,
if any, and the manager, if any. The proviso also requires further and better
particulars in specified cases. It is not necessary to refer to that proviso at
any length.
Now it remains to mention the relevant articles of association of the company. Under article 142, the directors have power at any time and from time to time to appoint any other qualified person to be a director as an addition to the board so that the total number of directors at any time shall not exceed the maximum fixed. Any person so appointed as an addition to the board shall retain his office only up to the date of the next annual general meeting but shall be eligible for re-election at such meeting. Under article 164, at every annual general meeting of the company, one-third of such of the directors for the time being as are liable to retire by rotation or, if their number is not three or a multiple of three, the number nearest to one-third shall retire from office. Article 166 makes it clear that a retiring director shall be eligible for re-election. It is true that counsel on either side did refer to other sections and articles to elucidate the various points raised by them. I need not consider them all at this stage.
The
first point made by Mr. Nariman on behalf of the appellants is about the
strength of the board of directors of the company. He objected to the expression
“functioning directors” and “additional directors” as used by the plaintiffs in
the plaint. He said that there is no warrant for any such distinction. Whether
the directors are appointed at the meeting or by the board of directors, they
all together constitute the board. The directors in that capacity have the same
rights, privileges and obligations under the provisions of the Act. He referred
to the definition of “director” as contained in section 2(13) of the Companies
Act. In all other places in the Act the board of directors was mentioned as
such and he says that the distinction sought to be made by the plaintiffs is
without any legal significance. It appears to me that the plaintiffs have used
the different expressions only for a better understanding of their case. The
appellants were, in the first instance, appointed as additional directors and
later on they were reappointed as directors. But, apart from this fine
distinction in phraseology, the point of substance made by Mr. Nariman is that
the company had not increased the number of directors from 8 to 10 at the
annual general meeting by the reappointment of the appellants. When the board
of directors in exercise of their power under section 260 of the Act co-opted
the appellants, the number of directors on the board was increased from 8 to
10. Even at the meeting the number was not reduced. The two directors retired
by rotation and the two additional directors ceased to hold office. There were,
therefore, four clear vacancies. When the company passed four resolutions
reappointing the four persons as directors there was no increase and the
provisions of section 258 are not attracted. I find it very difficult to accept
this submission. The composition of the board of directors with additional
directors will not be the same as the board of directors
appointed by the company at the general meeting. It cannot be said that the
company had at any time surrendered its inherent or statutory power to increase
the number of directors on the board when the board appointed or co-opted
additional directors. As observed by Lord Hanworth M.R. in Worcester Corsetry
Limited v. Witting, the
power conferred on the directors to appoint additional directors is a temporary
power vested in them, and this is to be reviewed and perhaps confirmed at the
general meeting. Even the wording of section 260 underlines the temporary
nature of this power conferred on the board of directors. Section 260, first
proviso, makes it clear that such directors shall hold office only up to the
date of the next annual general meeting. It is true that under article 142 of
the company, the board of directors can appoint any number of additional
directors at any time and from time to time so as not to exceed the permitted
maximum limit. Consistent with the first proviso to section 260, the article
also makes it clear that the person so appointed as an addition to the board
shall remain in office only up to the date of the next annual general meeting.
I am of the view that the board of directors cannot by the appointment of
additional directors increase the strength of the board so as to affect the
power of the company vested in it under section 258 of the Act.
Then Mr. Nariman argued
that the learned judge was not justified in holding that the company can
increase the strength of the board only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts. I have not used the exact words of the learned judge but in
substance that appears to be the finding recorded by him. According to Mr.
Nariman all that section 258 requires is that the company, subject to the other
restrictions imposed on it, must resolve to increase or reduce the number of
directors in the general meeting. The section itself has not prescribed any
other formality for effecting the increase or decrease in the number of
directors. Mr. Nariman points out that under the Companies Act, wherever
separate resolutions were found necessary, provisions were made in that behalf.
He referred to section 263 of the Act. I have already mentioned above the
substance of that section. Ordinarily, there will be a separate resolution for
appointing a person as a director at the annual general meeting of the company.
Mr. Nariman says that the company can exercise the power vested in it under
section 258 by passing one or more resolutions and as no form is prescribed,
one will have to look at the substance. When there are 8 members on the board
of directors, the company can by simply appointing two members in addition
increase the number and this can be done without passing a separate resolution.
He says that it is implicit in the act of appointing. The company has exercised
the power to increase the number.
While dealing with this
power of the company to increase the number, Mr. Nariman referred to the
corresponding English law and submitted that the provisions are substantially
similar. Mr. Nariman relied on an English case, Worcester Corsetry v. Witting. The
learned judges were considering the effect of two apparently inconsistent
articles of the company. But, as the case also dealt with the power of the
company to appoint directors and thereby increase the number, it has some
relevance while appreciating the point raised before me. Article 83 of Table A
contained the provisions similar to section 258 of the Indian Companies Act. At
page 649, Lawrence L.J. observes as follows about the existence of the power to
increase and its exercise by the company:
“Article 83 of Table A
shows in the plainest terms that the company has power to increase or reduce
the number of its board. It is said that that does not involve the nomination
and appointment of particular gentlemen or ladies as directors, but it seems to
me that that is necessarily implied in the provision of article 83. If, for
instance, there have been four directors, within the maximum number of directors,
and the board desire that two additional directors shall be appointed, it can
convene, in my judgment, a meeting under article 83 for the purpose of
increasing the number of directors by two named persons, appointing these two
persons, and thereby increasing the number of directors”.
Slesser L.J., at page 654,
approves the above observations and says:
“The more natural view of
article 83 is that it is not redundant or merely introducing unnecessary
machinery which is already provided by article 12 in dealing with the maximum
and minimum, but, as Lawrence L.J. has indicated, is itself conferring a power
not only to increase the number but to increase that number by itself
appointing directors to the extent to which it is intended to increase the
number”.
About the power of the
company to increase the number of directors under its articles of association,
the learned author in his book Pennington’s Company Law, 2nd edition, pages
456-57, sums up the legal position as under:
“The power to appoint
subsequent directors is usually exercisable by the members of the company in
general meeting by ordinary resolution. If the articles prescribe the maximum
number of directors who may be appointed, appointments in excess of the maximum
are void. Usually, however, the members are empowered to increase or reduce the
maximum number of directors by ordinary resolution, and then an appointment of
a director in excess
of the former maximum is taken to be an exercise of the power to increase the
number of directors, and is valid”.
While
making the last-mentioned observation, the learned author in the footnote has
referred to the above-mentioned case. So Mr. Nariman argued that section 258
was an enabling section, which authorised the company to increase or decrease
the number of directors just by an ordinary resolution. As singular includes
plural, one has to look at the result and not the number of resolutions to find
out whether the company has exercised the power vested in it.
Mr.
Thakkar, with equal force, stressed the word “resolution” and said that it was
a condition precedent to the valid appointment of directors resulting in the
increase of the number of directors. Any other construction, he says, will
render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish
the said decision on certain grounds. He says that article 83 construed by the
learned judges refers to a general meeting. Section 258 of the Companies Act
provides that the company may in general meeting by ordinary resolution
increase or reduce the number of its directors. In my opinion this distinction
is not one of substance. Any such difference in the wording will not affect in
any manner the efficacy of the observations made by the learned judges in the
above-mentioned case.
Then
Mr. Thakkar was at pains to point out that no such point was ever raised and
debated in that case. The observations of the judges quoted above are merely
obiter dicta. Mr. Thakkar says that the judges were reconciling the two
apparently conflicting articles which conferred the power of appointing
directors on the board of directors and the company. He referred to several
text books on Company Law, viz., Pennington’s Company Law, 2nd edition, page
456-57, Modern Company Law by C.B. Gower, 3rd edition, page 21, Palmer’s
Company Law, page 533, Halsbury’s Laws of England, volume 6, page 279, article
574, Buckley on the Companies Act, 13th edition, page 885, and submitted
that the above-mentioned authority was quoted by the learned authors to show
that the company had not surrendered its power to appoint directors in favour
of the board of directors. But, the decision is not cited by Mr. Nariman as a
binding authority on this court. Mr. Nariman relies only on the wording of the
article considered by the judges, which resembles the wording of section 258.
Under both the provisions the company has the power to increase the number of
directors. When the company at its meeting resolves to appoint additional
directors in excess of the present strength of the board, then it is an instance
where the company is exercising its two-fold powers. The company increases the
number not by separate resolution but by appointing additional directors. The
effect is that the company has increased the number of directors. That appears
to be a sensible construction which can be adopted while interpreting the
relevant provisions contained in section 258 of the Companies Act, 1956. In the
result, in my opinion, it is not necessary for the company to pass a separate
resolution increasing the number of directors before appointing the directors
to fill the additional sanctioned posts. In law it is possible for the company
to comply with the provisions of section 258 when it chooses to appoint within
the permitted limit additional directors so as to increase the strength of its
present board. The learned judge was in error in coming to the conclusion that
in the absence of a separate resolution the appointment of the appellants as
directors of respondent No. 3-compauy was null and void. The legality of the resolutions
Nos. 5 and 6 cannot be challenged on the ground that there was any
contravention of the provisions of section 258 of the Act.
Then
I propose to consider points Nos. 3 and 4 together as the discussion of law is
likely to be overlapping. Point No. 3 will involve the consideration of the
provisions of sections 172 and 173 of the Act and point No. 4 is about the
sufficiency or otherwise of the pleadings.
I
have already set out above the relevant provisions of section 173 of the Act. Section
173 will have to be read with section 172(1) of the Act. Under section 172(1)
every notice of a meeting of a company, among other things, must contain a
statement of the business to be transacted at the meeting. Section 173(1)
contains classification of the business and indicates when the business shall
be treated as special. Under section 173(2) any items of special business
mentioned in the notice must be accompanied by a statement setting out all
material facts concerning such items of business.
Mr.
Nariman for the appellants drew my attention to the notice of the meeting,
which is produced at exhibit D at page 90 of the paper book. It is worth while
to reproduce the material items of business:
Serial
No. 3
To
elect a director in the place of Shri Kasturbhai Lalbhai who retires by
rotation under article 164 of the articles of association of the. company, but
being eligible, offers himself for re-election.
Serial
No. 4
To
elect a director in the place of Shri Naval H. Tata, who retires by rotation under
article 164 of the articles of association of the company, but being eligible,
offers himself for re-election.
Serial
No. 7
To
appoint a director in place of Shri Laljibhai Chhaganlal Kapadia, who was
appointed an additional director of the company by the board of directors on
10th April, 1969, and who ceases to hold office under section 260 of the
Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act,
1956, has been received by the company.
Serial
No. 8
To appoint a director in
place of Shri Nimjibhai Chhanganlal Kapadia who was appointed an additional
director of the company by the board of directors on 10th April, 1969, and who
ceases to hold office under section 260 of the Companies Act, 1956, on the date
of this meeting in respect of whom a notice as required by section 257 of the
Companies Act, 1956, has been received by the company.
Items Nos. 3 and 4
constitute ordinary business and Items Nos. 7 and 8 constitute special business
within the meaning of section 173 of the Act, Being special business Items Nos.
7 and 8 are followed up by explanatory statements contained in an annexure to
the notice. Explanatory statement accompanying Item No. 7 read as under:
“Shri Laljibhai Chhaganlal
Kapadia was appointed an additional director on 10th April, 1969, by the board
of directors of the company and he retains his office as a director only up to
the date of this annual general meeting under the provisions of section 260 of
the Companies Act, 1956. As required by section 257 of the Companies Act, 1956,
a notice has been received from a member signifying his intention to propose
his appointment as a director. It is recommended that he be appointed as a
director”.
Explanatory statement accompanying
Item No. 8 is identical with the difference that it is in respect of the other
additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on the contents
of the notice in general and the explanatory notes in particular, Mr. Nariman
submits that there is compliance with the requirement of section 173 of the
Act. Mr. Nariman points out that under article 164 of the articles of
association of the company, at every annual general meeting of the company,
one-third of such of the directors for the time being as are liable to retire
by rotation or if their number is not three or a multiple of three, the number
nearest to one-third are to retire from office. The strength of the board was 8
and obviously the number of directors retiring by rotation will be two. Items
Nos. 3 and 4 in the notice in unmistakable terms give an indication of this
factual and legal position. As these items of business were not special there
was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8
constituted special business. The contents of these items conveyed to the body
of shareholders sufficient information about the proposal to fill up additional
posts. The two persons had acted as additional directors and they ceased to
hold office under section 260 of the Act on the day of the meeting. It is
stated that the company had received proposals about their appointment under
section 257 of the Act. It is implicit in this statement that the board wants
the company to consider the appointment of directors for two additional posts.
The explanatory statement contains one important additional particular. The
board of directors has made a recommendation that the two persons who have
acted as additional directors be appointed directors at the meeting, According
to Mr. Nariman the board has complied with the provisions of section 173 of the
Act.
Then Mr. Nariman argued
that in the present state of pleadings, it was not open to the plaintiffs to
raise any objections about the non-compliance with the requirement of section
173 of the Act. He says that the plaint nowhere refers to section 173 of the
Act. A fair reading of the plaint would show that the main grievance of the
plaintiffs was that no resolution was proposed or passed under section 258 of
the Companies Act read with article 169 of the articles of association of the
company about increasing the strength of the board of directors. According to
the plaintiffs the two resolutions appointing the appellants as directors are
not valid as they in effect increased the number of directors from 8 to 10
without an appropriate resolution being passed as required by section 258 of
the Act. This is the only grievance of the plaintiffs about the non-compliance
with the condition in section 258 of the Act. Mr. Nariman says that in view of
this specific case made out by the plaintiffs, there was no occasion for the
defendants to meet any other case about the illegality resulting from the
non-compliance with the provisions of section 173 of the Act. Mr. Nariman in
this connection heavily leaned upon a decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti
Prasad jain. The learned
judges of the Division Bench of that
High Court had to tackle a similar point about the sufficiency or otherwise of
the pleadings. While dealing with the issue No. 4(a) in that proceeding Misra
J., at page 202, in paragraph 17, observed as follows:
“The notice is challenged
as fraudulent and contrary to the statute. None of the grounds have been
pleaded. For the first time this contention appears to have been advanced in
course of argument before Mr. Justice Barman. In none of the affidavits the
petitioner swears that the notice was tricky, misleading or insufficient. The question
is one of mixed question of fact and law, and it is not permissible to be taken
at the stage of hearing for the first time”.
The learned judge certainly
refers later on to section 172(1) and section 173(2) of the Act. At page 214,
paragraph 58, Das J. observed as follows:
“At the outset, I must say
that the plea of invalidity of the notice was not taken either in the plaint
which was filed in the court of the subordinate judge or in the petitions and
affidavits before the honourable company judge of this court. At a fairly late
stage of the case, oral submissions were made challenging the validity of the
notice for the extraordinary general meeting of 29-3-1958. On that ground
alone, the point could have been left out of consideration”.
However, it must be stated
that the learned judges, despite the insufficiency of the pleadings, considered
the merits of the case, and held that the notice was in compliance with the
statutory requirements of section 173 of the Companies Act, as the meeting held
on the basis of such notice and the resolutions passed therein were not in any
way invalid. Mr. Nariman says that this authority has acquired additional
sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain
v. Kalinga Tubes Ltd.
Wanchoo J., at page 1545, paragraph 24, has observed as follows:
“It is, however, urged that
the notice for the general meeting of the 29th March, 1958, was not in
accordance with section 173, and so the proceedings of the meeting must be held
to be bad. This objection was, however, not taken in the petition and we have,
therefore, not permitted the appellant to raise it before us, as it is a mixed
question of fact and law. We may add that, though the objection was not taken
in the petition, it seems to have been urged before the appeal court. Das J.
has dealt with it at length and we would have agreed with him if we had
permitted the question to be raised”.
Relying on these decisions
Mr. Nariman maintained that the resolutions cannot be challenged on the ground
that the notice of the meeting and the explanatory statements accompanying the
notice were defective in any manner.
Mr. Nariman also submitted
that the provisions of section 173 were directory and not mandatory. Strict
compliance with section 173 was not necessary and there was in the present case
substantial compliance with the provisions of that section. It is for this
reason that, according to Mr. Nariman, any defect in the notice is capable of
being waived by the shareholders as the company had unanimously appointed the
appellants at the annual general meeting. If there were any averments in the
plaint setting out the various defects and irregularities in the drafting of
the notice and the explanatory statements, then it was open to the defendants
to adduce evidence and satisfy the court that the plaintiffs by their conduct
were stopped from objecting to the legality of the resolutions. As an instance
of the so-called irregularity, Mr. Nariman referred to In re Express
Engineering Works Ltd. It was
a case where the legality of the company’s meeting was challenged on the ground
that it was styled a directors’ meeting and business was transacted as if it
was a general meeting. The issue of debentures at the meeting W.I.P challenged as not valid. Younger
L.J. agreed with Lord Sterndale M.R., who held that the shareholders must be
deemed to have acted in the meeting as shareholders and not as directors. What
is stated by Younger L.J. at page 471 is to the following effect:
“I am of the same opinion.
I am content to rest my conclusion upon what was said by Lord Davey in
Solomon’s case that a
company is bound in a matter which is intra vires by the unanimous agreement of
all the corporators”.
But, this decision is not
of any assistance to us. A syndicate of five persons formed a private company.
They were all the directors and also shareholders. They all attended the
meeting and transacted business. The objection to the legality of the meeting
was rightly overruled.
Mr. Nariman then dwelt on
the case, In re Oxted Motor Company Ltd The court held that it was not open to a
creditor to impeach the validity of a resolution to wind up the company as it
was competent to the shareholders of the company acting together to waive the formalities
required by section 69 of the Companies (Consolidation) Act, 1908, as to notice
of intention to propose a resolution as an extraordinary resolution. Even this
decision will not carry us any further as in the present case everything turns
upon the interpretation of the words of section 173 of the Companies Act.
Then Mr. Thakkar for the
respondents submitted that section 173 was in terms mandatory and not
directory. He strongly relies upon a decision of the Gujarat High Court in
Sheth Mohanlal Ganpairam v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. Mr.
Thakkar pinpoints the following observations of Bhagwati J. (as he then was),
at page 338:
“The object of enacting section
173 is to secure that all facts which have a bearing on the question on which
the shareholders have to form their judgment are brought to the notice of the
shareholders so that the shareholders can exercise an intelligent judgment. The
provision is enacted in the interests of the shareholders so that the material
facts concerning the item of business to be transacted at the meeting are
before the share holders and they also know what is the nature of the concern
or interest of the management in such item of business, the idea being that the
share holders may not be duped by the management and may not be persuaded to
act in the manner desired by the management unless they have formed their own
judgment on the question after being placed in full possession of all material
facts and apprised of the interest of the management in any particular action
being taken. Having regard to the whole purpose and scope of the provision
enacted in section 173, I am of the opinion that it is mandatory and not
directory and that any disobedience of its requirements must lead to the
nullification of the action taken”.
Mr. Thakkar reinforced his
argument by reference to a Calcutta decision in
which it was held that it was incumbent on the directors to disclose in the
notice of the general meeting full facts. Before I refer to the relevant
observations of the learned judges, it is necessary to know in brief the facts
of that case. Section 294(2) of the Companies Act (as amended by Act 65 of
1960) provides that the appointment of a sole selling agent by the board of
directors shall cease to be valid if it is not approved by the company in the
first general meeting held after the date on which the appointment is made. The
court held that the provision was not directory but mandatory. The mere
substantial compliance was not enough but there must be a strict compliance.
The impugned agreement about the appointment was referred to in the report of
the directors and the same was adopted in the subsequent adjourned annual
general meeting. But the adoption or approval of the report was treated as
ordinary business and not as a special business. In the circumstances, the
learned judges allowed the appeal and granted ad-interim injunction against the
company and the directors restraining them from getting passed the resolution
in the ensuing annual general meeting of the company. At page 124 of the report
(Shalagram Jhajharia
v. National Co. Ltd.) Bose
C.J. has made the following observations after
quoting section 173(2) and (3) of the Act:
“So it appears that under
section 173(2) an explanatory note with regard to the special items of business
has to be annexed to the notice of the meeting; but this was not done with
regard to the agreement dated the 27th January, 1962. Therefore, there was no
compliance with the requirements of the statute inasmuch as it was incumbent
under the section, if any special business was to be transacted at the meeting,
to specify the nature of such business in the notice”.
Mitter J., at page 134,
dilates as follows on the importance of the statutory provision:
“The provision for inspection
of the agreement at the registered office of the company in terms of section
173(3) is not sufficient for the purposes of section 173(2)... As the
legislature has thought it fit to provide that shareholders must approve of the
appointment of selling agents the opportunity given to the shareholders must be
full and complete and there must be a full and frank disclosure of the salient
features of the agency agreement before the shareholders can be asked to give
their sanction. The provision for inspection of the agreement at the registered
office of the company
is not enough. Few shareholders have either the time or inclination to go to
the registered office to find out what the company is about to do. Moreover,
such an opportunity is illusory in the case of shareholders who do not live in
Calcutta, when the registered office is situate here”.
Coming
nearer home, Mr. Thakkar quotes a recent decision of this court in Firestone
Tyre and Rubber Co. v. Synthetics and Chemicals Ltd Madon J. reviewed the entire case law on
the subject while interpreting section 173(2) of the Act. I reproduce the
headnote which neatly summarises the conclusions of the learned judge:
“Under
section 173(2) of the Companies Act, where any items of business to be
transacted at the meeting are deemed to be special, there shall be annexed to
the notice of the meeting, a statement setting out all material facts
concerning each such item of business, including, in particular, the nature of
the concern or interest, if any, therein, of every director, the managing
agent, if any, the secretaries and treasurers, if any, and the manager, if any.
The object underlying section 173(2) is that the shareholders may have before
them all facts, which are material to enable them to form a judgment on the
business before them. Any fact which would assist them in making up their mind,
one way or the other, would be a material fact under section 173(2) and has to
be set out in the explanatory statement. This provision is mandatory and not
directory and disobedience to its requirements must lead to nullification of
the action taken”.
Then
Mr. Thakkar brought to my notice one more decision of the Calcutta High Court
in Shalagram Jhajharia v. National Company Ltd. It
must be noted that the subject-matter of the litigation in this case was an
impugned selling agency agreement which figured in the Calcutta decision cited
earlier by Mr. Thakkar. The plaintiff challenged the legality of the notice of
the annual general meeting on the ground that the explanatory statement
attached to the proposed ordinary resolution was in contravention of section
173 of the Act. On facts it was held that the explanatory statement was
misleading in relation to the facts stated and it did not disclose certain
other material facts. While concluding that the explanatory statement in that
case was bad and in violation of section 173 of the Act A.N. Ray J. indicated
the correct principle of law. He says at page 36:
“The
further question is whether the explanatory statement is in violation of
provisions contained in section 173 of the Companies Act.... It depends upon
the facts of each case as to whether an explanatory statement is tricky or
misleading”.
Ray
J. in Biswanath Prasad Khailan v. Neiv Central Jute Mills,
while considering the essentials of a valid notice convening an extraordinary general meeting, extracted two broad principles from the
authorities died before him. At page 135, he says:
“Two broad principles can
be extracted from the authorities: First, that notice must be fairly and
intelligently framed and it must not be misleading or equivocal. A benevolent
construction cannot be applied. Secondly, some matters must be brought
pointedly to the attention of the shareholders, for example, where the
directors are interested in a contract or matter which is to be submitted to a
meeting for confirmation or approval, it appears to be desirable and in certain
cases absolutely necessary to disclose the fact in the notice convening the
meeting or in some accompanying circular”.
In the wake of these
various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the
comments of the learned author of Law and Practice of Meetings by Frank
Shackleton, 5th edition. At page 27 under the caption “Special Business must be
clearly stated” the following requirements are noted:
“As to the essentials of a
notice, it must state clearly the nature of any special business to be
transacted, as no other business can be transacted in addition or otherwise,
unless the notice refers to ordinary business which it is competent for the
meeting to transact It is, however, always desirable to state clearly the
nature of any special business to be transacted, and if the regulations provide
for notice of such special business, any resolutions passed without due notice
will be invalid”.
To reiterate with emphasis
the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v.
Great Boulder Proprietary Gold Mines Ltd.
Article 102 of the articles of associations of the company provided as follows:
“If at any general meeting
at which an election of directors ought to take place the place of any director
retiring by rotation is not filled up, he shall, if willing, continue in office
until the ordinary meeting in the next year, and so on from year to year until
his place is filled up, unless it shall be determined at any such meeting on
due notice to reduce the number of directors in office”.
The question arose whether
the plaintiff, a retiring director, despite his failure to get re-elected,
continued in office. His claim was resisted on the ground that the company in
effect had at its meeting reduced the number of directors. Cohen L.J. overruled
the contention and held that the number of directors in office cannot be
reduced unless there was a specific resolution of the company to that effect
after a mention of the general nature of such a resolution has been made. The
concluding words of article
102 require a specific notice to that effect. Lord Greene M.R., at page 30 of
the report, clarifies the legal position in the following words:
“In
the present case counsel for the company argued that the company had, in
effect, determined to reduce the number of directors in office (a) by requiring
to reelect the retiring plaintiff, and (b) by not electing anybody to fill that
vacancy. I do not accept that argument. It. appears to me that the concluding
words of article 102 require a specific resolution, not merely to re-elect A,
but a specific resolution that nobody shall be elected to fill the vacancy”.
It
must be noted that the absence of due notice and a specific resolution was
linked up with certain legal consequences, for instance, continuation of the
retiring director in office. It was mostly on account of the peculiar wording
of article 102 that the court held that a proper resolution after due notice of
the proposed special business was absolutely necessary.
Then
Mr. Thakkar cited a decision in Tiessen v. Henderson . The
relevant part of the headnote of that case may be stated:
“The
notice of an extraordinary general meeting must disclose all facts necessary to
enable the shareholder receiving it to determine in his own interest whether or
not he ought to attend the meeting; and pecuniary interest of a director in the
matter of a special resolution to be proposed at the meeting is a material fact
for this purpose”.
While
restraining the company by an ad-interim injunction from acting upon or
carrying into effect certain special resolutions for reconstruction alleged to
have been passed and confirmed at its extraordinary general meetings, the
learned judge, Kekewich J., has made rather strong remarks at page 866 of the
report:
“The
application of the doctrine of Foss v. Harbottle to joint stock companies involves as a
necessary corollary the proposition that the vote of the majority at a general
meeting, as it binds both dissentient and absent shareholders, must be a vote
given with the utmost fairness—that not only must the matter be fairly put
before the meeting, but the meeting itself must be conducted in the fairest
possible manner”.
Then,
at pages 870-871, the learned judge makes a further observation:
“If
a meeting properly convened, and properly instructed as to the purpose for
which it is convened, chooses to assent to this, there is no reason why it
should not do so; but I think it ought to have the opportunity of considering
the point. The man I am protecting is not the dissentient, but the absent
shareholder—14 the man who is absent because, having received and
with more or less care looked at this circular, he comes to the conclusion that
on the whole he will not oppose the scheme, but leave it to the majority. I
cannot tell whether he would have left it to the majority of the meeting to
decide if he had known the real facts. He did not know the real facts; and,
therefore, I think the resolution is not binding upon him”.
Now,
I may sum up what emerges from these various authorities cited by Mr. Thakkar.
Bearing in mind the object of the legislature, I must say that section 173 is
mandatory and not directory. It is in the interest of the general body of
shareholders that the legislature has made provisions in section 173(2)
requiring the notice of a meeting to set out a statement containing all
material facts concerning each special item of business. A notice of meeting
when it contains items of special business within the meaning of section
173(1)(b) must disclose all the material facts. All the shareholders must be in
a position to make up their mind in advance whether they will attend the meeting
or leave it to the good sense of the majority at the meeting. Any
non-compliance with this requirement will nullify the action taken at the
meeting. While considering the efficacy of any such notice, a benevolent
construction will not be adopted so as to defeat the provisions of the statute.
It is also clear that whether or not a particular notice or an explanatory
statement in a given case complies with the statutory requirement is a question
of fact. There are two ways in which the mandatory provisions contained in
section 173 may be contravened. It may be a case where no explanatory statement
is at all appended to the item of a special business, or it may be a case where
the statement is incomplete, misleading or tricky. The contravention may be the
result of an act of omission or an act of commission. Whatever be the nature of
the contravention, the question always is a mixed question of fact and law.
When a challenge is made in a court of law the court will have to consider all
the facts and circumstances of the case and then decide one way or the other.
As
the contravention alleged by the plaintiffs in this case is a mixed question of
law and fact, the pleadings certainly assume importance. Mr. Nariman has made a
point, as stated above, that the pleadings give no indication that the
plaintiffs ever alleged any contravention of section 173. As the resolution is
challenged on the ground of breach of section 258 in particular and the
provisions of the Companies Act in general, there is certainly some difficulty
in permitting the plaintiffs to raise this point.
Mr.
Thakkar has not accepted the position that the plaint does not contain
sufficient averments. He has pointed out from the plaint and the written
statement that the pleadings certainly give an indication that the plaintiffs
wanted to challenge the legality of the action on the ground of either want of
or a defective resolution. Mr. Thakkar relied upon the averments in paragraph 7
of the plaint. The plaintiffs have averred that before
increasing the number of directors under section 258 of the Act and article 169
of the articles of association, a resolution ought to have been passed after
due compliance with the requirements of the provisions of the Companies Act.
Mr. Thakkar says that though the plaintiffs have alleged contravention of the
Companies Act, they have by implication referred to the requirements of an
explanatory statement under section 173 of the Act. Then Mr. Thakkar also read
out portions of the written statement of the appellants, particularly
paragraphs 9 and 10, which, according to Mr. Thakkar, show that the defendants
were aware of the challenge made by the plaintiffs to the legality of the
resolutions on the various grounds. Even apart from the pleadings, according to
Mr. Thakkar, the parties were aware of all the relevant facts and the point
about the applicability of section 173 of the Act. In this connection reliance
was also placed on the affidavits filed at the interlocutory stage in support
of the notice of motion taken out for interim relief. Plaintiffs had in their
affidavits referred to the defective explanatory statement and said that there
is non-compliance with the requirements of section 173. A reference was also
made to the appeal memo. (A.O. No. 436 of 1970) filed by the respondents in
this court against the interlocutory order. After considering all these
submissions, I am of the opinion that Mr. Thakkar can at best show in this case
that there is no explanatory note at all accompanying the item of special
business. But, the averments referred to above are certainly insufficient to
cover a plea that the explanatory statement appended to the notice of the
meeting about the special business is insufficient or misleading. Any such plea
about insufficiency of the explanatory statement is very much like the plea of
fraud. It is well-settled that the plea of fraud must be substantiated by all
relevant particulars disclosed in the pleadings.
Then I have to deal with
the points raised by Mr. Thakkar that in the present case there is no
explanatory statement and, therefore, there is a clear contravention of the
provisions of section 173 of the Act. Mr. Thakkar says that there was no
proposal in so many words about the increase of the number of directors. There
was no such item in the notice. Therefore, there was no occasion for any
explanatory statement.
I have already referred to
the contents of the items Nos. 3, 4, 7 and 8 in the notice of meeting. Items
Nos. 3 and 4 refer to ordinary business inasmuch as the directors retiring by
rotation were to be re-elected. The permanent strength of the board of
directors was 8. Under article 164 of the articles of association of the
company, the number nearest to one-third had to retire from office. Items Nos.
3 and 4 certainly indicate that the company was to fill up the two vacancies
caused by the retirement of the directors by rotation. Now, items Nos. 7 and 8
state that the board had appointed two additional directors on 10th April, 1969.
Those directors will cease to hold office under section 260 of the Act on
the date of the meeting, Notices, as required under section 257 of the Act,
have been received by the company proposing the candidature of these additional
directors at the meeting. This information about the item of business has to be
considered along with the corresponding explanatory statement. The explanatory
statement virtually restates what is contained in items Nos. 7 and 8. One
additional particular is also mentioned and that is the recommendation of the
board of directors that the named persons be appointed as directors. Items Nos.
7 and 8 along with the explanatory statement certainly convey to the
shareholders that the board of directors have made a proposal that two more
additional directors be appointed at the meeting and if possible the two named
persons be elected to fill up those additional posts. In my opinion this is
nothing short of a proposal to increase the strength of the board of directors
from 8 to 10. Mr. Thakkar tried to show that all this information has nothing
to do with the proposal to increase the number of directors. But, despite his
best efforts, he was not in a position to convince me that all this information
was in connection with some other intelligible topic, I have not been able to
place any other construction on items Nos. 7 and 8, and in my opinion the
plaintiffs have failed to make out a case that there is no information at all
about the proposed special business accompanied by the required explanatory
statement.
Then Mr. Thakkar argued that
at any rate the court must hold that the information given along with the
explanatory note is wholly misleading. Mr. Thakkar pointed out that the board
of directors has nowhere indicated in the notice or the explanatory statement
as to why it had made a proposal for increasing the number of directors.
Mr. Nariman, on the other
hand, submitted that the board can only disclose known reasons and it is not in
a position to disclose the unknown reasons. I do not find any substance in
either of these contentions. In the absence of a pleading in fact, Mr. Thakkar
cannot subsequently show that there was no reason contained in the statement
about the proposed increase. In my opinion the statement is a comprehensive and
compendious statement. The board has in a way indicated the reasons for the
increase. It has stated that it was required to appoint two men of their
confidence as additional directors. It is implicit in this action and the
statement that the company needed their services. This is followed by a recommendation
by the board that the two named persons be appointed to fill up the additional
posts. This is sufficient reason for the proposed increase. A shareholder,
after reading this information, can certainly form an intelligent judgment and
make up his mind one way or the other. He may either choose to attend the
meeting or leave it to the good sense of the majority of the voters. As the
plaint does not show in what way the explanatory statement is defective, there
is no reason to further examine the so-called defect pointed out by Mr.
Thakkar. Mr. Nariman’s distinction between known and unknown reasons is also
very far from convincing. One acts only for known reasons. Acting without
reasons is a leap in the dark and, therefore, there is never any occasion for
giving unknown reasons. But, I must make it clear that under section 173(2)
material facts will not necessarily include the reasons. It will all depend
upon the nature of the subject-matter which constitutes the special business.
Sometimes the facts stated are sufficiently eloquent and there is no need to
justify the proposed action by giving reasons. In the absence of sufficient
pleadings, the plaintiffs in the present case cannot challenge the statements
contained in the notice and the explanatory statement on the ground that the
particulars are insufficient and/or misleading. In the result I disagree with
the finding of the learned judge and hold that there is no contravention of the
provisions of section 173 of the Companies Act.
Then Mr. Thakkar argued
that the learned judge was in error in holding that the additional directors,
like the retiring directors, are not required to file any written consent duly
signed by them before their reappointment by the company. This question
involves the interpretation of section 264(1) of the Act. Section 264(1), as it
originally stood in 1956, has gone through a process of one or two amendments.
Before I consider the point and the various possible interpretations of section
264, it will be necessary to state a few more facts.
On April 9, 1969, there was
a move for appointing the appellants as additional directors. On the same day
two letters were separately addressed by the appellants to the company. The
letters purported to be consent in writing duly signed under section 264(1) of
the Act. The appellants have indicated their consent to act as a director of
the company if appointed. On April 10, 1969, the board of directors appointed
the appellants as additional directors under section 260 of the Act. On April 10,
1969, separate proposals by two members were made in favour of the appointment
of the appellants as directors at the ensuing meeting. Defendant No. 1, the
company, in its written statement, has stated that after the receipt of the
letters of consent dated April 9, 1969, the appellants were appointed as
additional directors. Mr. Thakkar referred to Form No. 29, which was submitted
on April 26, 1969, that is, long before the annual general meeting of the
company. All these facts and circumstances, according to Mr. Thakkar, show that
the letters of consent were, in fact, filed by the appellants in connection
with their appointment as additional directors. The learned judge has accepted
this position. But, Mr. Nariman for the appellants is challenging this finding.
