Section 262

Directors, casual vacancy

[1932] 2 COMP CAS 147 (MAD.)

HIGH COURT OF MADRAS

M.K. Srinivasan

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.

JUDGMENT

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.

[1952] 22 COMP. CAS. 324 (MAD.)

HIGH COURT OF MADRAS

A. Anantalakshmi Ammal

Indian Trades & Investments Ltd.

RAJAMANNAR, C.J.

AND VENKATARAMA IYER, J.

ORIGINAL SIDE APPEALS NO. 120 OF 1951 & NO. 15 OF 1952

APRIL 4, 1952

G. Vasantha Pai, for the Appellant.

M. Sambandamurthi, V. Radhakrishnaiah and R. Swaminatha Iyer, for the Respondent.

JUDGMENT

The question raised in these appeals is whether the co-option of K.N. Narayana Iyer and K.C. Chandy as directors in a company called the Amalgamated Coffee Estates Ltd. is valid. This company was formed with the object of carrying on business in coffee, tea cardamom and other commodities and was incorporated under the Indian Companies Act in 1944. The last annual meeting of the company was held on 31st January, 1949. Article 55 of the articles of the company provides that a general meeting shall be held within 18 months from the date of its incorporation and thereafter once at least in every calendar year at such time (not being more than 15 months after the holding of the last preceding general meeting) and place as the directors may decide. In accordance with this provision the last day for holding the annual meeting would be 30th April, 1950, but no meeting was held either on or before that date. Notices were issued by the management on 21st July, 1950, for an annual meeting to be held on 6th August, 1950. But this meeting, however, was cancelled on the ground that objections were taken to its legality. On 14th August, 1950, one of the shareholders, Mrs. A. Ananthalakshmi Ammal filed an application under Section 76(3) of the Indian Companies Act, Application No. 2813 of 1950, for an order that the court should call for a general meeting, and in the affidavit filed in support of that application it was alleged that no general body meeting had been called after 31st January, 1949, that the directorate consisted of only three members, V.R. Veeramani, A.S. Padmanabhan and B.V. Raman, while Article 75 provided for a minimum of four directors, that the affairs of the company were being grossly mismanaged and that accordingly the court should direct that a general body meeting should be convened for scrutinising the balance sheets, appointing auditors and electing "new directors in the vacancies caused". There was also a prayer that a commissioner should be appointed to convene the meeting and act as chairman therefor. A similar application was filed by one of the debenture-holders, Application No. 2814 of 1950, and therein Application No. 2826 of 1950 was made for an injunction restraining the management from co-opting any person as director. On 18th August, 1950, an interim injunction was issued. On 21st August, 1950, the management applied in Application No. 2954 of 1950 for cancelling the interim injunction and all the four applications were heard together by Krishnaswami Naidu, J., who passed an order on 26th September, 1950, that the annual meeting be called on 29th October, 1950, for discussing the balance sheet and profit and loss account for "election of directors in the places vacant" and to consider the auditor's report, and that notices of the said meeting be issued in the names of the two directors, V.R. Veeramani and B.V. Raman. He also appointed an advocate, Mr. Sanjeevi Naidu as commissioner to preside over the meeting. The injunction petition was dismissed on the ground that in view of the orders passed in Applications Nos. 2813 of 1950 and 2814 of 1950 no orders were necessary. On 7th October, 1950, notices were issued for animal meeting on 29th October, 1950, in terms of the order dated 26th September, 1950. The notices also stated that "two directors, A.S. Padmanabhan and B.V. Raman retire. The vacancies created by their retirements have to be filled up. Of the retiring directors Mr. B.V. Raman offers himself for re-election."

On 9th October, 1950, two of the directors, Veeramani and B.V. Raman passed a resolution co-opting K.N. Narayana Iyer as a director in the place of one Dakshinamurthi who had resigned on I8th June, 1950. On 11th October, 1950, V.R. Veeramani resigned his office as an elected director and was nominated by the managing agents as a director under Article 82A, and in the vacancy thus created K.C. Chandy was co-opted as a director. Both the co-options took place after the court had passed an order on 26th September, 1950, for holding the annual meeting on 29th October, 1950, and after notices thereof had actually been issued. Thus on 29th October, 1950, the position was that V.R. Veeramani had become a nominated director; two directors had to be elected in the place of Padmanabhan and B.V. Raman whose terms of office had expired; and K.N. Narayana Iyer and K.C. Chandy had been co-opted as directors.

At the annual meeting held on 29th October, 1950, when the subject of "Election of directors in the places vacant" was taken up disputes arose as to the number of vacancies which were available to be filled. On behalf of Mrs. Ananthalakshmi Ammal it was contended that the expression "places vacant" would include the maximum number of directors that could be elected under Article 75 and that should be determined by the general body and that further the co-options of K.N. Narayana Iyer and K.C. Chandy were invalid. The management contended that the election should be limited to the two vacancies mentioned in the notice and that the co-options of Narayana Iyer and K.C. Chandy were valid. In this conflict of opinion it was decided to adjourn the meeting and obtain from the court a clarification of the order dated 26th September, 1950. Application No. 4025 of 1950 was then filed by Mrs. Ananthalakshmi Ammal for that purpose and on that Krishnaswami Naidu, J., passed an order on 3rd November, 1950, that apart from the two vacancies mentioned in the notice there was also a vacancy caused by the resignation of Dakshinamurthi on 18th June, 1950, and that an election should be held to fill up that vacancy as well. On the question of the validity of the co-options he observed that it was unnecessary to go into the question in these proceedings.

Against this order the management filed O.S.A. No. 103 of 1950. Their contention being that as there was valid co-option in the place of Dakshinamurthi there were only two vacancies. Mrs. Ananthalakshmi Ammal filed O.S.A. No. 110 of 1950 claiming that V.R. Veeramani was the only director validly in office, that all the other places were vacant and that the shareholders had the right to fill the vacancies up to the maximum as provided under Article 75. Both these appeals were disposed of by the judgment of this court dated 9th February, 1951. Therein it was held that for the purpose of election of directors "in the places vacant" as provided in the order dated 26th September, 1950, it was necessary to determine the number of vacancies and that to decide that, it was necessary to decide whether the co-options were valid or not. The matter was accordingly remanded for decision on the validity of the co-options of K.N. Narayana Iyer and K.C. Chandy. There was also a direction that the court might order, at its discretion, addition of parties for the purpose of a satisfactory disposal of the points in dispute.

In pursuance of this order of remand Applications Nos. 2813 of 1950 and 2814 of 1950 came up for re-hearing before Krishnaswami Naidu, J. The two directors, the validity of whose co-option was at issue, Narayana Iyer and K.C. Chandy, were also impleaded as parties. The whole case was reheard and on 14th November, 1951, Krishnaswami Naidu, J., pronounced judgment upholding the co-option of K.N. Narayana Iyer and rejecting that of K.C. Chandy. It is against this judgment that the present appeals have been brought. In O.S.A. No. 120 of 1951 Mrs. Ananthalakshmi Ammal contends that the co-option of K.N. Narayana Iyer on 9th October, 1950, is invalid. In O.S.A. No. 15 of 1932 Mr. K.C. Chandy contends that his co-option on 11th October, 1950, is valid. These are the questions that fall to be determined in these appeals.

In O.S.A. No. 120 of 1951 Mr. Vasantha Pai, the learned advocate for the appellant contends that the co-option of Narayana Iyer on 9th October, 1950, was invalid because there was only one director who was entitled to act on that date and that the power to co-opt could not be exercised when there was no board of directors competent to act under Article 75; that in any event such a power could not be exercised after an annual meeting had been called; that at any rate on the facts of the present case such a power could not be exercised as the court had ordered on 26th September, 1950, that the shareholders should elect the directors in the vacancies at an annual meeting to be held on 29th October, 1950, and that the resolution dated 9th October, 1950, did not comply with the requirements of Article 99 of the articles of the company. It was further argued that even if the power to co-opt could be validly exercised on 9th October, 1950, it was not in fact so exercised as the co-option was made not in the interests of the shareholders but of the management. The management controverts the soundness of these contentions.