I may not consider this controversy at this stage
As
stated above, it will be necessary to point out the legislative changes before
I consider section 264 in its present form. Section 264 as originally enacted
read as follows:
“(1) A person who is not a retiring director
shall not be capable of being appointed director of a company unless he has, by
himself or by his agent authorised in writing, signed and filed with the
Registrar, a consent in writing to act as such director.
(2) Sub-section (1)
shall not apply to a private company unless it is a subsidiary of a public
company”.
The
provision as enacted required all persons who desired to be considered for
appointment as directors to file a written consent before their appointment.
The consent had to be given before the appointment as without such consent the
person was not capable of being appointed and he could not be considered a
qualified or a fit person for appointment as director. Only one person was
exempted from this condition and that was a retiring director. It was not
necessary for him to file any consent before his reappointment as a director.
Then as a result of the amending Act 65 of 1960, a new section 264 was
substituted with effect from December 28, 1960. The new section reads as under:
“264.(1) Every person (other than a person who has left
at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other
than a director reappointed after retirement by rotation shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar, his consent in writing to act as such
director.
(3) This section
shall not apply to a private company unless it is a subsidiary of a public
company”.
The
significant change in the wording is the deletion of the words “shall not be
capable of being appointed”. Section 264(1) dispenses with the formal consent
in the case of a person who has proposed himself as a candidate for the office
of a director under section 257 of the Act. Subsection (2) requires all persons
newly appointed as directors to file with the Registrar within 30 days of their
appointment a consent in writing to act as a director. Sub-section (2) makes it
clear that, unless such a consent is filed, the person appointed shall not act
as a director.
Thereafter,
by Act No. 31 of 1965, the section is substantially amended and I have to
consider the section so amended. The section, in the present form, is as
follows;
“264. (1) Every
person (other than a director retiring by rotation or otherwise or a person who
has left at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other
than—
(a) a director reappointed after retirement by
rotation or immediately on the expiry of his term of office, or
(b) an additional or alternate director, or a
person filling a casual vacancy in the office of a director under section 262,
appointed as a director or reappointed as an additional or alternate director,
immediately on the expiry of his term of office, or
(c) a
person named as a director of the company under its articles as first
registered,
shall not act as a director
of the company unless he has within thirty days of his appointment signed and
filed with the Registrar his consent in writing to act as such director.
(3) This section shall not apply to a private
company unless it is a subsidiary of a public company”.
The
first point debated before me by counsel on either side is whether section 264
is directory or mandatory. As the point is not covered by any direct authority,
the counsel had to rely upon their original submissions and they have also
referred to decisions which deal with the construction of statutes.
Mr.
Thakkar says that the section is mandatory because the condition referred to in
the section of filing a written consent is a condition precedent to the valid
appointment. The consent required under section 264 is to be in writing and
duly signed. Section 264(1) provides that the person who is a candidate for the
office of a director shall file his consent in the prescribed form to act as a
“director, if appointed. Mr. Thakkar says that the use of the expression
“shall” indicates that the section is mandatory. Mr. Thakkar invited my
attention to a number of judicial decisions about the interpretation of
statutes. He relied upon a decision of the Supreme Court in Aswini Kumar Ghose
v. Arabinda Bose for the proposition that if the specific words
used by the legislature are clear then for interpretation the courts could not
rely upon the statement of objects and reasons. Patanjali Shastri C.J., at page
378 (paragraph 32), has made the following observations:
“As
regards the propriety of the reference to the statement of objects and reasons,
it must be remembered that it seeks only to explain what reasons induced the
mover to introduce the bill in the House and what objects he sought to achieve. But, those objects and
reasons may or may not correspond to the objective which the majority of
members had in view when they passed it into law. The Bill may have undergone
radical changes during its passage through the House or Houses, and there is no
guarantee that the reasons which led to its introduction and the objects
thereby sought to be achieved have remained the same throughout till the Bill
emerges from the House as an Act of the legislature, for they do not form part
of the Bill and are not voted upon by the members. We, therefore, consider that
the statement of objects and reasons appended to the Bill should be ruled out
as an aid to the construction of a statute”.
But Mr. Thakkar admitted
that the rigour of the rule laid down in the above-mentioned case was relaxed
in a subsequent decision of the Supreme Court in Commissioner of Income-tax v. Smt. Sarda Devi ,
where Bhagwati J., at page 835, says:
“It is clear that unless
there is any such ambiguity it would not be open to the court to depart from
the normal rule of construction which is that the intention of the legislature
should be primarily gathered from the words which are used. It is only when the
words used are ambiguous that they would stand to be examined and construed in
the light of surrounding circumstances and constitutional principle and
practice”.
At page 839, a further rule
of construction of statute is stated:
“Though it is not
legitimate to refer to the statement of objects and reasons as an aid to the
construction or for ascertaining the meaning of any particular word used in the
Act or statute (see Aswini Kumar Ghose v. Arabinda Bose),
nevertheless this court in Stale of West Bengal v. Subodh Gopal Bose ,
referred to the same ‘ for the limited purpose of ascertaining the conditions
prevailing at the time which actuated the sponsor of the Bill to introduce the
same and the extent and urgency of the evil which he sought to remedy.’ “
Mr. Thakkar says that it is
the primary rule of construction that the statute should be interpreted without
looking into any other extraneous circumstances. It is only when there is some
ambiguity that, as stated by the Supreme Court, reference may be made to the
objects and reasons for the limited purpose of finding out the particular
reason which prompted the legislature to pass that enactment.
Then Mr. Thakkar referred
to the rule which, in the judicial parlance, is recognised as the golden rule
of construction of statutes. The statement of the rule by Burton J. in
Warburton v. Lovelavd is reproduced by the learned author in
Bindra’s Interpretation of Statutes, 5th edition, at page 71, and is to the
following effect:
“I apprehend it is a rule
in the construction of statutes that, in the first instance, the grammatical
sense of the words is to be adhered to. If that is contrary to, or inconsistent
with any expressed intention, or any declared purpose of the statute, or if it
would involve any absurdity, repugnance or inconsistency, the grammatical ser
se must then be modified, extended or abridged so far as to avoid such
inconvenience, but no further”.
The following passage in
Chapter XIII from Maxwell on the Interpretation of Statutes, 12th edition, page
314, also lays down a sound principle:
“It is impossible to lay
down any general rule for determining whether a provision is imperative or
directory. ‘No universal rule’, said Lord Campbell L.C can be laid down for the construction of
statutes, as to whether mandatory enactments shall be considered directory only
or obligatory, with an implied nullification for disobedience. It is the duty
of courts of justice to try to get at the real intention of the legislature by
carefully attending to the whole scope of the statute to be construed.’ And
Lord Penzance said: ‘I
believe, as far as any rule is concerned, you cannot safely go further than
that in each case you must look to the subject-matter; consider the importance
of the provision that has been disregarded, and the relation of that provision
to the general object intended to be secured by the Act; and upon a review of
the case in that aspect decide whether the matter is what is called imperative
or only directory”.
Viewed in the light of
these principles, the section, in my opinion, appears to be directory in so far
as the person who desires to be a candidate for the office of a director would
be required to file his consent. The object of the legislature is evident when
one considers the various amendments made by the legislature before the section
was enacted in the present form. Those who have once acted as directors were
only seeking reappointment. It was considered throughout that the formal
consent on their part was not necessary. It is very clear as to why such a
condition was found necessary. It may be that a person who is appointed as a
director may refuse to act on the ground that he had never consented to act as
a director. When such a flaw is discovered later on and the appointment will
have to be ignored as ineffective, the company will have to take again further
steps for filling the post of such director. Ordinarily, a person appointed as
a director is not likely to refuse to act. In a rare case, he may do so. It is
only to avoid the attending inconvenience that the legislature has prescribed
the condition. In the section as originally worded, somewhat strong language
was used. It was enacted that a person shall not be capable of being appointed
as a director unless he had filed earlier his consent in writing to act as such
director. The deletion of these words in the subsequent amended form of the
section is not without significance. Perhaps the legislature thought that the
condition was given comparatively more importance when it was introduced in the
section. If this is the only object which the legislature sought to achieve by
prescribing a prior consent in writing then there is no reason why the absence
of consent in all cases should invalidate the appointment. Even without a
consent a person appointed may accept the appointment and prefer to act as a
director. This is likely to happen in a majority of cases. Considering the
section as a whole and bearing in mind the object of the legislature and
magnitude of the mischief intended to be avoided, I hold that section 264(1) is
clearly directory and not mandatory. I am only interpreting section 264(1) of
the Act and it is not necessary to pronounce any opinion about section 264(2).
Whether it is mandatory or directory will have to be decided in a suitable
case. But, I cannot help expressing my opinion that the difference in the
language has certainly assisted me in reaching my conclusion about the
directory nature of section 264(1) of the Act. The consent under section 264(2)
which is to be filed with the Registrar is a condition precedent for acting as
a director. The sub-section provides that a person, who is being appointed for
the first time as a director, shall not act as a director of the company unless
he has filed the consent within the prescribed time. No argument is necessary
for saying that the sub-section is mandatory.
Then Mr. Thakkar submitted
that the learned judge was in error in holding that there is realty no
difference between the retiring director and the additional director while
considering the application of section 264(1) of the Act. As all the relevant
points were urged before me I had to consider them and give my decision
accordingly. In fact when I found that the section is directory it is
sufficient for the final disposal of the appeal but these are all points of law
touching the interpretation of section 264(1) as a whole and, therefore, I must
consider each point urged by the counsel separately.
That takes me to the
interpretation of the key words in section 264(1) “or otherwise”. The learned
judge while considering these words has relied on the dictionary meaning of the
expression “retire”. A person retires when he ceases to hold a particular
office. There is no difference between retiring by rotation and retiring by
ceasing to hold office. The additional directors appointed under section 260
hold office only up to the date of the next annual general meeting. In other
words, they cease to hold office before the date of the next annual general
meeting. Mr, Thakkar says that the learned judge was not right in reaching this
conclusion. According to Mr. Thakkar there is material difference between the
two sets of directors. Mr. Thakkar points out that under section 256(1) of the
Act certain proportion of directors retire by rotation. Under section 256(2)
the directors retire by rotation at every annual general meeting, whereas under
section 260, first proviso, the additional director holds office only up to the
date of the next annual general meeting of the company. In other words, the
additional director ceases to hold office earlier and thereafter the retiring
director who vacates the office at the meeting remains in office for at least a
short duration. Mr. Thakkar says that this distinction between the tenure of
the two classes of directors is recognised even under the English law. Mr.
Thakkar has relied on a decision in Eyre v. Milton Proprietary Ltd. The court in that case was required to
consider the exact connotation of two articles 85 and 90 of the articles of
association of the company. The court had to decide the meaning of the
expression “of the whole number of directors” in article 85. That was necessary
to determine the number of directors who had to retire in a particular year.
There was no doubt that the expression “whole number of directors” did not
include the managing director. Article 90 provided that the board may from time
to time appoint additional directors but any director so appointed shall hold
office only until the next following ordinary general meeting of the company,
and shall then be eligible for re-election. The point for consideration
depended for its answer on the words of article 85 as compared with the words
of article 90 and, in particular, certain later words of article 85. According
to the court there must be some point of time at which it was to be ascertained
as to who are the whole number of directors to whom must be applied the
provision relating to retirement. That point of time was to be at the ordinary
general meeting. It was clear from article 90 that at the annual general
meeting the two additional directors will not be in office as they were to hold
office only until the next following ordinary general meeting of the company.
At the commencement of the ordinary general meeting they will be no longer in
office. But, the retiring directors and the other continuing directors will act
as directors throughout the meeting. In others words, they would constitute the
total number of directors for deciding the proportion of the directors
retiring. Romer L.J., at page 257, sums up the legal position in the following
words:
“I agree that in the
circumstances the number of directors to be considered is the number of
directors existing at the moment when the ordinary general meeting begins, and
inasmuch as at the particular moment that it begins the two directors elected
under article 90 cease to be directors, the number of directors then must be
taken to be five and not seven”.
Mr. Thakkar relies on this
decision for underlining a similar distinction between the directors retiring
by rotation at every annual general meeting and the additional directors
holding office only up to the date of the next annual general meeting. Mr.
Thakkar says that when the legislature has used the expressions like “retiring”
and “holding office” up to a particular point of time, the court will have to
interpret the different words in a different way. In support of this rule of
interpretation he relies on a decision of this court in East and West Insurance Co. Ltd. v. Mrs.
Kamala Jayantilal Mehta.
Chief Justice, Chagla, who delivered the
judgment of the Bench, says at page 543:
“Now, the normal canon of construction
either of a statute or of articles of association is that when different
expressions are used they are intended to connote something different”
There cannot be any dispute
about this rule of interpretation. Giving full effect to the rule it only means
that a retiring director ceases to hold office later than the additional
director. The difference in the duration of their tenure is brought out by the
legislature by using appropriate expressions. But, it will not be correct to
carry this distinction too far. While interpreting the words appearing in
section 264, the expression “retiring by rotation” has to be understood in
conjunction with or along with the other key words “otherwise”. These two
expressions certainly are used for covering or for including different sets of
directors who cease to hold office. We know very well what is meant by a
director retiring by rotation. Section 256(1) provides that at the first annual
general meeting one-third of the directors for the time being as are liable to
retire by rotation, or if their number is not three or a multiple of three,
then the number nearest to one-third, shall retire from office. Then the
question arises on a literal interpretation of the words as to who are the
other directors who otherwise retire, that is, retire otherwise than by
rotation. Mr. Thakkar says that the articles of association of a company may
provide that all the directors en bloc shall retire and in that case the
company might appoint directors to fill up all the vacancies. Mr. Thakkar has
not been able to indicate any other class of directors who will be covered by
the expression “or otherwise”. He maintained that under section 256(1) a
company may by its articles provide that a certain proportion of directors will
ever remain in office and only the remaining directors will wholly retire and
it is to cover such a class of directors retiring In this manner that the
expression “or otherwise” is used by the legislature in section 264(1) of the
Act.
It is difficult to accept
this interpretation of section 256(1). Section 256(1) provides:
“....one-third of such of
the directors for the time being as are liable to retire by rotation, or if
their number is not three or a multiple of three, then, the number nearest to
one-third, shall retire from office”.
In the illustration given
by Mr. Thakkar, certain fixed number of directors will remain in office
permanently and the others will retire, so as to enable the company to fill up
those vacancies. Those who are retiring in this manner are, according to Mr.
Thakkar, not retiring by rotation. I am not prepared to accept this
interpretation of section 256(1) of the Act. When few of the directors retire
in the manner indicated in section 256(1) of the Act, then they are retiring by
rotation. If the articles so provide, all the directors may retire and that
retirement certainly will not be covered by the expression “retiring by
rotation”. On a reference to the Shorter Oxford Dictionary, volume II: N-Z, 3rd
edition, revised with addenda, I find that the adverb “otherwise” means in
another way or in other ways. Whether the expression “otherwise” would include
one or more classes is not clear. At any rate, the expression is somewhat
equivocal. In such a case I will be justified in following the dictum laid down
by the Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhanvadia . The
Supreme Court in that case, while interpreting certain articles of the
Constitution, relied upon the statement of objects and reasons. The Supreme
Court had to decide whether certain provisions were directory or mandatory. As
the provisions themselves were not clear, reliance was placed on the statement
of objects and reasons for finding out the intention of the legislature. I may
reproduce the following passage from the judgment of Mitter J. which appears at
page 769, paragraph 11, of the report:
“The above cases are
sufficient to show that non-compliance with the provisions of a statute or Constitution
will not necessarily render a proceeding invalid if by considering its nature,
its design and the consequences which follow from its non-observance one is not
led to the conclusion that the legislature or the Constitution-makers intended
that there should be no departure from the strict words used”.
So, in other words, while
interpreting the words or even while departing from the strict words used, the
court may find out the intention of the legislature by referring to the
statement of objects and reasons. Mr. Nariman rightly says that relying on this
decision one can look at the notes on clauses preceding the amendment of
section 264 of the Act. (See Gazette of India, Extraordinary, Part II, sec. 2, 1964, dated
September 21, 1964). Clause 32 reads as under:
“Section 264 requires that
a person proposed as a candidate for the office of director shall file with the
company his consent to act as director, if appointed. It also requires that a
person other than a director re-appointed after retirement by rotation shall
not act as director unless he has filed with the Registrar his consent in
writing to act as such. This amendment seeks to exempt persons who have served
as directors in the immediate preceding term from these requirements. It is
felt that in the case of such persons the requirement to file their consent in
writing is a formality which could well be dispensed with”.
Clause 32 shows in
unmistakable terms as to why the exceptions were enacted to dispense with the
filing of consent in certain cases. No such consent either under section 264(1)
or sub-section (2) was necessary in the case of persons who had immediately
before the reappointment acted as directors. Considering the object of the
amendment there is no reason why the additional directors who are expressly
exempted from the requirement of filing a consent under section 264(2) should
be excluded while construing a somewhat similar exemption under section 264(1)
of the Act. In my opinion the expression “otherwise” covers all the other directors
who for one reason or the other cease to hold office and are immediately
thereafter reappointed as directors. For these reasons I hold that the learned
judge was right when he recorded a finding that additional directors are not
required to file any written consent under section 264 of the Act, as a
condition precedent for the validity of their re-appointment.
Then Mr. Nariman submitted
that no such consent under section 264(1) is required for appointment of any
person as an additional director under section 260 of the Act. He relies on the
wording of section 264(1), viz.:
“Every
person.......proposed as a candidate for the office of a director shall sign
and file with the company, his consent in writing to act as a director, if
appointed”.
These words, according to
Mr. Nariman, indicate that the consent contemplated is referable to the
candidature of the person for the office of director. That can only be at the
meeting of the company in which directors are appointed by unanimous or
majority vote of the shareholders. Mr. Nariman says that section 260 confers
power on the board of directors’ to appoint additional directors when so
permitted by the articles of association of the company. Neither in section 260
nor anywhere in the articles of the company are there provisions requiring the
person to file his consent before his appointment as additional director. A
closer reading of section 264(1) furnishes one more reason in support of the
interpretation suggested by Mr. Nariman. One of the persons, who is exempted
from the condition of filing such a consent, is one who has left at the office
of the company a notice under section 257 signifying his candidature for the
office of a director. This clearly shows that the provision about consent is in
connection with the appointment of directors at the meeting of the company.
Even the consent that is prescribed is to be in writing to act as a director,
if appointed. There are no such words to show that the consent is given to act
as a director or an additional director. These various expressions used by the
legislature certainly indicate that section 264(1) does not in any manner
regulate the appointment of additional directors under section 260 of the Act.
It is not disputed before
me nor was there any dispute before the learned judge about the fact that there
is one set of written consent filed in this case on behalf of the appellants.
It is not necessary to resolve the controversy whether it was with reference to
the appointment as an additional director or with reference to the
reappointment as a director. If no consent was required for any appointment
under section 260 that consent, if filed, will be redundant. It is true that
the company by its written statement has taken up a contention that after
receipt of these consents the appellants were appointed is additional
directors. Mr. Thakkar also submitted that that may be accepted or a fact in view of the various facts
and circumstances mentioned above. But, the appellants in their written
statement have pleaded that these written consents certainly validated their
appointment in the general meeting. Once it is found as a fact that no consent
was required for the appellants’ appointment as additional directors, then
there is no reason why the appellants should not be allowed to rely upon the
letters of consent, when the validity of their appointment is challenged by the
plaintiffs. Letters of consent were to be filed duly signed by the persons
concerned with the company. They are so signed and filed with the company.
There are no words used in the letters to indicate that they had given the
consent only to act as additional directors, if appointed. In the absence of
any such restrictive words, it can be fairly assumed that they gave their
consent in writing not only to act as additional directors, if appointed, but
also to act as directors, if appointed. In my opinion even for this additional
reason the appointment of the appellants cannot be challenged.
The last point raised in
the present appeal is about the maintainability of the suit. Mr. Nariman,
consistent with the appellants’ stand in the lower court, submits that the
plaintiffs have come to the court with certain grievances about the
irregularities committed by the company while appointing the appellants as directors.
Mr. Nariman relied upon a decision of this court in V.N. Bhajekar v. K.M.
Shinkar.
It was a suit by the shareholders challenging irregularities committed by the
directors. It was held that such a suit was not competent. The headnote
indicates that there
are certain recognised exceptions to the rule that mere irregularities
committed during the course of the management of the internal affairs of the
company do not furnish any cause of action to the shareholders. The relevant
headnote is to the following effect:
“The
supremacy of the majority of shareholders is subject to certain exceptions,
viz.:
(1) Where
the act complained of is ultra vires the company;
(2) where
the act complained of is a fraud on the minority; and
(3) where there is an absolute necessity to
waive the rule in order that there may not be a denial of justice”.
Mr.
Nariman submits that the present case is not covered by any one of these three exceptions.
The appellants were appointed directors by an unanimous resolution passed by at
the meeting of the company. The plaintiffs after a long lapse of time had no
reason to rush to the court for any relief. It is not an act which is patently
illegal or ultra vires the company. But, I find it difficult to accept this
contention of Mr. Nariman. I have already held that section 173 is mandatory
and not directory. Any non-compliance with the provisions of section 173 will
result in the nullification of the Act. The plaintiffs have alleged that there
was contravention of section 258 of the Indian Companies Act, as there was no
valid resolution proposing the increase in the number of directors. It may be
that the plaintiffs have not eventually succeeded in the suit. In view of the
findings recorded by me, it cannot be said that the suit as framed is not
competent. In my opinion the plaintiffs’ case will be covered by the first of
the three exceptions mentioned above. The learned judge was, therefore, right when
he held that the suit as framed was maintainable.
Mr.
Buch with Mr. Munshi, who appeared for respondent No. 3-company, submits to the
orders of this court.
In
the result the appeal is allowed, the judgment and decree of the lower court is
set aside and the plaintiffs’ suit is dismissed with costs throughout.
Respondents Nos. 1 and 2 will not be liable to pay the costs of respondent No.
3 throughout.
[1973] 43 Comp. Cas. 17 (Bom.)
HIGH COURT OF
v.
Lalji B. Desai
S.B. BHASME, J.
July 26
and 27, 1971
F.S. Nariman for the appellants.
G.A. Thakkar with A.N.
Mody, D.H. Buck with G.K. Munshi for the respondent.
Bhasme, J.—This is an
appeal by defendants Nos. 2 and 3 and is directed against the judgment and
decree passed in the suit filed by respondents Nos. 1 and 2 against the
appellants and respondent No. 3. The suit was for a permanent injunction
restraining respondent No. 3 and its directors, servants and agents from
allowing the appellants to act as directors of the respondent No. 3-company. A
similar injunction was also claimed against the appellants restraining them
from acting in any manner as the directors of the respondent No. 3-company.
Respondent No. 3 is a
public limited company registered under the Indian Companies Act and carries on
business, inter alia, as manufacturer of rayon yarn and has its registered
office at
The plaintiffs by the suit
challenged the legality of the appointment of the appellants on certain
grounds. According to the plaintiffs the number of directors on the board can
be increased by the company under section 258 of the Indian Companies Act by
passing a resolution. No such resolution was ever duly notified, proposed and
passed. In the absence of any such resolution, respondent No. 3-company had not
the power to appoint the appellants as directors. The plaintiffs submit that
resolution Nos. 5 and 6 are, therefore, invalid, void and of no effect.
The plaintiffs also submit
that without prejudice to the aforesaid ground, the appointment of the appellants
as directors was illegal, void and of no effect as they had not filed letters
of consent under section 264(1) of the Act in respect of their proposed
appointment as directors at the annual general meeting. The plaintiffs, as
shareholders of respondent No. 3-company, have the right to property in
respondent No. 3-company. It is for this reason that they had filed the suit
restraining the appellants from acting as directors of respondent No.
3-company.
Respondent No. 3-company filed
its written statement and submitted that the appointment of the appellants as
directors was valid and legal. It has stated that a separate resolution to
increase the number of directors was not required under the provisions of the
law. The company also stated in paragraph 12(a) of the written statement that
on 9th April, 1969, the appellants had filed their letters of consent to act as
directors, if appointed. After receipt of these letters the appellants were
appointed as directors. It is mentioned in the written statement that after
their appointment as additional directors on 10th April, 1969, two shareholders
delivered to the company notices under section 257 of the Act intending to
propose the appellants as candidates for the office of the directors of
respondent No. 3-company at the next annual general meeting of the company. The
appellants were not required to file any letters of consent under section
264(1) of the Act before their election as directors at the 22nd annual general
meeting. According to the company the appellants were validly proposed and
elected as directors.
The appellants between
themselves filed one written statement and supported the validity of their
appointment on all the grounds alleged by respondent No. 3-company. In addition
the appellants stated that on their appointment as additional directors, the
strength of the board was increased to 10 directors. In paragraph 8 of the
written statement it is submitted that they were not required to file any
letters of consent under section 264(1) of the Act before their appointment as
directors at the meeting. Without prejudice to this defence it is also pleaded
that they did file the letters of consent on 9th April, 1969, with respondent
No. 3-company. They argued that, as additional directors, they were persons to
whom section 264(1) of the Act did not apply. Assuming that there was any such
requirement, it is asserted that it was a mere irregularity and that did not
disable them from acting or functioning as directors. The made it clear that it
was implicit in the two resolutions appointing them as directors that the
number of directors was, if necessary, being increased. According to them no
separate resolution under section 258 or article 169 of the articles of
association of the company was necessary for increasing the number of directors
from 8 to 10. At any rate, the absence of any separate resolution will not
affect the validity of the resolution appointing them as directors of
respondent No. 3-company. They denied that it is mandatory under section 258 of
the Companies Act or under article 169 of the articles of association of the
company that before the number of directors is increased, a resolution
increasing the number of directors ought to have been duly notified or proposed
or passed. There were other allegations made by the appellants against the
plaintiffs but for deciding the points raised in this appeal they are not at
all relevant. As the parties had not sought any issues on the basis of those
allegations, the learned judge was not called upon to consider whether they
were true or false. The substance of those allegations was that according to
the appellants the plaintiffs had filed the suit mala fide at a late stage at
the instance of one Rasiklal J. Chinai who was defeated in the contest for
election of directors at the general meeting of the shareholders of respondent
No. 3-company.
At the trial the learned
judge framed the relevant issues. Parties did not lead any oral evidence. By
consent of the parties only documents were exhibited. The defendants had also
resisted the suit on the ground that the plaintiffs being shareholders cannot
have any grievance against respondent No. 3-company as the matter in dispute
was concerning the internal management of the company and the suit by the two
shareholders was not maintainable. Perhaps it was felt by the parties that the
issues arising in the suit are purely questions of law and it was not necessary
to adduce any oral evidence.
The learned judge, on a
consideration of the evidence on record and the submissions of the parties, has
recorded his findings. He held that the present suit is maintainable. He came
to the conclusion that the letters of consent under section 264(1) of the Act
for the appointment of the appellants as directors at the annual general
meeting were not necessary. In view of this finding he held that whether or not
such letters were filed need not be considered. According to him the impugned
resolutions Nos. 5 and 6 passed at the annual general meeting of the company on
June 11, 1969, appointing the appellants as directors of the company were
illegal. Consistent with this finding the learned judge decreed the plaintiff’s
suit and granted the injunctions against respondent No. 3-company and the
appellants.
As stated above the
appellants, aggrieved by the decree, have come to this court with the present
appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody,
instructed by M/s. Haridas & Co., appears for respondents Nos. 1 and 2, the
original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi, instructed by M/s.
Bhaishankar Kanga and Girdharilal,
appears for respondent No. 3-company. It must be stated at the outset that
respondents Nos. 1 and 2 have purported to file cross-objections against the
finding recorded by the learned judge about the consent letters under section
264(1) of the Act. Mr. Thakkar conceded that the cross-objections are
misconceived but mentioned that he had the right, as an advocate appearing for
the respondents, to assail the decree under appeal on any of the grounds
decided against him. Therefore, the points for determination in this appeal
are:
(1) Whether the board of directors of
the company before and after the annual’ general meeting consisted of ten
members or whether at the annual general meeting the strength of the board of
directors was increased from 8 to 10.
(2) Whether the company can increase the
strength of the board of directors only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts.
(3) Has the board of directors
contravened the mandatory provisions of section 173 of the Act by not
furnishing any information about the proposed special business or by furnishing
information, which is hopelessly inadequate or misleading?
(4) Can the plaintiffs rely on the above
contraventions in any form without specific averments in the plaint?
(5) Has the learned judge erred in
holding that the additional directors, like the retiring directors, are not
required to file written consent duly signed before their reappointment as
directors by the company?
(6) Is the suit not competent as the
alleged irregularities arise in the course of the internal management of the
company?
Before
I proceed to consider the various points urged before me, it is desirable to
refer to the relevant provisions of the Companies Act, 1956, and the articles
of association of respondent No. 3-company.
Section
2(13) of the Companies Act defines “director” as any person occupying the position
of director, by whatever name called. Section 255 provides for the appointment
of directors and the proportion of those who are to retire by rotation. Section
256 contains provisions for ascertainment of directors retiring by rotation and
filling up of the vacancies. Under section 257 a person who is not a retiring
director shall be eligible for appointment to the office of director if he or
some member intending to propose him has, not less than fourteen days before
the meeting, left at the office of the company a notice in writing under his
hand signifying his candidature for the office of director or the intention of
such member to propose him as a candidate for that office. The other provisions
of section 257 are not quite relevant and need not be referred to here.
Under section 358 of the
Act, subject to the provisions of sections 252 255 and 259, a company in
general meeting may, by ordinary resolution, increase or reduce the number of
its directors within the limits fixed in that behalf by its articles. Section
259 in certain cases requires the sanction or approval of the Central
Government for any increase in the number of its directors. Section 260
provides that the board of directors, if permitted by the articles of
association, can appoint additional directors. The board is to exercise that
power so as not to exceed the maximum strength fixed for the board by the
articles. The first proviso to section 260 makes it clear that such additional
directors shall hold office only up to the date of the next annual general
meeting of the company. Section 262 deals with the filling of casual vacancies
amongst directors. Under section 263(1) ordinarily there will be only one
resolution for the appointment of one director at the annual general meeting of
the company. A single resolution is permitted under certain special
circumstances for appointing more than one director. Section 263(2) provides
that a resolution moved in contravention of sub-section (1) shall be void,
whether or not objection was taken at the time to its being so moved. Section
264(1) under certain circumstances requires that the candidate for directorship
should file his written consent with the company before his appointment as
director at the meeting. Section 264(2) requires that a person appointed as a
director shall not act as a director unless he has within the prescribed time
signed and filed his consent with the Registrar to act as such director.
Apart from the group of
these sections, there are two more sections, which assume importance while
deciding the points, which arise in this appeal. Section 172 requires that
every notice of a meeting of a company shall contain certain relevant
particulars. Leaving the other details, I must only mention that under section
172(1) such notice shall contain a statement of business to be transacted at
the meeting. Under section 173(1)(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of the business relating to four specified items. Item No 3 deals
with the appointment of directors in the place of those retiring. Section 173
(1)(b) makes it clear that in the case of any other meeting, all business shall
be deemed special. Section 173(2) contains a direction that where any items of
business to be transacted at the meeting are deemed to be special under
sub-section (1), there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each such item of business,
including in particular the nature of the concern or interest, if any, therein
of every director, the managing agent, if any, the secretaries and treasurers,
if any, and the manager, if any. The proviso also requires further and better
particulars in specified cases. It is not necessary to refer to that proviso at
any length.
Now it remains to mention the relevant articles of association of the company. Under article 142, the directors have power at any time and from time to time to appoint any other qualified person to be a director as an addition to the board so that the total number of directors at any time shall not exceed the maximum fixed. Any person so appointed as an addition to the board shall retain his office only up to the date of the next annual general meeting but shall be eligible for re-election at such meeting. Under article 164, at every annual general meeting of the company, one-third of such of the directors for the time being as are liable to retire by rotation or, if their number is not three or a multiple of three, the number nearest to one-third shall retire from office. Article 166 makes it clear that a retiring director shall be eligible for re-election. It is true that counsel on either side did refer to other sections and articles to elucidate the various points raised by them. I need not consider them all at this stage.
The
first point made by Mr. Nariman on behalf of the appellants is about the
strength of the board of directors of the company. He objected to the
expression “functioning directors” and “additional directors” as used by the
plaintiffs in the plaint. He said that there is no warrant for any such
distinction. Whether the directors are appointed at the meeting or by the board
of directors, they all together constitute the board. The directors in that
capacity have the same rights, privileges and obligations under the provisions
of the Act. He referred to the definition of “director” as contained in section
2(13) of the Companies Act. In all other places in the Act the board of
directors was mentioned as such and he says that the distinction sought to be
made by the plaintiffs is without any legal significance. It appears to me that
the plaintiffs have used the different expressions only for a better
understanding of their case. The appellants were, in the first instance,
appointed as additional directors and later on they were reappointed as
directors. But, apart from this fine distinction in phraseology, the point of
substance made by Mr. Nariman is that the company had not increased the number
of directors from 8 to 10 at the annual general meeting by the reappointment of
the appellants. When the board of directors in exercise of their power under
section 260 of the Act co-opted the appellants, the number of directors on the
board was increased from 8 to 10. Even at the meeting the number was not
reduced. The two directors retired by rotation and the two additional directors
ceased to hold office. There were, therefore, four clear vacancies. When the
company passed four resolutions reappointing the four persons as directors
there was no increase and the provisions of section 258 are not attracted. I
find it very difficult to accept this submission. The composition of the board
of directors with additional directors will not be the same as the board of directors appointed by the company at the general meeting.
It cannot be said that the company had at any time surrendered its inherent or
statutory power to increase the number of directors on the board when the board
appointed or co-opted additional directors. As observed by Lord Hanworth M.R.
in Worcester Corsetry Limited v. Witting, the
power conferred on the directors to appoint additional directors is a temporary
power vested in them, and this is to be reviewed and perhaps confirmed at the
general meeting. Even the wording of section 260 underlines the temporary
nature of this power conferred on the board of directors. Section 260, first
proviso, makes it clear that such directors shall hold office only up to the
date of the next annual general meeting. It is true that under article 142 of
the company, the board of directors can appoint any number of additional
directors at any time and from time to time so as not to exceed the permitted
maximum limit. Consistent with the first proviso to section 260, the article
also makes it clear that the person so appointed as an addition to the board
shall remain in office only up to the date of the next annual general meeting. I
am of the view that the board of directors cannot by the appointment of
additional directors increase the strength of the board so as to affect the
power of the company vested in it under section 258 of the Act.
Then Mr. Nariman argued
that the learned judge was not justified in holding that the company can
increase the strength of the board only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts. I have not used the exact words of the learned judge but in
substance that appears to be the finding recorded by him. According to Mr.
Nariman all that section 258 requires is that the company, subject to the other
restrictions imposed on it, must resolve to increase or reduce the number of
directors in the general meeting. The section itself has not prescribed any
other formality for effecting the increase or decrease in the number of
directors. Mr. Nariman points out that under the Companies Act, wherever
separate resolutions were found necessary, provisions were made in that behalf.
He referred to section 263 of the Act. I have already mentioned above the
substance of that section. Ordinarily, there will be a separate resolution for
appointing a person as a director at the annual general meeting of the company.
Mr. Nariman says that the company can exercise the power vested in it under
section 258 by passing one or more resolutions and as no form is prescribed,
one will have to look at the substance. When there are 8 members on the board
of directors, the company can by simply appointing two members in addition
increase the number and this can be done without passing a separate resolution.
He says that it is implicit in the act of appointing. The company has exercised
the power to increase the number.