The position that the power to co-opt directors comes to an end when once an annual meeting is convened, is not ought to be supported by anything in the Companies Act or in the articles of the company. Nor is any authority cited in support of it. We have no hesitation in rejecting it. Nor is there any substance in the argument that the order of the court dated 26th September, 1950, directing that the annual meeting be convened for filling up vacancies has the effect of extinguishing that power. Though interim injunction was issued against co-option in Application No. 2826 of 1950 on 18th August, 1950, that became dissolved on the dismissal of that application on 26th September, 1950. It is true that the order of dismissal was made not on the merits but in view of the orders passed in Applications Nos. 2813 of 1950 and 2814 of 1950 and it must have been assumed that all the places would be filled by election, at the annual meeting, on 29th October, 1950. This circumstance, though material on the question whether the exercise of power on 9th October, 1950, and 11th October, 1950, was bona fide or not, does not operate to deprive the management of its powers under Article 81. The objection based on Article 99 that the resolution dated 9th October, 1950, was not signed by all the directors but only by two of them must also be rejected inasmuch as no contention is raised by the management that the co-option of K.N. Narayana Iyer, if not valid under Article 81 could still be upheld as one passed in circulation under Article 99.

The two substantial contentions urged on behalf of the appellant are (1) that on 9th October, 1950, there was only one director competent to act and according to the articles of the company he would have no power to co-opt a director and (2) that in any event the exercise of the power was not for the benefit of the shareholders and therefore void. With reference to the first contention it is necessary to set out the relevant articles of the company on which it is based. Under Article 75 "Until otherwise determined by a general meeting the number of the directors shall not be less than four or more than nine." Article 83 provides that "at the first ordinary meeting of the company the whole of the directors excepting the ex-officio directors, shall retire from office and at the ordinary meeting in every subsequent year, one-third of the directors (other than the ex-officio 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." Section 83A(1) of the Indian Companies Act enacts that "every company shall have at least three directors." Turning to the facts it should be remembered that the last annual meeting was held on 31st January, 1949. Even at that time there were only three directors in office, A.S. Padmanabhan, M.S. Periasami Nadar and V.R. Veeramani. Of these Padmanabhan was due to retire under Article 83 at the next annual meeting. Periasami Nadar resigned in August 1949 and in his place Dakshinamurthi was co-opted on 25th September, 1949. On 22nd March, 1950, one B.V. Raman was co-opted as the fourth director but he was also due to retire at the next annual meeting. The meeting should have been held under Article 55 on 30th April, 1950, at the latest. On 18th June, 1950, Dakshinamurthi resigned and it was in his place that K.N. Narayana Iyer was co-opted by a resolution of the directors, Veeramani and B.V. Raman.

On these facts it was argued by the learned advocate for the appellants that two of the directors, Padmanabhan and B.V. Raman who were due to retire at the annual meeting next to that held on 31st January, 1949, should be held to have vacated their office on the last date on which the annual meeting should have been held and that in consequence they ceased to be directors after 30th April, 1950. This contention is amply supported by the authorities. In Re Consolidated Nickel Mines Ltd. the question arose whether two directors, Steel and Phillips, were entitled to remuneration as directors. Article 101 of the company provided that at the ordinary meeting all the directors should retire from office. Section 49 of the Companies Act provided that the directors were bound to summon a general meeting of the company once in every calendar year. After 1905 no meeting was called but the two directors continued to act. It was held that they vacated the office on the last day on which the annual meeting should have been held, that is no 31st December, 1906, and that therefore they were not entitled to remuneration thereafter.

In Srinivasan v. Watrap Subramania Iyer Cornish, J., followed the decision in re Consolidated Nickel Mines Ltd. In Kanssen v. Rialte the point for decision was whether the allotment of shares made at a directors' meeting held on 30th March, 1942, was valid. Two persons Cromie and Strelitz purported to act as directors and made the allotment. Strelitz claimed to have been appointed as director at a meeting held on 1st February, 1940. It was found that there was no such meeting or appointment. Cromie was one of the original directors but under Rule 73 of Table A of the Companies Act, 1929, which in substance corresponds to Article 83 in the present case, the directors would have to retire at the annual meeting and the last day on which such a meeting should have been held was 31st December, 1941. On these provisions Lord Greene, M.R., who delivered the leading judgment of the Court of Appeal observed as follows:—

"Neither Mr. Cromie nor Mr. Strelitz was then (on 30th March, 1942) a director of the company. Mr. Cromie had been a director but he had vacated the office on 31st December, 1941, by reason of Article 73 of the company's articles of association. See Re Consolidated Nickel Mines Ltd."

This decision was affirmed by the House of Lords in Morris v. Kanssen. On the point now under consideration the decision is thus stated in the head note:—

"No general meeting was held in 1941 and accordingly by the effect of Article 73 of Table A as varied by Article 22 of the company's articles of association there were thereafter no de jure directors."

Vide the observations in the speech of Lord Simonds at pages 467, 468 and 471. In Buckley on Companies Acts the learned author commenting on Rule 89 in Schedule I of the Companies Act, 1948, which in terms corresponds to the present Article 83 states the law as follows:—

"If in any calendar year an annual meeting is not held under an article in this form, those directors who would have retired at the meeting had the same been held will vacate office on the last date of the year." (12th edition, page 882).

On these authorities it must be held that both Padmanabhan and B.V. Raman ceased to be directors after 30th April, 1950, and that at the time of the co-option of K.N. Narayana Iyer on 9th October, 1950, there was only one director, Veeramani, who was lawfully in office.

What follows on this conclusion? The appellant contends that if on 9th October, 1950, there was only one director, then there was no board of directors as required by Article 75 and that therefore there could be no valid co-option as the power to co-opt could only be exercised by the board. The respondent relies on Article 81 which is in these terms:—

"The continuing directors may act notwithstanding any vacancy in their body; but, so that if the number falls below the minimum above fixed the directors, shall not, except in emergencies or for the purpose of filling up vacancies, act so long as the number is below the minimum."

The argument is that this is a special provision made for meeting contingencies like the present and that the co-option made thereunder is valid. The contention of the appellant is that even for invoking the power under Article 81 there must be a board with the minimum strength as required by Article 75 but this is opposed to the plain language of the article which expressly confers power on the continuing directors to fill vacancies when the number falls below the minimum and the minimum that is referred to in this article is the minimum prescribed under Article 75.

There is also considerable body of authority in England on the construction of clauses similar to Article 81. In Re Scottish Petroleum Company the article fixed a minimum strength of the board of directors at four and the quorum for the board's meeting at two as do Articles 75 and 93 in the present case. The strength of the board came down to two; when they co-opted another director and allotted shares to him. Article 83 of the company provided that the continuing directors may act notwithstanding any vacancy in the board. On these provisions it was held that the power to co-opt a director could be exercised even though the strength of the board had fallen below the minimum. The following observations occurring in the judgment of BAGGALLAY, L.J., may be usefully quoted:—

"It is also contended that though by the articles two directors form a quorum when the board is duly constituted, there could not be a quorum capable of transacting business when the board of directors was not filled up to the minimum number. I assume that the retiring directors had ceased to be directors, and if that be so, the board was not made up to the minimum number. Still I think that having regard to Article 83, the objection cannot be maintained. It is urged that this article can only apply when the number of directors is more than four, but I see no reason for adopting that view."

In Re Bank of Syria, Owen and Ashworth's claim, Whitworth's claim Article 38 of the company provided that the members of the council shall be not be less than three and not more than nine. At the time of the transaction there were only two directors and the question arose whether they had the power to act. Article 42 provided that "the continuing council may act notwithstanding any vacancy." It was held by Wright, J., that under this clause the directors were entitled to act. He observed "I am asked to say that in as much as there were only two directors acting at that time, they had no power to bind the company. But it seems to me that I ought to hold, having regard to the authorities, that Article 42, which provides that a continuing council may act notwithstanding any vacancy, gets over the difficulty... It seems to me, having in view Article 42, that the principle in Re Scottish Petroleum Company applies to the present case." There was an appeal against this decision. Vide Re Bank of Syria, Owen and Ashworth's claim, Whitworth's claim.

LORD ALVERSTON, C.J., in agreeing with the decision of Wright, J., on this point observed that even if the number of directors fell below the quorum fixed for a directors' meeting the principle laid down in Re Scottish Petroleum Company would apply and that the continuing directors would be entitled to act under Article 42. That is to say the power to co-opt might be exercised notwithstanding that the strength of the directorate has fallen below the minimum required, and below the quorum prescribed, by the articles.

In Re Sly Spink and Co., the articles required that the number of directors should not be less than four, that the quorum for a board's meeting should be three and Article 88 gave authority to the continuing directors to fill in vacancies. From the very start the company had never a board of four directors. Only three directors were appointed and they allotted shares. The company having gone into liquidation the question arose whether the allotment of shares was valid. It was contended that the three directors had authority to act under Article 88 and that the allotment was consequently valid. Neville, J., held that article 88 would apply only if there had been a properly constituted board of directors in the first instance but that where there never was a board with the minimum strength, Article 88 would not apply. The following observations may be quoted:—

"It is said that they were continuing directors because they had not ceased to be directors. I do not think that is a reasonable interpretation to put upon the words contained in the articles. The expression is a familiar one and it applies to cases where the number of the original board had been reduced by death or otherwise, and in such cases those who are left, subject to the provisions of Article 88, would be entitled to conduct the business of the company. With regard to that, I think the two cases which were cited In re Scottish Petrolium Company and In re British Empire Match Co. show very clearly the distinction between the case where the directors too few in number can and cannot act as continuing directors. In one case you have a board insufficient in number from the first and notwithstanding the continuing clause it was held that the board could not transact business. In the other case you have a board which was originally competent to transact business but was diminished by retirement to a number less than that provided for by articles. The continuing clause was held to apply and those directors were held to be competent to transact the business of the company."

The company in the present case started with four directors, being the minimum strength under Article 75. Vide the allegations in paragraph 5 in the affidavit of Davar in Application No. 2954 of 1950; and therefore the continuing directors would under the decision in Re Sly, Spink and Co. have power to act under Article 81. In Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Railway, the articles of the company provided that the minimum number of directors should be three, that the quorum for the board's meeting should be two and Article 89 gave power to the "remaining directors" to fill vacancies. The company began with three directors, then two of them resigned leaving only one director in office and he co-opted a director under Article 89. It was contended that this co-option was invalid because the board had neither the minimum strength nor even the quorum provided by the articles. Rejecting this contention Lord Cozens Hardy M.R. observed as follows:—

"Sir John Jackson thus became sole director. What was his power? Under the Companies Clauses Act, 1845, as continuing director, he had power to fill up the vacancies on the board. The fact that a person exercising that power does not constitute a quorum is not really a relevant matter. The generality of the language used in Section 99 is so clear that it is impossible for us to overlook it. Any other view on that point would paralyse many a company."

The following observations occurring in the judgment of Swinfen Eady, L.J., might also be usefully quoted:—

"I think that the context requires that the words 'remaining directors' should include the case of a remaining director. It is obvious that the number of the board may, by death or resignation or otherwise, be so reduced that it may be below the quorum, as well as that there may be vacancies occurring in the board whilst still leaving a quorum, but in either case it is necessary or proper that the vacancy should be filled up. In my opinion the necessity of the case requires that 'the remaining directors' should be read as including the case of a remaining director, so that if and so long as there is any remaining director he may proceed to fill up the board by appointing persons when casual vacancies occur. For these reasons I am of opinion that it was open to Sir John Jackson as the sole remaining director, under Section 89, to appoint duly qualified persons to be directors in the place of the two who had ceased to be members of the board."

Applying these principles it must be held that the power under Article 81 could be exercised even though the strength of the board had fallen below the minimum prescribed by Article 81 and below the quorum mentioned in Article 92 and even when there is only one director capable of acting. The co-option of Narayana Iyer on 9th October, 1950, must, therefore, be held to be within the scope of the authority conferred on the continuing directors under Article 81.

The only question that remains to be decided is whether on the fact and circumstances of this case the co-option of Narayana Iyer is open to attack as improper and mala fide. The learned advocate for the appellant argued that the directors stand in a fiduciary relationship to the shareholders, that any power conferred on them must be exercised for the benefit of the shareholders, that the co-option of directors should also be made only in the interests of the shareholders and that Narayana Iyer was co-opted only for the purpose of strengthening the hands of the management in their fight with their shareholders and it is, therefore, invalid. That the directors, are in a fiduciary position in relation to the shareholders cannot seriously be questioned. In Ferguson v. Wilson Lord Cairns held that while the directors of the company were in the position of agents of the company in its dealings with the outside world, they were in the position of the trustees in relation to the shareholders. Similar observations are to be found in the judgment of Lord Selbourne in G.E. Railway v. Turner.

The position is thus summed up in Palmer's Company Precedents:

"Where the directors of a company are invested by the regulations with certain powers, the authority thus conferred is to be read subject to the general rules applicable to the exercise by directors of the powers vested in them, and in particular to the rule that the directors are to exercise the powers for the benefit of the company and in the true interests of the company and according to the best of their judgment, for they stand in a fiduciary position, and must act accordingly."

(Vide Vol. 1, page 434, paragraph 21; 16th edition).

We, therefore, agree with the appellant that if the co-option of a director under Article 81 is not made in the interests of the shareholders but for other purposes it cannot stand.

What then are the facts? It is common ground that the affairs of the company were during this period in a very unsatisfactory condition. For want of funds the coffee and tea estates were in a state of neglect. More than Rs. 96,000 had to be paid for income-tax and the Government were taking coercive steps to recover the same. Interests due to the debenture-holders had not been paid; nor dividends which had been declared on the shares. The creditors had obtained decrees against the company and execution proceedings were in progress. These facts are stated in the affidavits filed on behalf of the appellants in these proceedings. But it also appears from these affidavits that the coffee and tea plantations owned by the company were extensive and valuable and if finance was forthcoming they could be properly worked and made to yield profits. It is clear from the records that the managing agents were making strenuous attempts to get at a financier who would be willing to advance the necessary funds for the working of the estate and at last they found him in Narayana Iyer. This Narayana Iyer was the managing director of a company called Messrs. Parkins (India) Ltd., which has under its management several plantation companies owning tea, coffee and rubber estates. He has had experience in this line of business for about twenty years and is a man of considerable worth. It cannot be doubted that it would be to the advantage of the company if he could be persuaded to join it. It appears from paragraph 3 of his affidavit that early in August, 1950, the shareholders themselves approached him with a request to join the company and advance the necessary funds. This is borne out by a letter dated 7th September, 1950, written by a director of Messrs. Parkins (India) Ltd., to the advocate for the appellant. This letter gives particulars about the status of Messrs. Parkins (India) Ltd., and of its managing director, Narayana Iyer and proceeds to state:—

"Messrs. Parkins (India) Ltd., are willing and they are in a position to provide working finance and other finance required immediately to pay the pressing creditors of the Amalgamated Coffee Estates Ltd."

A reading of this letter leaves no doubt that the shareholders considered that the accession of Narayana Iyer would add to the strength of the company and enable it to tide over its difficulties. It is admitted in the affidavit filed in Application No. 2826 of 1950 that as early as August the management itself had been negotiating with Narayana Iyer with the object of bringing him in. He insisted naturally that if he should advance the necessary funds, he should have a voice in the control and management of the company. The management agreed to this and co-opted him as a director on 9th October, 1950. It appears from the affidavit of Narayana Iyer that after his co-option he advanced monies to the extent of a lakh of rupees for the working of the estate and harvesting coffee. The facts clearly show that the company was in need of finance, that Narayana Iyer was co-opted for the purpose of finding the necessary funds and that both from the point of view of his experience and financial status he would be a source of strength to the company.