While dealing with this
power of the company to increase the number, Mr. Nariman referred to the
corresponding English law and submitted that the provisions are substantially
similar. Mr. Nariman relied on an English case, Worcester Corsetry v. Witting. The
learned judges were considering the effect of two apparently inconsistent
articles of the company. But, as the case also dealt with the power of the
company to appoint directors and thereby increase the number, it has some
relevance while appreciating the point raised before me. Article 83 of Table A
contained the provisions similar to section 258 of the Indian Companies Act. At
page 649, Lawrence L.J. observes as follows about the existence of the power to
increase and its exercise by the company:
“Article 83 of Table A
shows in the plainest terms that the company has power to increase or reduce
the number of its board. It is said that that does not involve the nomination
and appointment of particular gentlemen or ladies as directors, but it seems to
me that that is necessarily implied in the provision of article 83. If, for
instance, there have been four directors, within the maximum number of
directors, and the board desire that two additional directors shall be
appointed, it can convene, in my judgment, a meeting under article 83 for the
purpose of increasing the number of directors by two named persons, appointing
these two persons, and thereby increasing the number of directors”.
Slesser L.J., at page 654,
approves the above observations and says:
“The more natural view of
article 83 is that it is not redundant or merely introducing unnecessary machinery
which is already provided by article 12 in dealing with the maximum and
minimum, but, as Lawrence L.J. has indicated, is itself conferring a power not
only to increase the number but to increase that number by itself appointing
directors to the extent to which it is intended to increase the number”.
About the power of the
company to increase the number of directors under its articles of association,
the learned author in his book Pennington’s Company Law, 2nd edition, pages
456-57, sums up the legal position as under:
“The power to appoint
subsequent directors is usually exercisable by the members of the company in
general meeting by ordinary resolution. If the articles prescribe the maximum
number of directors who may be appointed, appointments in excess of the maximum
are void. Usually, however, the members are empowered to increase or reduce the
maximum number of directors by ordinary resolution, and then an appointment of
a director in excess
of the former maximum is taken to be an exercise of the power to increase the
number of directors, and is valid”.
While
making the last-mentioned observation, the learned author in the footnote has
referred to the above-mentioned case. So Mr. Nariman argued that section 258
was an enabling section, which authorised the company to increase or decrease
the number of directors just by an ordinary resolution. As singular includes
plural, one has to look at the result and not the number of resolutions to find
out whether the company has exercised the power vested in it.
Mr.
Thakkar, with equal force, stressed the word “resolution” and said that it was
a condition precedent to the valid appointment of directors resulting in the
increase of the number of directors. Any other construction, he says, will
render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish
the said decision on certain grounds. He says that article 83 construed by the
learned judges refers to a general meeting. Section 258 of the Companies Act
provides that the company may in general meeting by ordinary resolution
increase or reduce the number of its directors. In my opinion this distinction
is not one of substance. Any such difference in the wording will not affect in
any manner the efficacy of the observations made by the learned judges in the
above-mentioned case.
Then
Mr. Thakkar was at pains to point out that no such point was ever raised and
debated in that case. The observations of the judges quoted above are merely
obiter dicta. Mr. Thakkar says that the judges were reconciling the two
apparently conflicting articles which conferred the power of appointing
directors on the board of directors and the company. He referred to several
text books on Company Law, viz., Pennington’s Company Law, 2nd edition, page
456-57, Modern Company Law by C.B. Gower, 3rd edition, page 21, Palmer’s
Company Law, page 533, Halsbury’s Laws of England, volume 6, page 279, article
574, Buckley on the Companies Act, 13th edition, page 885, and submitted
that the above-mentioned authority was quoted by the learned authors to show
that the company had not surrendered its power to appoint directors in favour
of the board of directors. But, the decision is not cited by Mr. Nariman as a
binding authority on this court. Mr. Nariman relies only on the wording of the
article considered by the judges, which resembles the wording of section 258.
Under both the provisions the company has the power to increase the number of
directors. When the company at its meeting resolves to appoint additional
directors in excess of the present strength of the board, then it is an
instance where the company is exercising its two-fold powers. The company
increases the number not by separate resolution but by appointing additional
directors. The effect is that the company has increased the number of
directors. That appears to be a sensible construction which can be adopted
while interpreting the relevant provisions contained in section 258 of the
Companies Act, 1956. In the result, in my opinion, it is not necessary for the
company to pass a separate resolution increasing the number of directors before
appointing the directors to fill the additional sanctioned posts. In law it is
possible for the company to comply with the provisions of section 258 when it
chooses to appoint within the permitted limit additional directors so as to
increase the strength of its present board. The learned judge was in error in
coming to the conclusion that in the absence of a separate resolution the
appointment of the appellants as directors of respondent No. 3-compauy was null
and void. The legality of the resolutions Nos. 5 and 6 cannot be challenged on
the ground that there was any contravention of the provisions of section 258 of
the Act.
Then
I propose to consider points Nos. 3 and 4 together as the discussion of law is
likely to be overlapping. Point No. 3 will involve the consideration of the
provisions of sections 172 and 173 of the Act and point No. 4 is about the
sufficiency or otherwise of the pleadings.
I
have already set out above the relevant provisions of section 173 of the Act.
Section 173 will have to be read with section 172(1) of the Act. Under section
172(1) every notice of a meeting of a company, among other things, must contain
a statement of the business to be transacted at the meeting. Section 173(1)
contains classification of the business and indicates when the business shall
be treated as special. Under section 173(2) any items of special business
mentioned in the notice must be accompanied by a statement setting out all
material facts concerning such items of business.
Mr.
Nariman for the appellants drew my attention to the notice of the meeting,
which is produced at exhibit D at page 90 of the paper book. It is worth while
to reproduce the material items of business:
Serial
No. 3
To
elect a director in the place of Shri Kasturbhai Lalbhai who retires by
rotation under article 164 of the articles of association of the. company, but
being eligible, offers himself for re-election.
Serial
No. 4
To
elect a director in the place of Shri Naval H. Tata, who retires by rotation
under article 164 of the articles of association of the company, but being
eligible, offers himself for re-election.
Serial
No. 7
To
appoint a director in place of Shri Laljibhai Chhaganlal Kapadia, who was
appointed an additional director of the company by the board of directors on
10th April, 1969, and who ceases to hold office under section 260 of the
Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act,
1956, has been received by the company.
Serial
No. 8
To appoint a director in
place of Shri Nimjibhai Chhanganlal Kapadia who was appointed an additional
director of the company by the board of directors on 10th April, 1969, and who
ceases to hold office under section 260 of the Companies Act, 1956, on the date
of this meeting in respect of whom a notice as required by section 257 of the
Companies Act, 1956, has been received by the company.
Items Nos. 3 and 4
constitute ordinary business and Items Nos. 7 and 8 constitute special business
within the meaning of section 173 of the Act, Being special business Items Nos.
7 and 8 are followed up by explanatory statements contained in an annexure to
the notice. Explanatory statement accompanying Item No. 7 read as under:
“Shri Laljibhai Chhaganlal
Kapadia was appointed an additional director on 10th April, 1969, by the board
of directors of the company and he retains his office as a director only up to
the date of this annual general meeting under the provisions of section 260 of
the Companies Act, 1956. As required by section 257 of the Companies Act, 1956,
a notice has been received from a member signifying his intention to propose
his appointment as a director. It is recommended that he be appointed as a director”.
Explanatory statement
accompanying Item No. 8 is identical with the difference that it is in respect
of the other additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on
the contents of the notice in general and the explanatory notes in particular,
Mr. Nariman submits that there is compliance with the requirement of section
173 of the Act. Mr. Nariman points out that under article 164 of the articles
of association of the company, at every annual general meeting of the company,
one-third of such of the directors for the time being as are liable to retire
by rotation or if their number is not three or a multiple of three, the number
nearest to one-third are to retire from office. The strength of the board was 8
and obviously the number of directors retiring by rotation will be two. Items
Nos. 3 and 4 in the notice in unmistakable terms give an indication of this
factual and legal position. As these items of business were not special there
was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8
constituted special business. The contents of these items conveyed to the body
of shareholders sufficient information about the proposal to fill up additional
posts. The two persons had acted as additional directors and they ceased to
hold office under section 260 of the Act on the day of the meeting. It is
stated that the company had received proposals about their appointment under
section 257 of the Act. It is implicit in this statement that the board wants
the company to consider the appointment of directors for two additional posts.
The explanatory statement contains one important additional particular. The
board of directors has made a recommendation that the two persons who have
acted as additional directors be appointed directors at the meeting, According
to Mr. Nariman the board has complied with the provisions of section 173 of the
Act.
Then Mr. Nariman argued
that in the present state of pleadings, it was not open to the plaintiffs to
raise any objections about the non-compliance with the requirement of section
173 of the Act. He says that the plaint nowhere refers to section 173 of the
Act. A fair reading of the plaint would show that the main grievance of the
plaintiffs was that no resolution was proposed or passed under section 258 of
the Companies Act read with article 169 of the articles of association of the
company about increasing the strength of the board of directors. According to
the plaintiffs the two resolutions appointing the appellants as directors are
not valid as they in effect increased the number of directors from 8 to 10
without an appropriate resolution being passed as required by section 258 of
the Act. This is the only grievance of the plaintiffs about the non-compliance
with the condition in section 258 of the Act. Mr. Nariman says that in view of
this specific case made out by the plaintiffs, there was no occasion for the
defendants to meet any other case about the illegality resulting from the
non-compliance with the provisions of section 173 of the Act. Mr. Nariman in
this connection heavily leaned upon a decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti
Prasad jain. The learned
judges of the Division Bench of that
High Court had to tackle a similar point about the sufficiency or otherwise of
the pleadings. While dealing with the issue No. 4(a) in that proceeding Misra
J., at page 202, in paragraph 17, observed as follows:
“The notice is challenged
as fraudulent and contrary to the statute. None of the grounds have been
pleaded. For the first time this contention appears to have been advanced in
course of argument before Mr. Justice Barman. In none of the affidavits the
petitioner swears that the notice was tricky, misleading or insufficient. The
question is one of mixed question of fact and law, and it is not permissible to
be taken at the stage of hearing for the first time”.
The learned judge certainly
refers later on to section 172(1) and section 173(2) of the Act. At page 214,
paragraph 58, Das J. observed as follows:
“At the outset, I must say
that the plea of invalidity of the notice was not taken either in the plaint
which was filed in the court of the subordinate judge or in the petitions and affidavits
before the honourable company judge of this court. At a fairly late stage of
the case, oral submissions were made challenging the validity of the notice for
the extraordinary general meeting of 29-3-1958. On that ground alone, the point
could have been left out of consideration”.
However, it must be stated
that the learned judges, despite the insufficiency of the pleadings, considered
the merits of the case, and held that the notice was in compliance with the
statutory requirements of section 173 of the Companies Act, as the meeting held
on the basis of such notice and the resolutions passed therein were not in any
way invalid. Mr. Nariman says that this authority has acquired additional
sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain
v. Kalinga Tubes Ltd.
Wanchoo J., at page 1545, paragraph 24, has observed as follows:
“It is, however, urged that
the notice for the general meeting of the 29th March, 1958, was not in
accordance with section 173, and so the proceedings of the meeting must be held
to be bad. This objection was, however, not taken in the petition and we have,
therefore, not permitted the appellant to raise it before us, as it is a mixed
question of fact and law. We may add that, though the objection was not taken
in the petition, it seems to have been urged before the appeal court. Das J.
has dealt with it at length and we would have agreed with him if we had
permitted the question to be raised”.
Relying on these decisions
Mr. Nariman maintained that the resolutions cannot be challenged on the ground
that the notice of the meeting and the explanatory statements accompanying the
notice were defective in any manner.
Mr. Nariman also submitted
that the provisions of section 173 were directory and not mandatory. Strict
compliance with section 173 was not necessary and there was in the present case
substantial compliance with the provisions of that section. It is for this
reason that, according to Mr. Nariman, any defect in the notice is capable of
being waived by the shareholders as the company had unanimously appointed the
appellants at the annual general meeting. If there were any averments in the
plaint setting out the various defects and irregularities in the drafting of
the notice and the explanatory statements, then it was open to the defendants
to adduce evidence and satisfy the court that the plaintiffs by their conduct
were stopped from objecting to the legality of the resolutions. As an instance
of the so-called irregularity, Mr. Nariman referred to In re Express
Engineering Works Ltd. It was
a case where the legality of the company’s meeting was challenged on the ground
that it was styled a directors’ meeting and business was transacted as if it
was a general meeting. The issue of debentures at the meeting W.I.P challenged as not valid. Younger
L.J. agreed with Lord Sterndale M.R., who held that the shareholders must be
deemed to have acted in the meeting as shareholders and not as directors. What
is stated by Younger L.J. at page 471 is to the following effect:
“I am of the same opinion.
I am content to rest my conclusion upon what was said by Lord Davey in
Solomon’s case that a
company is bound in a matter which is intra vires by the unanimous agreement of
all the corporators”.
But, this decision is not
of any assistance to us. A syndicate of five persons formed a private company.
They were all the directors and also shareholders. They all attended the
meeting and transacted business. The objection to the legality of the meeting
was rightly overruled.
Mr. Nariman then dwelt on
the case, In re Oxted Motor Company Ltd The court held that it was not open to a
creditor to impeach the validity of a resolution to wind up the company as it
was competent to the shareholders of the company acting together to waive the
formalities required by section 69 of the Companies (Consolidation) Act, 1908,
as to notice of intention to propose a resolution as an extraordinary
resolution. Even this decision will not carry us any further as in the present
case everything turns upon the interpretation of the words of section 173 of
the Companies Act.
Then Mr. Thakkar for the
respondents submitted that section 173 was in terms mandatory and not directory.
He strongly relies upon a decision of the Gujarat High Court in Sheth Mohanlal
Ganpairam v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. Mr.
Thakkar pinpoints the following observations of Bhagwati J. (as he then was),
at page 338:
“The object of enacting
section 173 is to secure that all facts which have a bearing on the question on
which the shareholders have to form their judgment are brought to the notice of
the shareholders so that the shareholders can exercise an intelligent judgment.
The provision is enacted in the interests of the shareholders so that the
material facts concerning the item of business to be transacted at the meeting
are before the share holders and they also know what is the nature of the
concern or interest of the management in such item of business, the idea being
that the share holders may not be duped by the management and may not be
persuaded to act in the manner desired by the management unless they have
formed their own judgment on the question after being placed in full possession
of all material facts and apprised of the interest of the management in any
particular action being taken. Having regard to the whole purpose and scope of
the provision enacted in section 173, I am of the opinion that it is mandatory
and not directory and that any disobedience of its requirements must lead to
the nullification of the action taken”.
Mr. Thakkar reinforced his
argument by reference to a Calcutta decision in
which it was held that it was incumbent on the directors to disclose in the
notice of the general meeting full facts. Before I refer to the relevant
observations of the learned judges, it is necessary to know in brief the facts
of that case. Section 294(2) of the Companies Act (as amended by Act 65 of
1960) provides that the appointment of a sole selling agent by the board of
directors shall cease to be valid if it is not approved by the company in the
first general meeting held after the date on which the appointment is made. The
court held that the provision was not directory but mandatory. The mere
substantial compliance was not enough but there must be a strict compliance. The
impugned agreement about the appointment was referred to in the report of the
directors and the same was adopted in the subsequent adjourned annual general
meeting. But the adoption or approval of the report was treated as ordinary
business and not as a special business. In the circumstances, the learned
judges allowed the appeal and granted ad-interim injunction against the company
and the directors restraining them from getting passed the resolution in the
ensuing annual general meeting of the company. At page 124 of the report (Shalagram Jhajharia v. National
Co. Ltd.)
Bose C.J. has made the following observations
after quoting section 173(2) and (3) of the Act:
“So it appears that under
section 173(2) an explanatory note with regard to the special items of business
has to be annexed to the notice of the meeting; but this was not done with
regard to the agreement dated the 27th January, 1962. Therefore, there was no
compliance with the requirements of the statute inasmuch as it was incumbent
under the section, if any special business was to be transacted at the meeting,
to specify the nature of such business in the notice”.
Mitter J., at page 134,
dilates as follows on the importance of the statutory provision:
“The provision for
inspection of the agreement at the registered office of the company in terms of
section 173(3) is not sufficient for the purposes of section 173(2)... As the
legislature has thought it fit to provide that shareholders must approve of the
appointment of selling agents the opportunity given to the shareholders must be
full and complete and there must be a full and frank disclosure of the salient
features of the agency agreement before the shareholders can be asked to give
their sanction. The provision for inspection of the agreement at the registered
office of the company
is not enough. Few shareholders have either the time or inclination to go to
the registered office to find out what the company is about to do. Moreover,
such an opportunity is illusory in the case of shareholders who do not live in
Calcutta, when the registered office is situate here”.
Coming
nearer home, Mr. Thakkar quotes a recent decision of this court in Firestone
Tyre and Rubber Co. v. Synthetics and Chemicals Ltd Madon J. reviewed the entire case law on
the subject while interpreting section 173(2) of the Act. I reproduce the
headnote which neatly summarises the conclusions of the learned judge:
“Under
section 173(2) of the Companies Act, where any items of business to be
transacted at the meeting are deemed to be special, there shall be annexed to
the notice of the meeting, a statement setting out all material facts concerning
each such item of business, including, in particular, the nature of the concern
or interest, if any, therein, of every director, the managing agent, if any,
the secretaries and treasurers, if any, and the manager, if any. The object
underlying section 173(2) is that the shareholders may have before them all
facts, which are material to enable them to form a judgment on the business
before them. Any fact which would assist them in making up their mind, one way
or the other, would be a material fact under section 173(2) and has to be set
out in the explanatory statement. This provision is mandatory and not directory
and disobedience to its requirements must lead to nullification of the action
taken”.
Then
Mr. Thakkar brought to my notice one more decision of the Calcutta High Court
in Shalagram Jhajharia v. National Company Ltd. It
must be noted that the subject-matter of the litigation in this case was an
impugned selling agency agreement which figured in the Calcutta decision cited
earlier by Mr. Thakkar. The plaintiff challenged the legality of the notice of
the annual general meeting on the ground that the explanatory statement
attached to the proposed ordinary resolution was in contravention of section
173 of the Act. On facts it was held that the explanatory statement was
misleading in relation to the facts stated and it did not disclose certain
other material facts. While concluding that the explanatory statement in that case
was bad and in violation of section 173 of the Act A.N. Ray J. indicated the
correct principle of law. He says at page 36:
“The
further question is whether the explanatory statement is in violation of
provisions contained in section 173 of the Companies Act.... It depends upon
the facts of each case as to whether an explanatory statement is tricky or
misleading”.
Ray
J. in Biswanath Prasad Khailan v. Neiv Central Jute Mills,
while considering the essentials of a valid notice convening an extraordinary general meeting, extracted two broad principles from the
authorities died before him. At page 135, he says:
“Two broad principles can
be extracted from the authorities: First, that notice must be fairly and
intelligently framed and it must not be misleading or equivocal. A benevolent
construction cannot be applied. Secondly, some matters must be brought
pointedly to the attention of the shareholders, for example, where the
directors are interested in a contract or matter which is to be submitted to a
meeting for confirmation or approval, it appears to be desirable and in certain
cases absolutely necessary to disclose the fact in the notice convening the
meeting or in some accompanying circular”.
In the wake of these
various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the
comments of the learned author of Law and Practice of Meetings by Frank
Shackleton, 5th edition. At page 27 under the caption “Special Business must be
clearly stated” the following requirements are noted:
“As to the essentials of a
notice, it must state clearly the nature of any special business to be
transacted, as no other business can be transacted in addition or otherwise,
unless the notice refers to ordinary business which it is competent for the
meeting to transact It is, however, always desirable to state clearly the
nature of any special business to be transacted, and if the regulations provide
for notice of such special business, any resolutions passed without due notice
will be invalid”.
To reiterate with emphasis
the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v.
Great Boulder Proprietary Gold Mines Ltd.
Article 102 of the articles of associations of the company provided as follows:
“If at any general meeting
at which an election of directors ought to take place the place of any director
retiring by rotation is not filled up, he shall, if willing, continue in office
until the ordinary meeting in the next year, and so on from year to year until
his place is filled up, unless it shall be determined at any such meeting on
due notice to reduce the number of directors in office”.
The question arose whether
the plaintiff, a retiring director, despite his failure to get re-elected,
continued in office. His claim was resisted on the ground that the company in
effect had at its meeting reduced the number of directors. Cohen L.J. overruled
the contention and held that the number of directors in office cannot be
reduced unless there was a specific resolution of the company to that effect
after a mention of the general nature of such a resolution has been made. The
concluding words of
article 102 require a specific notice to that effect. Lord Greene M.R., at page
30 of the report, clarifies the legal position in the following words:
“In
the present case counsel for the company argued that the company had, in
effect, determined to reduce the number of directors in office (a) by requiring
to reelect the retiring plaintiff, and (b) by not electing anybody to fill that
vacancy. I do not accept that argument. It. appears to me that the concluding
words of article 102 require a specific resolution, not merely to re-elect A,
but a specific resolution that nobody shall be elected to fill the vacancy”.
It
must be noted that the absence of due notice and a specific resolution was
linked up with certain legal consequences, for instance, continuation of the
retiring director in office. It was mostly on account of the peculiar wording
of article 102 that the court held that a proper resolution after due notice of
the proposed special business was absolutely necessary.
Then
Mr. Thakkar cited a decision in Tiessen v. Henderson . The
relevant part of the headnote of that case may be stated:
“The
notice of an extraordinary general meeting must disclose all facts necessary to
enable the shareholder receiving it to determine in his own interest whether or
not he ought to attend the meeting; and pecuniary interest of a director in the
matter of a special resolution to be proposed at the meeting is a material fact
for this purpose”.
While
restraining the company by an ad-interim injunction from acting upon or
carrying into effect certain special resolutions for reconstruction alleged to
have been passed and confirmed at its extraordinary general meetings, the
learned judge, Kekewich J., has made rather strong remarks at page 866 of the
report:
“The
application of the doctrine of Foss v. Harbottle to joint stock companies involves as a
necessary corollary the proposition that the vote of the majority at a general
meeting, as it binds both dissentient and absent shareholders, must be a vote
given with the utmost fairness—that not only must the matter be fairly put
before the meeting, but the meeting itself must be conducted in the fairest possible
manner”.
Then,
at pages 870-871, the learned judge makes a further observation:
“If
a meeting properly convened, and properly instructed as to the purpose for
which it is convened, chooses to assent to this, there is no reason why it
should not do so; but I think it ought to have the opportunity of considering
the point. The man I am protecting is not the dissentient, but the absent
shareholder—14 the man who is absent because, having received and
with more or less care looked at this circular, he comes to the conclusion that
on the whole he will not oppose the scheme, but leave it to the majority. I
cannot tell whether he would have left it to the majority of the meeting to
decide if he had known the real facts. He did not know the real facts; and, therefore,
I think the resolution is not binding upon him”.
Now,
I may sum up what emerges from these various authorities cited by Mr. Thakkar.
Bearing in mind the object of the legislature, I must say that section 173 is
mandatory and not directory. It is in the interest of the general body of
shareholders that the legislature has made provisions in section 173(2)
requiring the notice of a meeting to set out a statement containing all
material facts concerning each special item of business. A notice of meeting
when it contains items of special business within the meaning of section
173(1)(b) must disclose all the material facts. All the shareholders must be in
a position to make up their mind in advance whether they will attend the
meeting or leave it to the good sense of the majority at the meeting. Any
non-compliance with this requirement will nullify the action taken at the
meeting. While considering the efficacy of any such notice, a benevolent
construction will not be adopted so as to defeat the provisions of the statute.
It is also clear that whether or not a particular notice or an explanatory
statement in a given case complies with the statutory requirement is a question
of fact. There are two ways in which the mandatory provisions contained in
section 173 may be contravened. It may be a case where no explanatory statement
is at all appended to the item of a special business, or it may be a case where
the statement is incomplete, misleading or tricky. The contravention may be the
result of an act of omission or an act of commission. Whatever be the nature of
the contravention, the question always is a mixed question of fact and law.
When a challenge is made in a court of law the court will have to consider all
the facts and circumstances of the case and then decide one way or the other.
As
the contravention alleged by the plaintiffs in this case is a mixed question of
law and fact, the pleadings certainly assume importance. Mr. Nariman has made a
point, as stated above, that the pleadings give no indication that the
plaintiffs ever alleged any contravention of section 173. As the resolution is
challenged on the ground of breach of section 258 in particular and the
provisions of the Companies Act in general, there is certainly some difficulty
in permitting the plaintiffs to raise this point.
Mr.
Thakkar has not accepted the position that the plaint does not contain
sufficient averments. He has pointed out from the plaint and the written
statement that the pleadings certainly give an indication that the plaintiffs
wanted to challenge the legality of the action on the ground of either want of
or a defective resolution. Mr. Thakkar relied upon the averments in paragraph 7
of the plaint. The plaintiffs have averred that before
increasing the number of directors under section 258 of the Act and article 169
of the articles of association, a resolution ought to have been passed after
due compliance with the requirements of the provisions of the Companies Act.
Mr. Thakkar says that though the plaintiffs have alleged contravention of the
Companies Act, they have by implication referred to the requirements of an
explanatory statement under section 173 of the Act. Then Mr. Thakkar also read
out portions of the written statement of the appellants, particularly
paragraphs 9 and 10, which, according to Mr. Thakkar, show that the defendants
were aware of the challenge made by the plaintiffs to the legality of the
resolutions on the various grounds. Even apart from the pleadings, according to
Mr. Thakkar, the parties were aware of all the relevant facts and the point
about the applicability of section 173 of the Act. In this connection reliance
was also placed on the affidavits filed at the interlocutory stage in support
of the notice of motion taken out for interim relief. Plaintiffs had in their
affidavits referred to the defective explanatory statement and said that there
is non-compliance with the requirements of section 173. A reference was also
made to the appeal memo. (A.O. No. 436 of 1970) filed by the respondents in
this court against the interlocutory order. After considering all these
submissions, I am of the opinion that Mr. Thakkar can at best show in this case
that there is no explanatory note at all accompanying the item of special
business. But, the averments referred to above are certainly insufficient to
cover a plea that the explanatory statement appended to the notice of the
meeting about the special business is insufficient or misleading. Any such plea
about insufficiency of the explanatory statement is very much like the plea of
fraud. It is well-settled that the plea of fraud must be substantiated by all
relevant particulars disclosed in the pleadings.
Then I have to deal with
the points raised by Mr. Thakkar that in the present case there is no
explanatory statement and, therefore, there is a clear contravention of the
provisions of section 173 of the Act. Mr. Thakkar says that there was no
proposal in so many words about the increase of the number of directors. There was
no such item in the notice. Therefore, there was no occasion for any
explanatory statement.
I have already referred to
the contents of the items Nos. 3, 4, 7 and 8 in the notice of meeting. Items
Nos. 3 and 4 refer to ordinary business inasmuch as the directors retiring by
rotation were to be re-elected. The permanent strength of the board of
directors was 8. Under article 164 of the articles of association of the
company, the number nearest to one-third had to retire from office. Items Nos.
3 and 4 certainly indicate that the company was to fill up the two vacancies
caused by the retirement of the directors by rotation. Now, items Nos. 7 and 8
state that the board had appointed two additional directors on 10th April, 1969.
Those directors will cease to hold office under section 260 of the Act on
the date of the meeting, Notices, as required under section 257 of the Act,
have been received by the company proposing the candidature of these additional
directors at the meeting. This information about the item of business has to be
considered along with the corresponding explanatory statement. The explanatory
statement virtually restates what is contained in items Nos. 7 and 8. One
additional particular is also mentioned and that is the recommendation of the board
of directors that the named persons be appointed as directors. Items Nos. 7 and
8 along with the explanatory statement certainly convey to the shareholders
that the board of directors have made a proposal that two more additional
directors be appointed at the meeting and if possible the two named persons be
elected to fill up those additional posts. In my opinion this is nothing short
of a proposal to increase the strength of the board of directors from 8 to 10.
Mr. Thakkar tried to show that all this information has nothing to do with the
proposal to increase the number of directors. But, despite his best efforts, he
was not in a position to convince me that all this information was in
connection with some other intelligible topic, I have not been able to place
any other construction on items Nos. 7 and 8, and in my opinion the plaintiffs
have failed to make out a case that there is no information at all about the
proposed special business accompanied by the required explanatory statement.
Then Mr. Thakkar argued
that at any rate the court must hold that the information given along with the
explanatory note is wholly misleading. Mr. Thakkar pointed out that the board
of directors has nowhere indicated in the notice or the explanatory statement
as to why it had made a proposal for increasing the number of directors.
Mr. Nariman, on the other
hand, submitted that the board can only disclose known reasons and it is not in
a position to disclose the unknown reasons. I do not find any substance in
either of these contentions. In the absence of a pleading in fact, Mr. Thakkar
cannot subsequently show that there was no reason contained in the statement
about the proposed increase. In my opinion the statement is a comprehensive and
compendious statement. The board has in a way indicated the reasons for the
increase. It has stated that it was required to appoint two men of their
confidence as additional directors. It is implicit in this action and the
statement that the company needed their services. This is followed by a
recommendation by the board that the two named persons be appointed to fill up
the additional posts. This is sufficient reason for the proposed increase. A
shareholder, after reading this information, can certainly form an intelligent
judgment and make up his mind one way or the other. He may either choose to
attend the meeting or leave it to the good sense of the majority of the voters.
As the plaint does not show in what way the explanatory statement is defective,
there is no reason to further examine the so-called defect pointed out by Mr.
Thakkar. Mr. Nariman’s distinction between known and unknown reasons is also
very far from convincing. One acts only for known reasons. Acting without
reasons is a leap in the dark and, therefore, there is never any occasion for
giving unknown reasons. But, I must make it clear that under section 173(2)
material facts will not necessarily include the reasons. It will all depend
upon the nature of the subject-matter which constitutes the special business.
Sometimes the facts stated are sufficiently eloquent and there is no need to
justify the proposed action by giving reasons. In the absence of sufficient
pleadings, the plaintiffs in the present case cannot challenge the statements
contained in the notice and the explanatory statement on the ground that the
particulars are insufficient and/or misleading. In the result I disagree with
the finding of the learned judge and hold that there is no contravention of the
provisions of section 173 of the Companies Act.
Then Mr. Thakkar argued
that the learned judge was in error in holding that the additional directors,
like the retiring directors, are not required to file any written consent duly
signed by them before their reappointment by the company. This question
involves the interpretation of section 264(1) of the Act. Section 264(1), as it
originally stood in 1956, has gone through a process of one or two amendments.
Before I consider the point and the various possible interpretations of section
264, it will be necessary to state a few more facts.
On April 9, 1969, there was
a move for appointing the appellants as additional directors. On the same day
two letters were separately addressed by the appellants to the company. The
letters purported to be consent in writing duly signed under section 264(1) of
the Act. The appellants have indicated their consent to act as a director of
the company if appointed. On April 10, 1969, the board of directors appointed
the appellants as additional directors under section 260 of the Act. On April
10, 1969, separate proposals by two members were made in favour of the
appointment of the appellants as directors at the ensuing meeting. Defendant
No. 1, the company, in its written statement, has stated that after the receipt
of the letters of consent dated April 9, 1969, the appellants were appointed as
additional directors. Mr. Thakkar referred to Form No. 29, which was submitted
on April 26, 1969, that is, long before the annual general meeting of the
company. All these facts and circumstances, according to Mr. Thakkar, show that
the letters of consent were, in fact, filed by the appellants in connection
with their appointment as additional directors. The learned judge has accepted
this position. But, Mr. Nariman for the appellants is challenging this finding.
I may not consider this controversy at this stage
As
stated above, it will be necessary to point out the legislative changes before
I consider section 264 in its present form. Section 264 as originally enacted
read as follows:
“(1)A person who is not a retiring director shall not be
capable of being appointed director of a company unless he has, by himself or
by his agent authorised in writing, signed and filed with the Registrar, a
consent in writing to act as such director.
(2) Sub-section (1)
shall not apply to a private company unless it is a subsidiary of a public
company”.
The
provision as enacted required all persons who desired to be considered for
appointment as directors to file a written consent before their appointment.
The consent had to be given before the appointment as without such consent the
person was not capable of being appointed and he could not be considered a
qualified or a fit person for appointment as director. Only one person was
exempted from this condition and that was a retiring director. It was not
necessary for him to file any consent before his reappointment as a director.
Then as a result of the amending Act 65 of 1960, a new section 264 was
substituted with effect from December 28, 1960. The new section reads as under:
“264.
(1) Every person (other than a person who has left at the office of the company
a notice under section 257 signifying his candidature for the office of a
director) proposed as a candidate for the office of a director shall sign, and
file with the company, his consent in writing to act as a director, if
appointed.
(2) A person other
than a director reappointed after retirement by rotation shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar, his consent in writing to act as such
director.
(3) This section
shall not apply to a private company unless it is a subsidiary of a public
company”.
The
significant change in the wording is the deletion of the words “shall not be
capable of being appointed”. Section 264(1) dispenses with the formal consent
in the case of a person who has proposed himself as a candidate for the office
of a director under section 257 of the Act. Subsection (2) requires all persons
newly appointed as directors to file with the Registrar within 30 days of their
appointment a consent in writing to act as a director. Sub-section (2) makes it
clear that, unless such a consent is filed, the person appointed shall not act
as a director.
Thereafter,
by Act No. 31 of 1965, the section is substantially amended and I have to
consider the section so amended. The section, in the present form, is as
follows;
“264. (1) Every
person (other than a director retiring by rotation or otherwise or a person who
has left at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other
than—
(a) a director reappointed after retirement by
rotation or immediately on the expiry of his term of office, or
(b) an additional or alternate director, or a
person filling a casual vacancy in the office of a director under section 262,
appointed as a director or reappointed as an additional or alternate director,
immediately on the expiry of his term of office, or
(c) a
person named as a director of the company under its articles as first
registered,
shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar his consent in writing to act as such
director.
(3)
This section shall not apply to a private company unless it is a subsidiary of
a public company”.
The
first point debated before me by counsel on either side is whether section 264
is directory or mandatory. As the point is not covered by any direct authority,
the counsel had to rely upon their original submissions and they have also
referred to decisions which deal with the construction of statutes.
Mr.
Thakkar says that the section is mandatory because the condition referred to in
the section of filing a written consent is a condition precedent to the valid
appointment. The consent required under section 264 is to be in writing and
duly signed. Section 264(1) provides that the person who is a candidate for the
office of a director shall file his consent in the prescribed form to act as a
“director, if appointed. Mr. Thakkar says that the use of the expression
“shall” indicates that the section is mandatory. Mr. Thakkar invited my
attention to a number of judicial decisions about the interpretation of
statutes. He relied upon a decision of the Supreme Court in Aswini Kumar Ghose
v. Arabinda Bose for the proposition that if the specific words
used by the legislature are clear then for interpretation the courts could not
rely upon the statement of objects and reasons. Patanjali Shastri C.J., at page
378 (paragraph 32), has made the following observations:
“As
regards the propriety of the reference to the statement of objects and reasons,
it must be remembered that it seeks only to explain what reasons induced the
mover to introduce the bill in the House and what objects he sought to achieve. But, those objects and
reasons may or may not correspond to the objective which the majority of
members had in view when they passed it into law. The Bill may have undergone
radical changes during its passage through the House or Houses, and there is no
guarantee that the reasons which led to its introduction and the objects
thereby sought to be achieved have remained the same throughout till the Bill
emerges from the House as an Act of the legislature, for they do not form part
of the Bill and are not voted upon by the members. We, therefore, consider that
the statement of objects and reasons appended to the Bill should be ruled out
as an aid to the construction of a statute”.