But it is argued on behalf of the appellant that notwithstanding the above circumstances, the co-option of Narayana Iyer must be rejected as improper and mala fide because the vacancy in which he was filled arose on 18th June, 1950, when Dakshinamurthi resigned, that the management did not choose to fill that vacancy then; that on the other hand they stated in their counter-affidavit in Applications Nos. 2813 of 1950 and 2814 of 1950 that they thought it fair not to co-opt a director in view of the general body meeting that was proposed to be convened; that an injunction was actually issued on the 18th of August, 1950, restraining the managing agents from making any co-option and though it became dissolved on 26th September, 1950, it was understood by all persons that the vacancy would be filled by the shareholders at the annual meeting and that therefore, the co option on 9th October, 1950, must be held to have been made with the object of depriving the shareholders of their right to elect a director.

But it must be remembered that during this period the management was on the look out for a suitable financier and that it was responsible on their part to have left the place vacated by Dakshinamurthi vacant until a suitable person could be found and to have left it to the shareholders to fill the place if their endeavours to get at a financier did not succeed. Nor can any sinister purpose be spelt out of the fact that the co-option was made after a general meeting had been called. It is admitted that the coffee crops were ready for harvesting and if early steps were not taken to gather them considerable damage would result. In paragraph 13 of the counter affidavit filed by Davar in Appln. No. 2954 of 1950 it is alleged that "the coffee plantations in Palghat and the cardamoms are deteriorating; crops were being spoilt and what little can be gathered from the crops would be lost to the shareholders and the debenture-holders on account of the neglect and irresponsible attitude of the managing agents." This was in August, 1950. It is obvious that the urgency must have been greater in October and the managing agents acted in the best interests of the shareholders in concluding a bargain with Narayana Iyer on 9th October, 1950.

On a review of all the circumstances we agree with Krishnaswami Naidu, J., that the co-option of Narayana Iyer was a proper exercise of the power under Article 81. O.S.A. 120 of 1951 must accordingly be dismissed with costs.

In O.S.A. 15 of 1952 the point for determination is whether the co-option of K.C. Chandy on 11th October, 1950, was a valid exercise of the power under Article 81. The facts relating to this co-option present a picture totally different from what has been seen in the case of Narayana Iyer. No particular reason has been shown why this co-option should have been made on 11th October, 1950, when the annual meeting had been called for 29th October, 1950. It is not stated that this co-option was made under any arrangement to advance funds for the company. That arrangement had already been concluded with Narayana Iyer. Nor does K.C. Chandy possess anything like the experience which Narayana Iyer undoubtedly does possess. He is an Advocate practising at Kottayam. The circumstances under which the co-option was made clearly stamp it as mala fide. V.R. Veeramani who was one director who has been in active management resigned his place as an elected director on 11th November, 1950, and as part of the same proceedings he became a nominated director. It is clear that this manoeuvre was adopted for co-opting a director of the choice of the managing agents and it is open to the objection that, it was made with a view to strengthen the hands of the managing agents and not in the interests of the shareholders. We agree with Krishnaswami Naidu, J. that this co-option cannot be upheld.

It was argued by Mr. V. Radhakrishnayya the learned advocate for the appellant that the validity of this co-option cannot be gone into in these proceedings, but the matter is concluded by the judgment of this court dated 9th February, 1951, and even otherwise the decision, on the validity of the co-option is incidental to the exercise of the powers under Section 76(3) of the Companies Act. In the result the appeal fails and is dismissed with costs.

[1952] 22 COMP. CAS. 324 (MAD.)

HIGH COURT OF MADRAS

A. Anantalakshmi Ammal

Indian Trades & Investments Ltd.

RAJAMANNAR, C.J.

AND VENKATARAMA IYER, J.

ORIGINAL SIDE APPEALS NO. 120 OF 1951 & NO. 15 OF 1952

APRIL 4, 1952

G. Vasantha Pai, for the Appellant.

M. Sambandamurthi, V. Radhakrishnaiah and R. Swaminatha Iyer, for the Respondent.

JUDGMENT

This decision was affirmed by the House of Lords in Morris v. Kanssen. On the point now under consideration the decision is thus stated in the head note:—

The following observations occurring in the judgment of Swinfen Eady, L.J., might also be usefully quoted:—

The position is thus summed up in Palmer's Company Precedents:

(Vide Vol. 1, page 434, paragraph 21; 16th edition).

We, therefore, agree with the appellant that if the co-option of a director under Article 81 is not made in the interests of the shareholders but for other purposes it cannot stand.

Section 264

Consent of candidate for directorship

[1973] 43 Comp. Cas. 17 (Bom.)

HIGH COURT OF BOMBAY

Laljibhai c. Kapadia

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.

JUDGMENT

Bhasme, J.—This is an appeal by defendants Nos. 2 and 3 and is directed against the judgment and decree passed in the suit filed by respondents Nos. 1 and 2 against the appellants and respondent No. 3. The suit was for a permanent injunction restraining respondent No. 3 and its directors, servants and agents from allowing the appellants to act as directors of the respondent No. 3-company. A similar injunction was also claimed against the appellants restraining them from acting in any manner as the directors of the respondent No. 3-company.

Respondent No. 3 is a public limited company registered under the Indian Companies Act and carries on business, inter alia, as manufacturer of rayon yarn and has its registered office at Bombay. It is the plaintiffs’ case that on April 9, 1969, the board of directors appointed the appellants as additional directors of respondent No. 3-company. The board of directors consisted at that time of 8 members excluding those additionally appointed directors. The plaintiffs have referred to the 8 directors as functioning directors and that may be to distinguish them from the appellants who are appointed additional directors. Thereafter notices dated l0th April, 1969, were received by respondent No. 3-company proposing the appellants as directors at the next annual general meeting. On June 11, 1969, the 22nd annual general meeting of the respondent No. 3-company was convened. At the general meeting two directors, Kasturbhai Lalbhai and Naval H. Tata, retired by rotation and were again re-elected as directors. At the same meeting by two separate resolutions, the appellants were appointed directors. The two resolutions are referred to in the plaint as resolutions Nos. 5 and 6.

The plaintiffs by the suit challenged the legality of the appointment of the appellants on certain grounds. According to the plaintiffs the number of directors on the board can be increased by the company under section 258 of the Indian Companies Act by passing a resolution. No such resolution was ever duly notified, proposed and passed. In the absence of any such resolution, respondent No. 3-company had not the power to appoint the appellants as directors. The plaintiffs submit that resolution Nos. 5 and 6 are, therefore, invalid, void and of no effect.

The plaintiffs also submit that without prejudice to the aforesaid ground, the appointment of the appellants as directors was illegal, void and of no effect as they had not filed letters of consent under section 264(1) of the Act in respect of their proposed appointment as directors at the annual general meeting. The plaintiffs, as shareholders of respondent No. 3-company, have the right to property in respondent No. 3-company. It is for this reason that they had filed the suit restraining the appellants from acting as directors of respondent No. 3-company.

Respondent No. 3-company filed its written statement and submitted that the appointment of the appellants as directors was valid and legal. It has stated that a separate resolution to increase the number of directors was not required under the provisions of the law. The company also stated in paragraph 12(a) of the written statement that on 9th April, 1969, the appellants had filed their letters of consent to act as directors, if appointed. After receipt of these letters the appellants were appointed as directors. It is mentioned in the written statement that after their appointment as additional directors on 10th April, 1969, two shareholders delivered to the company notices under section 257 of the Act intending to propose the appellants as candidates for the office of the directors of respondent No. 3-company at the next annual general meeting of the company. The appellants were not required to file any letters of consent under section 264(1) of the Act before their election as directors at the 22nd annual general meeting. According to the company the appellants were validly proposed and elected as directors.