But Mr. Thakkar admitted
that the rigour of the rule laid down in the above-mentioned case was relaxed
in a subsequent decision of the Supreme Court in Commissioner of Income-tax v. Smt. Sarda Devi ,
where Bhagwati J., at page 835, says:
“It is clear that unless
there is any such ambiguity it would not be open to the court to depart from
the normal rule of construction which is that the intention of the legislature
should be primarily gathered from the words which are used. It is only when the
words used are ambiguous that they would stand to be examined and construed in
the light of surrounding circumstances and constitutional principle and
practice”.
At page 839, a further rule
of construction of statute is stated:
“Though it is not
legitimate to refer to the statement of objects and reasons as an aid to the
construction or for ascertaining the meaning of any particular word used in the
Act or statute (see Aswini Kumar Ghose v. Arabinda Bose),
nevertheless this court in Stale of West Bengal v. Subodh Gopal Bose ,
referred to the same ‘ for the limited purpose of ascertaining the conditions
prevailing at the time which actuated the sponsor of the Bill to introduce the
same and the extent and urgency of the evil which he sought to remedy.’ “
Mr. Thakkar says that it is
the primary rule of construction that the statute should be interpreted without
looking into any other extraneous circumstances. It is only when there is some
ambiguity that, as stated by the Supreme Court, reference may be made to the
objects and reasons for the limited purpose of finding out the particular
reason which prompted the legislature to pass that enactment.
Then Mr. Thakkar referred
to the rule which, in the judicial parlance, is recognised as the golden rule
of construction of statutes. The statement of the rule by Burton J. in
Warburton v. Lovelavd is reproduced by the learned author in
Bindra’s Interpretation of Statutes, 5th edition, at page 71, and is to the
following effect:
“I apprehend it is a rule
in the construction of statutes that, in the first instance, the grammatical
sense of the words is to be adhered to. If that is contrary to, or inconsistent
with any expressed intention, or any declared purpose of the statute, or if it
would involve any absurdity, repugnance or inconsistency, the grammatical ser
se must then be modified, extended or abridged so far as to avoid such
inconvenience, but no further”.
The following passage in
Chapter XIII from Maxwell on the Interpretation of Statutes, 12th edition, page
314, also lays down a sound principle:
“It is impossible to lay
down any general rule for determining whether a provision is imperative or
directory. ‘No universal rule’, said Lord Campbell L.C can be laid down for the construction of
statutes, as to whether mandatory enactments shall be considered directory only
or obligatory, with an implied nullification for disobedience. It is the duty
of courts of justice to try to get at the real intention of the legislature by
carefully attending to the whole scope of the statute to be construed.’ And
Lord Penzance said: ‘I
believe, as far as any rule is concerned, you cannot safely go further than
that in each case you must look to the subject-matter; consider the importance
of the provision that has been disregarded, and the relation of that provision
to the general object intended to be secured by the Act; and upon a review of
the case in that aspect decide whether the matter is what is called imperative
or only directory”.
Viewed in the light of
these principles, the section, in my opinion, appears to be directory in so far
as the person who desires to be a candidate for the office of a director would
be required to file his consent. The object of the legislature is evident when
one considers the various amendments made by the legislature before the section
was enacted in the present form. Those who have once acted as directors were
only seeking reappointment. It was considered throughout that the formal
consent on their part was not necessary. It is very clear as to why such a
condition was found necessary. It may be that a person who is appointed as a
director may refuse to act on the ground that he had never consented to act as
a director. When such a flaw is discovered later on and the appointment will
have to be ignored as ineffective, the company will have to take again further
steps for filling the post of such director. Ordinarily, a person appointed as
a director is not likely to refuse to act. In a rare case, he may do so. It is
only to avoid the attending inconvenience that the legislature has prescribed
the condition. In the section as originally worded, somewhat strong language
was used. It was enacted that a person shall not be capable of being appointed
as a director unless he had filed earlier his consent in writing to act as such
director. The deletion of these words in the subsequent amended form of the
section is not without significance. Perhaps the legislature thought that the
condition was given comparatively more importance when it was introduced in the
section. If this is the only object which the legislature sought to achieve by
prescribing a prior consent in writing then there is no reason why the absence
of consent in all cases should invalidate the appointment. Even without a
consent a person appointed may accept the appointment and prefer to act as a director.
This is likely to happen in a majority of cases. Considering the section as a
whole and bearing in mind the object of the legislature and magnitude of the
mischief intended to be avoided, I hold that section 264(1) is clearly
directory and not mandatory. I am only interpreting section 264(1) of the Act
and it is not necessary to pronounce any opinion about section 264(2). Whether
it is mandatory or directory will have to be decided in a suitable case. But, I
cannot help expressing my opinion that the difference in the language has
certainly assisted me in reaching my conclusion about the directory nature of
section 264(1) of the Act. The consent under section 264(2) which is to be
filed with the Registrar is a condition precedent for acting as a director. The
sub-section provides that a person, who is being appointed for the first time
as a director, shall not act as a director of the company unless he has filed
the consent within the prescribed time. No argument is necessary for saying
that the sub-section is mandatory.
Then Mr. Thakkar submitted
that the learned judge was in error in holding that there is realty no
difference between the retiring director and the additional director while
considering the application of section 264(1) of the Act. As all the relevant
points were urged before me I had to consider them and give my decision
accordingly. In fact when I found that the section is directory it is
sufficient for the final disposal of the appeal but these are all points of law
touching the interpretation of section 264(1) as a whole and, therefore, I must
consider each point urged by the counsel separately.
That takes me to the
interpretation of the key words in section 264(1) “or otherwise”. The learned
judge while considering these words has relied on the dictionary meaning of the
expression “retire”. A person retires when he ceases to hold a particular
office. There is no difference between retiring by rotation and retiring by
ceasing to hold office. The additional directors appointed under section 260
hold office only up to the date of the next annual general meeting. In other
words, they cease to hold office before the date of the next annual general
meeting. Mr, Thakkar says that the learned judge was not right in reaching this
conclusion. According to Mr. Thakkar there is material difference between the
two sets of directors. Mr. Thakkar points out that under section 256(1) of the
Act certain proportion of directors retire by rotation. Under section 256(2)
the directors retire by rotation at every annual general meeting, whereas under
section 260, first proviso, the additional director holds office only up to the
date of the next annual general meeting of the company. In other words, the
additional director ceases to hold office earlier and thereafter the retiring
director who vacates the office at the meeting remains in office for at least a
short duration. Mr. Thakkar says that this distinction between the tenure of
the two classes of directors is recognised even under the English law. Mr. Thakkar
has relied on a decision in Eyre v. Milton Proprietary Ltd. The court in that case was required to
consider the exact connotation of two articles 85 and 90 of the articles of association
of the company. The court had to decide the meaning of the expression “of the
whole number of directors” in article 85. That was necessary to determine the
number of directors who had to retire in a particular year. There was no doubt
that the expression “whole number of directors” did not include the managing
director. Article 90 provided that the board may from time to time appoint
additional directors but any director so appointed shall hold office only until
the next following ordinary general meeting of the company, and shall then be
eligible for re-election. The point for consideration depended for its answer
on the words of article 85 as compared with the words of article 90 and, in
particular, certain later words of article 85. According to the court there
must be some point of time at which it was to be ascertained as to who are the
whole number of directors to whom must be applied the provision relating to
retirement. That point of time was to be at the ordinary general meeting. It
was clear from article 90 that at the annual general meeting the two additional
directors will not be in office as they were to hold office only until the next
following ordinary general meeting of the company. At the commencement of the
ordinary general meeting they will be no longer in office. But, the retiring
directors and the other continuing directors will act as directors throughout
the meeting. In others words, they would constitute the total number of
directors for deciding the proportion of the directors retiring. Romer L.J., at
page 257, sums up the legal position in the following words:
“I agree that in the
circumstances the number of directors to be considered is the number of
directors existing at the moment when the ordinary general meeting begins, and
inasmuch as at the particular moment that it begins the two directors elected
under article 90 cease to be directors, the number of directors then must be
taken to be five and not seven”.
Mr. Thakkar relies on this
decision for underlining a similar distinction between the directors retiring
by rotation at every annual general meeting and the additional directors
holding office only up to the date of the next annual general meeting. Mr.
Thakkar says that when the legislature has used the expressions like “retiring”
and “holding office” up to a particular point of time, the court will have to
interpret the different words in a different way. In support of this rule of
interpretation he relies on a decision of this court in East and West Insurance Co. Ltd. v. Mrs.
Kamala Jayantilal Mehta.
Chief Justice, Chagla, who delivered the
judgment of the Bench, says at page 543:
“Now, the normal canon of
construction either of a statute or of articles of association is that when
different expressions are used they are intended to connote something
different”
There cannot be any dispute
about this rule of interpretation. Giving full effect to the rule it only means
that a retiring director ceases to hold office later than the additional
director. The difference in the duration of their tenure is brought out by the
legislature by using appropriate expressions. But, it will not be correct to
carry this distinction too far. While interpreting the words appearing in
section 264, the expression “retiring by rotation” has to be understood in
conjunction with or along with the other key words “otherwise”. These two
expressions certainly are used for covering or for including different sets of
directors who cease to hold office. We know very well what is meant by a
director retiring by rotation. Section 256(1) provides that at the first annual
general meeting one-third of the directors for the time being as are liable to
retire by rotation, or if their number is not three or a multiple of three,
then the number nearest to one-third, shall retire from office. Then the
question arises on a literal interpretation of the words as to who are the
other directors who otherwise retire, that is, retire otherwise than by
rotation. Mr. Thakkar says that the articles of association of a company may
provide that all the directors en bloc shall retire and in that case the
company might appoint directors to fill up all the vacancies. Mr. Thakkar has
not been able to indicate any other class of directors who will be covered by
the expression “or otherwise”. He maintained that under section 256(1) a
company may by its articles provide that a certain proportion of directors will
ever remain in office and only the remaining directors will wholly retire and
it is to cover such a class of directors retiring In this manner that the
expression “or otherwise” is used by the legislature in section 264(1) of the
Act.
It is difficult to accept
this interpretation of section 256(1). Section 256(1) provides:
“....one-third of such of
the directors for the time being as are liable to retire by rotation, or if
their number is not three or a multiple of three, then, the number nearest to
one-third, shall retire from office”.
In the illustration given
by Mr. Thakkar, certain fixed number of directors will remain in office
permanently and the others will retire, so as to enable the company to fill up
those vacancies. Those who are retiring in this manner are, according to Mr.
Thakkar, not retiring by rotation. I am not prepared to accept this
interpretation of section 256(1) of the Act. When few of the directors retire
in the manner indicated in section 256(1) of the Act, then they are retiring by
rotation. If the articles so provide, all the directors may retire and that
retirement certainly will not be covered by the expression “retiring by
rotation”. On a reference to the Shorter Oxford Dictionary, volume II: N-Z, 3rd
edition, revised with addenda, I find that the adverb “otherwise” means in another
way or in other ways. Whether the expression “otherwise” would include one or
more classes is not clear. At any rate, the expression is somewhat equivocal.
In such a case I will be justified in following the dictum laid down by the
Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhanvadia . The
Supreme Court in that case, while interpreting certain articles of the
Constitution, relied upon the statement of objects and reasons. The Supreme
Court had to decide whether certain provisions were directory or mandatory. As
the provisions themselves were not clear, reliance was placed on the statement
of objects and reasons for finding out the intention of the legislature. I may
reproduce the following passage from the judgment of Mitter J. which appears at
page 769, paragraph 11, of the report:
“The above cases are
sufficient to show that non-compliance with the provisions of a statute or
Constitution will not necessarily render a proceeding invalid if by considering
its nature, its design and the consequences which follow from its
non-observance one is not led to the conclusion that the legislature or the
Constitution-makers intended that there should be no departure from the strict
words used”.
So, in other words, while
interpreting the words or even while departing from the strict words used, the
court may find out the intention of the legislature by referring to the
statement of objects and reasons. Mr. Nariman rightly says that relying on this
decision one can look at the notes on clauses preceding the amendment of
section 264 of the Act. (See Gazette of India, Extraordinary, Part II, sec. 2, 1964, dated
September 21, 1964). Clause 32 reads as under:
“Section 264 requires that
a person proposed as a candidate for the office of director shall file with the
company his consent to act as director, if appointed. It also requires that a
person other than a director re-appointed after retirement by rotation shall
not act as director unless he has filed with the Registrar his consent in
writing to act as such. This amendment seeks to exempt persons who have served
as directors in the immediate preceding term from these requirements. It is
felt that in the case of such persons the requirement to file their consent in
writing is a formality which could well be dispensed with”.
Clause 32 shows in
unmistakable terms as to why the exceptions were enacted to dispense with the
filing of consent in certain cases. No such consent either under section 264(1)
or sub-section (2) was necessary in the case of persons who had immediately
before the reappointment acted as directors. Considering the object of the
amendment there is no reason why the additional directors who are expressly
exempted from the requirement of filing a consent under section 264(2) should
be excluded while construing a somewhat similar exemption under section 264(1)
of the Act. In my opinion the expression “otherwise” covers all the other
directors who for one reason or the other cease to hold office and are
immediately thereafter reappointed as directors. For these reasons I hold that
the learned judge was right when he recorded a finding that additional
directors are not required to file any written consent under section 264 of the
Act, as a condition precedent for the validity of their re-appointment.
Then Mr. Nariman submitted
that no such consent under section 264(1) is required for appointment of any
person as an additional director under section 260 of the Act. He relies on the
wording of section 264(1), viz.:
“Every
person.......proposed as a candidate for the office of a director shall sign
and file with the company, his consent in writing to act as a director, if
appointed”.
These words, according to
Mr. Nariman, indicate that the consent contemplated is referable to the
candidature of the person for the office of director. That can only be at the
meeting of the company in which directors are appointed by unanimous or
majority vote of the shareholders. Mr. Nariman says that section 260 confers
power on the board of directors’ to appoint additional directors when so
permitted by the articles of association of the company. Neither in section 260
nor anywhere in the articles of the company are there provisions requiring the
person to file his consent before his appointment as additional director. A
closer reading of section 264(1) furnishes one more reason in support of the
interpretation suggested by Mr. Nariman. One of the persons, who is exempted
from the condition of filing such a consent, is one who has left at the office
of the company a notice under section 257 signifying his candidature for the
office of a director. This clearly shows that the provision about consent is in
connection with the appointment of directors at the meeting of the company.
Even the consent that is prescribed is to be in writing to act as a director,
if appointed. There are no such words to show that the consent is given to act
as a director or an additional director. These various expressions used by the
legislature certainly indicate that section 264(1) does not in any manner
regulate the appointment of additional directors under section 260 of the Act.
It is not disputed before me
nor was there any dispute before the learned judge about the fact that there is
one set of written consent filed in this case on behalf of the appellants. It
is not necessary to resolve the controversy whether it was with reference to
the appointment as an additional director or with reference to the
reappointment as a director. If no consent was required for any appointment
under section 260 that consent, if filed, will be redundant. It is true that
the company by its written statement has taken up a contention that after
receipt of these consents the appellants were appointed is additional
directors. Mr. Thakkar also submitted that that may be accepted or a fact in view of the various facts
and circumstances mentioned above. But, the appellants in their written
statement have pleaded that these written consents certainly validated their
appointment in the general meeting. Once it is found as a fact that no consent
was required for the appellants’ appointment as additional directors, then
there is no reason why the appellants should not be allowed to rely upon the
letters of consent, when the validity of their appointment is challenged by the
plaintiffs. Letters of consent were to be filed duly signed by the persons
concerned with the company. They are so signed and filed with the company.
There are no words used in the letters to indicate that they had given the
consent only to act as additional directors, if appointed. In the absence of
any such restrictive words, it can be fairly assumed that they gave their
consent in writing not only to act as additional directors, if appointed, but
also to act as directors, if appointed. In my opinion even for this additional
reason the appointment of the appellants cannot be challenged.
The last point raised in
the present appeal is about the maintainability of the suit. Mr. Nariman,
consistent with the appellants’ stand in the lower court, submits that the
plaintiffs have come to the court with certain grievances about the
irregularities committed by the company while appointing the appellants as
directors. Mr. Nariman relied upon a decision of this court in V.N. Bhajekar v.
K.M. Shinkar. It
was a suit by the shareholders challenging irregularities committed by the
directors. It was held that such a suit was not competent. The headnote
indicates that there
are certain recognised exceptions to the rule that mere irregularities
committed during the course of the management of the internal affairs of the
company do not furnish any cause of action to the shareholders. The relevant
headnote is to the following effect:
“The
supremacy of the majority of shareholders is subject to certain exceptions,
viz.:
(1) Where
the act complained of is ultra vires the company;
(2) where
the act complained of is a fraud on the minority; and
(3) where there is an absolute necessity to
waive the rule in order that there may not be a denial of justice”.
Mr.
Nariman submits that the present case is not covered by any one of these three
exceptions. The appellants were appointed directors by an unanimous resolution
passed by at the meeting of the company. The plaintiffs after a long lapse of
time had no reason to rush to the court for any relief. It is not an act which
is patently illegal or ultra vires the company. But, I find it difficult to
accept this contention of Mr. Nariman. I have already held that section 173 is
mandatory and not directory. Any non-compliance with the provisions of section
173 will result in the nullification of the Act. The plaintiffs have alleged
that there was contravention of section 258 of the Indian Companies Act, as
there was no valid resolution proposing the increase in the number of
directors. It may be that the plaintiffs have not eventually succeeded in the
suit. In view of the findings recorded by me, it cannot be said that the suit
as framed is not competent. In my opinion the plaintiffs’ case will be covered
by the first of the three exceptions mentioned above. The learned judge was,
therefore, right when he held that the suit as framed was maintainable.
Mr.
Buch with Mr. Munshi, who appeared for respondent No. 3-company, submits to the
orders of this court.
In
the result the appeal is allowed, the judgment and decree of the lower court is
set aside and the plaintiffs’ suit is dismissed with costs throughout.
Respondents Nos. 1 and 2 will not be liable to pay the costs of respondent No.
3 throughout.
[1984]
55 COMP. CAS. 500 (MAD.)
HIGH COURT OF
v.
Aruna Sugars Ltd.
SHANMUKHAMM J.
April 23, 1983
P.R. Rangarajan, K.M.
Vijayan and C.M. Krishnakumar for the applicant.
C. Harikrishnan and A.K.
Mylswami for the respondent.
The applicant in both the
applications is a shareholder of the public limited company, Aruna Sugars Ltd.
The relief claimed in the
former is to declare that the election of the second respondent as director of
the first respondent company as void, while that in the latter is to restrain
the second respondent from functioning as director pending disposal of the
former.
The undisputed facts, in
brief, are given below: At the annual general meeting of the company held on
March 30, 1983, at Hotel Dasaprakash,
The
main contention of Mr. Rangarajan, learned counsel for the applicant, proceeded
thus: The strength of the directors was only eight. As the company had not
raised the strength of board of directors from eight to nine as provided under
art. 109, the election of the second respondent as director is invalid. I find
this contention is not well founded. In the foremost, it has to be noticed that
though art. 93 provided that, until otherwise determined by the general
meeting, the number of directors shall be not less than three and not more than
12, including any ex-officio members. It is not the case of the applicant that
in any general meeting the strength of the directors were fixed at eight.
In
the absence of even an averment to the above effect, it is not open to the applicant
to submit that the fixed strength of the board of directors is eight and that,
therefore, unless as provided under art. 109, the strength is increased, there
cannot be a valid appointment of a ninth director in the annual general
meeting. On the other hand, according to art. 93, any number of directors, not
exceeding 12, can be appointed by the members at the annual general meeting.
Further, it is seen from the balance-sheets for the year ending September 30,
1981, and September 30, 1982, the strength of the board of directors was 9 and
10 respectively. Such constitution is consistent with art. 93.
The
other contention is that the election of a director otherwise than in the
vacancy caused by the retiring director is a special subject and that, therefore,
the statutory notice issued under s. 173(1)(a) shall contain explanatory notes
in relation to such special subject. The argument proceeded further to the
effect that in this case as admittedly the statutory notice dated February 16,
1983, did not contain any explanatory note, the meeting held on March 30, 1983,
pursuant to such defective notice, is illegal and, consequently, the election
of the second respondent is also void. Even here I find no merit for factually
in the statutory notice dated February 16, 1983, the reference to the
nomination of the second respondent was not possible because it is only after
the issue of the said notice, the company was in receipt of the three notices
under s. 257(1) of the Act.
It
is necessary to examine sections 171 and 257.
Section 171 reads as
follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty one days' notice in writing.
(2) A general meeting may be called after giving
shorter notice than that specified in sub-section (1), if consent is accorded
thereto—
(i) in the case of an annual general meeting, by all the members
entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent. of such
part of the paid up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than
95 per cent. of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
Section 257 reads thus:
"257.
Right of persons other than retiring directors to stand for directorship.—(1) A person who is not a retiring director shall,
subject to the provisions of this Act, be eligible for appointment to the
office of director at any general meeting, if he or some member intending to
propose him has, not less than fourteen days before the meeting, left at the
office of the company a notice in writing under his hand signifying his
candidature for the office of director or the intention of such member to
propose him as a candidate for that office, as the case may be.
(1A) The company shall
inform its members of the candidature of a person for the office of director or
the intention of a member to propose such person as a candidate for that
office, by serving individual notices on the members not less than seven days
before the meeting :
Provided that it shall not
be necessary for the company to serve individual notices upon the members as
aforesaid if the company advertises such candidature or intention not less than
seven days before the meeting in at least two newspapers circulating in the
place where the registered office of the company is located, of which one is
published in the English language and the other in the regional language of
that place.
(2)
sub-section (1) shall not apply to a private company, unless it is a subsidiary
of a public company".
The use of the expression
"not less than fourteen days" before the meeting, obviously referring
to the general meeting by the framers of the Act, is a clear indication that in
respect of the general meeting of which notice under s. 171 had been issued, a
member can exercise his option to nominate any person as a candidate for the
office of a director provided he had not less than fourteen days before the
meeting, left at the office of the company a notice in writing under his hand
signifying his candidature for the office of director or the intention of such
member to propose him as a candidate for that office, as the case may be.
Section 257 does not contemplate a case of adjournment of that meeting on any
ground. If the contention of Mr. Rangarajan were to be accepted, it would mean
that whenever any notice under s. 257(1) is received by the company, the
company shall invariably adjourn the general meeting because the notice
containing the explanatory note must have 21 clear days preceding the date of
the meeting. Such a position is against the express language employed in s.
257. A longer period fixed under s. 171 and a lesser period under s. 257 will
also justify the conclusion that there was no statutory obligation on the
company to adjourn the general meeting simply because it was served by a member
with a notice under s. 257(1) and it owed a duty to inform its members of such
notice. Further, it is well settled that, while interpreting the two provisions
in a statute, one should not be allowed to operate as to render the other otiose
and that they are intended to cover two different fields. Then the reasonable
interpretation is that when a special subject were to be included in the agenda
for the general meeting, the notice itself should contain an explanation,
while, when the company was found to act under s. 257(1A), it is enough the
later notice issued contained the explanatory note. In this case, the notice
dated March 16, 1983, did contain a note "if he (Arumugam) is elected, the
number of directors on the board of Aruna Sugars Ltd. will go up from the
present 8 to 9". In my opinion, there is thus compliance of both the
provisions of ss. 173 and 257 of the Act.
The learned counsel laid
emphasis on the following expression "subject to the provisions of this
Act" found in the opening sentence of s. 257 and submitted that s. 257,
is, therefore, subject to s. 173. I am unable to countenance the said argument.
For, the expression "subject to the provisions of this Act" will only
qualify the person who is not a retiring director. He must otherwise possess
the requisite qualification for being nominated as a director. It does not,
therefore, follow that s. 257 is in any way controlled by s. 173. I have
already pointed out that the two sections cover two different areas. If a.
subject has to be shown in the agenda in the notice under s. 173, there is a
statutory obligation on the part of the company to refer to the explanation
with reference to the special subject. While the company was obliged to act
under s. 257(1A) it can validly act by sending a notice intimating its receipt
of the notice from a member or members proposing the candidature of any person
as a director by serving individual notices to the members not less than seven
days before the meeting. This time factor, one referred to in s. 171, while the
others referred to in s. 257 and s. 257(1A), will serve as a guiding factor as
to reasonably infer that, while the company were to act under s. 257(1A), it
cannot practically comply with s. 173(2). At the same time, the requirement of
s. 173(2) was complied with by appending a note to the second notice. I have
already pointed out that it had been complied with in the instant case.
The other complaint averred
in the affidavit is that the applicant was denied of an opportunity to offer
himself as a candidate to the office of the director at the meeting held, on
March 30, 1983. It is stated in the counter-affidavit filed by the company that
it is not disputing that the applicant became a member only on March 22, 1983.
Therefore, factually he could not have offered himself as a candidate for the
office of the director at the meeting held on March 30, 1983. Hence, this
contention also fails.
Here, there is another
factor, which will be disadvantageous to the applicant, that is, the majority
of the shareholders had expressed their mind and elected the second respondent
as a director. In my opinion, in the above conspectus, it is not open to the
applicant to have the election of the second respondent as director declared
void on an interlocutory petition. So far as the maintainability is concerned,
I do not propose to advert to this as on merits the applications fail.
The result is the
applications are dismissed. But I make no order as to costs.
Section
260
Additional
director
[1932] 2 COMP CAS
147 (MAD.)
HIGH COURT OF
v.
W.S. Subrahmanya
Ayyar
CURGENVEN AND
CORNISH, JJ.
C.S. NO. 491 OF 1930
JANUARY 29, 1931
V.V. Srinivasa Ayyangar and K. Venkataramani, for the Appellant.
T.R. Venkatarama Sastri, K. Narasimha Ayyar, N.S. Rangaswami Ayyangar, T.R. Srinivasa U. Rama-chandran, V.C. Gopalaratnam, K.S. Rajagopala Ayyangar, R.V. Raghava Thathachari and S. Panchapakesa Sastri, for the Respondent.
Curgenven, J.—The suit out of which this appeal arises relates to a Company known as the United India Life Assurance Co., and the circumstances which gave rise to the dispute are briefly these. The Directorate of the company is composed of two policy-holders' Directors, elected by the policy-holders, and of a certain number of shareholders' Directors. The ordinary General Meeting for the election of share-holders' Directors was fixed for the 13th October, 1930. The Articles of Association had contained a provision that the number of share-holders' Directors should be six and that two should retire in rotation their places being filled by election at the meeting. But this number had been by amendment of the Articles reduced to five, and it was provided, as a special case, that at the General meeting of 1930 the six Directors should vacate office and that not more than five should be elected in place of them. At the meeting the 3rd defendant, who was at the time the Chairman of Directors, took the chair, and, it being decided to fill all five vacancies, a vote was taken by show of hands, and five persons were declared elected. A poll was then demanded, and the Chairman directed that it should be held at the Company's Office on Monday, the 20th October, between the hours of 4 and 6 p.m., and appointed the Company's Manager, Mr. Church, Returning Officer for purpose of taking it. In thus allowing a week to elapse before the poll was taken, the Chairman incurred the disapproval of the 1st plaintiff, one of the share-holders, who addressed to him on the 15th, a letter protesting against his action, and pointing out that, since all the share-holders' Directors had retired on the 13th, the share-holders must during the interval remain wholly unrepresented, and the operations of the Company come to a standstill, because the two policy-holders' Directors were below the minimun number authorised to transact business. This letter was certainly most provocative in tone, and perhaps explains, though it may not justify, what happened next. On the 16th, the two Policy-holder's Directors appointed two other persons—the Chairman himself and the 4th defendant—thus bringing the number of Directors up to four, the minimum number required by Art. 88 to act in the name of the Company. It will be for consideration whether this action was within their powers. It evoked from the 1st plaintiff another letter, written the day before the date fixed for the poll, condemning this procedure and expressing the apprehension that advantage was intended to be taken of it to hold a poll only in respect of the three remaining vacancies. What happened—whether by accident or design we are not now concerned to inquire—more than justified his misgivings. On the 20th, at the appointed time, a number of share-holders assembled at the office of the Company, but neither did the Returning Officer appear, nor were any other arrangements made for holding the poll. They waited there and eventually dispersed. The explanation given is, that Mr. Church was unable to attend through sudden illness, and that a message which he sent to Chairman in the course of the afternoon was not delivered as the Chairman had shortly before left Madras on a visit to a sick relative. No further attempt was made to take a poll, and indeed, whether rightly or wrongly, the four persons at that time claiming to be Directors—defendants 1 to 4 —two days later took the line best calculated to demonstrate their refusal to adopt that course by 'co-opting' three more Directors, defendants 5 to 7 thereby bringing their number up to the maximum. The four plaintiffs as share-holders, filed their suit on the 24th October, praying inter alia that these appointments might be declared illegal and invalid, and that the Court should direct a poll to be taken to elect five share-holders' Directors to the existing vacancies.
The learned Judge who tried the suit, Waller, J., has dismissed it upon a preliminary issue. He finds indeed that the co-optation, in two stages, of the five share-holders' Directors was ultra vires, but that, assuming it to have been so, the Company, and not individual share-holders, should have been the plaintiffs. Further, he considers that the Articles of Association provided the share-holders with an alternative remedy, and that at least until that had proved infructuous the Court should not intervene. All the plaintiffs appeal against this decision, which is supported in varying ways by the several defendants, whose points of view may be gathered from the contents of their written statements. The 1st and 2nd defendants, the two policy holders' Directors, endeavour to justify their action in co-opting the 3rd and 4th defendants, and then, with these defendants, co-opting the defendants 5 to 7. The Chairman (3rd Defendant) contends that even if this procedure was not legal, those of the new Directors who were previously in Office—all except the 4th Defendant—may be deemed to have continued by virtue of the terms of Art. 68 (g). The 4th Defendant, the sole new comer to the Office has—perhaps to give scope to this alternative—since resigned. The 5th and 6th Defendants denounce the act of co-opting them as unlawful, but claim to be still in office under Art. 68 (g).
It has become clear to me that the crucial questions of law upon the answers to which a correct decision depends in this case are, firstly, what determines the duration of an ordinary general meeting for the election of Directors, and, secondly, what is the nature of the process known as taking a poll. The rules governing these matters are not, I think, in any respect peculiar to this Company. Art. 37 gives the Directors, power to fix the annual Ordinary General Meeting, and Art. 42 provides for the election of Directors at it. Such election is to be, in the first instance, by show of hands. If at least three members demand a poll, the Chairman shall grant it. Art. 49 empowers the Chairman to take it and runs as follows:
"If a poll is demanded as aforesaid it shall be taken in such manner, and at such time and place as the Chairman of the meeting directs, and either at once or after an interval or adjournment, or otherwise, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn."
Put shortly, the view pressed upon us by Mr. T.R. Venkatarama Sastri on behalf of the respondents is that the process of holding the poll is a detached portion of the general meeting, or is at any rate a 'meeting' within the meaning of the Articles of Association, and that when that 'meeting' comes to an end, whether or not the poll has been taken, the general meeting also terminates, and there exists no power to revive it, either on the part of the Chairman or of the Directors; and if for some reason the poll has not been taken and no Directors elected, there exists no further power to do these things. It will be at once evident—indeed no better illustration is needed than the present case—how completely subversive these 'doctrines would be of the rights of election possessed by the share-holders. Fortunately they appear to be based upon fundamentally erroneous conceptions. The original meeting in law continues until the Chairman has carried out the direction given to him by the share-holders to take a poll. It is a national meeting, not dependent for its existence and continuity upon the share-holders being actually in session, and business being transacted. The actual process of holding the poll is not a 'meeting' at all. It differs in several of its features from any meeting of share-holders. For example, the articles provide that every such meeting shall be held at the Office of the Company, whereas Art. 49, reproduced above, empowers the Chairman to take the poll at such place as he may direct. The person appointed to conduct the poll, unlike the Chairman of a meeting, need not be, and indeed in the present instance was not, a share-holder of the Company. His functions in no way resemble those of a chairman of a meeting, and are, as has been pointed out in Harben v. Phillips purely ministerial. The operation of taking a ballot, too, has little resemblance to such a meeting—each share-holder may come at any time between the hours fixed, record his vote, and go away. It is only the result of the poll which forms part of the meeting at which the poll was demanded by being deemed to be a resolution passed on it. 'The taking of a poll,' said Brett, L. J., in The Queen v. Wimbledon Local Board 'is a mere enlargement of the meeting at which it was demanded.' In the same case Cotton, L.J., observes:
"A poll is not a new meeting, but it is a mode of ascertaining the sense of the meeting which is continued for that purpose. The meeting of rate-payers did not come to an end, for the poll which was demanded has never been held."
In Shaw v. Tati Concessions, Limited, Swinfen Eady, J., after remarking that the taking of a poll is not a meeting, continues: 'The true legal position is this. This is no adjourned meeting but the original meeting continues for the purpose of taking the poll until the poll is closed.' For the principle that the poll is not complete, and therefore, the general meeting endures until the shareholders have had an opportunity of voting, I may refer to the Queen v. The Vestrymen, etc., of St. Pancras. The position was defined with clearness by Russell, J., in Spiller v. Mayo Development Co., Ltd. in settling a question of the validity of certain proxies. 'It was well settled,' he said, 'that the taking of a poll was not a meeting of the company in the strict sense, but was in law a mere continuation of the meeting at which the poll was directed to be taken.' No authority has been cited to us for the position which the respondents assume, which requires that the taking of the poll is in law a meeting convened by the Chairman, from which the inference sought to be drawn is that if the Chairman makes default in holding the meeting, the shareholders' only remedy is to take the poll themselves, unless they resolve to adjourn the meeting to some other day. I doubt whether in face of the wide powers delegated in this respect to the Chairman, the shareholders would be legally competent to do this. But it is unnecessary to decide that point, especially in the present case, where it appears to have been almost physically impossible for them to adopt this course. Ballot papers had indeed been printed, but they were locked up in the Manager's safe, and the key was not accessible. The assembled shareholders had no official record of the names of the eleven candidates standing for election. It would probably appear, had the case been fully heard, that there were other obstacles. They took the only course apparent to them, and dispersed without recording their votes. Even on the theory that a gathering of shareholders recording their votes is a meeting, it is difficult to contend that any meeting took place here. When and by virtue of what act did it begin, and when terminate? Having brought matters to this impasse by the break-down of the arrangements which it was his duty to render effectual, the Chairman would now ask the Court to dismiss the claim of these persons on the ground that, as matters fell out, their only course was to assume his functions and proceed with the election, failing which they must suffer disenfranchisement until the time should arrive for another annual general meeting. The alternative view, more commendable alike to the terms of the Articles and the common sense, is that the Chairman having been enjoined by the shareholders to hold a poll and having under Art. 49 ample power to carry out their wishes, should have persisted in his attempts to do so until they were successful. I have heard no argument which, upon the true theory underlying these proceedings, encourages me to hold that when the first attempt broke down he was functus officio.
Let us now see by what machinery it is proposed to carry on the business of the Company in the meanwhile. It is sought to justify the action of the two policy holders' Directors in the first place, and of themselves and their two co-opted directors in the second, in filling up the places upon the directorate, by recourse to the provision of Art. 68 (h), which enables Directors to appoint any duly qualified member as Director either to fill a casual vacancy or as an addition to the Board. Alternatively the powers conferred by Arts. 86 and 88 are invoked, though a perusal of those Articles will show that they do not enlarge the powers derivable from Art. 68 (h). The contesting defendants in their written statements justified the action taken upon one or other of these grounds, but before us such a position has been virtually abandoned and is obviously untenable. A casual vacancy means in general any vacancy occurring by death, resignation or bankruptcy and not by effluxion of time (Palmer's Company Precedents, 13th edn. Part 1, page 720, York Tramways Company v. Willows and Munster v. Cammell Company. Art. 69 defines the different modes in which such a vacancy arises. The occasion for appointing a Director 'as addition to the Board' will only arise when the share-holders have abstained from filling one or more of the sanctioned posts of Director. The rule has no application to the present circumstances. The Article upon which reliance is now placed is No. 68 (g), which runs thus:
"If at any ordinary general meeting 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 leave the vacancy or vacancies unfilled."