The appellants between themselves filed one written statement and supported the validity of their appointment on all the grounds alleged by respondent No. 3-company. In addition the appellants stated that on their appointment as additional directors, the strength of the board was increased to 10 directors. In paragraph 8 of the written statement it is submitted that they were not required to file any letters of consent under section 264(1) of the Act before their appointment as directors at the meeting. Without prejudice to this defence it is also pleaded that they did file the letters of consent on 9th April, 1969, with respondent No. 3-company. They argued that, as additional directors, they were persons to whom section 264(1) of the Act did not apply. Assuming that there was any such requirement, it is asserted that it was a mere irregularity and that did not disable them from acting or functioning as directors. The made it clear that it was implicit in the two resolutions appointing them as directors that the number of directors was, if necessary, being increased. According to them no separate resolution under section 258 or article 169 of the articles of association of the company was necessary for increasing the number of directors from 8 to 10. At any rate, the absence of any separate resolution will not affect the validity of the resolution appointing them as directors of respondent No. 3-company. They denied that it is mandatory under section 258 of the Companies Act or under article 169 of the articles of association of the company that before the number of directors is increased, a resolution increasing the number of directors ought to have been duly notified or proposed or passed. There were other allegations made by the appellants against the plaintiffs but for deciding the points raised in this appeal they are not at all relevant. As the parties had not sought any issues on the basis of those allegations, the learned judge was not called upon to consider whether they were true or false. The substance of those allegations was that according to the appellants the plaintiffs had filed the suit mala fide at a late stage at the instance of one Rasiklal J. Chinai who was defeated in the contest for election of directors at the general meeting of the shareholders of respondent No. 3-company.

At the trial the learned judge framed the relevant issues. Parties did not lead any oral evidence. By consent of the parties only documents were exhibited. The defendants had also resisted the suit on the ground that the plaintiffs being shareholders cannot have any grievance against respondent No. 3-company as the matter in dispute was concerning the internal management of the company and the suit by the two shareholders was not maintainable. Perhaps it was felt by the parties that the issues arising in the suit are purely questions of law and it was not necessary to adduce any oral evidence.

The learned judge, on a consideration of the evidence on record and the submissions of the parties, has recorded his findings. He held that the present suit is maintainable. He came to the conclusion that the letters of consent under section 264(1) of the Act for the appointment of the appellants as directors at the annual general meeting were not necessary. In view of this finding he held that whether or not such letters were filed need not be considered. According to him the impugned resolutions Nos. 5 and 6 passed at the annual general meeting of the company on June 11, 1969, appointing the appellants as directors of the company were illegal. Consistent with this finding the learned judge decreed the plaintiff’s suit and granted the injunctions against respondent No. 3-company and the appellants.

As stated above the appellants, aggrieved by the decree, have come to this court with the present appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody, instructed by M/s. Haridas & Co., appears for respondents Nos. 1 and 2, the original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi, instructed by M/s. Bhaishankar Kanga and Girdharilal, appears for respondent No. 3-company. It must be stated at the outset that respondents Nos. 1 and 2 have purported to file cross-objections against the finding recorded by the learned judge about the consent letters under section 264(1) of the Act. Mr. Thakkar conceded that the cross-objections are misconceived but mentioned that he had the right, as an advocate appearing for the respondents, to assail the decree under appeal on any of the grounds decided against him. Therefore, the points for determination in this appeal are:

(1) Whether the board of directors of the company before and after the annual’ general meeting consisted of ten members or whether at the annual general meeting the strength of the board of directors was increased from 8 to 10.

(2) Whether the company can increase the strength of the board of directors only by passing a separate and distinct resolution before proceeding to appoint directors by filling the additional sanctioned posts.

(3) Has the board of directors contravened the mandatory provisions of section 173 of the Act by not furnishing any information about the proposed special business or by furnishing information, which is hopelessly inadequate or misleading?

(4) Can the plaintiffs rely on the above contraventions in any form without specific averments in the plaint?

(5) Has the learned judge erred in holding that the additional directors, like the retiring directors, are not required to file written consent duly signed before their reappointment as directors by the company?

(6) Is the suit not competent as the alleged irregularities arise in the course of the internal management of the company?

Before I proceed to consider the various points urged before me, it is desirable to refer to the relevant provisions of the Companies Act, 1956, and the articles of association of respondent No. 3-company.

Section 2(13) of the Companies Act defines “director” as any person occupying the position of director, by whatever name called. Section 255 provides for the appointment of directors and the proportion of those who are to retire by rotation. Section 256 contains provisions for ascertainment of directors retiring by rotation and filling up of the vacancies. Under section 257 a person who is not a retiring director shall be eligible for appointment to the office of director if he or some member intending to propose him has, not less than fourteen days before the meeting, left at the office of the company a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office. The other provisions of section 257 are not quite relevant and need not be referred to here.

Under section 358 of the Act, subject to the provisions of sections 252 255 and 259, a company in general meeting may, by ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles. Section 259 in certain cases requires the sanction or approval of the Central Government for any increase in the number of its directors. Section 260 provides that the board of directors, if permitted by the articles of association, can appoint additional directors. The board is to exercise that power so as not to exceed the maximum strength fixed for the board by the articles. The first proviso to section 260 makes it clear that such additional directors shall hold office only up to the date of the next annual general meeting of the company. Section 262 deals with the filling of casual vacancies amongst directors. Under section 263(1) ordinarily there will be only one resolution for the appointment of one director at the annual general meeting of the company. A single resolution is permitted under certain special circumstances for appointing more than one director. Section 263(2) provides that a resolution moved in contravention of sub-section (1) shall be void, whether or not objection was taken at the time to its being so moved. Section 264(1) under certain circumstances requires that the candidate for directorship should file his written consent with the company before his appointment as director at the meeting. Section 264(2) requires that a person appointed as a director shall not act as a director unless he has within the prescribed time signed and filed his consent with the Registrar to act as such director.

Apart from the group of these sections, there are two more sections, which assume importance while deciding the points, which arise in this appeal. Section 172 requires that every notice of a meeting of a company shall contain certain relevant particulars. Leaving the other details, I must only mention that under section 172(1) such notice shall contain a statement of business to be transacted at the meeting. Under section 173(1)(a) in the case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exception of the business relating to four specified items. Item No 3 deals with the appointment of directors in the place of those retiring. Section 173 (1)(b) makes it clear that in the case of any other meeting, all business shall be deemed special. Section 173(2) contains a direction that where any items of business to be transacted at the meeting are deemed to be special under sub-section (1), there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. The proviso also requires further and better particulars in specified cases. It is not necessary to refer to that proviso at any length.

Now it remains to mention the relevant articles of association of the company. Under article 142, the directors have power at any time and from time to time to appoint any other qualified person to be a director as an addition to the board so that the total number of directors at any time shall not exceed the maximum fixed. Any person so appointed as an addition to the board shall retain his office only up to the date of the next annual general meeting but shall be eligible for re-election at such meeting. Under article 164, at every annual general meeting of the company, one-third of such of the directors for the time being as are liable to retire by rotation or, if their number is not three or a multiple of three, the number nearest to one-third shall retire from office. Article 166 makes it clear that a retiring director shall be eligible for re-election. It is true that counsel on either side did refer to other sections and articles to elucidate the various points raised by them. I need not consider them all at this stage.