I leave on one side the argument, special to the circumstances of this case, that since six Directors retired and only five posts were sanctioned for the future, no one retiring Director could be said to have a 'place' into which he could be deemed to be re-elected. The claim may, I think, be disallowed upon more general grounds. Nor is it necessary to point out that, to declare these so-called co-optations valid by virtue of this provision, a perversion of it to a use that can never have been in contemplation would have to be countenanced. It is a necessary condition of its application that the ordinary general meeting should have come to an end without an election of directors ; indeed, it was with the object in view of rendering its application possible that the arguments to which I have already referred were with some strenuousness advanced. So long as the meeting exists, it appears that under the Articles, as they now stand, the Directors' posts remain vacant. It was to save any inconvenience arising from this that a provision existed in the Articles before amendment that the outgoing Directors should continue until their successors were elected (See old Art. 64), but whether by inadvertance or intention this has not been reproduced. If, as. I hold, the General Meeting has never been closed, this provision for automatic re-election admittedly can have no application, and the five Directors' places may still be filled up by election.
The remainder of the arguments addressed to us represent an attempt to prevent the Court from interfering. It would seem that in a case where the share-holders have, through no fault of their own, been deprived of their fundamental privilege of choosing their own management, and where that management has passed into the hands of persons with no legal title to enjoy it, if ever there were a case for the Court's interposition it must be this. Since however the learned trial Judge has taken a different view, and since the question has been elaborately argued before us, it is advisable that we justify the course we propose to take by reference to authority. The questions raised are, firstly, can an individual share-holder sue for the reliefs asked for by the plaintiffs, and, if so, secondly, ought the Court to interfere, having regard to such other remedies as may be available? It is worthwhile to repeat here the nature of the reliefs asked for. The plaintiffs sue for a declaration that they and the other share-holders are entitled to elect five share-holder's Directors, and for a direction that a proper election by poll be ordered; as a necessary preliminary they ask also that it may be declared that the appointment of persons to fill the vacancies by co-optation is illegal and invalid. In substance, therefore, the suit is one to establish and enforce the right of a share-holder to exercise his vote. Now on examining the authorities, it will be found that the cases may be grouped according as the injury complained of is an injury to the share-holder, by infringing his individual rights, or only an injury to the company in which the share-holder holds an interest. Cases falling within the former category may again be divided into those which relate to an injury to one or some only of the shareholders, and those which have arisen from a breach of duty towards all the share-holders; for it does not necessarily follow that, where all the share-holders (except those of them who contrive the injury) are affected, an individual share-holder is precluded from suing. The test depends upon the nature of the wrong alleged. An instance of a case where some only of the share-holders were denied their legal rights is Pender v. Lushington which arose irom a poll at which the Chairman ruled out certain votes which should have been included. Jessel M.R., in deciding that the action could be maintained by the single share-holder who brought it, observed: 'He is a member of the Company, and where he votes with the majority or the minority, he is entitled to his vote recorded, an individual right in respect of which he has a right to sue.' Other cases which fall within the same class are Pulbrook v. Richmond Consolidated Mining Company and Henderson v. Bank of Australasia. The class which concerns us here, however, relates to acts in derogation of the rights of all the share-holders, and is represented by a number of instances of suits brought by individual share-holders. In Moseley v. Koffyfontein Mines, Ltd., the plaintiff sued the company and Directors on behalf of himself and the other share-holders to restrain the unauthorised issue of capital. It was a matter affecting the share-holders as a body, but the plaintiff was allowed to sue because, as Fletcher Moulton, L.J., put it, 'it must be the right of a shareholder by reason of his being a share-holder to bring an action to stop such a proceeding.' It is to be observed that in such a case the Company itself, by resolution of its members, could also have sued to restrain the Directors from such an act. Another case involving a breach of duty by the Directors towards the whole body of share-holders is Alexander v. Automatic Telephone Company. Lindley, M.R., decided that it was not a matter of mere internal management—a description which it has been sought to apply to the conduct of the defendants in the present case—and that a suit by some of the share-holders was unobjectionable in form. Baillie v. Oriental Telephone and Electric Co., Ltd. related to failure on the part of the Directors to make a frank disclosure to the share-holders of the circumstances in which they claimed extra remuneration. It was argued that the plaintiff, a share-holder, was not entitled to sue to impeach the validity of a special resolution, but the Court of Appeal disallowed the objection on the ground, expressed by Swinfen Eady, J., that even a majority of the share-holders could not legalise an invalid act and prevent action being taken to set it aside. This case bears upon the further question we have to decide—the remedy, if any, open to the plaintiffs at the hands of the Company. In Hoole v. Great Western Railway Co., the power of the railway company to issue additional shares was in dispute. The question of the proper parties to the action was raised, and Sir John Rolt, L.J., saw no reason why any single share-holder should not be at liberty to file a bill to restrain the Company from exceeding its powers. 'If one individual having an interest complains of an act of the whole Company, or the executive of the whole Company, as being illegal, there is, as a general rule, no necessity for any other share-holders being present.
The other line of cases, in which it has been held that the Company, not the share-holder, is the party to complain, opens with Foss v. Harbottle, decided by the Court of Chancery in 1843. This was a suit brought by two share-holders against the Directors and some others alleging that the Directors, as Directors, had bought for an excessive price certain lands from themselves as private individuals, and, to find money for the purchase had mortgaged the Company's property in a manner unauthorised by the Act of Incorporation. Objection was taken that an individual share-holder could not sue, and the learned Vice-Chancellor, while conceding that in certain circumstances a suit might properly be so framed, agreed that this was not such a case. The injury alleged was an injury to the Corporation as a whole, inflicted upon it, as a. cestui que trust, by its trustees, and it was for the Corporation to deal with it. The purchase was not void, but only voidable, and if the Corporation should choose to ratify it no individual shareholder could resist such action. 'The very fact that the governing body of proprietors assembled at the special general meeting may so bind even a reluctant minority is decisive to shew that the frame of this suit cannot be maintained whilst that body retains it functions.' It might be that the mortgages were void, as ultra vires, but that would not in the circumstances dispose of the question, because, since the money received was expended in the manner stated, if the Corporation approved the Directors' action in making the purchases it could not complain of the manner in which they raised the money. The principles on which this case was decided were thus that there was no infringement of the individual rights of a share-holder, only a possible injury to the Company as a corporate body; and secondly, since it would lie with the Company to ratify it must also lie with it to challenge, whether by suit or otherwise. The same principles were applied by Lord Cottenham, L.C. in Mozley v. Alston where two share-holders complained of the omission of the twelve Directors to ballot out four of their number in order that four others might be elected in their stead. This case does certainly in some respects resemble the case now before us; but it is perhaps permissible to surmise that since 1847, when Mozely v. Alston was decided, some modification of the attitude then take up by the Court of Chancery has taken place, in the same way as Lord Cottenham himself recognizes that a relaxation was apparent in his own day "to meet the exigencies of modern times." The observations of Swinfen Eady, L.J., upon this case in Baillie v. Oriental Telephone and Electric Company, Ltd., suggest that the stringency of the rule laid down in these two earlier cases has been relaxed in more modern times. The remaining case of this class cited to us, MacDougall, v. Gardiner, dealt with what was at the most an irregularity and not an illegality, James, L.J., expressly excluding illegal, oppressive or fraudulent acts from the scope of the principles on which he acted. Even therefore, adopting the position assumed by these earlier Chancery cases in all its rigour, I do not find reasons in them to nonsuit the plaintiffs here.
Nor do I think, that the contesting respondents are on any better ground in contending that the plaintiffs should have availed themselves of facilities for rectifying the position afforded by the Articles of the Company. The learned trial Judge considered that it was open to the share-holders by special resolution to remove the so-called Directors from office, a course dependent upon securing a three-fourths majority. The reasonableness of referring the plaintiffs to such a procedure has not been pressed upon us in appeal, and indeed it hardly seems right to tell a share-holder who complains of acts committed in defiance of the Articles of Association that the enforcement of his legal rights is dependent upon securing such a majority. Mr. T.R. Venkatarama Sastri prefers to adopt the position that a mere majority of share-holders would be able to validate the acts performed ultra vires by the Chairman and his party, but here again, I think, that he bases his arguments upon a fallacy. It is no doubt, true that if the Directors of a Company act ultra vires, and if what they have done would be within the power of the Company, acting with its Memorandum and Articles of Association, to do, the Company can ratify the action taken. It cannot so ratify it by a simple majority if by a general resolution it could not sanction such a course. The effect of the cases cited to us has been thus summed up by Lindley (6th Edn., Vol. 1, page 769):
"……..if Directors or share-holders have done or are about to do that which is a fraud upon the minority, or is wrong, even if sanctioned by a majority, then an action by some of the members on behalf of themselves and others, or by a member suing alone, may be sustained, for otherwise the dissentients would be without redress."
It is surely enough to point out that even a majority cannot act in breach of rules which they have agreed shall regulate their actions. "The articles", observed Swinfen Eady, J., in Boschoeck Proprietary Company, Limited v. Fuke, "until altered, bound the share-holders in general meeting as much as the board", the case being one of an attempted confirmation of a Director not possessing the necessary qualifications. The Indian Companies Act gives statutory force to this principle by providing in Sect. 21 that the Memorandum and Articles shall bind the Company or the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each to observe all their provisions. Accordingly to say that the course taken in the present case could have been ratified by the vote of the majority is equivalent to saying that the Articles permit the election of Directors to be made otherwise than at the Ordinary General Meeting, as Art. 68 (f) provides,' and otherwise than by submission of the name of all eligible candidates to the choice of the voters. It is evident, that a resolution proposing that certain five persons be appointed Directors is not only unauthorised by the Articles, but would be a departure not only in form but in effect from the accepted procedure.
I have come to the conclusion, therefore that, the only course compatible with enforcing the rights to which the plaintiffs are entitled under the Articles of Association is to declare that the so-called co-optation of defendants 3 to 7 to the vacant post of Directors is illegal, and that the share-holders are entitled to elect five of their number to those vacancies. The 3rd defendant, as Chairman, will be directed to proceed with the operation of election, and to take a poll after due notice to all share-holders, and within ten days of the date of this judgment. Defendants 1-3 and 7 will pay the plaintiffs' costs here and below, and each defendant will pay his own costs. In view of the importance of the case we fix the advocate's fee for the appeal at Rs. 1,000. The actual cost of printing will also be included in the costs.
Cornish, J.—I agree that the co-option of Defendants 3 and 4 on the 16th October, and of Defendants 5 ,6 and 7 on the 23rd October as Directors cannot be justified under Arts. 68 (h) or 86 of the Articles of Association and was ultra vires. Defendant 4 filed a written statement claiming to be of the directorate by reason of his co-option by defendants and 2, but we are told that he has since withdrawn from that body.
Defendants 5 and 6 by their written statements have repudiated their supposed co-option. They claim that as retiring Directors they continue in office till their successors are actually elected, or that by virtue of provision of Art. 68 (g), they are to be deemed to have been re-elected. These two defendants together with Defendants 3, 7 and 8 are five of the six shareholders' Directors who under the Articles of Association were due to retire at the Ordinary General Meeting on the 13th October. Defendants 3 and 7 also rely on Article 68 (g). Defendant 8 has not put in a written statement. The learned Counsel for Defendants 5 and 6 has not pressed the first part of his clients' contention, and I think it is untenable. "A Director," said Sargant, J., in In re Consolidated Nickel Mines Ltd. "does not ordinarily step into an office which is pepetual unless terminated by some act, but into an office the holding of which is limited by the terms of the Articles." By Art. 63 the six share-holders' Directors vacated office at the Annual General Meeting on the 13th October. Having vacated their office, at that meeting, there could be no question of their still continuing in the office when a poll was pending to fill up the vacancies caused by their retirement. The provisions of Art. 68 (g) then have to be considered. This says: "If at any ordinary 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 leave the vacancies unfilled." It has been suggested that Art. 68 (g) can have no application, because there were six Directors due to retire, but under the amended Articles only five vacancies to be filled. But admittedly one of these gentlemen had written to the Chairman on the 13th October stating that for reasons of health he was not standing for election, and I do not see how a person who has withdrawn his candidature for election could be regarded as capable of being deemed to have been re-elected under the provisions of Act. 68 (g). There would, therefore, be no objection on that ground to the five retiring Directors, who were seeking re-election, having the benefit of this article.
The question is, whether, in view of what happened on the 20th October, there has been such a failure to elect Directors as will entitle Defendants 3, 5, 6, 7, and 8 to claim to have been re-elected in pursuance of Art. 68 (g). In other words, has the meeting at which the election of Directors ought to have taken place terminated without the vacancies being filled up? Now it is beyond dispute that when the share-holders arrived at the Company's premises for the poll, which had been fixed by 3rd defendant, the Chairman, to be held there between the hours of 4 and 6 p. m., it was not until 5-20 p.m., that they learned that the Returning Officer appointed to take the poll was unable to attend. No arrangements had been made for any other person to conduct the poll. The Assistant Manager who was on the premises reported that he had no instructions in the matter; and it is admitted by the Returning Officer that the proxies and voting papers for the poll were locked in a safe of which he had the key, and were not available because the 3rd defendant, to whom he sent the keys when he reported his inability to attend, was absent from Madras and did not get his message until 6-45 p.m., that evening. In has been contended that, in spite of all this, the assembled share-holders had the remedy in their own hands; that under Art. 44 they might have chosen one of their number of he Chairman in the absence of the 3rd defendant and have proceeded with the business of the poll, using such pieces of paper for the purpose of voting papers as might have been available; or that under Art. 46 they might have resolved to adjourn the meeting to some other date for the taking of the poll. Articles 44 and 46 in terms apply to ordinary general meetings. In my opinion, an assembly of share-holders for the purpose of recording their votes at a poll has no power to fix some other date than that already fixed for the holding of the poll. The position, when a poll has been demanded and directed to be taken at a future date, is that the meeting subsists in contemplation of law until the poll has been taken; or, as Lord Justice Brett expressed it, "the taking of the poll is a mere enlargement of the meeting at which it was demanded.": The Queen v. Wimbledon Local Board . See also Shaw v. Tati Concessions Ltd. and Spiller v. Mayo Development Co. Ltd.. In the last mentioned case Russel, J., said:—"It was well settled that the taking of the poll was not a meeting of the company in the strict sense, but was in law a continuation of the meeting at which the poll was directed to be taken." Article 49 regards the taking of the poll in the same sense; for it says, "the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded." The conclusion upon these authorities is, the legal conception of the meeting being that it continues for the purpose of taking the poll, that the meeting continues for that purpose only and for no other purpose or business.
The last question, therefore, resolves itself into this—has the breakdown of the arrangements for the poll on the 20th October put an end to the taking of a poll? I do not think so. In my opinion, the words in Art. 68 (g) "If at any Ordinary General Meeting at which an election of Directors ought to take place", imply that it must be possible for the poll to be taken at the appointed time and place. There must at least be a reasonable opportunity to the voters and to the candidates of having the poll taken: see Reg v. Lambeth. In the present case it is to be observed that there were eleven candidates for the five vacancies. And if unforeseen circumstances have arisen to prevent the poll being taken, then I think that, not only has there been no termination of the election but, that it became the duty of the Chairman, the 3rd defendant, (and he had the power under the articles) to appoint some other time for the talking of the poll. The rule is, that a poll is demanded it must be taken, and this is so even though the Chairman refuses to grant the poll: The Queen v. Wimbledon Local Board. Art- 49 is equally emphatic. It says: "if a poll is demanded as aforesaid (i.e., at the General Meeting) it shall be taken"; and it goes on to provide that it is to be taken "in such manner, and at such time and place as the Chairman of the meeting directs and either at once, or after an interval or adjournment, or otherwise." The language of the article leaves no doubt in my mind that it was open to the 3rd defendant as Chairman, and indeed obligatory upon him, when he learned that the poll could not be held on the 20th, to appoint another date for it.
Finally, it has been objected that the matter being one of internal management of the Company's affairs the Court has no jurisdiction to interfere, and that the plaintiff's suit is unsustainable. It was upon this objection that the learned trial Judge dismissed the suit. A number of authorities have been cited to us. I do not think it necessary to refer to them in detail, because the law upon the subject has been compendiously stated by Lawrence, L.J., in Cotter v. National Union of Seamen, as follows:—
"If an act is intra vires the corporation, and therefore one which could be sanctioned by the majority of the corporators properly assembled in general meeting, the Court will not entertain any proceedings to restrain the doing of the act resolved upon, unless such proceedings are brought by the majority of the corporators and in the name of the corporation itself."
It has been contended that, assuming Defendants, 3, 5, 6, 7 and 8 have usurped the office of share-holders' Directors, this was a matter capable of confirmation by the Company in General Meeting—though no meeting of the Company has in fact sanctioned it. In other words, the argument is that the Company, which means, of course, a majority of the general body of shareholders, could by a resolution override the Articles which require Directors to be elected, and resolve that these five gentlemen, who have contrived to step back into office without an election should remain there. I do not think that this would be intra vires a general meeting of the share-holders, for the articles until altered (and this, according to Sect. 20, Indian Companies Act, can only be done by special resolution), bind the shareholders in General Meeting as much as the board: see Boschoeck Proprietary Co., Ltd. v. Fuke. It seems to me that the principle of that case governs this case where five gentlemen have been installed as Directors in contravention of the articles. Such a mode of constituting directors would be equally ultra vires the Board and the Company to sanction. This being the case, and there being no adequate remedy open to the plaintiffs under the articles, I think it falls within the rule that the Court has jurisdiction to entertain a suit by share-holders against the Company in respect of an infringement of their individual rights as share-holders when the interests of justice so require : Baillie v. Oriental Telephone and Electric Co., Ltd..
For these reasons, I agree that there should be a declaration that defendants 3, 5, 6, 7 and 8 are not Directors of the Company, and with the order directing the 3rd defendant as Chairman to take the poll.
Companies
Act
[2004]
51 scl 76 (mad.)
v.
Central Government
R.
Jayasimha Babu and S.R. Singharavelu, JJ.
December
31, 2003
Section 260 of
Companies Act is not meant to enable
company to keep on its board a person as additional
director for an indefinite period of time by not
holding AGM
Section 260, read with section 166 of the
Companies Act, 1956 - Directors - Additional directors - Board of directors of
a banking company comprised of additional directors, chairman and two directors
nominated by RBI - Though Annual General Meeting (AGM) of company had not been
held for over seven years, additional directors asserted their right to remain
on board - Additional directors in a board meeting passed a resolution seeking
removal of Chairman nominated by RBI - On Central Government’s application, CLB
directed that board of directors be superseded and that nominated directors
would function as board till AGM was held - Whether additional directors had no
right to remain on board as directors as their term had come to an end long
ago, on date on which, AGM for different years should have been held and their
failure to hold meeting could not be taken advantage of by them to hang on to
position of directors indefinitely - Held, yes - Whether there was no
illegality in directions issued by CLB in superseding board which comprised of
additional directors and in its place empowering nominee directors, whose
tenure was not dependent upon and was not for any specified period to function
as directors - Held, yes - Whether annual general meeting which had not been
held for several years must be held with utmost expedition - Held, yes
The board of
directors of a banking company comprised of 15 directors. Three, including the
chairman were nominees of the RBI. Ten directors were additional directors who
had not been elected by the general body, but had been co-opted to the board.
The banking company had not held its AGM for over seven years and the
additional directors asserted a right to remain on the board despite their
admitted failure to convene and hold the AGMs. Having regard to the
unsatisfactory state of affairs of the bank, the Central Government approached
the Company Law Board (CLB) with a petition under sections 397 and 398, seeking
suitable directions with regard to the management of the affairs of the bank.
One of the prayers was that the Central Government be given power to nominate
the majority of the directors on the board of the bank. After the Central
Government’s petition, the additional directors, at a board meeting passed a
resolution seeking the removal of the Chairman who had been nominated by the
RBI. That conduct on part of the additional directors provoked the Central
Government to apply to the CLB, seeking the supersession of the board. The CLB
gave ex parte, directions that the board of directors of the company be
superseded with the further direction that a committee comprising of three
nominee directors of the RBI, one of whom was the chairman and the two other
directors nominated by the Central Government, would function as the board till
the application that was filed by the Central Government before it for
superseding the board was finally decided. Certain other directions also had
been given with regard to the holding of the AGM. The legality of that
direction of the CLB had been challenged by the appellant-additional director.
In instant
case, the last annual general meeting was held some time in the year 1996 and
no annual general meeting had been held thereafter. It was the stand of some of
the additional directors that they had a right to remain in office as
directors, until such time as a AGM was, in fact, held. That claim was not one
which could be accepted. Section 260 is not meant to enable persons to become
directors of a company without having to obtain the support of the general body
and thereafter, remain on the board for years together by not holding the AGM.
[
The provision
for an additional director is one which is meant to enable the companies to
have the benefit of the services of a person, who otherwise is suitable for
serving on the board, and whose presence in the Board is desirable in the
interests of the company, till the time the next AGM is held. That provision is
not meant to enable the company to keep on its board a person as additional
director for an indefinite period of time by not holding the AGM. Section 260,
therefore, must necessarily be read with section 166 which stipulates that the
AGM be held every year and not more than fifteen months shall elapse between
the date of one AGM and the next. [Para 14]
All the
additional directors, therefore, were persons who had no right to remain on the
board as directors as their term had come to an end long ago, on the date on which
the AGM for different years should have been held. Their failure to hold the
meeting could not be taken advantage of by them to hang on to the position of
directors indefinitely. [Para 19]
The fact that
the Central Government has the power to convene a meeting is, however, evident
from a perusal of section 167. The additional directors who were on the board
had obviously made no attempt whatsoever to invoke section 167, if they were of
the view that there were impediments to their being able to call a meeting and
that it was necessary to apply to the Central Government for having such a
meeting called and held. The additional directors could not take advantage of
their own acts of omission in that regard. [Para 21]
All those ten
additional directors had vacated their office of directors long ago and could
not assert any right to remain on the board. The ‘de facto’ doctrine would save
the decisions taken by them when they acted as directors despite their having
in law vacated their office. That, however, did not clothe those persons with
any right to remain in office ‘de jure’. [Para 22]
Therefore,
there was no illegality in the directions issued by the CLB in superseding the
board which comprised of additional directors and in its place empowering the
nominee directors, whose tenure was not dependent upon and was not for any
specified period to function as directors, the Chairman also being a nominee of
the Reserve Bank of India. [Para 23]
That
arrangement, however, could only be for a limited period till the AGM was held.
The AGM which had not been held for several years must be held with utmost
expedition. [Para 24]
The CLB should
fix the date for holding the AGM after giving sufficient time for the despatch
of notice. [Para 28]
A. Ananthalakshmi
Ammal v. Indian Trade & Investments Ltd. AIR 1953 Mad. 467 (para 15) and
Krishnaprasad Jwaladutt Pilani v. Colaba Land & Mills Co. Ltd. AIR 1960
Bom. 312 (para 16).
R.
Thiagarajan and A.R.L. Sundaresan for the Appellant. M.T. Arunan,
A.L. Somayaji, R. Sankarasubramanian, V.T. Gopalan, K. Renganatha Reddy, P.S.
Raman, Arvind Pandiyan and Murari for the Respondent.
R. Jayasimha
Babu, J. - In this appeal one of the additional directors of the Tamil Nadu
Mercantile Bank Limited has challenged the ex parte directions given by the
Company Law Board that the Board of Directors of the Company be superseded with
the further direction that a committee comprising of the three nominee
directors of the Reserve Bank of India, one of whom is the Chairman, and the
two other Directors nominated by the Central Government, function as the Board
till the application that was filed by the Central Government before it, for
superseding the Board is finally decided.
2. Certain other directions
also have been given in that order with regard to the holding of the Annual
General Meeting which has been deferred by the Company Law Board in order that
the share certificates may be despatched to the persons entitled thereto, as
the number of such transfers is large, and the Investors Forum which had
organised and effected purchase of about thirty four per cent of the issued
shares and which had been allowed to assist the Board in this regard has not
yet been able to complete its work.
3. A group led by a
non-resident Indian had purchased about sixty seven per cent of the paid up
capital some time prior to the year 1996. However, the shares were not
transferred in favour of the purchaser, the Reserve Bank of India whose consent
for transfer was required under the Banking Regulation Act having declined to
grant approval for the transfer, on the ground that the purchaser was an
industrial house.
4. Subsequently, that
group is said to have transferred about thirty four per cent of the paid up
capital to the members of the Investors Forum, which is said to represent over
25,000 investors belonging to the Nadar community, which community it is said
by counsel, regards this bank as their own and meant for them. The balance
thirty three per cent, we are informed, has been transferred by the NRI
purchaser to four investment companies belonging to a group known as Sterling
Group. As each of the companies has purchased more than five per cent of the
paid up capital, transfer in their favour has not yet been effected as the RBI
is yet to give its approval for the transfer.
5. The Board of Directors
comprises of 15 Directors. Three including the Chairman are nominees of the
RBI. Two have been nominated by the Central Government pursuant to direction given
earlier by the Company Law Board. The other ten Directors are persons who had
not been elected by the General Body, but had been co-opted to the Board. Such
co-option in case of many of these Directors was by persons who had themselves
been co-opted. This Banking company has not held its Annual General Meetings
for over seven years. These Additional Directors assert a right to remain on
the Board despite their admitted failure to convene and hold the Annual General
Meetings.
6. Having regard to the unsatisfactory
state of affairs of this Bank, the Central Government approached the Company
Law Board initially with a petition under section 408, which was subsequently
amended into one under sections 397 and 398, seeking suitable directions with
regard to the management of the affairs of this Bank. One of the prayers is
that the Central Government be given power to nominate the majority of the
Directors on the Board of the Bank.
7. After the Central
Government had amended the petition, further developments, wholly
unanticipated, took place which, having been brought to the notice of the
Company Law Board, it was prompted to make the ex parte order superseding the
Board of Directors.
8. On 25th November, 2003
at a Board Meeting the additional directors passed a resolution removing, the
resolution having been later modified as one seeking the removal of the
Chairman who had been nominated by the Reserve Bank of India. The Reserve Bank
of India did not agree to such removal being effected. Thereafter a suit was
filed to restrain the Chairman from functioning as Chairman. An interim order
was also secured which had to be challenged before this Court and this Court
suspended that interim order. The Chairman who was nominated by the Reserve
Bank of India now is functioning as the Chairman of the Board.
9. The Chairman in his affidavit filed in this Court has narrated
the high handed conduct of these additional directors, who having been thwarted
in their cozy arrangements of utilising the Bank’s funds for their business by
obtaining liberal foreign currency loans at low rates of interest, had after
passing the resolution for the removal of the Chairman deprived him of all the
facilities that he was entitled to have as Chairman, and had prevented him from
discharging his duties as Chairman. He is a formal General Manager of another
scheduled Bank.
10. This conduct on the part
of the additional directors in trying to rest control of the Board for
themselves and the manner in which they went about doing it by ousting the
Chairman who had been appointed by the Reserve Bank of India in the public
interest provoked the Central Government to apply to the Company Law Board,
inter alia, seeking the supersession of the Board. The Company Law Board which
took up the application for hearing immediately after it was filed was of the
view that the developments brought to its notice warranted an ex parte
supersession pending consideration of the application that had been filed by
the Central Government.
11. The legality of that direction
has been challenged before us by one of the additional directors, the other
additional directors supporting him through their counsel.
12. Additional Directors are
appointed under section 260 of the Companies Act, which, inter alia, provides
that additional Directors shall hold office only ‘upto the date of the next
Annual General Meeting’ of the Company. Section 166 of the Companies Act which
deals with the Annual General Meeting provides that every company shall in each
year hold in addition to any other meetings, a general meeting as its annual
general meeting. It also provides that not more than fifteen months shall
elapse between the date of one general meeting of a company and that of the
next.
13. In this case, admittedly
the last annual general meeting was held some time in the year 1996 and no
annual general meeting has been held thereafter. It is the stand of some of the
additional directors before us that they have a right to remain in office as
Directors, until such time as a annual general meeting is, in fact, held. This
claim is not one which can be accepted. Section 260 was not meant to enable
persons to become directors of a company without having to obtain the support
of the general body and thereafter, remain on the Board for years together by
not holding the annual general meeting.
14. The provision for an
additional director is one which is meant to enable the companies to have the
benefit of the services of a person, who otherwise is suitable for serving on
the Board, and whose presence in the Board is desirable in the interests of the
company till upto the time the next annual general meeting is held. That
provision is not meant to enable the company to keep on its Board a person as
additional director for an indefinite period of time by not holding the annual
general meeting. Section 260 of the Act, therefore, must necessarily be read
with section 166 of the Act which stipulates that the annual general meeting be
held every year and not more than fifteen months shall elapse between the date
of one annual general meeting and the next.
15. A Division Bench of this
Court comprising of Rajamannar, C.J., and Venkatarama Aiyar, J., as he then was
in the case of A. Ananthalakshmi Ammal v. Indian Trades and Investments Ltd.
AIR 1953 Mad. 467 with Venkatarama Aiyar, speaking for the Bench, after a
review of the English cases, held that directors of a company who are due to
retire at an annual general meeting vacate their office on the last date on
which the annual general meeting should have been held though the meeting in
fact was not held.
16. The Bombay High Court in
the case of Krishnaprasad Jwaladutt Pilani v. Colaba Land & Mills Co. Ltd.
AIR 1960 Bom. 312, a case which was argued by a galaxy of Company lawyers, considered
the question as to whether the elected Directors can continue after the expiry
of the statutory period laid down for calling of the Annual General Meeting,
and held that “we find little difficulty in reaching the conclusion that a
Director vacates his office at the latest on the last day on which an Annual
General Meeting could have been called as required by section 166”.
17. The Court also
considered in that case the tenure of Additional Directors and held that all
directors - whether elected or co-opted vacate office on the last date on which
the Annual General Meeting should have been called under section 166. The Court
rejected the contention that despite the breach on the part of the directors of
their statutory duty to call for AGM, they would still continue to be Directors
till the AGM is in fact held.
18. In reaching the
conclusion it did, the Bombay High Court followed the decision of a Division
Bench of this Court in the case of A. Ananthalakshmi Ammal (supra).
19. All the additional directors,
therefore are persons who have no right to remain on the Board as Directors as
their term came to an end long ago on the date on which the annual general
meeting for different years should have been held. Their failure to hold the
meeting cannot be taken advantage of by them to hang on to the position of
Directors indefinitely.
20. It was submitted by
counsel that under section 167 the Central Government has power to call for an
annual general meeting and that an attempt by a shareholder was in fact made to
have such a meeting called but without success. We have not been shown the
orders of the Central Government or the record in relation to that alleged
attempt.
21. The fact that the
Central Government has the power to convene a meeting is however evident from a
perusal of section 167. The additional directors who were on the Board had
obviously made no attempt whatsoever to invoke section 167 if they were of the
view that there were impediments to their being able to call a meeting and that
it was necessary to apply to the Central Government for having such a meeting
called and held. The additional directors cannot take advantage of their own
acts of omission in this regard.
22. All these ten additional
directors had vacated their office of Directors long ago and cannot assert any
right to remain on the Board. The ‘de facto’ doctrine will save the decisions
taken, when they acted as Directors despite their having in law vacated their
office. That, however, does not clothe these persons with any right to remain
in office ‘de jure’.
23. We, therefore, do not
find any illegality in the directions issued by the Company Law Board
superseding the Board which comprised of additional directors and in its place
empowering the nominee directors whose tenure was not dependent upon and was
not for any specified period to function as Directors, the Chairman also being
a nominee of the Reserve Bank of India.
24. This arrangement however
can only for a limited period till the annual general meeting is held. The
annual general meeting which has not been held for several years must now be
held with utmost expedition. The Company Law Board has already directed that
the process of distribution of share certificates to the members of the
Investors Forum be completed before the 25th January, 2004, that the Members
Register close as on that date, and that notice of the AGM be sent to those
whose names appear in the Register of Members on that date.
25. We must however take
note of the Reserve Bank of India’s failure to act with a sense of urgency with
regard to application said to have been sent to it some time in October 2003
with regard to the transfer of shares to four investment companies belonging to
the Sterling Group. The transfer of shares in their favour has already been, we
are told, approved by the Board of Directors of this company, subject to the
Reserve Bank of India giving its approval.
26. Learned Additional
Solicitor General who appeared for the Reserve Bank of India assured us that
the Reserve Bank will definitely take a decision and communicate the same to
the company within a period of two weeks from today.
27. We direct the Reserve
Bank of India to complete the process within two weeks from today so that
thereafter, in the event of the transfer being approved, notice of the AGM can
be sent to the purchasers after bringing their names on record in the Register
of Members, and in the event of permission being refused, notice of the meeting
can be sent to persons in whose names those shares presently stand in the
Register of Members.
28. The Company Law Board
shall fix the date for holding the annual general meeting after giving
sufficient time for the despatch of notice and that meeting shall as far as
possible be held before the end of February 2004 and in any event not later
than 15th March, 2004.
29. The Committee now
constituted by the Company Law Board under the impugned order shall only take
decisions with regard to day-to-day matters and the normal functioning of the
bank and shall not embark upon any new major project or take any major decision
affecting the future of the bank, as the directors to be elected by the general
body should have the opportunity to deal with those matters after the annual
general meeting is held.
30. We make it clear that
the Company Law Board may proceed with the hearing of the application filed by
the Central Government after the counter affidavits of the respondents to that
application are filed before it and make appropriate orders thereon.
31. This
appeal is dismissed.
[1973] 43 Comp. Cas. 17 (Bom.)
HIGH COURT OF
v.
Lalji B. Desai
S.B. BHASME, J.
First
Appeal No. 262 of 1971
July 26
and 27, 1971
F.S. Nariman for the appellants.
G.A. Thakkar with A.N. Mody,
D.H. Buck with G.K. Munshi for the respondent.
Bhasme, J.—This is an
appeal by defendants Nos. 2 and 3 and is directed against the judgment and
decree passed in the suit filed by respondents Nos. 1 and 2 against the
appellants and respondent No. 3. The suit was for a permanent injunction
restraining respondent No. 3 and its directors, servants and agents from
allowing the appellants to act as directors of the respondent No. 3-company. A
similar injunction was also claimed against the appellants restraining them
from acting in any manner as the directors of the respondent No. 3-company.
Respondent No. 3 is a
public limited company registered under the Indian Companies Act and carries on
business, inter alia, as manufacturer of rayon yarn and has its registered
office at
The plaintiffs by the suit
challenged the legality of the appointment of the appellants on certain
grounds. According to the plaintiffs the number of directors on the board can
be increased by the company under section 258 of the Indian Companies Act by passing
a resolution. No such resolution was ever duly notified, proposed and passed.
In the absence of any such resolution, respondent No. 3-company had not the
power to appoint the appellants as directors. The plaintiffs submit that
resolution Nos. 5 and 6 are, therefore, invalid, void and of no effect.
The plaintiffs also submit
that without prejudice to the aforesaid ground, the appointment of the
appellants as directors was illegal, void and of no effect as they had not
filed letters of consent under section 264(1) of the Act in respect of their
proposed appointment as directors at the annual general meeting. The
plaintiffs, as shareholders of respondent No. 3-company, have the right to
property in respondent No. 3-company. It is for this reason that they had filed
the suit restraining the appellants from acting as directors of respondent No.
3-company.