The first point made by Mr. Nariman on behalf of the appellants is about the strength of the board of directors of the company. He objected to the expression “functioning directors” and “additional directors” as used by the plaintiffs in the plaint. He said that there is no warrant for any such distinction. Whether the directors are appointed at the meeting or by the board of directors, they all together constitute the board. The directors in that capacity have the same rights, privileges and obligations under the provisions of the Act. He referred to the definition of “director” as contained in section 2(13) of the Companies Act. In all other places in the Act the board of directors was mentioned as such and he says that the distinction sought to be made by the plaintiffs is without any legal significance. It appears to me that the plaintiffs have used the different expressions only for a better understanding of their case. The appellants were, in the first instance, appointed as additional directors and later on they were reappointed as directors. But, apart from this fine distinction in phraseology, the point of substance made by Mr. Nariman is that the company had not increased the number of directors from 8 to 10 at the annual general meeting by the reappointment of the appellants. When the board of directors in exercise of their power under section 260 of the Act co-opted the appellants, the number of directors on the board was increased from 8 to 10. Even at the meeting the number was not reduced. The two directors retired by rotation and the two additional directors ceased to hold office. There were, therefore, four clear vacancies. When the company passed four resolutions reappointing the four persons as directors there was no increase and the provisions of section 258 are not attracted. I find it very difficult to accept this submission. The composition of the board of directors with additional directors will not be the same as the board of directors appointed by the company at the general meeting. It cannot be said that the company had at any time surrendered its inherent or statutory power to increase the number of directors on the board when the board appointed or co-opted additional directors. As observed by Lord Hanworth M.R. in Worcester Corsetry Limited v. Witting, the power conferred on the directors to appoint additional directors is a temporary power vested in them, and this is to be reviewed and perhaps confirmed at the general meeting. Even the wording of section 260 underlines the temporary nature of this power conferred on the board of directors. Section 260, first proviso, makes it clear that such directors shall hold office only up to the date of the next annual general meeting. It is true that under article 142 of the company, the board of directors can appoint any number of additional directors at any time and from time to time so as not to exceed the permitted maximum limit. Consistent with the first proviso to section 260, the article also makes it clear that the person so appointed as an addition to the board shall remain in office only up to the date of the next annual general meeting. I am of the view that the board of directors cannot by the appointment of additional directors increase the strength of the board so as to affect the power of the company vested in it under section 258 of the Act.

Then Mr. Nariman argued that the learned judge was not justified in holding that the company can increase the strength of the board only by passing a separate and distinct resolution before proceeding to appoint directors by filling the additional sanctioned posts. I have not used the exact words of the learned judge but in substance that appears to be the finding recorded by him. According to Mr. Nariman all that section 258 requires is that the company, subject to the other restrictions imposed on it, must resolve to increase or reduce the number of directors in the general meeting. The section itself has not prescribed any other formality for effecting the increase or decrease in the number of directors. Mr. Nariman points out that under the Companies Act, wherever separate resolutions were found necessary, provisions were made in that behalf. He referred to section 263 of the Act. I have already mentioned above the substance of that section. Ordinarily, there will be a separate resolution for appointing a person as a director at the annual general meeting of the company. Mr. Nariman says that the company can exercise the power vested in it under section 258 by passing one or more resolutions and as no form is prescribed, one will have to look at the substance. When there are 8 members on the board of directors, the company can by simply appointing two members in addition increase the number and this can be done without passing a separate resolution. He says that it is implicit in the act of appointing. The company has exercised the power to increase the number.

While dealing with this power of the company to increase the number, Mr. Nariman referred to the corresponding English law and submitted that the provisions are substantially similar. Mr. Nariman relied on an English case, Worcester Corsetry v. Witting. The learned judges were considering the effect of two apparently inconsistent articles of the company. But, as the case also dealt with the power of the company to appoint directors and thereby increase the number, it has some relevance while appreciating the point raised before me. Article 83 of Table A contained the provisions similar to section 258 of the Indian Companies Act. At page 649, Lawrence L.J. observes as follows about the existence of the power to increase and its exercise by the company:

“Article 83 of Table A shows in the plainest terms that the company has power to increase or reduce the number of its board. It is said that that does not involve the nomination and appointment of particular gentlemen or ladies as directors, but it seems to me that that is necessarily implied in the provision of article 83. If, for instance, there have been four directors, within the maximum number of directors, and the board desire that two additional directors shall be appointed, it can convene, in my judgment, a meeting under article 83 for the purpose of increasing the number of directors by two named persons, appointing these two persons, and thereby increasing the number of directors”.

Slesser L.J., at page 654, approves the above observations and says:

“The more natural view of article 83 is that it is not redundant or merely introducing unnecessary machinery which is already provided by article 12 in dealing with the maximum and minimum, but, as Lawrence L.J. has indicated, is itself conferring a power not only to increase the number but to increase that number by itself appointing directors to the extent to which it is intended to increase the number”.

About the power of the company to increase the number of directors under its articles of association, the learned author in his book Pennington’s Company Law, 2nd edition, pages 456-57, sums up the legal position as under:

“The power to appoint subsequent directors is usually exercisable by the members of the company in general meeting by ordinary resolution. If the articles prescribe the maximum number of directors who may be appointed, appointments in excess of the maximum are void. Usually, however, the members are empowered to increase or reduce the maximum number of directors by ordinary resolution, and then an appointment of a director in excess of the former maximum is taken to be an exercise of the power to increase the number of directors, and is valid”.

While making the last-mentioned observation, the learned author in the footnote has referred to the above-mentioned case. So Mr. Nariman argued that section 258 was an enabling section, which authorised the company to increase or decrease the number of directors just by an ordinary resolution. As singular includes plural, one has to look at the result and not the number of resolutions to find out whether the company has exercised the power vested in it.

Mr. Thakkar, with equal force, stressed the word “resolution” and said that it was a condition precedent to the valid appointment of directors resulting in the increase of the number of directors. Any other construction, he says, will render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish the said decision on certain grounds. He says that article 83 construed by the learned judges refers to a general meeting. Section 258 of the Companies Act provides that the company may in general meeting by ordinary resolution increase or reduce the number of its directors. In my opinion this distinction is not one of substance. Any such difference in the wording will not affect in any manner the efficacy of the observations made by the learned judges in the above-mentioned case.

Then Mr. Thakkar was at pains to point out that no such point was ever raised and debated in that case. The observations of the judges quoted above are merely obiter dicta. Mr. Thakkar says that the judges were reconciling the two apparently conflicting articles which conferred the power of appointing directors on the board of directors and the company. He referred to several text books on Company Law, viz., Pennington’s Company Law, 2nd edition, page 456-57, Modern Company Law by C.B. Gower, 3rd edition, page 21, Palmer’s Company Law, page 533, Halsbury’s Laws of England, volume 6, page 279, article 574, Buckley on the Companies Act, 13th edition, page 885, and submitted that the above-mentioned authority was quoted by the learned authors to show that the company had not surrendered its power to appoint directors in favour of the board of directors. But, the decision is not cited by Mr. Nariman as a binding authority on this court. Mr. Nariman relies only on the wording of the article considered by the judges, which resembles the wording of section 258. Under both the provisions the company has the power to increase the number of directors. When the company at its meeting resolves to appoint additional directors in excess of the present strength of the board, then it is an instance where the company is exercising its two-fold powers. The company increases the number not by separate resolution but by appointing additional directors. The effect is that the company has increased the number of directors. That appears to be a sensible construction which can be adopted while interpreting the relevant provisions contained in section 258 of the Companies Act, 1956. In the result, in my opinion, it is not necessary for the company to pass a separate resolution increasing the number of directors before appointing the directors to fill the additional sanctioned posts. In law it is possible for the company to comply with the provisions of section 258 when it chooses to appoint within the permitted limit additional directors so as to increase the strength of its present board. The learned judge was in error in coming to the conclusion that in the absence of a separate resolution the appointment of the appellants as directors of respondent No. 3-compauy was null and void. The legality of the resolutions Nos. 5 and 6 cannot be challenged on the ground that there was any contravention of the provisions of section 258 of the Act.

Then I propose to consider points Nos. 3 and 4 together as the discussion of law is likely to be overlapping. Point No. 3 will involve the consideration of the provisions of sections 172 and 173 of the Act and point No. 4 is about the sufficiency or otherwise of the pleadings.

I have already set out above the relevant provisions of section 173 of the Act. Section 173 will have to be read with section 172(1) of the Act. Under section 172(1) every notice of a meeting of a company, among other things, must contain a statement of the business to be transacted at the meeting. Section 173(1) contains classification of the business and indicates when the business shall be treated as special. Under section 173(2) any items of special business mentioned in the notice must be accompanied by a statement setting out all material facts concerning such items of business.

Mr. Nariman for the appellants drew my attention to the notice of the meeting, which is produced at exhibit D at page 90 of the paper book. It is worth while to reproduce the material items of business:

Serial No. 3

To elect a director in the place of Shri Kasturbhai Lalbhai who retires by rotation under article 164 of the articles of association of the. company, but being eligible, offers himself for re-election.

Serial No. 4

To elect a director in the place of Shri Naval H. Tata, who retires by rotation under article 164 of the articles of association of the company, but being eligible, offers himself for re-election.

Serial No. 7

To appoint a director in place of Shri Laljibhai Chhaganlal Kapadia, who was appointed an additional director of the company by the board of directors on 10th April, 1969, and who ceases to hold office under section 260 of the Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act, 1956, has been received by the company.

Serial No. 8

To appoint a director in place of Shri Nimjibhai Chhanganlal Kapadia who was appointed an additional director of the company by the board of directors on 10th April, 1969, and who ceases to hold office under section 260 of the Companies Act, 1956, on the date of this meeting in respect of whom a notice as required by section 257 of the Companies Act, 1956, has been received by the company.

Items Nos. 3 and 4 constitute ordinary business and Items Nos. 7 and 8 constitute special business within the meaning of section 173 of the Act, Being special business Items Nos. 7 and 8 are followed up by explanatory statements contained in an annexure to the notice. Explanatory statement accompanying Item No. 7 read as under:

“Shri Laljibhai Chhaganlal Kapadia was appointed an additional director on 10th April, 1969, by the board of directors of the company and he retains his office as a director only up to the date of this annual general meeting under the provisions of section 260 of the Companies Act, 1956. As required by section 257 of the Companies Act, 1956, a notice has been received from a member signifying his intention to propose his appointment as a director. It is recommended that he be appointed as a director”.

Explanatory statement accompanying Item No. 8 is identical with the difference that it is in respect of the other additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on the contents of the notice in general and the explanatory notes in particular, Mr. Nariman submits that there is compliance with the requirement of section 173 of the Act. Mr. Nariman points out that under article 164 of the articles of association of the company, at every annual general meeting of the company, one-third of such of the directors for the time being as are liable to retire by rotation or if their number is not three or a multiple of three, the number nearest to one-third are to retire from office. The strength of the board was 8 and obviously the number of directors retiring by rotation will be two. Items Nos. 3 and 4 in the notice in unmistakable terms give an indication of this factual and legal position. As these items of business were not special there was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8 constituted special business. The contents of these items conveyed to the body of shareholders sufficient information about the proposal to fill up additional posts. The two persons had acted as additional directors and they ceased to hold office under section 260 of the Act on the day of the meeting. It is stated that the company had received proposals about their appointment under section 257 of the Act. It is implicit in this statement that the board wants the company to consider the appointment of directors for two additional posts. The explanatory statement contains one important additional particular. The board of directors has made a recommendation that the two persons who have acted as additional directors be appointed directors at the meeting, According to Mr. Nariman the board has complied with the provisions of section 173 of the Act.

Then Mr. Nariman argued that in the present state of pleadings, it was not open to the plaintiffs to raise any objections about the non-compliance with the requirement of section 173 of the Act. He says that the plaint nowhere refers to section 173 of the Act. A fair reading of the plaint would show that the main grievance of the plaintiffs was that no resolution was proposed or passed under section 258 of the Companies Act read with article 169 of the articles of association of the company about increasing the strength of the board of directors. According to the plaintiffs the two resolutions appointing the appellants as directors are not valid as they in effect increased the number of directors from 8 to 10 without an appropriate resolution being passed as required by section 258 of the Act. This is the only grievance of the plaintiffs about the non-compliance with the condition in section 258 of the Act. Mr. Nariman says that in view of this specific case made out by the plaintiffs, there was no occasion for the defendants to meet any other case about the illegality resulting from the non-compliance with the provisions of section 173 of the Act. Mr. Nariman in this connection heavily leaned upon a decision of the Orissa High Court in Kalinga Tubes Ltd. v. Shanti Prasad jain. The learned judges of the Division Bench of that High Court had to tackle a similar point about the sufficiency or otherwise of the pleadings. While dealing with the issue No. 4(a) in that proceeding Misra J., at page 202, in paragraph 17, observed as follows:

“The notice is challenged as fraudulent and contrary to the statute. None of the grounds have been pleaded. For the first time this contention appears to have been advanced in course of argument before Mr. Justice Barman. In none of the affidavits the petitioner swears that the notice was tricky, misleading or insufficient. The question is one of mixed question of fact and law, and it is not permissible to be taken at the stage of hearing for the first time”.

The learned judge certainly refers later on to section 172(1) and section 173(2) of the Act. At page 214, paragraph 58, Das J. observed as follows:

“At the outset, I must say that the plea of invalidity of the notice was not taken either in the plaint which was filed in the court of the subordinate judge or in the petitions and affidavits before the honourable company judge of this court. At a fairly late stage of the case, oral submissions were made challenging the validity of the notice for the extraordinary general meeting of 29-3-1958. On that ground alone, the point could have been left out of consideration”.

However, it must be stated that the learned judges, despite the insufficiency of the pleadings, considered the merits of the case, and held that the notice was in compliance with the statutory requirements of section 173 of the Companies Act, as the meeting held on the basis of such notice and the resolutions passed therein were not in any way invalid. Mr. Nariman says that this authority has acquired additional sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. Wanchoo J., at page 1545, paragraph 24, has observed as follows:

“It is, however, urged that the notice for the general meeting of the 29th March, 1958, was not in accordance with section 173, and so the proceedings of the meeting must be held to be bad. This objection was, however, not taken in the petition and we have, therefore, not permitted the appellant to raise it before us, as it is a mixed question of fact and law. We may add that, though the objection was not taken in the petition, it seems to have been urged before the appeal court. Das J. has dealt with it at length and we would have agreed with him if we had permitted the question to be raised”.

Relying on these decisions Mr. Nariman maintained that the resolutions cannot be challenged on the ground that the notice of the meeting and the explanatory statements accompanying the notice were defective in any manner.

Mr. Nariman also submitted that the provisions of section 173 were directory and not mandatory. Strict compliance with section 173 was not necessary and there was in the present case substantial compliance with the provisions of that section. It is for this reason that, according to Mr. Nariman, any defect in the notice is capable of being waived by the shareholders as the company had unanimously appointed the appellants at the annual general meeting. If there were any averments in the plaint setting out the various defects and irregularities in the drafting of the notice and the explanatory statements, then it was open to the defendants to adduce evidence and satisfy the court that the plaintiffs by their conduct were stopped from objecting to the legality of the resolutions. As an instance of the so-called irregularity, Mr. Nariman referred to In re Express Engineering Works Ltd. It was a case where the legality of the company’s meeting was challenged on the ground that it was styled a directors’ meeting and business was transacted as if it was a general meeting. The issue of debentures at the meeting W.I.P challenged as not valid. Younger L.J. agreed with Lord Sterndale M.R., who held that the shareholders must be deemed to have acted in the meeting as shareholders and not as directors. What is stated by Younger L.J. at page 471 is to the following effect:

“I am of the same opinion. I am content to rest my conclusion upon what was said by Lord Davey in Solomon’s case that a company is bound in a matter which is intra vires by the unanimous agreement of all the corporators”.

But, this decision is not of any assistance to us. A syndicate of five persons formed a private company. They were all the directors and also shareholders. They all attended the meeting and transacted business. The objection to the legality of the meeting was rightly overruled.

Mr. Nariman then dwelt on the case, In re Oxted Motor Company Ltd The court held that it was not open to a creditor to impeach the validity of a resolution to wind up the company as it was competent to the shareholders of the company acting together to waive the formalities required by section 69 of the Companies (Consolidation) Act, 1908, as to notice of intention to propose a resolution as an extraordinary resolution. Even this decision will not carry us any further as in the present case everything turns upon the interpretation of the words of section 173 of the Companies Act.