Respondent No. 3-company
filed its written statement and submitted that the appointment of the
appellants as directors was valid and legal. It has stated that a separate
resolution to increase the number of directors was not required under the
provisions of the law. The company also stated in paragraph 12(a) of the
written statement that on 9th April, 1969, the appellants had filed their
letters of consent to act as directors, if appointed. After receipt of these
letters the appellants were appointed as directors. It is mentioned in the
written statement that after their appointment as additional directors on 10th
April, 1969, two shareholders delivered to the company notices under section
257 of the Act intending to propose the appellants as candidates for the office
of the directors of respondent No. 3-company at the next annual general meeting
of the company. The appellants were not required to file any letters of consent
under section 264(1) of the Act before their election as directors at the 22nd
annual general meeting. According to the company the appellants were validly
proposed and elected as directors.
The appellants between
themselves filed one written statement and supported the validity of their
appointment on all the grounds alleged by respondent No. 3-company. In addition
the appellants stated that on their appointment as additional directors, the
strength of the board was increased to 10 directors. In paragraph 8 of the
written statement it is submitted that they were not required to file any
letters of consent under section 264(1) of the Act before their appointment as
directors at the meeting. Without prejudice to this defence it is also pleaded
that they did file the letters of consent on 9th April, 1969, with respondent
No. 3-company. They argued that, as additional directors, they were persons to
whom section 264(1) of the Act did not apply. Assuming that there was any such
requirement, it is asserted that it was a mere irregularity and that did not
disable them from acting or functioning as directors. The made it clear that it
was implicit in the two resolutions appointing them as directors that the
number of directors was, if necessary, being increased. According to them no
separate resolution under section 258 or article 169 of the articles of
association of the company was necessary for increasing the number of directors
from 8 to 10. At any rate, the absence of any separate resolution will not
affect the validity of the resolution appointing them as directors of
respondent No. 3-company. They denied that it is mandatory under section 258 of
the Companies Act or under article 169 of the articles of association of the
company that before the number of directors is increased, a resolution
increasing the number of directors ought to have been duly notified or proposed
or passed. There were other allegations made by the appellants against the
plaintiffs but for deciding the points raised in this appeal they are not at
all relevant. As the parties had not sought any issues on the basis of those
allegations, the learned judge was not called upon to consider whether they
were true or false. The substance of those allegations was that according to the
appellants the plaintiffs had filed the suit mala fide at a late stage at the
instance of one Rasiklal J. Chinai who was defeated in the contest for election
of directors at the general meeting of the shareholders of respondent No.
3-company.
At the trial the learned
judge framed the relevant issues. Parties did not lead any oral evidence. By
consent of the parties only documents were exhibited. The defendants had also
resisted the suit on the ground that the plaintiffs being shareholders cannot
have any grievance against respondent No. 3-company as the matter in dispute
was concerning the internal management of the company and the suit by the two
shareholders was not maintainable. Perhaps it was felt by the parties that the
issues arising in the suit are purely questions of law and it was not necessary
to adduce any oral evidence.
The learned judge, on a
consideration of the evidence on record and the submissions of the parties, has
recorded his findings. He held that the present suit is maintainable. He came
to the conclusion that the letters of consent under section 264(1) of the Act
for the appointment of the appellants as directors at the annual general
meeting were not necessary. In view of this finding he held that whether or not
such letters were filed need not be considered. According to him the impugned
resolutions Nos. 5 and 6 passed at the annual general meeting of the company on
June 11, 1969, appointing the appellants as directors of the company were
illegal. Consistent with this finding the learned judge decreed the plaintiff’s
suit and granted the injunctions against respondent No. 3-company and the
appellants.
As stated above the
appellants, aggrieved by the decree, have come to this court with the present
appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody,
instructed by M/s. Haridas & Co., appears for respondents Nos. 1 and 2, the
original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi, instructed by M/s.
Bhaishankar Kanga and Girdharilal,
appears for respondent No. 3-company. It must be stated at the outset that
respondents Nos. 1 and 2 have purported to file cross-objections against the
finding recorded by the learned judge about the consent letters under section
264(1) of the Act. Mr. Thakkar conceded that the cross-objections are
misconceived but mentioned that he had the right, as an advocate appearing for
the respondents, to assail the decree under appeal on any of the grounds
decided against him. Therefore, the points for determination in this appeal
are:
(1) Whether the board of directors of
the company before and after the annual’ general meeting consisted of ten
members or whether at the annual general meeting the strength of the board of
directors was increased from 8 to 10.
(2) Whether the company can increase the
strength of the board of directors only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts.
(3) Has the board of directors
contravened the mandatory provisions of section 173 of the Act by not
furnishing any information about the proposed special business or by furnishing
information, which is hopelessly inadequate or misleading?
(4) Can the plaintiffs rely on the above
contraventions in any form without specific averments in the plaint?
(5) Has the learned judge erred in
holding that the additional directors, like the retiring directors, are not
required to file written consent duly signed before their reappointment as directors
by the company?
(6) Is the suit not competent as the
alleged irregularities arise in the course of the internal management of the
company?
Before
I proceed to consider the various points urged before me, it is desirable to
refer to the relevant provisions of the Companies Act, 1956, and the articles
of association of respondent No. 3-company.
Section
2(13) of the Companies Act defines “director” as any person occupying the
position of director, by whatever name called. Section 255 provides for the appointment
of directors and the proportion of those who are to retire by rotation. Section
256 contains provisions for ascertainment of directors retiring by rotation and
filling up of the vacancies. Under section 257 a person who is not a retiring
director shall be eligible for appointment to the office of director if he or
some member intending to propose him has, not less than fourteen days before
the meeting, left at the office of the company a notice in writing under his
hand signifying his candidature for the office of director or the intention of
such member to propose him as a candidate for that office. The other provisions
of section 257 are not quite relevant and need not be referred to here.
Under section 358 of the
Act, subject to the provisions of sections 252 255 and 259, a company in
general meeting may, by ordinary resolution, increase or reduce the number of
its directors within the limits fixed in that behalf by its articles. Section
259 in certain cases requires the sanction or approval of the Central
Government for any increase in the number of its directors. Section 260
provides that the board of directors, if permitted by the articles of
association, can appoint additional directors. The board is to exercise that
power so as not to exceed the maximum strength fixed for the board by the
articles. The first proviso to section 260 makes it clear that such additional
directors shall hold office only up to the date of the next annual general
meeting of the company. Section 262 deals with the filling of casual vacancies
amongst directors. Under section 263(1) ordinarily there will be only one
resolution for the appointment of one director at the annual general meeting of
the company. A single resolution is permitted under certain special circumstances
for appointing more than one director. Section 263(2) provides that a
resolution moved in contravention of sub-section (1) shall be void, whether or
not objection was taken at the time to its being so moved. Section 264(1) under
certain circumstances requires that the candidate for directorship should file
his written consent with the company before his appointment as director at the
meeting. Section 264(2) requires that a person appointed as a director shall
not act as a director unless he has within the prescribed time signed and filed
his consent with the Registrar to act as such director.
Apart from the group of
these sections, there are two more sections, which assume importance while
deciding the points, which arise in this appeal. Section 172 requires that
every notice of a meeting of a company shall contain certain relevant
particulars. Leaving the other details, I must only mention that under section
172(1) such notice shall contain a statement of business to be transacted at
the meeting. Under section 173(1)(a) in the case of an annual general meeting,
all business to be transacted at the meeting shall be deemed special, with the
exception of the business relating to four specified items. Item No 3 deals
with the appointment of directors in the place of those retiring. Section 173
(1)(b) makes it clear that in the case of any other meeting, all business shall
be deemed special. Section 173(2) contains a direction that where any items of
business to be transacted at the meeting are deemed to be special under
sub-section (1), there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each such item of business,
including in particular the nature of the concern or interest, if any, therein
of every director, the managing agent, if any, the secretaries and treasurers,
if any, and the manager, if any. The proviso also requires further and better
particulars in specified cases. It is not necessary to refer to that proviso at
any length.
Now it remains to mention the relevant articles of association of the company. Under article 142, the directors have power at any time and from time to time to appoint any other qualified person to be a director as an addition to the board so that the total number of directors at any time shall not exceed the maximum fixed. Any person so appointed as an addition to the board shall retain his office only up to the date of the next annual general meeting but shall be eligible for re-election at such meeting. Under article 164, at every annual general meeting of the company, one-third of such of the directors for the time being as are liable to retire by rotation or, if their number is not three or a multiple of three, the number nearest to one-third shall retire from office. Article 166 makes it clear that a retiring director shall be eligible for re-election. It is true that counsel on either side did refer to other sections and articles to elucidate the various points raised by them. I need not consider them all at this stage.
The
first point made by Mr. Nariman on behalf of the appellants is about the
strength of the board of directors of the company. He objected to the
expression “functioning directors” and “additional directors” as used by the
plaintiffs in the plaint. He said that there is no warrant for any such
distinction. Whether the directors are appointed at the meeting or by the board
of directors, they all together constitute the board. The directors in that
capacity have the same rights, privileges and obligations under the provisions
of the Act. He referred to the definition of “director” as contained in section
2(13) of the Companies Act. In all other places in the Act the board of
directors was mentioned as such and he says that the distinction sought to be
made by the plaintiffs is without any legal significance. It appears to me that
the plaintiffs have used the different expressions only for a better
understanding of their case. The appellants were, in the first instance,
appointed as additional directors and later on they were reappointed as
directors. But, apart from this fine distinction in phraseology, the point of
substance made by Mr. Nariman is that the company had not increased the number
of directors from 8 to 10 at the annual general meeting by the reappointment of
the appellants. When the board of directors in exercise of their power under
section 260 of the Act co-opted the appellants, the number of directors on the
board was increased from 8 to 10. Even at the meeting the number was not
reduced. The two directors retired by rotation and the two additional directors
ceased to hold office. There were, therefore, four clear vacancies. When the
company passed four resolutions reappointing the four persons as directors
there was no increase and the provisions of section 258 are not attracted. I
find it very difficult to accept this submission. The composition of the board
of directors with additional directors will not be the same as the board of directors appointed by the company at the general meeting.
It cannot be said that the company had at any time surrendered its inherent or
statutory power to increase the number of directors on the board when the board
appointed or co-opted additional directors. As observed by Lord Hanworth M.R.
in Worcester Corsetry Limited v. Witting, the
power conferred on the directors to appoint additional directors is a temporary
power vested in them, and this is to be reviewed and perhaps confirmed at the
general meeting. Even the wording of section 260 underlines the temporary
nature of this power conferred on the board of directors. Section 260, first
proviso, makes it clear that such directors shall hold office only up to the
date of the next annual general meeting. It is true that under article 142 of
the company, the board of directors can appoint any number of additional
directors at any time and from time to time so as not to exceed the permitted
maximum limit. Consistent with the first proviso to section 260, the article
also makes it clear that the person so appointed as an addition to the board
shall remain in office only up to the date of the next annual general meeting.
I am of the view that the board of directors cannot by the appointment of additional
directors increase the strength of the board so as to affect the power of the
company vested in it under section 258 of the Act.
Then Mr. Nariman argued
that the learned judge was not justified in holding that the company can
increase the strength of the board only by passing a separate and distinct
resolution before proceeding to appoint directors by filling the additional
sanctioned posts. I have not used the exact words of the learned judge but in
substance that appears to be the finding recorded by him. According to Mr.
Nariman all that section 258 requires is that the company, subject to the other
restrictions imposed on it, must resolve to increase or reduce the number of
directors in the general meeting. The section itself has not prescribed any other
formality for effecting the increase or decrease in the number of directors.
Mr. Nariman points out that under the Companies Act, wherever separate
resolutions were found necessary, provisions were made in that behalf. He
referred to section 263 of the Act. I have already mentioned above the
substance of that section. Ordinarily, there will be a separate resolution for
appointing a person as a director at the annual general meeting of the company.
Mr. Nariman says that the company can exercise the power vested in it under
section 258 by passing one or more resolutions and as no form is prescribed,
one will have to look at the substance. When there are 8 members on the board
of directors, the company can by simply appointing two members in addition increase
the number and this can be done without passing a separate resolution. He says
that it is implicit in the act of appointing. The company has exercised the
power to increase the number.
While dealing with this
power of the company to increase the number, Mr. Nariman referred to the
corresponding English law and submitted that the provisions are substantially
similar. Mr. Nariman relied on an English case, Worcester Corsetry v. Witting. The
learned judges were considering the effect of two apparently inconsistent
articles of the company. But, as the case also dealt with the power of the
company to appoint directors and thereby increase the number, it has some
relevance while appreciating the point raised before me. Article 83 of Table A
contained the provisions similar to section 258 of the Indian Companies Act. At
page 649, Lawrence L.J. observes as follows about the existence of the power to
increase and its exercise by the company:
“Article 83 of Table A
shows in the plainest terms that the company has power to increase or reduce
the number of its board. It is said that that does not involve the nomination
and appointment of particular gentlemen or ladies as directors, but it seems to
me that that is necessarily implied in the provision of article 83. If, for
instance, there have been four directors, within the maximum number of
directors, and the board desire that two additional directors shall be
appointed, it can convene, in my judgment, a meeting under article 83 for the
purpose of increasing the number of directors by two named persons, appointing
these two persons, and thereby increasing the number of directors”.
Slesser L.J., at page 654,
approves the above observations and says:
“The more natural view of
article 83 is that it is not redundant or merely introducing unnecessary
machinery which is already provided by article 12 in dealing with the maximum
and minimum, but, as Lawrence L.J. has indicated, is itself conferring a power
not only to increase the number but to increase that number by itself
appointing directors to the extent to which it is intended to increase the
number”.
About the power of the
company to increase the number of directors under its articles of association,
the learned author in his book Pennington’s Company Law, 2nd edition, pages
456-57, sums up the legal position as under:
“The power to appoint
subsequent directors is usually exercisable by the members of the company in
general meeting by ordinary resolution. If the articles prescribe the maximum
number of directors who may be appointed, appointments in excess of the maximum
are void. Usually, however, the members are empowered to increase or reduce the
maximum number of directors by ordinary resolution, and then an appointment of
a director in excess
of the former maximum is taken to be an exercise of the power to increase the
number of directors, and is valid”.
While
making the last-mentioned observation, the learned author in the footnote has
referred to the above-mentioned case. So Mr. Nariman argued that section 258
was an enabling section, which authorised the company to increase or decrease
the number of directors just by an ordinary resolution. As singular includes
plural, one has to look at the result and not the number of resolutions to find
out whether the company has exercised the power vested in it.
Mr.
Thakkar, with equal force, stressed the word “resolution” and said that it was
a condition precedent to the valid appointment of directors resulting in the
increase of the number of directors. Any other construction, he says, will
render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish
the said decision on certain grounds. He says that article 83 construed by the
learned judges refers to a general meeting. Section 258 of the Companies Act
provides that the company may in general meeting by ordinary resolution
increase or reduce the number of its directors. In my opinion this distinction
is not one of substance. Any such difference in the wording will not affect in
any manner the efficacy of the observations made by the learned judges in the
above-mentioned case.
Then
Mr. Thakkar was at pains to point out that no such point was ever raised and
debated in that case. The observations of the judges quoted above are merely
obiter dicta. Mr. Thakkar says that the judges were reconciling the two
apparently conflicting articles which conferred the power of appointing
directors on the board of directors and the company. He referred to several
text books on Company Law, viz., Pennington’s Company Law, 2nd edition, page
456-57, Modern Company Law by C.B. Gower, 3rd edition, page 21, Palmer’s
Company Law, page 533, Halsbury’s Laws of England, volume 6, page 279, article
574, Buckley on the Companies Act, 13th edition, page 885, and submitted
that the above-mentioned authority was quoted by the learned authors to show
that the company had not surrendered its power to appoint directors in favour
of the board of directors. But, the decision is not cited by Mr. Nariman as a
binding authority on this court. Mr. Nariman relies only on the wording of the
article considered by the judges, which resembles the wording of section 258.
Under both the provisions the company has the power to increase the number of
directors. When the company at its meeting resolves to appoint additional
directors in excess of the present strength of the board, then it is an
instance where the company is exercising its two-fold powers. The company
increases the number not by separate resolution but by appointing additional
directors. The effect is that the company has increased the number of
directors. That appears to be a sensible construction which can be adopted
while interpreting the relevant provisions contained in section 258 of the
Companies Act, 1956. In the result, in my opinion, it is not necessary for the
company to pass a separate resolution increasing the number of directors before
appointing the directors to fill the additional sanctioned posts. In law it is
possible for the company to comply with the provisions of section 258 when it
chooses to appoint within the permitted limit additional directors so as to
increase the strength of its present board. The learned judge was in error in
coming to the conclusion that in the absence of a separate resolution the
appointment of the appellants as directors of respondent No. 3-compauy was null
and void. The legality of the resolutions Nos. 5 and 6 cannot be challenged on
the ground that there was any contravention of the provisions of section 258 of
the Act.
Then
I propose to consider points Nos. 3 and 4 together as the discussion of law is
likely to be overlapping. Point No. 3 will involve the consideration of the
provisions of sections 172 and 173 of the Act and point No. 4 is about the
sufficiency or otherwise of the pleadings.
I
have already set out above the relevant provisions of section 173 of the Act.
Section 173 will have to be read with section 172(1) of the Act. Under section
172(1) every notice of a meeting of a company, among other things, must contain
a statement of the business to be transacted at the meeting. Section 173(1)
contains classification of the business and indicates when the business shall
be treated as special. Under section 173(2) any items of special business
mentioned in the notice must be accompanied by a statement setting out all
material facts concerning such items of business.
Mr.
Nariman for the appellants drew my attention to the notice of the meeting, which
is produced at exhibit D at page 90 of the paper book. It is worth while to
reproduce the material items of business:
Serial
No. 3
To
elect a director in the place of Shri Kasturbhai Lalbhai who retires by
rotation under article 164 of the articles of association of the. company, but
being eligible, offers himself for re-election.
Serial
No. 4
To
elect a director in the place of Shri Naval H. Tata, who retires by rotation
under article 164 of the articles of association of the company, but being
eligible, offers himself for re-election.
Serial
No. 7
To
appoint a director in place of Shri Laljibhai Chhaganlal Kapadia, who was
appointed an additional director of the company by the board of directors on
10th April, 1969, and who ceases to hold office under section 260 of the
Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act,
1956, has been received by the company.
Serial
No. 8
To appoint a director in
place of Shri Nimjibhai Chhanganlal Kapadia who was appointed an additional
director of the company by the board of directors on 10th April, 1969, and who
ceases to hold office under section 260 of the Companies Act, 1956, on the date
of this meeting in respect of whom a notice as required by section 257 of the
Companies Act, 1956, has been received by the company.
Items Nos. 3 and 4
constitute ordinary business and Items Nos. 7 and 8 constitute special business
within the meaning of section 173 of the Act, Being special business Items Nos.
7 and 8 are followed up by explanatory statements contained in an annexure to
the notice. Explanatory statement accompanying Item No. 7 read as under:
“Shri Laljibhai Chhaganlal
Kapadia was appointed an additional director on 10th April, 1969, by the board
of directors of the company and he retains his office as a director only up to
the date of this annual general meeting under the provisions of section 260 of
the Companies Act, 1956. As required by section 257 of the Companies Act, 1956,
a notice has been received from a member signifying his intention to propose
his appointment as a director. It is recommended that he be appointed as a
director”.
Explanatory statement
accompanying Item No. 8 is identical with the difference that it is in respect
of the other additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on
the contents of the notice in general and the explanatory notes in particular,
Mr. Nariman submits that there is compliance with the requirement of section
173 of the Act. Mr. Nariman points out that under article 164 of the articles
of association of the company, at every annual general meeting of the company,
one-third of such of the directors for the time being as are liable to retire
by rotation or if their number is not three or a multiple of three, the number
nearest to one-third are to retire from office. The strength of the board was 8
and obviously the number of directors retiring by rotation will be two. Items
Nos. 3 and 4 in the notice in unmistakable terms give an indication of this
factual and legal position. As these items of business were not special there
was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8
constituted special business. The contents of these items conveyed to the body
of shareholders sufficient information about the proposal to fill up additional
posts. The two persons had acted as additional directors and they ceased to
hold office under section 260 of the Act on the day of the meeting. It is
stated that the company had received proposals about their appointment under
section 257 of the Act. It is implicit in this statement that the board wants
the company to consider the appointment of directors for two additional posts.
The explanatory statement contains one important additional particular. The
board of directors has made a recommendation that the two persons who have
acted as additional directors be appointed directors at the meeting, According
to Mr. Nariman the board has complied with the provisions of section 173 of the
Act.
Then Mr. Nariman argued
that in the present state of pleadings, it was not open to the plaintiffs to
raise any objections about the non-compliance with the requirement of section
173 of the Act. He says that the plaint nowhere refers to section 173 of the
Act. A fair reading of the plaint would show that the main grievance of the
plaintiffs was that no resolution was proposed or passed under section 258 of
the Companies Act read with article 169 of the articles of association of the
company about increasing the strength of the board of directors. According to
the plaintiffs the two resolutions appointing the appellants as directors are
not valid as they in effect increased the number of directors from 8 to 10
without an appropriate resolution being passed as required by section 258 of
the Act. This is the only grievance of the plaintiffs about the non-compliance
with the condition in section 258 of the Act. Mr. Nariman says that in view of
this specific case made out by the plaintiffs, there was no occasion for the
defendants to meet any other case about the illegality resulting from the
non-compliance with the provisions of section 173 of the Act. Mr. Nariman in
this connection heavily leaned upon a decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti
Prasad jain. The learned
judges of the Division Bench of that
High Court had to tackle a similar point about the sufficiency or otherwise of the
pleadings. While dealing with the issue No. 4(a) in that proceeding Misra J.,
at page 202, in paragraph 17, observed as follows:
“The notice is challenged
as fraudulent and contrary to the statute. None of the grounds have been
pleaded. For the first time this contention appears to have been advanced in
course of argument before Mr. Justice Barman. In none of the affidavits the
petitioner swears that the notice was tricky, misleading or insufficient. The
question is one of mixed question of fact and law, and it is not permissible to
be taken at the stage of hearing for the first time”.
The learned judge certainly
refers later on to section 172(1) and section 173(2) of the Act. At page 214,
paragraph 58, Das J. observed as follows:
“At the outset, I must say
that the plea of invalidity of the notice was not taken either in the plaint
which was filed in the court of the subordinate judge or in the petitions and
affidavits before the honourable company judge of this court. At a fairly late
stage of the case, oral submissions were made challenging the validity of the
notice for the extraordinary general meeting of 29-3-1958. On that ground
alone, the point could have been left out of consideration”.
However, it must be stated
that the learned judges, despite the insufficiency of the pleadings, considered
the merits of the case, and held that the notice was in compliance with the
statutory requirements of section 173 of the Companies Act, as the meeting held
on the basis of such notice and the resolutions passed therein were not in any
way invalid. Mr. Nariman says that this authority has acquired additional
sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain
v. Kalinga Tubes Ltd.
Wanchoo J., at page 1545, paragraph 24, has observed as follows:
“It is, however, urged that
the notice for the general meeting of the 29th March, 1958, was not in
accordance with section 173, and so the proceedings of the meeting must be held
to be bad. This objection was, however, not taken in the petition and we have,
therefore, not permitted the appellant to raise it before us, as it is a mixed
question of fact and law. We may add that, though the objection was not taken
in the petition, it seems to have been urged before the appeal court. Das J.
has dealt with it at length and we would have agreed with him if we had
permitted the question to be raised”.
Relying on these decisions
Mr. Nariman maintained that the resolutions cannot be challenged on the ground
that the notice of the meeting and the explanatory statements accompanying the
notice were defective in any manner.
Mr. Nariman also submitted
that the provisions of section 173 were directory and not mandatory. Strict
compliance with section 173 was not necessary and there was in the present case
substantial compliance with the provisions of that section. It is for this
reason that, according to Mr. Nariman, any defect in the notice is capable of
being waived by the shareholders as the company had unanimously appointed the
appellants at the annual general meeting. If there were any averments in the
plaint setting out the various defects and irregularities in the drafting of
the notice and the explanatory statements, then it was open to the defendants
to adduce evidence and satisfy the court that the plaintiffs by their conduct
were stopped from objecting to the legality of the resolutions. As an instance
of the so-called irregularity, Mr. Nariman referred to In re Express
Engineering Works Ltd. It was
a case where the legality of the company’s meeting was challenged on the ground
that it was styled a directors’ meeting and business was transacted as if it
was a general meeting. The issue of debentures at the meeting W.I.P challenged as not valid. Younger
L.J. agreed with Lord Sterndale M.R., who held that the shareholders must be
deemed to have acted in the meeting as shareholders and not as directors. What
is stated by Younger L.J. at page 471 is to the following effect:
“I am of the same opinion.
I am content to rest my conclusion upon what was said by Lord Davey in
Solomon’s case that a
company is bound in a matter which is intra vires by the unanimous agreement of
all the corporators”.
But, this decision is not
of any assistance to us. A syndicate of five persons formed a private company.
They were all the directors and also shareholders. They all attended the
meeting and transacted business. The objection to the legality of the meeting
was rightly overruled.
Mr. Nariman then dwelt on
the case, In re Oxted Motor Company Ltd The court held that it was not open to a
creditor to impeach the validity of a resolution to wind up the company as it
was competent to the shareholders of the company acting together to waive the
formalities required by section 69 of the Companies (Consolidation) Act, 1908,
as to notice of intention to propose a resolution as an extraordinary
resolution. Even this decision will not carry us any further as in the present
case everything turns upon the interpretation of the words of section 173 of
the Companies Act.
Then Mr. Thakkar for the
respondents submitted that section 173 was in terms mandatory and not
directory. He strongly relies upon a decision of the Gujarat High Court in
Sheth Mohanlal Ganpairam v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. Mr.
Thakkar pinpoints the following observations of Bhagwati J. (as he then was),
at page 338:
“The object of enacting
section 173 is to secure that all facts which have a bearing on the question on
which the shareholders have to form their judgment are brought to the notice of
the shareholders so that the shareholders can exercise an intelligent judgment.
The provision is enacted in the interests of the shareholders so that the material
facts concerning the item of business to be transacted at the meeting are
before the share holders and they also know what is the nature of the concern
or interest of the management in such item of business, the idea being that the
share holders may not be duped by the management and may not be persuaded to
act in the manner desired by the management unless they have formed their own
judgment on the question after being placed in full possession of all material
facts and apprised of the interest of the management in any particular action
being taken. Having regard to the whole purpose and scope of the provision
enacted in section 173, I am of the opinion that it is mandatory and not
directory and that any disobedience of its requirements must lead to the
nullification of the action taken”.
Mr. Thakkar reinforced his
argument by reference to a Calcutta decision in which
it was held that it was incumbent on the directors to disclose in the notice of
the general meeting full facts. Before I refer to the relevant observations of
the learned judges, it is necessary to know in brief the facts of that case.
Section 294(2) of the Companies Act (as amended by Act 65 of 1960) provides
that the appointment of a sole selling agent by the board of directors shall
cease to be valid if it is not approved by the company in the first general
meeting held after the date on which the appointment is made. The court held
that the provision was not directory but mandatory. The mere substantial
compliance was not enough but there must be a strict compliance. The impugned
agreement about the appointment was referred to in the report of the directors
and the same was adopted in the subsequent adjourned annual general meeting.
But the adoption or approval of the report was treated as ordinary business and
not as a special business. In the circumstances, the learned judges allowed the
appeal and granted ad-interim injunction against the company and the directors
restraining them from getting passed the resolution in the ensuing annual
general meeting of the company. At page 124 of the report (Shalagram Jhajharia v. National
Co. Ltd.)
Bose C.J. has made the following observations
after quoting section 173(2) and (3) of the Act:
“So it appears that under
section 173(2) an explanatory note with regard to the special items of business
has to be annexed to the notice of the meeting; but this was not done with
regard to the agreement dated the 27th January, 1962. Therefore, there was no
compliance with the requirements of the statute inasmuch as it was incumbent
under the section, if any special business was to be transacted at the meeting,
to specify the nature of such business in the notice”.
Mitter J., at page 134,
dilates as follows on the importance of the statutory provision:
“The provision for inspection
of the agreement at the registered office of the company in terms of section
173(3) is not sufficient for the purposes of section 173(2)... As the
legislature has thought it fit to provide that shareholders must approve of the
appointment of selling agents the opportunity given to the shareholders must be
full and complete and there must be a full and frank disclosure of the salient
features of the agency agreement before the shareholders can be asked to give
their sanction. The provision for inspection of the agreement at the registered
office of the company
is not enough. Few shareholders have either the time or inclination to go to
the registered office to find out what the company is about to do. Moreover,
such an opportunity is illusory in the case of shareholders who do not live in
Calcutta, when the registered office is situate here”.
Coming
nearer home, Mr. Thakkar quotes a recent decision of this court in Firestone
Tyre and Rubber Co. v. Synthetics and Chemicals Ltd Madon J. reviewed the entire case law on
the subject while interpreting section 173(2) of the Act. I reproduce the
headnote which neatly summarises the conclusions of the learned judge:
“Under
section 173(2) of the Companies Act, where any items of business to be
transacted at the meeting are deemed to be special, there shall be annexed to
the notice of the meeting, a statement setting out all material facts
concerning each such item of business, including, in particular, the nature of
the concern or interest, if any, therein, of every director, the managing
agent, if any, the secretaries and treasurers, if any, and the manager, if any.
The object underlying section 173(2) is that the shareholders may have before
them all facts, which are material to enable them to form a judgment on the
business before them. Any fact which would assist them in making up their mind,
one way or the other, would be a material fact under section 173(2) and has to
be set out in the explanatory statement. This provision is mandatory and not
directory and disobedience to its requirements must lead to nullification of
the action taken”.
Then
Mr. Thakkar brought to my notice one more decision of the Calcutta High Court
in Shalagram Jhajharia v. National Company Ltd. It
must be noted that the subject-matter of the litigation in this case was an
impugned selling agency agreement which figured in the Calcutta decision cited
earlier by Mr. Thakkar. The plaintiff challenged the legality of the notice of
the annual general meeting on the ground that the explanatory statement
attached to the proposed ordinary resolution was in contravention of section
173 of the Act. On facts it was held that the explanatory statement was
misleading in relation to the facts stated and it did not disclose certain
other material facts. While concluding that the explanatory statement in that
case was bad and in violation of section 173 of the Act A.N. Ray J. indicated
the correct principle of law. He says at page 36:
“The
further question is whether the explanatory statement is in violation of
provisions contained in section 173 of the Companies Act.... It depends upon
the facts of each case as to whether an explanatory statement is tricky or
misleading”.
Ray
J. in Biswanath Prasad Khailan v. Neiv Central Jute Mills,
while considering the essentials of a valid notice convening an extraordinary general meeting, extracted two broad principles from the
authorities died before him. At page 135, he says:
“Two broad principles can
be extracted from the authorities: First, that notice must be fairly and
intelligently framed and it must not be misleading or equivocal. A benevolent
construction cannot be applied. Secondly, some matters must be brought
pointedly to the attention of the shareholders, for example, where the
directors are interested in a contract or matter which is to be submitted to a
meeting for confirmation or approval, it appears to be desirable and in certain
cases absolutely necessary to disclose the fact in the notice convening the
meeting or in some accompanying circular”.
In the wake of these
various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the
comments of the learned author of Law and Practice of Meetings by Frank
Shackleton, 5th edition. At page 27 under the caption “Special Business must be
clearly stated” the following requirements are noted:
“As to the essentials of a
notice, it must state clearly the nature of any special business to be
transacted, as no other business can be transacted in addition or otherwise,
unless the notice refers to ordinary business which it is competent for the
meeting to transact It is, however, always desirable to state clearly the
nature of any special business to be transacted, and if the regulations provide
for notice of such special business, any resolutions passed without due notice
will be invalid”.
To reiterate with emphasis
the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v.
Great Boulder Proprietary Gold Mines Ltd.
Article 102 of the articles of associations of the company provided as follows:
“If at any general meeting
at which an election of directors ought to take place the place of any director
retiring by rotation is not filled up, he shall, if willing, continue in office
until the ordinary meeting in the next year, and so on from year to year until
his place is filled up, unless it shall be determined at any such meeting on
due notice to reduce the number of directors in office”.
The question arose whether
the plaintiff, a retiring director, despite his failure to get re-elected,
continued in office. His claim was resisted on the ground that the company in
effect had at its meeting reduced the number of directors. Cohen L.J. overruled
the contention and held that the number of directors in office cannot be
reduced unless there was a specific resolution of the company to that effect
after a mention of the general nature of such a resolution has been made. The
concluding words of
article 102 require a specific notice to that effect. Lord Greene M.R., at page
30 of the report, clarifies the legal position in the following words:
“In
the present case counsel for the company argued that the company had, in
effect, determined to reduce the number of directors in office (a) by requiring
to reelect the retiring plaintiff, and (b) by not electing anybody to fill that
vacancy. I do not accept that argument. It. appears to me that the concluding
words of article 102 require a specific resolution, not merely to re-elect A,
but a specific resolution that nobody shall be elected to fill the vacancy”.
It
must be noted that the absence of due notice and a specific resolution was
linked up with certain legal consequences, for instance, continuation of the
retiring director in office. It was mostly on account of the peculiar wording
of article 102 that the court held that a proper resolution after due notice of
the proposed special business was absolutely necessary.
Then
Mr. Thakkar cited a decision in Tiessen v. Henderson . The
relevant part of the headnote of that case may be stated:
“The
notice of an extraordinary general meeting must disclose all facts necessary to
enable the shareholder receiving it to determine in his own interest whether or
not he ought to attend the meeting; and pecuniary interest of a director in the
matter of a special resolution to be proposed at the meeting is a material fact
for this purpose”.
While
restraining the company by an ad-interim injunction from acting upon or
carrying into effect certain special resolutions for reconstruction alleged to
have been passed and confirmed at its extraordinary general meetings, the
learned judge, Kekewich J., has made rather strong remarks at page 866 of the
report:
“The
application of the doctrine of Foss v. Harbottle to joint stock companies involves as a
necessary corollary the proposition that the vote of the majority at a general
meeting, as it binds both dissentient and absent shareholders, must be a vote
given with the utmost fairness—that not only must the matter be fairly put
before the meeting, but the meeting itself must be conducted in the fairest
possible manner”.
Then,
at pages 870-871, the learned judge makes a further observation:
“If
a meeting properly convened, and properly instructed as to the purpose for
which it is convened, chooses to assent to this, there is no reason why it
should not do so; but I think it ought to have the opportunity of considering
the point. The man I am protecting is not the dissentient, but the absent
shareholder—14 the man who is absent because, having received and
with more or less care looked at this circular, he comes to the conclusion that
on the whole he will not oppose the scheme, but leave it to the majority. I
cannot tell whether he would have left it to the majority of the meeting to
decide if he had known the real facts. He did not know the real facts; and,
therefore, I think the resolution is not binding upon him”.
Now,
I may sum up what emerges from these various authorities cited by Mr. Thakkar.
Bearing in mind the object of the legislature, I must say that section 173 is
mandatory and not directory. It is in the interest of the general body of
shareholders that the legislature has made provisions in section 173(2)
requiring the notice of a meeting to set out a statement containing all
material facts concerning each special item of business. A notice of meeting
when it contains items of special business within the meaning of section
173(1)(b) must disclose all the material facts. All the shareholders must be in
a position to make up their mind in advance whether they will attend the
meeting or leave it to the good sense of the majority at the meeting. Any non-compliance
with this requirement will nullify the action taken at the meeting. While
considering the efficacy of any such notice, a benevolent construction will not
be adopted so as to defeat the provisions of the statute. It is also clear that
whether or not a particular notice or an explanatory statement in a given case
complies with the statutory requirement is a question of fact. There are two
ways in which the mandatory provisions contained in section 173 may be
contravened. It may be a case where no explanatory statement is at all appended
to the item of a special business, or it may be a case where the statement is
incomplete, misleading or tricky. The contravention may be the result of an act
of omission or an act of commission. Whatever be the nature of the
contravention, the question always is a mixed question of fact and law. When a
challenge is made in a court of law the court will have to consider all the
facts and circumstances of the case and then decide one way or the other.
As
the contravention alleged by the plaintiffs in this case is a mixed question of
law and fact, the pleadings certainly assume importance. Mr. Nariman has made a
point, as stated above, that the pleadings give no indication that the
plaintiffs ever alleged any contravention of section 173. As the resolution is
challenged on the ground of breach of section 258 in particular and the
provisions of the Companies Act in general, there is certainly some difficulty
in permitting the plaintiffs to raise this point.
Mr.
Thakkar has not accepted the position that the plaint does not contain
sufficient averments. He has pointed out from the plaint and the written
statement that the pleadings certainly give an indication that the plaintiffs
wanted to challenge the legality of the action on the ground of either want of
or a defective resolution. Mr. Thakkar relied upon the averments in paragraph 7
of the plaint. The plaintiffs have averred that before
increasing the number of directors under section 258 of the Act and article 169
of the articles of association, a resolution ought to have been passed after
due compliance with the requirements of the provisions of the Companies Act.
Mr. Thakkar says that though the plaintiffs have alleged contravention of the
Companies Act, they have by implication referred to the requirements of an
explanatory statement under section 173 of the Act. Then Mr. Thakkar also read
out portions of the written statement of the appellants, particularly
paragraphs 9 and 10, which, according to Mr. Thakkar, show that the defendants
were aware of the challenge made by the plaintiffs to the legality of the
resolutions on the various grounds. Even apart from the pleadings, according to
Mr. Thakkar, the parties were aware of all the relevant facts and the point
about the applicability of section 173 of the Act. In this connection reliance
was also placed on the affidavits filed at the interlocutory stage in support
of the notice of motion taken out for interim relief. Plaintiffs had in their
affidavits referred to the defective explanatory statement and said that there
is non-compliance with the requirements of section 173. A reference was also
made to the appeal memo. (A.O. No. 436 of 1970) filed by the respondents in
this court against the interlocutory order. After considering all these
submissions, I am of the opinion that Mr. Thakkar can at best show in this case
that there is no explanatory note at all accompanying the item of special
business. But, the averments referred to above are certainly insufficient to
cover a plea that the explanatory statement appended to the notice of the
meeting about the special business is insufficient or misleading. Any such plea
about insufficiency of the explanatory statement is very much like the plea of
fraud. It is well-settled that the plea of fraud must be substantiated by all
relevant particulars disclosed in the pleadings.
Then I have to deal with
the points raised by Mr. Thakkar that in the present case there is no
explanatory statement and, therefore, there is a clear contravention of the
provisions of section 173 of the Act. Mr. Thakkar says that there was no
proposal in so many words about the increase of the number of directors. There
was no such item in the notice. Therefore, there was no occasion for any explanatory
statement.
I have already referred to
the contents of the items Nos. 3, 4, 7 and 8 in the notice of meeting. Items
Nos. 3 and 4 refer to ordinary business inasmuch as the directors retiring by
rotation were to be re-elected. The permanent strength of the board of
directors was 8. Under article 164 of the articles of association of the
company, the number nearest to one-third had to retire from office. Items Nos.
3 and 4 certainly indicate that the company was to fill up the two vacancies
caused by the retirement of the directors by rotation. Now, items Nos. 7 and 8
state that the board had appointed two additional directors on 10th April, 1969.
Those directors will cease to hold office under section 260 of the Act on
the date of the meeting, Notices, as required under section 257 of the Act,
have been received by the company proposing the candidature of these additional
directors at the meeting. This information about the item of business has to be
considered along with the corresponding explanatory statement. The explanatory
statement virtually restates what is contained in items Nos. 7 and 8. One
additional particular is also mentioned and that is the recommendation of the
board of directors that the named persons be appointed as directors. Items Nos.
7 and 8 along with the explanatory statement certainly convey to the
shareholders that the board of directors have made a proposal that two more
additional directors be appointed at the meeting and if possible the two named
persons be elected to fill up those additional posts. In my opinion this is
nothing short of a proposal to increase the strength of the board of directors
from 8 to 10. Mr. Thakkar tried to show that all this information has nothing
to do with the proposal to increase the number of directors. But, despite his
best efforts, he was not in a position to convince me that all this information
was in connection with some other intelligible topic, I have not been able to
place any other construction on items Nos. 7 and 8, and in my opinion the plaintiffs
have failed to make out a case that there is no information at all about the
proposed special business accompanied by the required explanatory statement.
Then Mr. Thakkar argued
that at any rate the court must hold that the information given along with the
explanatory note is wholly misleading. Mr. Thakkar pointed out that the board
of directors has nowhere indicated in the notice or the explanatory statement
as to why it had made a proposal for increasing the number of directors.
Mr. Nariman, on the other
hand, submitted that the board can only disclose known reasons and it is not in
a position to disclose the unknown reasons. I do not find any substance in
either of these contentions. In the absence of a pleading in fact, Mr. Thakkar
cannot subsequently show that there was no reason contained in the statement
about the proposed increase. In my opinion the statement is a comprehensive and
compendious statement. The board has in a way indicated the reasons for the
increase. It has stated that it was required to appoint two men of their
confidence as additional directors. It is implicit in this action and the
statement that the company needed their services. This is followed by a
recommendation by the board that the two named persons be appointed to fill up
the additional posts. This is sufficient reason for the proposed increase. A
shareholder, after reading this information, can certainly form an intelligent
judgment and make up his mind one way or the other. He may either choose to
attend the meeting or leave it to the good sense of the majority of the voters.
As the plaint does not show in what way the explanatory statement is defective,
there is no reason to further examine the so-called defect pointed out by Mr.
Thakkar. Mr. Nariman’s distinction between known and unknown reasons is also
very far from convincing. One acts only for known reasons. Acting without
reasons is a leap in the dark and, therefore, there is never any occasion for
giving unknown reasons. But, I must make it clear that under section 173(2)
material facts will not necessarily include the reasons. It will all depend
upon the nature of the subject-matter which constitutes the special business.
Sometimes the facts stated are sufficiently eloquent and there is no need to
justify the proposed action by giving reasons. In the absence of sufficient
pleadings, the plaintiffs in the present case cannot challenge the statements
contained in the notice and the explanatory statement on the ground that the
particulars are insufficient and/or misleading. In the result I disagree with
the finding of the learned judge and hold that there is no contravention of the
provisions of section 173 of the Companies Act.
Then Mr. Thakkar argued
that the learned judge was in error in holding that the additional directors,
like the retiring directors, are not required to file any written consent duly
signed by them before their reappointment by the company. This question
involves the interpretation of section 264(1) of the Act. Section 264(1), as it
originally stood in 1956, has gone through a process of one or two amendments.
Before I consider the point and the various possible interpretations of section
264, it will be necessary to state a few more facts.
On April 9, 1969, there was
a move for appointing the appellants as additional directors. On the same day
two letters were separately addressed by the appellants to the company. The
letters purported to be consent in writing duly signed under section 264(1) of
the Act. The appellants have indicated their consent to act as a director of
the company if appointed. On April 10, 1969, the board of directors appointed
the appellants as additional directors under section 260 of the Act. On April
10, 1969, separate proposals by two members were made in favour of the
appointment of the appellants as directors at the ensuing meeting. Defendant
No. 1, the company, in its written statement, has stated that after the receipt
of the letters of consent dated April 9, 1969, the appellants were appointed as
additional directors. Mr. Thakkar referred to Form No. 29, which was submitted
on April 26, 1969, that is, long before the annual general meeting of the
company. All these facts and circumstances, according to Mr. Thakkar, show that
the letters of consent were, in fact, filed by the appellants in connection
with their appointment as additional directors. The learned judge has accepted
this position. But, Mr. Nariman for the appellants is challenging this finding.
I may not consider this controversy at this stage
As
stated above, it will be necessary to point out the legislative changes before
I consider section 264 in its present form. Section 264 as originally enacted
read as follows:
“(1)A person who is not a retiring director shall not be
capable of being appointed director of a company unless he has, by himself or
by his agent authorised in writing, signed and filed with the Registrar, a
consent in writing to act as such director.
(2) Sub-section (1) shall not apply to a private company
unless it is a subsidiary of a public company”.
The
provision as enacted required all persons who desired to be considered for
appointment as directors to file a written consent before their appointment.
The consent had to be given before the appointment as without such consent the
person was not capable of being appointed and he could not be considered a
qualified or a fit person for appointment as director. Only one person was
exempted from this condition and that was a retiring director. It was not
necessary for him to file any consent before his reappointment as a director.
Then as a result of the amending Act 65 of 1960, a new section 264 was
substituted with effect from December 28, 1960. The new section reads as under:
“264.
(1) Every person (other than a person who has left at the office of the company
a notice under section 257 signifying his candidature for the office of a
director) proposed as a candidate for the office of a director shall sign, and
file with the company, his consent in writing to act as a director, if
appointed.
(2) A person other
than a director reappointed after retirement by rotation shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar, his consent in writing to act as such
director.
(3) This section
shall not apply to a private company unless it is a subsidiary of a public
company”.
The
significant change in the wording is the deletion of the words “shall not be
capable of being appointed”. Section 264(1) dispenses with the formal consent
in the case of a person who has proposed himself as a candidate for the office
of a director under section 257 of the Act. Subsection (2) requires all persons
newly appointed as directors to file with the Registrar within 30 days of their
appointment a consent in writing to act as a director. Sub-section (2) makes it
clear that, unless such a consent is filed, the person appointed shall not act
as a director.
Thereafter,
by Act No. 31 of 1965, the section is substantially amended and I have to
consider the section so amended. The section, in the present form, is as
follows;
“264. (1) Every
person (other than a director retiring by rotation or otherwise or a person who
has left at the office of the company a notice under section 257 signifying his
candidature for the office of a director) proposed as a candidate for the
office of a director shall sign, and file with the company, his consent in
writing to act as a director, if appointed.
(2) A person other
than—
(a) a director reappointed after retirement by
rotation or immediately on the expiry of his term of office, or
(b) an additional or alternate director, or a
person filling a casual vacancy in the office of a director under section 262, appointed
as a director or reappointed as an additional or alternate director,
immediately on the expiry of his term of office, or
(c) a
person named as a director of the company under its articles as first
registered,
shall not act as a
director of the company unless he has within thirty days of his appointment
signed and filed with the Registrar his consent in writing to act as such
director.
(3)
This section shall not apply to a private company unless it is a subsidiary of
a public company”.
The
first point debated before me by counsel on either side is whether section 264
is directory or mandatory. As the point is not covered by any direct authority,
the counsel had to rely upon their original submissions and they have also
referred to decisions which deal with the construction of statutes.
Mr.
Thakkar says that the section is mandatory because the condition referred to in
the section of filing a written consent is a condition precedent to the valid
appointment. The consent required under section 264 is to be in writing and
duly signed. Section 264(1) provides that the person who is a candidate for the
office of a director shall file his consent in the prescribed form to act as a
“director, if appointed. Mr. Thakkar says that the use of the expression “shall”
indicates that the section is mandatory. Mr. Thakkar invited my attention to a
number of judicial decisions about the interpretation of statutes. He relied
upon a decision of the Supreme Court in Aswini Kumar Ghose v. Arabinda Bose for the proposition that if the specific words
used by the legislature are clear then for interpretation the courts could not
rely upon the statement of objects and reasons. Patanjali Shastri C.J., at page
378 (paragraph 32), has made the following observations:
“As
regards the propriety of the reference to the statement of objects and reasons,
it must be remembered that it seeks only to explain what reasons induced the
mover to introduce the bill in the House and what objects he sought to achieve. But, those objects and
reasons may or may not correspond to the objective which the majority of
members had in view when they passed it into law. The Bill may have undergone
radical changes during its passage through the House or Houses, and there is no
guarantee that the reasons which led to its introduction and the objects
thereby sought to be achieved have remained the same throughout till the Bill
emerges from the House as an Act of the legislature, for they do not form part
of the Bill and are not voted upon by the members. We, therefore, consider that
the statement of objects and reasons appended to the Bill should be ruled out
as an aid to the construction of a statute”.
But Mr. Thakkar admitted
that the rigour of the rule laid down in the above-mentioned case was relaxed
in a subsequent decision of the Supreme Court in Commissioner of Income-tax v. Smt. Sarda Devi ,
where Bhagwati J., at page 835, says:
“It is clear that unless
there is any such ambiguity it would not be open to the court to depart from
the normal rule of construction which is that the intention of the legislature
should be primarily gathered from the words which are used. It is only when the
words used are ambiguous that they would stand to be examined and construed in
the light of surrounding circumstances and constitutional principle and
practice”.
At page 839, a further rule
of construction of statute is stated:
“Though it is not
legitimate to refer to the statement of objects and reasons as an aid to the
construction or for ascertaining the meaning of any particular word used in the
Act or statute (see Aswini Kumar Ghose v. Arabinda Bose),
nevertheless this court in Stale of West Bengal v. Subodh Gopal Bose , referred
to the same ‘ for the limited purpose of ascertaining the conditions prevailing
at the time which actuated the sponsor of the Bill to introduce the same and
the extent and urgency of the evil which he sought to remedy.’ “
Mr. Thakkar says that it is
the primary rule of construction that the statute should be interpreted without
looking into any other extraneous circumstances. It is only when there is some
ambiguity that, as stated by the Supreme Court, reference may be made to the
objects and reasons for the limited purpose of finding out the particular
reason which prompted the legislature to pass that enactment.
Then Mr. Thakkar referred
to the rule which, in the judicial parlance, is recognised as the golden rule
of construction of statutes. The statement of the rule by Burton J. in
Warburton v. Lovelavd is reproduced by the learned author in
Bindra’s Interpretation of Statutes, 5th edition, at page 71, and is to the
following effect:
“I apprehend it is a rule
in the construction of statutes that, in the first instance, the grammatical
sense of the words is to be adhered to. If that is contrary to, or inconsistent
with any expressed intention, or any declared purpose of the statute, or if it
would involve any absurdity, repugnance or inconsistency, the grammatical ser
se must then be modified, extended or abridged so far as to avoid such
inconvenience, but no further”.
The following passage in
Chapter XIII from Maxwell on the Interpretation of Statutes, 12th edition, page
314, also lays down a sound principle:
“It is impossible to lay
down any general rule for determining whether a provision is imperative or
directory. ‘No universal rule’, said Lord Campbell L.C can be laid down for the construction of
statutes, as to whether mandatory enactments shall be considered directory only
or obligatory, with an implied nullification for disobedience. It is the duty
of courts of justice to try to get at the real intention of the legislature by
carefully attending to the whole scope of the statute to be construed.’ And
Lord Penzance said: ‘I believe,
as far as any rule is concerned, you cannot safely go further than that in each
case you must look to the subject-matter; consider the importance of the
provision that has been disregarded, and the relation of that provision to the
general object intended to be secured by the Act; and upon a review of the case
in that aspect decide whether the matter is what is called imperative or only
directory”.
Viewed in the light of
these principles, the section, in my opinion, appears to be directory in so far
as the person who desires to be a candidate for the office of a director would
be required to file his consent. The object of the legislature is evident when
one considers the various amendments made by the legislature before the section
was enacted in the present form. Those who have once acted as directors were
only seeking reappointment. It was considered throughout that the formal
consent on their part was not necessary. It is very clear as to why such a
condition was found necessary. It may be that a person who is appointed as a
director may refuse to act on the ground that he had never consented to act as
a director. When such a flaw is discovered later on and the appointment will
have to be ignored as ineffective, the company will have to take again further
steps for filling the post of such director. Ordinarily, a person appointed as
a director is not likely to refuse to act. In a rare case, he may do so. It is
only to avoid the attending inconvenience that the legislature has prescribed
the condition. In the section as originally worded, somewhat strong language
was used. It was enacted that a person shall not be capable of being appointed
as a director unless he had filed earlier his consent in writing to act as such
director. The deletion of these words in the subsequent amended form of the
section is not without significance. Perhaps the legislature thought that the
condition was given comparatively more importance when it was introduced in the
section. If this is the only object which the legislature sought to achieve by
prescribing a prior consent in writing then there is no reason why the absence
of consent in all cases should invalidate the appointment. Even without a
consent a person appointed may accept the appointment and prefer to act as a director.
This is likely to happen in a majority of cases. Considering the section as a
whole and bearing in mind the object of the legislature and magnitude of the
mischief intended to be avoided, I hold that section 264(1) is clearly
directory and not mandatory. I am only interpreting section 264(1) of the Act
and it is not necessary to pronounce any opinion about section 264(2). Whether
it is mandatory or directory will have to be decided in a suitable case. But, I
cannot help expressing my opinion that the difference in the language has
certainly assisted me in reaching my conclusion about the directory nature of
section 264(1) of the Act. The consent under section 264(2) which is to be
filed with the Registrar is a condition precedent for acting as a director. The
sub-section provides that a person, who is being appointed for the first time
as a director, shall not act as a director of the company unless he has filed
the consent within the prescribed time. No argument is necessary for saying
that the sub-section is mandatory.
Then Mr. Thakkar submitted
that the learned judge was in error in holding that there is realty no
difference between the retiring director and the additional director while considering
the application of section 264(1) of the Act. As all the relevant points were
urged before me I had to consider them and give my decision accordingly. In
fact when I found that the section is directory it is sufficient for the final
disposal of the appeal but these are all points of law touching the
interpretation of section 264(1) as a whole and, therefore, I must consider
each point urged by the counsel separately.
That takes me to the
interpretation of the key words in section 264(1) “or otherwise”. The learned
judge while considering these words has relied on the dictionary meaning of the
expression “retire”. A person retires when he ceases to hold a particular
office. There is no difference between retiring by rotation and retiring by
ceasing to hold office. The additional directors appointed under section 260
hold office only up to the date of the next annual general meeting. In other
words, they cease to hold office before the date of the next annual general
meeting. Mr, Thakkar says that the learned judge was not right in reaching this
conclusion. According to Mr. Thakkar there is material difference between the
two sets of directors. Mr. Thakkar points out that under section 256(1) of the
Act certain proportion of directors retire by rotation. Under section 256(2)
the directors retire by rotation at every annual general meeting, whereas under
section 260, first proviso, the additional director holds office only up to the
date of the next annual general meeting of the company. In other words, the
additional director ceases to hold office earlier and thereafter the retiring
director who vacates the office at the meeting remains in office for at least a
short duration. Mr. Thakkar says that this distinction between the tenure of
the two classes of directors is recognised even under the English law. Mr.
Thakkar has relied on a decision in Eyre v. Milton Proprietary Ltd. The court in that case was required to
consider the exact connotation of two articles 85 and 90 of the articles of
association of the company. The court had to decide the meaning of the
expression “of the whole number of directors” in article 85. That was necessary
to determine the number of directors who had to retire in a particular year.
There was no doubt that the expression “whole number of directors” did not
include the managing director. Article 90 provided that the board may from time
to time appoint additional directors but any director so appointed shall hold
office only until the next following ordinary general meeting of the company,
and shall then be eligible for re-election. The point for consideration
depended for its answer on the words of article 85 as compared with the words
of article 90 and, in particular, certain later words of article 85. According
to the court there must be some point of time at which it was to be ascertained
as to who are the whole number of directors to whom must be applied the
provision relating to retirement. That point of time was to be at the ordinary
general meeting. It was clear from article 90 that at the annual general
meeting the two additional directors will not be in office as they were to hold
office only until the next following ordinary general meeting of the company.
At the commencement of the ordinary general meeting they will be no longer in
office. But, the retiring directors and the other continuing directors will act
as directors throughout the meeting. In others words, they would constitute the
total number of directors for deciding the proportion of the directors
retiring. Romer L.J., at page 257, sums up the legal position in the following
words:
“I agree that in the
circumstances the number of directors to be considered is the number of
directors existing at the moment when the ordinary general meeting begins, and
inasmuch as at the particular moment that it begins the two directors elected
under article 90 cease to be directors, the number of directors then must be
taken to be five and not seven”.
Mr. Thakkar relies on this
decision for underlining a similar distinction between the directors retiring
by rotation at every annual general meeting and the additional directors
holding office only up to the date of the next annual general meeting. Mr. Thakkar
says that when the legislature has used the expressions like “retiring” and
“holding office” up to a particular point of time, the court will have to
interpret the different words in a different way. In support of this rule of
interpretation he relies on a decision of this court in East and West Insurance Co. Ltd. v. Mrs.
Kamala Jayantilal Mehta.
Chief Justice, Chagla, who delivered the
judgment of the Bench, says at page 543:
“Now, the normal canon of
construction either of a statute or of articles of association is that when
different expressions are used they are intended to connote something
different”
There cannot be any dispute
about this rule of interpretation. Giving full effect to the rule it only means
that a retiring director ceases to hold office later than the additional
director. The difference in the duration of their tenure is brought out by the
legislature by using appropriate expressions. But, it will not be correct to
carry this distinction too far. While interpreting the words appearing in
section 264, the expression “retiring by rotation” has to be understood in
conjunction with or along with the other key words “otherwise”. These two
expressions certainly are used for covering or for including different sets of
directors who cease to hold office. We know very well what is meant by a
director retiring by rotation. Section 256(1) provides that at the first annual
general meeting one-third of the directors for the time being as are liable to
retire by rotation, or if their number is not three or a multiple of three,
then the number nearest to one-third, shall retire from office. Then the
question arises on a literal interpretation of the words as to who are the other
directors who otherwise retire, that is, retire otherwise than by rotation. Mr.
Thakkar says that the articles of association of a company may provide that all
the directors en bloc shall retire and in that case the company might appoint
directors to fill up all the vacancies. Mr. Thakkar has not been able to
indicate any other class of directors who will be covered by the expression “or
otherwise”. He maintained that under section 256(1) a company may by its
articles provide that a certain proportion of directors will ever remain in
office and only the remaining directors will wholly retire and it is to cover
such a class of directors retiring In this manner that the expression “or
otherwise” is used by the legislature in section 264(1) of the Act.
It is difficult to accept
this interpretation of section 256(1). Section 256(1) provides:
“....one-third of such of
the directors for the time being as are liable to retire by rotation, or if
their number is not three or a multiple of three, then, the number nearest to
one-third, shall retire from office”.
In the illustration given
by Mr. Thakkar, certain fixed number of directors will remain in office
permanently and the others will retire, so as to enable the company to fill up
those vacancies. Those who are retiring in this manner are, according to Mr.
Thakkar, not retiring by rotation. I am not prepared to accept this
interpretation of section 256(1) of the Act. When few of the directors retire
in the manner indicated in section 256(1) of the Act, then they are retiring by
rotation. If the articles so provide, all the directors may retire and that
retirement certainly will not be covered by the expression “retiring by
rotation”. On a reference to the Shorter Oxford Dictionary, volume II: N-Z, 3rd
edition, revised with addenda, I find that the adverb “otherwise” means in
another way or in other ways. Whether the expression “otherwise” would include
one or more classes is not clear. At any rate, the expression is somewhat
equivocal. In such a case I will be justified in following the dictum laid down
by the Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhanvadia . The
Supreme Court in that case, while interpreting certain articles of the
Constitution, relied upon the statement of objects and reasons. The Supreme
Court had to decide whether certain provisions were directory or mandatory. As
the provisions themselves were not clear, reliance was placed on the statement
of objects and reasons for finding out the intention of the legislature. I may
reproduce the following passage from the judgment of Mitter J. which appears at
page 769, paragraph 11, of the report:
“The above cases are
sufficient to show that non-compliance with the provisions of a statute or
Constitution will not necessarily render a proceeding invalid if by considering
its nature, its design and the consequences which follow from its
non-observance one is not led to the conclusion that the legislature or the
Constitution-makers intended that there should be no departure from the strict
words used”.
So, in other words, while
interpreting the words or even while departing from the strict words used, the
court may find out the intention of the legislature by referring to the statement
of objects and reasons. Mr. Nariman rightly says that relying on this decision
one can look at the notes on clauses preceding the amendment of section 264 of
the Act. (See Gazette
of India, Extraordinary, Part II, sec. 2, 1964, dated September 21, 1964). Clause 32 reads as under:
“Section 264 requires that
a person proposed as a candidate for the office of director shall file with the
company his consent to act as director, if appointed. It also requires that a
person other than a director re-appointed after retirement by rotation shall
not act as director unless he has filed with the Registrar his consent in
writing to act as such. This amendment seeks to exempt persons who have served
as directors in the immediate preceding term from these requirements. It is
felt that in the case of such persons the requirement to file their consent in
writing is a formality which could well be dispensed with”.
Clause 32 shows in
unmistakable terms as to why the exceptions were enacted to dispense with the
filing of consent in certain cases. No such consent either under section 264(1)
or sub-section (2) was necessary in the case of persons who had immediately
before the reappointment acted as directors. Considering the object of the
amendment there is no reason why the additional directors who are expressly
exempted from the requirement of filing a consent under section 264(2) should
be excluded while construing a somewhat similar exemption under section 264(1)
of the Act. In my opinion the expression “otherwise” covers all the other
directors who for one reason or the other cease to hold office and are
immediately thereafter reappointed as directors. For these reasons I hold that
the learned judge was right when he recorded a finding that additional
directors are not required to file any written consent under section 264 of the
Act, as a condition precedent for the validity of their re-appointment.
Then Mr. Nariman submitted
that no such consent under section 264(1) is required for appointment of any
person as an additional director under section 260 of the Act. He relies on the
wording of section 264(1), viz.:
“Every
person.......proposed as a candidate for the office of a director shall sign
and file with the company, his consent in writing to act as a director, if
appointed”.
These words, according to
Mr. Nariman, indicate that the consent contemplated is referable to the
candidature of the person for the office of director. That can only be at the
meeting of the company in which directors are appointed by unanimous or
majority vote of the shareholders. Mr. Nariman says that section 260 confers
power on the board of directors’ to appoint additional directors when so
permitted by the articles of association of the company. Neither in section 260
nor anywhere in the articles of the company are there provisions requiring the
person to file his consent before his appointment as additional director. A
closer reading of section 264(1) furnishes one more reason in support of the
interpretation suggested by Mr. Nariman. One of the persons, who is exempted
from the condition of filing such a consent, is one who has left at the office
of the company a notice under section 257 signifying his candidature for the
office of a director. This clearly shows that the provision about consent is in
connection with the appointment of directors at the meeting of the company.
Even the consent that is prescribed is to be in writing to act as a director,
if appointed. There are no such words to show that the consent is given to act
as a director or an additional director. These various expressions used by the
legislature certainly indicate that section 264(1) does not in any manner
regulate the appointment of additional directors under section 260 of the Act.
It is not disputed before
me nor was there any dispute before the learned judge about the fact that there
is one set of written consent filed in this case on behalf of the appellants.
It is not necessary to resolve the controversy whether it was with reference to
the appointment as an additional director or with reference to the
reappointment as a director. If no consent was required for any appointment
under section 260 that consent, if filed, will be redundant. It is true that
the company by its written statement has taken up a contention that after
receipt of these consents the appellants were appointed is additional
directors. Mr. Thakkar also submitted that that may be accepted or a fact in view of the various facts
and circumstances mentioned above. But, the appellants in their written
statement have pleaded that these written consents certainly validated their
appointment in the general meeting. Once it is found as a fact that no consent
was required for the appellants’ appointment as additional directors, then
there is no reason why the appellants should not be allowed to rely upon the
letters of consent, when the validity of their appointment is challenged by the
plaintiffs. Letters of consent were to be filed duly signed by the persons
concerned with the company. They are so signed and filed with the company.
There are no words used in the letters to indicate that they had given the
consent only to act as additional directors, if appointed. In the absence of
any such restrictive words, it can be fairly assumed that they gave their
consent in writing not only to act as additional directors, if appointed, but
also to act as directors, if appointed. In my opinion even for this additional
reason the appointment of the appellants cannot be challenged.
The last point raised in
the present appeal is about the maintainability of the suit. Mr. Nariman,
consistent with the appellants’ stand in the lower court, submits that the
plaintiffs have come to the court with certain grievances about the
irregularities committed by the company while appointing the appellants as
directors. Mr. Nariman relied upon a decision of this court in V.N. Bhajekar v.
K.M. Shinkar. It
was a suit by the shareholders challenging irregularities committed by the
directors. It was held that such a suit was not competent. The headnote
indicates that there
are certain recognised exceptions to the rule that mere irregularities
committed during the course of the management of the internal affairs of the
company do not furnish any cause of action to the shareholders. The relevant
headnote is to the following effect:
“The
supremacy of the majority of shareholders is subject to certain exceptions,
viz.:
(1) Where
the act complained of is ultra vires the company;
(2) where
the act complained of is a fraud on the minority; and
(3) where there is an absolute necessity to
waive the rule in order that there may not be a denial of justice”.
Mr.
Nariman submits that the present case is not covered by any one of these three
exceptions. The appellants were appointed directors by an unanimous resolution
passed by at the meeting of the company. The plaintiffs after a long lapse of
time had no reason to rush to the court for any relief. It is not an act which
is patently illegal or ultra vires the company. But, I find it difficult to
accept this contention of Mr. Nariman. I have already held that section 173 is
mandatory and not directory. Any non-compliance with the provisions of section
173 will result in the nullification of the Act. The plaintiffs have alleged
that there was contravention of section 258 of the Indian Companies Act, as
there was no valid resolution proposing the increase in the number of
directors. It may be that the plaintiffs have not eventually succeeded in the
suit. In view of the findings recorded by me, it cannot be said that the suit
as framed is not competent. In my opinion the plaintiffs’ case will be covered
by the first of the three exceptions mentioned above. The learned judge was,
therefore, right when he held that the suit as framed was maintainable.
Mr.
Buch with Mr. Munshi, who appeared for respondent No. 3-company, submits to the
orders of this court.
In
the result the appeal is allowed, the judgment and decree of the lower court is
set aside and the plaintiffs’ suit is dismissed with costs throughout.
Respondents Nos. 1 and 2 will not be liable to pay the costs of respondent No.
3 throughout.
[1940] 10 COMP. CAS. 133 (
JUDICIAL COMMISSIONER'S COURT OF SIND
v.
Yeotmal Electric
Supply Co.,
WESTON, J.
AUGUST 18, 1939
Khanchand Gopaldas, for the Plaintiff.
Hakumatrai M. Eidnani and Kimatrai Bhojraj, for the Respondent.
Weston,
J.—Plaintiff is a
shareholder and a director of the defendant company, the Yeotmal Electric
Supply Co., Ltd., which for some reason has its registered office at
Plaintiff bases his case upon three main grounds. The first is that the meeting of 28th May 1939 was not properly convened and that all resolutions passed at that meeting are therefore invalid. The second is that even if the meeting was validly convened, the first resolution set out in para. 4 of the plaint alters one of the articles of association of the company, namely Art. 98. Under Section 20, Companies Act, an article of association can be altered only by special resolution, which admittedly was not done in the present instance. If then the first resolution is invalid, the second resolution appointing four additional directors is also invalid. The third ground is that even if the first resolution is valid the power to appoint additional directors vests in the directors and not in the company under Art. 102 of the articles of association, and the second resolution appointing specific persons as additional directors is ultra vires. Mr. Khanchand for plaintiff has accepted my suggestion that the remaining resolutions on other matters are only recommendatory, or commendatory, and therefore of no practical importance, and he has confined his objections to the first two resolutions. Of course, if the meeting was not validly convened, all the resolutions would be as if they had not been passed.
The first objection to the validity of the meeting is that the requisition is dated 25th March 1939 while the meeting was convened for 28th May 1939. This is said to contravene Art. 63 of the articles of association which provides that a meeting convened on requisition shall be held not more than two months after the date of delivery to the company of the requisition. Evidence has been led by the company to show that although the requisition is dated 25th March 1939, it was not delivered at the company's office until 15th April. Plaintiff's witness K. C. Advani one of the directors, admits that he received a copy of the requisition with notice dated 24th April 1939 of a directors' meeting, and that the copy of requisition sent to him bore a note that it had been received on 15th April 1939. Mr. Khanchand argues that the presumption is that the requisition was received on the date it bears, but I know of no authority to justify such a presumption being made. I see no reason to doubt the evidence of the managing agent and his clerk that it was received on 15th April 1939. This assertion is shown to have been made on 24th April 1939 when there was no reason for any false assertion, for the meeting could have been convened for 21st or 24th May as easily as for 28th May 1939. I accept therefore that the meeting was convened in accordance with Art. 68. It is further argued that as the notice to shareholders did not show, as the copy to directors showed the date of requisition, the shareholders were not put in possession of all facts necessary to enable them to determine whether they should attend the meeting. It has no doubt been held in many cases that a shareholder is entitled to be given adequate information as to the business to be transacted, as Section 78, Companies Act, in fact requires ; but I am not aware that it has ever been held that unless the notice of the meeting recites all facts necessary to meet every technical objection which may be raised as to its validity, the meeting held in pursuance to such notice must be invalid.
I may also remark that Art. 68 is not in accord with Clause (3) of Section 78, Companies Act, which provides a period of three months from the date of deposit of the requisition within which an extraordinary general meeting must be held. It is very doubtful if a meeting valid under the substantive law could be invalidated by an article of association. On this question, it is not necessary for me to express a definite opinion. I hold that the meeting was held within two months of the receipt of the requisition, and that the absence of the date of receipt in the notice of meeting does not invalidate the meeting. The first ground of objection taken by plaintiff therefore has no substance. The first resolution passed at the meeting is in the following terms :
"That until otherwise
determined by a general meeting the number of directors shall be not less than
3 or more than 11, and the present strength of the Board be increased to
11."
It is claimed for plaintiff that this resolution alters and in fact replaces Art. 98 of the articles of association which reads :
"Until otherwise
determined by a general meeting the number of directors shall be not less than
3 or more than 7."
It is true that the language of the resolution suggests the replacement of Art. 98 by the resolution but I can see no difficulty in holding that this resolution is a resolution made under Art. 98. It does what this Article contemplates may be done. There is nothing in the Companies Act which requires that articles of association must be rigid and may not in themselves provide for varying sets of circumstances. The form of Art. 98 is identical with the specimen article given at p. 668 of Palmers Company Precedents, Part I, Edition 15, and the learned author's note is:
"In the absence of the
first seven words it seems that the number cannot be reduced without a special
resolution."
In Gur Prasad v. Rameshwar Prasad, (55 All. 399), the same question arose as in the present case. The relevant articles of association were identical with those of the Yeotmal Electric Supply Company. It was held that a resolution at a general meeting that the number of directors should be increased to 16 was valid and that no special resolution was required. In this the Bombay case, Nav Navnitlal Chabildas v. Scindia Steam Navigation, Co. Ltd., (A.I.R. 1927 Bom. 609), relied on by Mr. Khanchand is distinguished and the same points of distinction arise in the present case. On the second ground also, I consider plaintiff must fail. On the last ground Mr. Khanchand relies mainly upon the case in Blair Open Hearth Furnace Co. v. Reigart, [1913] (108 L.T. 665), in which Eve, J., held on the articles of association of that company that the power of appointing additional directors had been divested from the company and had been entrusted to the board of directors to the exclusion of the company. This case was considered by the Court of Appeal in Worcester Corsetry Ltd. v. Wittings, [1936] (7 Comp. Cas. 296). The principle accepted in both cases is that the power of appointing additional directors will lie with the company in general meeting unless the company by its articles of association has divested itself of this power. This principle also is expressed in Section 83-B, Companies Act. In Worcester Corsetry Ltd. v. Wittings, [1936] (7 Comp. Cas. 296), the articles were not the same as in Blair Open Hearth Furnace Co. v. Reigart, [1913] (108 L.T. 665), but appear to be practically identical with those in the present case. In Worcester Corsetry Ltd. v. Wittings, [1936] (7 Comp. Cas. 296), it was held that on the articles in that case the rights and powers of the company in general meeting to appoint directors had not been circumscribed so as to prevent their being exercised by the corporators. Art. 102 in the present case is as follows:
"The
directors shall have power, at any time, and from time to time, to appoint any
other qualified person to be a director, either to fill a vacancy or as an
addition to the board, but so that the total number of directors shall not at
any time exceed the maximum number fixed by Art. 98, and any person so
appointed shall retain his office only until the next following ordinary
meeting, and shall then be eligible for re-election".