Then Mr. Thakkar for the respondents submitted that section 173 was in terms mandatory and not directory. He strongly relies upon a decision of the Gujarat High Court in Sheth Mohanlal Ganpairam v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. Mr. Thakkar pinpoints the following observations of Bhagwati J. (as he then was), at page 338:

“The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the share holders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the share holders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience of its requirements must lead to the nullification of the action taken”.

Mr. Thakkar reinforced his argument by reference to a Calcutta decision in which it was held that it was incumbent on the directors to disclose in the notice of the general meeting full facts. Before I refer to the relevant observations of the learned judges, it is necessary to know in brief the facts of that case. Section 294(2) of the Companies Act (as amended by Act 65 of 1960) provides that the appointment of a sole selling agent by the board of directors shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made. The court held that the provision was not directory but mandatory. The mere substantial compliance was not enough but there must be a strict compliance. The impugned agreement about the appointment was referred to in the report of the directors and the same was adopted in the subsequent adjourned annual general meeting. But the adoption or approval of the report was treated as ordinary business and not as a special business. In the circumstances, the learned judges allowed the appeal and granted ad-interim injunction against the company and the directors restraining them from getting passed the resolution in the ensuing annual general meeting of the company. At page 124 of the report (Shalagram Jhajharia v. National Co. Ltd.) Bose C.J. has made the following observations after quoting section 173(2) and (3) of the Act:

“So it appears that under section 173(2) an explanatory note with regard to the special items of business has to be annexed to the notice of the meeting; but this was not done with regard to the agreement dated the 27th January, 1962. Therefore, there was no compliance with the requirements of the statute inasmuch as it was incumbent under the section, if any special business was to be transacted at the meeting, to specify the nature of such business in the notice”.

Mitter J., at page 134, dilates as follows on the importance of the statutory provision:

“The provision for inspection of the agreement at the registered office of the company in terms of section 173(3) is not sufficient for the purposes of section 173(2)... As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or inclination to go to the registered office to find out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta, when the registered office is situate here”.

Coming nearer home, Mr. Thakkar quotes a recent decision of this court in Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd Madon J. reviewed the entire case law on the subject while interpreting section 173(2) of the Act. I reproduce the headnote which neatly summarises the conclusions of the learned judge:

“Under section 173(2) of the Companies Act, where any items of business to be transacted at the meeting are deemed to be special, there shall be annexed to the notice of the meeting, a statement setting out all material facts concerning each such item of business, including, in particular, the nature of the concern or interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. The object underlying section 173(2) is that the shareholders may have before them all facts, which are material to enable them to form a judgment on the business before them. Any fact which would assist them in making up their mind, one way or the other, would be a material fact under section 173(2) and has to be set out in the explanatory statement. This provision is mandatory and not directory and disobedience to its requirements must lead to nullification of the action taken”.

Then Mr. Thakkar brought to my notice one more decision of the Calcutta High Court in Shalagram Jhajharia v. National Company Ltd. It must be noted that the subject-matter of the litigation in this case was an impugned selling agency agreement which figured in the Calcutta decision cited earlier by Mr. Thakkar. The plaintiff challenged the legality of the notice of the annual general meeting on the ground that the explanatory statement attached to the proposed ordinary resolution was in contravention of section 173 of the Act. On facts it was held that the explanatory statement was misleading in relation to the facts stated and it did not disclose certain other material facts. While concluding that the explanatory statement in that case was bad and in violation of section 173 of the Act A.N. Ray J. indicated the correct principle of law. He says at page 36:

“The further question is whether the explanatory statement is in violation of provisions contained in section 173 of the Companies Act.... It depends upon the facts of each case as to whether an explanatory statement is tricky or misleading”.

Ray J. in Biswanath Prasad Khailan v. Neiv Central Jute Mills^, while considering the essentials of a valid notice convening an extraordinary general meeting, extracted two broad principles from the authorities died before him. At page 135, he says:

“Two broad principles can be extracted from the authorities: First, that notice must be fairly and intelligently framed and it must not be misleading or equivocal. A benevolent construction cannot be applied. Secondly, some matters must be brought pointedly to the attention of the shareholders, for example, where the directors are interested in a contract or matter which is to be submitted to a meeting for confirmation or approval, it appears to be desirable and in certain cases absolutely necessary to disclose the fact in the notice convening the meeting or in some accompanying circular”.

In the wake of these various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the comments of the learned author of Law and Practice of Meetings by Frank Shackleton, 5th edition. At page 27 under the caption “Special Business must be clearly stated” the following requirements are noted:

“As to the essentials of a notice, it must state clearly the nature of any special business to be transacted, as no other business can be transacted in addition or otherwise, unless the notice refers to ordinary business which it is competent for the meeting to transact It is, however, always desirable to state clearly the nature of any special business to be transacted, and if the regulations provide for notice of such special business, any resolutions passed without due notice will be invalid”.

To reiterate with emphasis the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v. Great Boulder Proprietary Gold Mines Ltd. Article 102 of the articles of associations of the company provided as follows:

“If at any general meeting at which an election of directors ought to take place the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the ordinary meeting in the next year, and so on from year to year until his place is filled up, unless it shall be determined at any such meeting on due notice to reduce the number of directors in office”.

The question arose whether the plaintiff, a retiring director, despite his failure to get re-elected, continued in office. His claim was resisted on the ground that the company in effect had at its meeting reduced the number of directors. Cohen L.J. overruled the contention and held that the number of directors in office cannot be reduced unless there was a specific resolution of the company to that effect after a mention of the general nature of such a resolution has been made. The concluding words of article 102 require a specific notice to that effect. Lord Greene M.R., at page 30 of the report, clarifies the legal position in the following words:

“In the present case counsel for the company argued that the company had, in effect, determined to reduce the number of directors in office (a) by requiring to reelect the retiring plaintiff, and (b) by not electing anybody to fill that vacancy. I do not accept that argument. It. appears to me that the concluding words of article 102 require a specific resolution, not merely to re-elect A, but a specific resolution that nobody shall be elected to fill the vacancy”.

It must be noted that the absence of due notice and a specific resolution was linked up with certain legal consequences, for instance, continuation of the retiring director in office. It was mostly on account of the peculiar wording of article 102 that the court held that a proper resolution after due notice of the proposed special business was absolutely necessary.

Then Mr. Thakkar cited a decision in Tiessen v. Henderson . The relevant part of the headnote of that case may be stated:

“The notice of an extraordinary general meeting must disclose all facts necessary to enable the shareholder receiving it to determine in his own interest whether or not he ought to attend the meeting; and pecuniary interest of a director in the matter of a special resolution to be proposed at the meeting is a material fact for this purpose”.

While restraining the company by an ad-interim injunction from acting upon or carrying into effect certain special resolutions for reconstruction alleged to have been passed and confirmed at its extraordinary general meetings, the learned judge, Kekewich J., has made rather strong remarks at page 866 of the report:

“The application of the doctrine of Foss v. Harbottle to joint stock companies involves as a necessary corollary the proposition that the vote of the majority at a general meeting, as it binds both dissentient and absent shareholders, must be a vote given with the utmost fairness—that not only must the matter be fairly put before the meeting, but the meeting itself must be conducted in the fairest possible manner”.

Then, at pages 870-871, the learned judge makes a further observation:

“If a meeting properly convened, and properly instructed as to the purpose for which it is convened, chooses to assent to this, there is no reason why it should not do so; but I think it ought to have the opportunity of considering the point. The man I am protecting is not the dissentient, but the absent shareholder—¹⁴the 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

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 BOMBAY

Laljibhai c. Kapadia

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.

JUDGMENT

(4) Can the plaintiffs rely on the above contraventions in any form without specific averments in the plaint?

(6) Is the suit not competent as the alleged irregularities arise in the course of the internal management of the company?

Slesser L.J., at page 654, approves the above observations and says:

Serial No. 3

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

Serial No. 8

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:

Mitter J., at page 134, dilates as follows on the importance of the statutory provision:

Then Mr. Thakkar cited a decision in Tiessen v. Henderson . The relevant part of the headnote of that case may be stated:

Then, at pages 870-871, the learned judge makes a further observation:

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”.

“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.