Other material articles are Nos. 110, 111, 112 and 113 which are as follows:
"110. 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 and without notice in that behalf may fill up any other vacancies.
111. 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.
112. The company in general meeting may, from time to time, increase or reduce the number of directors, and may alter their qualification and may also determine in what rotation such increased or reduced number is to go out of office and may remove any director (not being the director representing the managing agents) before the expiration of this period of office and appoint another person in his stead. The person so appointed shall hold office during such time only as the director in whose place he is appointed would have held the same if he had not been removed.
113. No person, not being a retiring director, shall, unless recommended by the directors for election, be eligible for election to the office of director at any general meeting unless he or some other member intending to propose him has at least seven days before the meeting left at the office a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him".
For consideration of these articles, I do not think I can do better than repeat the observations of Slesser, L. J., in Worcester Corsetry Ltd. v. Writings, [1936] (7 Comp. Cas. 296):
"I proceed to consider the matter from the other end and to ask myself, first, what are the powers of the directors to appoint additional directors at all? In my view the powers of the directors to make appointments are limited to the powers given to them in Art. 85 of table A to the following effect: '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'.
That provision indicates to me that a special emergency power for a limited period of appointing an additional director is given to the directors, which appointment lapses when the corporators would normally assume control over the appointment or the removal, as the case may be, of directors at their ordinary general meeting. I can find here no other power given to the directors to appoint directors at all. When we contrast that power with the power given to the directors by Art. 93 in Blair Open Hearth Furnace Ltd. v. Reigart, [1913] (108 L. T. 665), we see that there the directors may from time to time appoint additional directors, but so that the total number of directors shall not exceed the prescribed maximum.
There is no limitation there as to the time for which such additional directors shall serve, and that is one matter which distinguishes this case from Blair Open Hearth Furnace Ltd. v. Regart, [1913] (108 L. T. 665). In addition to that limitation of power of the directors to appoint in the present case, in my opinion, the company are in terms by Art. 83 given a power themselves to appoint directors, which power is not directly to be found in the articles in Blair Open Hearth Furnace Ltd. v. Regart, [1913] (108 L. T. 665). In my view Art. 12 of the plaintiff company's articles, which says: 'Until otherwise determined by a general meeting the number of directors shall not be less than two nor more than seven,' is dealing with a different subject-matter and has a different intent from Art. 83. I think that Art. 12, which corresponds in terms with Art. 82 in Blair Open Hearth Furnace Ltd. v. Regart, [1913] (108 L.T.665), is dealing with the total number of possible directors. The machinery for varying that number is contained in Art. 12, because it says that the number of directors shall not be less than two nor more than seven until otherwise determined by a general meeting. That article contains within itself all the machinery for fixing the maximum and minimum number of directors. I do not think that Art. 83 is dealing with such a matter. Art. 83 gives to the company in terms power to increase the number of directors. I put this question to the respondents' counsel for my information: Supposing the company increased the number of directors, or purported to do so, under Art. 83 and then the directors, who, on the respondents' counsels' argument, have the power alone to make the appointment, do not make the appointment ; have the company increased the number of the directors or have they not, because in fact the increase which they had authorized under Art. 83 would never have been made? The more natural view of Art. 83 is that it is not redundant or merely introducing unnecessary machinery which is already provided by Art. 12 in dealing with the maximum and minimum, but as, Lawrence, L.J., has indicated, is itself conferring a power not only to increase the number but to increase that number by itself appointing directors to the extent to which it is intended to increase the number. That view is supported by the considerations urged by my Lord with regard to the latter part of that clause, which gives to the company power to determine in what rotation the increased or reduced number of directors is to go out of office. It clearly, in my opinion, contemplates, among other things, that the rotation of those persons may be a rotation indicated by their names as well as by the proportion in which they are to retire. Finally, I draw attention to the last part of Art. 85 of Table A which in terms says, that in any event the directors who have been appointed as additional directors are eligible for re-election by the company which indicates that in that case at their ordinary general meeting the company have power to elect directors. That power is also missing in Blair Open Hearth Furance Co. v. Reigart, [1913] (108 L.T. 665).
For these reasons, and also because I do not think that the inherent power of the corporators to direct the control of their own company by nominating the directors is excluded by any contract contained in the articles of association, I think this appeal must be allowed."
This reasoning applies equally to the present case, and I must hold that the ordinary power of the company in general meeting to appoint additional directors has not been excluded by the articles of association and that the second resolution appointing defendants 2 to 5 viz., Fatehchand Assudomal Jhangiani, Chandiram Bulchand Advani, Gaganmal Rijhumal Jhangiani, and Hiranand Hassamal Sararangani, is not ultra vires the powers of the meeting. On these findings the suit must fail and it is dismissed with costs.
[1989]
66 COMP. CAS. 410 (
HIGH COURT OF
Technical Consultancy House
Private Ltd
v.
Kuldip Raj Narang
D.P. WADHWA J.
DECEMBER 12, 1986
V.V. Shastri, Indermeet
Kaur, for the Petitioner.
Ved Vyas, Rajiv Behl and P.K.
Seth for the Respondent.
D.P. Wadhwa J.—M/s Technical Consultancy House (P.) Ltd., the company,
was ordered to be wound up by order dated October 20, 1978 (O.P. No. 74 of
1977). This was on a creditor's petition filed under section 439(1)(b) of the
Companies Act, 1956 (for short "the Act"), on the ground that the
company was unable to pay its debts (section 433(e)). The company was
incorporated on November 24, 1971, and was established with the object of
providing technical consultancy to companies. The company had various other
objects also.
On the making of the
winding-up order, the statement of affairs was to be filed as required under
section 454 of the Act. This was not done within the prescribed time and the
official liquidator, therefore, as a complainant, filed the present complaint
under section 454(5) of the Act. This sub-section (5) is as under :—
"(5) If any person, without reasonable
excuse, makes default in complying with any of the requirements of this
section, he shall be punishable with imprisonment for a term which may extend
to two years, or with fine which may extend to one hundred rupees for every day
during which the default continues, or with both."
There are three accused.
The case against accused No. 2 was separated and the present complaint,
therefore, proceeded only against accused No. 1, Kuldip Raj Narang, and accused
No. 3 Mokan Singh. In the complaint, it is mentioned that on the passing of the
winding-up order, the complainant came to be in charge of the affairs of the
company and that he caused the registered office of the company and the records
of the company maintained in the office of the Registrar of Companies, Delhi,
to be inspected. A visit to the company's registered office at 3, Cavalry
Lines,
The court took cognizance
of an offence and summoned the accused. On notice being issued to them on May
16, 1983, under section 251 of the Code of Criminal Procedure, 1973, the
accused pleaded not guilty. Thereafter, evidence of the complainant was
recorded. Meanwhile and prior to the issue of the aforesaid notice, an
opportunity was granted to the accused to file a statement of affairs. In this
connection, reference may be made to the order dated April 15, 1981. It appears
that a statement of affairs was in fact filed by the accused Narang on or about
September 6, 1982, but it was defective in many ways and did not fulfil the
requirements of the section or rule 127 of the Rules. It did not give the names
of the creditors or the auditors of the company. The complainant took time to
send a formal requisition to the accused for further particulars. The matter
rested at that.
In support of his case, the
complainant examined three witnesses. The first witness is S.M. Talwar, an
upper division clerk from the office of the Registrar of Companies,
The second witness of the
complainant is V.N. Sharma, a technical assistant in the office of the official
liquidator. He referred to the issue of notices requiring the directors of the
company to file the statement of affairs and for handing over the records and
assets of the company. Since notices remained uncomplied with, the present
complaint came to be filed. He said that during the pendency of these
proceedings, a statement of affairs was filed but that was defective and it was
prepared from the bank accounts of the company and not from the account books.
The witness said that the account books were with the directors and they had
not surrendered the same to the complaintant. He said in the statement of
affairs that the names of the banks, account numbers, etc., had not been
mentioned and that other details were also incomplete. He said that in one of
the columns of the statement of affairs, it was mentioned that an amount of Rs.
5,55,645.68 was due to the creditors but the names and particulars of the debts
due were not given. Similarly, no details of trade debtors, loans and advances
were given. According to the witness, the official liquidator thus had no
details of the creditors, loans and advances, etc., of the bank and it was not
possible to trace them from the statement of affairs. He said a letter dated
February 26, 1983, was written by the official liquidator requiring the directors
to file a revised statement of affairs and to remove the defects. Though a list
of creditors was attached with the statement of affairs, their addresses were
not mentioned. He said that as per the record of the Registrar of Companies,
accused, Narang, was a director on the date of the winding-up order, but he
said he could not say as to what were the functions of the accused Narang. He
also could not say what were the functions performed by A.P. Sehgal The letter
dated February 26, 1983, which the official liquidator sent was exhibit R-1.
This letter was not addressed to the accused, Mokam Singh, as the statement of
affairs was filed only by the accused, Narang. This witness could not say
whether the accused, Mokam Singh, was co-opted as alternate director of the
company in 1975 or whether he did not participate in the management as well as
other affairs of the company.
The third witness of the
complaintant is V.P. Verma, assistant official liquidator. He stated that the
accused, Narang, was summoned to the office of the official liquidator for
examination under rule 130 of the Rules, but the accused Narang, however,
wanted questions in writing which were given to him and he later replied to
them in writing. This witness referred to notices being issued to the directors
of the company requiring them to file the statement of affairs and also about
the filing of a defective statement of affairs by the accused Narang. When
cross-examined by accused No. 1, the witness said that the official liquidator
was not in possession of the account books, bills, vouchers and minute books of
the company as these were not filed with him. He said that as such there was no
question of the official liquidator asking Narang to inspect those documents.
The witness said that he could not say whether the accused, Narang, was not
in-charge of the day-to-day affairs of the company or whether he was not in
possession of the account books, vouchers, minute books, etc. He said that he
did not know in whose possession the entire record of the company was kept and
he also could not say if A.P. Sehgal was the finance director. He said that the
accused Narang was a director of the company on the date of its winding up.
This, he said, was on the basis of the records of the Registrar of Companies.
Statements of the accused
Narang and Mokam Singh were recorded under section 313 of the Code of Criminal
Procedure. In this statement, Narang said that he was not a director of the
company on October 20, 1978, the date of its winding up. He said he remained a
director from the inception of the company until he left India for Berkeley in
the year 1977. He said he did not file the statement of affairs within the time
prescribed because he was not in charge of the conduct of the affairs of the
company at the material time and he remained out of India from 1977 to 1978 and
could not have, therefore, submitted the statement of affairs. He said he did
submit a statement of affairs after the institution of the present proceedings.
The accused, Mokam Singh, said that he was not a director of the company on the
date of its winding up and, therefore, the question of his submitting the
statement of affairs did not arise.
The accused also appeared
as witnesses in their defence. In his statement recorded as DW-1, the accused
Narang said that he left for Berkeley, United States, in the end of March,
1977, on a teaching assignment and returned in the first week of February,
1978. He said A.P. Sehgal was the managing director of the company and he left
the country while the accused Narang was abroad and that A.P. Sehgal died in
Nairobi. The accused said that he was director (organization) of the company in
terms of its articles. In this connection, he referred to form No. 32 filed by
the company which was registered in the office of the Registrar of Companies on
January 14, 1972. A "certified copy" of this form No. 32 has been
brought on record. The accused Narang deposed that he did not look after the
financial matters or the maintenance of books of account at any material time
and these were being looked after by A.P. Sehgal who, he said, was a chartered
accountant. He said he did not know to whom Sehgal handed over charge when he
left for Nairobi. He also said that A.P. Sehgal and T.P.S. Randhawa were the
two active directors of the company at that time and the accused Narang said
that he presumed that Sehgal had handed over charge to T.P.S. Randhawa. He
narrated the circumstances under which he got the statements of affairs
prepared in the absence of the records. He said he got the accounts
reconstructed from the bank records. He said the official liquidator did not
inform him that the books of account and other records of the company were
available with the official liquidator. In his cross-examination, he said that
he was not ousted from the management of the company "in the sense that I
was free to participate in the conduct of its affairs, if I chose to do
so."
The accused, Mokan Singh,
in his statement said that he was elected as an alternate director of the
company some time in 1975 and that that election was, however, not confirmed in
any general meeting of the company. He said he did not take any part in the
conduct of the affairs of the company and that he was elected director only
because his tenanted premises were being used by the company. He said that as
far as he knew the relevant record of the company was in the possession of the
other two directors, Sehgal and Randhawa. In his cross-examination, he denied
the suggestion that his appointment as a director of the company was in fact
confirmed in the board meeting of the company. He said he became aware of form
No. 32 filed by the company showing him as an alternate director only during
the pendency of these proceedings. He said he was never aware of any such form
No. 32 having been filed earlier.
That is all the evidence in
the case.
During the course of
arguments, a copy of the memorandum of association and articles of association
of the company were also placed on record which was admitted by both the parties.
It is mentioned in the articles of association that where no specific
provisions have been made, provisions of Schedule I, Table A of the Act, shall
apply. This would also be, to an extent, the effect of section 28(2) of the
Act. Article 21 gives the names of the first directors who are seven in number.
The accused, Narang, is described as organisation director and A.P. Sehgal as
director (finance). Other directors have been described as technical director,
director (banking), director (marketing), director (accounts and law), and
director (company law). Under article 23, the powers and responsibilities of
the directors of the company are those as given in the Act and in Table A
except in so far as these stood modified by the provisions of the articles of
association. Under article 22, each director is to be paid out of the funds of
the company by way of remuneration for services rendered to the company such
amount as may be decided by the board from time to time and each director is
also to be paid such fee as may be decided by the board for every meeting
attended by him. Under article 26, the directors may appoint one or more of
them to the office of the managing director for such period and on such terms
as they think fit. Then articles 27 and 28 prescribe the remuneration to be
paid to the managing director and also the powers to be conferred upon him.
Sub-section (1) of section
454 of the Act prescribes that where the court has made a winding up order,
there shall be made out and submitted to the official liquidator a statement as
to the affairs of the company in the form prescribed. The particulars to be
given in the statement of affairs are also mentioned in the sub-section. These
are :
(a) the assets of the company, stating separately the cash balance
in hand and at the bank if any, and the negotiable securities, if any, held by
the company ;
(b) its debts
and liabilities ;
(c) the names, residences and occupations of its creditors,
stating separately the amount of secured and unsecured debts ; and in the case
of secured debts, particulars of the securities given, whether by the company
or an officer thereof, their value and the dates on which they were given ;
(d) the debts due to the company and the names, residences
and occupations of the persons from whom they are due and the amount likely to
be realised on account thereof;
(e) such further or other information as may be prescribed, or
as the official liquidator may require.
Sub-section (2) prescribes
that such a statement snail be submitted and verified by one or more of the
persons who are at the relevant date, the directors and by the person who is at
that date the manager, secretary or other chief officer of the company. Then
sub-section (3) says that the statement shall be submitted within 21 days from
the relevant date or within such extended time not exceeding three months from
that date as the official liquidator or the court may for special reasons
appoint. The relevant date of course would be the date of the winding up order.
Sub-section (5) which prescribes punishment for the default has already been
set out above. I have set out sub-sections (1) and (2) above so far as these
are relevant to this case. At this stage, some of the provisions of the Act
which have a bearing on the case may also be referred to. Section 163 requires
that register of members, copies of all annual returns, etc., are to be kept at
the registered office of the company. Under section 193, minutes of the general
meeting and board meetings of the company are be kept and under section 196,
these are required to be kept at the registered office of the company. Then,
under section 209, the requirement is that every company shall keep at its
registered office proper books of account with details as mentioned therein and
the persons responsible for securing compliance with the provisions of this
section are liable to be punished for default. Under sub-s. (6) of s. 209,
these persons would be the managing directors, or a manager, if there is one,
and otherwise every director of the company. Section 291 refers to the powers
of the board of directors and says that the board of directors shall be
entitled to exercise all such powers and to do all such acts and things as the
company is authorised to exercise and do. Thus, the board of directors is
responsible for the overall conduct and management of the affairs of the
company and to comply with the statutory requirements under the Act and other
laws. Under section 260, the board of directors is entitled to appoint
additional directors but these additional directors are to hold office only up
to the date of the annual general meeting of the company. Then article 72 of
Table A in Schedule I would be relevant as this article would be applicable in
the present case. Under this article, the board has again power to appoint a
person as additional director and that person is to hold office only up to the
date of the annual general meeting but shall be eligible for appointment by the
company as a director at that meeting subject to the provisions of the Act.
Under section 283, the office of a director becomes vacant if he absents
himself from three consecutive meetings of the board of directors or from all
meetings of the board for a continuous period of three months, whichever is
longer, without obtaining leave of absence from the board [clause (g) of
sub-section (1)]. Under section 285, a meeting of the board of directors is to
be held at least once in every three months and at least four such meetings
shall be held every year. Then under section 286, notice of every meeting of
the board of directors of a company is to be given in writing to every director
for the time being in India and at his usual address in India to every other
director. Sections 540 to 545 contain provisions regarding liability of certain
persons for fraudulent conduct of the business of the company, etc. Under
section 541, where a company is being wound up and if it is shown that proper
books of account were not kept by the company during a particular period, every
officer of the company is liable to be punished unless he shows that he acted
honestly. Under section 2(26), "managing director", means a director
who, either 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 it would also include a director occupying the position of managing
director by whatever name called. A managing director is, however, to exercise
his powers subject to the superintendence, control and direction of the board
of directors. Certain powers of routine nature as given in the proviso to this
sub-section would not be deemed to be substantial powers of management. Under
section 303, every company is to keep at its registered office a register of
its directors, managing director etc. containing particulars as given in the
section. Under sub-section (2) of this section, a company is to send to the
Registrar of Companies a return in the form prescribed containing particulars
as specified in the register of its directors mentioned above and is also to
send a notification, again in the form prescribed (Form No. 32), of any change
among its directors, managing directors, managers or secretaries, etc.,
specifying the date of the change. These returns are to be filed within the
specified period as given in the sub-section.
Reference to two decisions
may also be made. In a Full Bench decision of this court in O.L. of Security
and Finance P. Ltd. v. B.K. Bedi [1974] 44 Comp Cas 499 (Delhi); ILR [1974] I
Delhi 809 [FB], the court held that it would be for the official liquidator to
prove that the default under section 454(5) of the Act was committed without
reasonable excuse and as to how that was to be proved, the court observed as
under (p. 506):
"It appears to us as that the official
liquidator need only prove that notice was sent to the concerned director to
submit a statement of affairs, that prescribed time has lapsed and that no
extension has been sought for from him or from the court and that the necessary
books of the company were available for inspection by the concerned director.
These are facts which are conveniently available to the official liquidator and
if he shows these facts prima facie he would have proved that the director has,
without reasonable excuse, made the default in complying with the requirements
of section 454. In such a case, it would obviously be for the concerned
director to prove circumstances to justify his conduct and to show that he had
a reasonable excuse in making the default."
In In re, Beejay
Engineering Pvt. Ltd. [1983] 53 Comp Cas 918, the court was examining the
question whether relief could be given under section 633 of the Act in respect
of liability under Acts other than the Companies Act and one of the questions
was whether a director could be exonerated merely on the ground of being a
technical director. The court was of the view that no distinction could be
drawn amongst the directors for fastening liability or granting relief from
liability on the consideration that a person was on the board purely by virtue
of his technical skill or because he represented certain special interests and
there were other directors who were in effective control of the management and
affairs of the company.
Prof. Ved Vyas, learned
counsel for accused Narang, submitted that in view of the provisions of
sections 283(1)(g) and 285, Narang ceased to be a director of the company and
he could not be fastened with liability under section 454. It was also
submitted that the whole of the working of the company was in the hands of A.P.
Sehgal who was a chartered accountant by profession and was shown as director
(finance) and it was he who was to maintain the account books and other
statutory records of the company. It was also stated that the accused Narang
was unaware of the affairs of the company and in spite of that he tried his
best to submit a statement of affairs and which he did though it was not in the
form prescribed and did not contain the relevant particulars. It was also
submitted that the court should exercise discretion and dispense with the
filing of the statement of affairs in the circumstances of the present case. It
was submitted that though the petition was advertised, no creditor was
forthcoming. Strong reliance was placed on the decision of this court in B.K.
Bedi's case [1974] 44 Comp Cas 499 (Delhi) [FB].
Mr. B.K. Seth, learned
counsel for Mokam Singh, adopted the arguments of Prof. Ved Vyas but stated
that Mokam Singh was appointed as additional director and that there was
nothing on the record to show that his appointment was approved in the annual
general meeting of the company. He also said that it was A.P. Sehgal who was
looking after the affairs of the company and that after the death of Sehgal,
accused Randhwa was looking after the affairs of the company.
Mr. V.V. Shastri, learned
counsel appearing for the complainant, however, stated that there was nothing
in the Act to describe a director as active, dormant or nominal and that the
Act imposed statutory duty on the whole body of directors to comply with the
provisions of section 454 of the Act.
Books of account, statutory
books or any other record or asset of the company were not found at its
registered office and nor were these handed over to the official liquidator.
Where is then the question of the official liquidator making available to the
accused the necessary books of the company for inspection by them so as to
enable them to file the statement of affairs ? The official liquidator made the
accused aware of their statutory duty and under the circumstances, he could do
no more. The Full Bench decision of this court in B.K. Bedi's case [1974] 44
Comp Cas 499 (Delhi) [FB] is inapplicable in the present case. As will be seen,
the accused are trying to plead in their defence default committed by them in
their statutory body. This cannot be permitted: The State of Bombay v. Bhandhan
Ram Bhandani [1961] 31 Comp Cas 1 (SC); [1961] 1 SCR 801.
The board of directors of a
company is to exercise such powers and to do all such acts and things as the
company is authorised to exercise and do. The general management and conduct of
the affairs of the company are vested in the board of directors. This board is
collectively responsible for the management and conduct of the business of the
company. Each and every act which a company is required to do under the
provisions of the Act including the maintenance of books of account, minute
books etc., is the collective responsibility of the board of directors as the
general administration of the company vests in the board. Sometimes, it is
usual to appoint one or more of the directors as whole-time working directors
including the managing director of the company to look after the day-to-day
administration of the company. This is so as it may not be possible for the
board of directors to collectively act and conduct each and every act or thing
on behalf of the company. In the case of a private limited company, mostly all
the directors exercise some functions in the day-to-day working or affairs of
the company. In the case of a public limited company, however, the day-to-day
administration is usually left to one or two directors who are termed as
managing director or a whole-time director. Again, a managing director or a
whole-time director delegates various functions to the officers of the company
when it is not possible for him to attend to the same. The board of directors
is duty-bound in the management of the affairs of the company to ensure that
statutory records and other records of the company are maintained in accordance
with the provisions of law. If, however, the directors are in a position to
explain that the responsibility for the maintenance of the minutes books etc.
were delegated or otherwise entrusted to any particular director or officer of
the company and that they bona fide believed that the said minutes books, etc.,
were being kept in a proper and safe manner by the said director or officer of
the company, then in that case, they might not be held responsible for the loss
or non-maintenance of the minutes books. It is the duty of each and every
director to explain as to why he should not be held responsible for the loss,
non-maintenance and non-availability of the minutes books in the facts and
circumstances of each case. A director cannot escape liability merely by
pleading that he was not directly responsible for the loss of the minutes books
and other records. He has to show that he had in the usual circumstances
reposed confidence in the directors and/or officers of the company who were
entrusted with the responsibility of maintaining the minutes books and that
there was no occasion for him to warrant any inquiry into the fact that the
minutes books were not properly kept or were in danger of being lost and that
he acted in a bona fide manner and in the interests of the company. The
following paragraph from Palmer's Company Law, 23rd edition would be relevant—
"On principle, the management of the
company is vested in the board of directors collectively and the directors
must, as a general rule, act at board meetings, but the articles, or rules made
by the directors under powers vested in them by the articles, may otherwise
provide. This principle ensures that the collective wisdom of the board is
available to the company on important decisions, and enables discussion to take
place before a decision is taken."
(Paragraph
62-01, page 823)
All this discussion has
been necessary to show the liability of the directors constituting the board in
the conduct of the affairs of the company under certain provisions relevant to
the case and to examine the various pleas of the accused in the background of
these provisions.
In the present case, the
accused have stated that the responsibility for maintaining the statutory
records of the company was on A.P. Sehgal and after him on Randhawa. Accused
Narang even went to the extent of saying that A.P. Sehgal was the managing
director of the company. No document has been brought on record to show that
the board of directors had entrusted the management of the affairs of the
company to A.P. Sehgal or that he was the managing director of the company. In
the absence of any records, I am unable to accept this contention. Accused
Narang relied on Form No. 32 registered with the Registrar of Companies on
January 14, 1972, in which he has been shown as director (organisation) and
A.P. Sehgal as director (Finance). As mentioned above, other directors have
also been given various designations as director (technical, banking,
marketing, accounts and law, and Company Law). No advantage can be derived by the
accused Narang from the fact that A.P. Sehgal had been shown as director
(finance) and as such he was required to keep the minutes books and other
statutory records of the company. These descriptions of the directors do not
explain or define the functions of the directors. Accused Narang has been
unable to show as to what were his functions when he was shown as director
(organisation). Again, I would reject this argument that merely because A.P.
Sehgal was described as director (finance), it was he who was solely
responsible for the conduct of the affairs of the company.
The accused also said that
they were not the directors on the date of the making of the winding up order.
Accused Narang said that he did not attend any board meeting for about two
years and that he received no notice of any such board meeting and also that he
was out of India for a certain period. There is nothing on the record to show
that any board meeting was held during this period or that any notice of any
such meeting was at all issued or that accused Narang did not obtain any leave
of absence to attend any such board meeting. For all that matter, there might
have been default in holding the meetings of the board of directors. As per the
records of the Registrar of Companies, the accused Narang was a director of the
company. He contended that the last available record was for the period 1976
which showed him as a director and that while the winding up order was made on
October 20, 1978, there was nothing on the record of the Registrar of Companies
to show that accused Narang was a director on that day. This argument is again,
to my mind, misconceived. It is on record that though the annual returns of the
company filed for the period ending September 30, 1975 and September 30, 1976,
were with the Registrar of Companies ; but these were not registered because of
certain objections. Thereafter, no annual return or Form No. 32 was filed when
there was any change in the board. Thus again, the accused is trying to plead
in his defence his own default in not complying with the provisions of law
regarding filing of annual returns and Form No. 32 and other documents with the
Registrar of Companies.
It was also contended by
Prof. Ved Vyas that after the winding up petition was advertised, no creditor
of the company had come forward and that the court should dispense with the
filing of the statement of affairs. I cannot accept this submission. To my
mind, the statement of affairs is a basic document from which proceedings after
the winding up order start. It is an important document. It must not be
forgotten that the winding up order was made on a petition filed by a creditor.
The official liquidator has not filed any application seeking dispensing with
the requirement of section 454 of the Act. Rather, he is prosecuting the
accused for their default. No ground exists to dispense with the filing of the
statements of affairs.
The statement of affairs
filed during the pendency of these proceedings by accused Narang obviously does
not meet the requirements of law as it does not contain the particulars as
required and as above mentioned. The default therefore continues.
The case of the accused
Mokam Singh appears to be different. It has come on record that as per Form No.
32 filed with the Registrar Companies, he was shown as an additional director.
His appointment as an additional director was to continue till the date of the
next annual general meeting of the company. Nothing has been brought on record
to show that in the annual general meeting of the company, he was appointed as
a director. It, therefore, cannot be said that he was a director of the company
on the date of the passing of the winding up order. He has, therefore, to be
acquitted.
As far as accused Narang is
concerned, he was aware of the winding up order and of his duty to file the
statement of affairs within the prescribed period. This he failed to do.
Notices were sent by the official liquidator requiring him to file the
statement of affairs. This again was not done by him. Statutory books and other
books of the company were not handed over to the official liquidator, and in
fact I would say he was prevented from taking these into possession as these
were not found at the registered office of the company for which default the
directors could also be liable under the Act. It is correct that in the present
case, it is not enough for the complainant to prove merely the prohibited act
and then must the defendant bring himself within the statutory defence (sic).
The prosecution must bring home to the accused either by direct or
circumstantial evidence showing liability of a guilty mind based in the form of
actual knowledge or connivance because of the use of the words "without
reasonable excuse" in section 454(5) of the Act. To my mind, in the present
case, the prosecution has clearly proved what the accused had to do and that he
deliberately refrained from complying with the provisions of section 454
containing obligations to be performed by him as a director in spite of notices
from the official liquidator on a pretext which, as noted above, cannot bear
scrutiny. The suggestion that the accused was merely a figurehead not taking
any active part in the control of the company is, in my opinion, not worth any
serious consideration. He was a director throughout the relevant period and was
responsible, along with other directors, for the management of the company. He
was not there merely for a chromatic effect. There is nothing on the record to
show whether A.P. Sehgal was the managing director of the company. Further, in
the absence of any other evidence to corroborate the version of accused Narang,
I am not prepared to accept his statement that he was unconnected or
unconcerned with the affairs of the company. He has no defence. As noted above,
the provisions of section 209 which relate to keeping of proper books of
account of the company at its registered office are quite explicit.
Non-compliance with these provisions would make every director of the company
liable to penal action (sub-section (6)(d) of section 209). Accused Narang
cannot escape his liability by contending that the books of account were not
made available to him by the official liquidator, the complainant.
The prosecution has brought
home the charge to the accused. Narang has to be held guilty of an offence
punishable under section 454(5) of the Act, and I convict him accordingly.
Accused Mokam Singh is acquitted.
The question that now
remains is as to what punishment is to be awarded to accused Narang. Before I
pass any order in that respect, I would grant the accused Narang an opportunity
of being heard on the question of sentence.
I have heard arguments on
the question of sentence.
An offence under section
454(5) of the Act is a serious offence and a deterrent punishment has been
provided. The offence for not filing the statement of affairs under section
454(1) of the Act is a continuing one and terminates only on the filing of the
statement of affairs. The offence is punishable not only with imprisonment for
a term extending to two years but is also punishable with fine extending to Rs.
100 for every day during which the default continues. I do not, therefore,
think that in such a case the provisions of section 360 of the Code of Criminal
Procedure, 1973 should be invoked which provide for release on probation of
good conduct or after admonition, as was contended before me. As to why
sub-section (5) of section 454 of the Act was substituted in the Act as it now
stands can be best found from the recommendations of the Companies Act Amendment
Committee. The relevant portion of the recommendations of the Committee is as
under ;—
"It has been the complaint of official
liquidators that the statement of affairs is not filed in spite of repeated
reminders and warnings, and if filed at all, is filed only after considerable
delay. The penal provision is hardly ever enforced apparently because a
complaint has to be made by the official liquidator to the criminal court, and
this involves delay. Much of the delay in winding up is caused by the statement
of affairs of the company not being filed in time to enable the Official
Liquidator to take the necessary action. It would facilitate his work and speed
up the winding-up of companies, if the power to punish the officers of the
company who default in filing the statement of affairs, is vested in the
winding-up court instead of in the ordinary criminal courts. The winding-up
court, which in most cases will be the High Court, will be in a better position
to judge the degree and nature of the default of the officers concerned and
mete out appropriate punishment where necessary. The fear that the winding-up
court would take immediate cognisance of any delay and deal adequately with
those in default would by itself do much to ensure prompt filing of the statement
of affairs. Section 454 of the Act should, therefore, be amended, vesting the
power of punishment under the section in the winding-up court (Report: para.
166)."
(At p. 942, Guide to the Companies Act
by A.
Ramaiya, 10th Edn. 1984)
As noted in the judgment
above, the books of account and other statutory records of the company were not
handed over to the official liquidator. The directors contravened the provision
of law regarding tiling of the statement of affairs which is an important
document to enable the official liquidator to start the process of winding up
of the company. It now appears to me that the official liquidator is extremely
handicapped in the present case and perhaps he has no choice except to seek an
order under section 481 of the Act for dissolution of the company without
knowing who the debtors are and who the creditors are and what functions the
company performed. That appears to be the unfortunate result. It was again
asserted that no creditor had come forward even after the petition for the
winding up order was advertised. It is not the case of the accused that there
were no creditors, and if that be so, the argument now advanced does not help
the accused at all. I have already mentioned that the company was in fact
ordered to be wound up on a creditor's petition. The official liquidator has
not invited any claims so far ; and it will not be possible to send individual
notices to the creditors as provided and I do not know what he is going to do
in the circumstances of the present case. The gravity of the offence cannot be
minimised. That the offence under section 454(5) of the Act is a continuing one
cannot now be disputed in view of the decision of the Supreme Court in Maya
Rani Punj v. Commissioner of Income-tax [1986] 157 ITR 330. By this decision,
an earlier decision of the Supreme Court in Commissioner oj Wealth-tax v.
Suresh Seth [1981] 129 ITR 328 was overruled. A question, however, arose as to
whether sentence of fine which is for each day during which the default
continues is to be limited up to the date of filing of the complaint or up to
the date of conviction. The first impression was that perhaps it would be up to
the date of conviction in the present case inasmuch as the court did take
notice of the fact that during the pendency of this complaint, the statement of
affairs was not tiled and that which was filed was altogether not in accordance
with the provisions of section 454(1) of the Act and could not be termed as a
statement of affairs in the eye of law. However, in my opinion, a sentence of
fine cannot be imposed for the period after filing of the complaint.
Sub-section (5A) of section 454 of the Act is as follows :
"The court by which the winding up order
is made or the provisional liquidator is appointed, may take cognizance of an
offence under sub-section (5) upon receiving a complaint of facts constituting
such an offence and trying the offence itself in accordance with the procedure
laid down in the Code of Criminal Procedure, 1898, for the trial of summons
cases by magistrates".
If reference is made to the
Code of Criminal Procedure, 1973 (after repeal of the earlier Code of 1898),
'complaint' has been defined to mean any allegation made orally or in writing
to a Magistrate, with a view to his taking action under the Code, that some
person, whether known or unknown, has committed an offence (section 2(d)). The
court takes cognizance of the offence under section 190 of the Code upon
receiving a complaint of facts constituting the offence. Process is issued to
the accused under section 204 of the Code and when he appears, the substance of
the accusation is to be stated to him (section 251). The provisions contained
in Chapter XX of the Code relating to trial of summons cases are to be
applicable inasmuch as the punishment with imprisonment is for a term up to two
years Then after the trial, the court is to record its finding, convicting or
acquitting the accused. Thus, it will be seen that the accused is to meet the
case as set out in the complaint and the substance of the accusation is stated
to him and he is asked to plead guilty or not to the same. This substance of
accusation is given in the complaint only up to the date of filing of the
complaint.
Considering, however, the
facts and circumstances of the present case, I am of the opinion that the ends
of justice will be met by imposing a fine on the accused and he need not be
sent to prison. I would, therefore, sentence the accused Kuldip Raj Narang to
pay a fine of Rs. 50 per day for every day during which the default continued.
The fine at the rate of Rs. 50 per day will be payable from November 11, 1978,
21 days after the date of the winding up order which is October 20, 1978, till
December 19, 1980, when the complaint was filed. The amount of fine comes to
Rs. 38,500. In default of payment of fine, the accused will undergo rigorous
imprisonment for a period of two months. The fine, when realised, will be
payable to the official liquidator, the complainant.