Sections 290
to 293
BOARD’S
POWERS AND RESTRICTIONS THEREON
[1991] 71 COMP. CAS. 136
(MAD.)
HIGH COURT OF
v.
Drivers and Conductors Bus Service P. Ltd.
O.S. APPEALS NOS. 61 OF 1983 AND 39 OF 1984 AND C.P. NO. 18 OF 1979
JULY 11, 1990
T. Raghavan, Dulip Singh and A.S.
Venkatachalamoorthy for the Appellant.
Vedantham Srinivasan and J. Krishnamurthy for the Respondent.
JUDGMENT
Abdul Hadi
J.—These two appeals are
directed against the order dated April 26, 1983, in C.P. No. 18 of 1979. While
O.S.A. No. 61 of 1983 has been preferred by the sixth respondent in C.P. No. 18
of 1979, O.S.A. No. 39 of 1984 is at the instance of respondents Nos. 1, 2, 4
and 5 therein. The petitioners in C.P. No. 18 of 1979 figure as respondents
Nos. 6 and 7 in O.S. A. No. 61 of 1983 and as respondents Nos. 1 and 2 in
0.S.A. No. 39 of 1984. In the course of this judgment, the parties will be
referred to according to their array in the said company petition.
The
petitioners filed C.P. No. 18 of 1979 under sections 397 and 398 of the
Companies Act, 1956 (hereinafter referred to as "the Act"), alleging
oppression and mismanagement and praying for a declaration that respondents
Nos. 2, 4 and 5 (appellants Nos. 2 to 4 in O.S. No. 39 of 1984) in C.P. No. 18
of 1979 are not shareholders or directors of the first respondent company, that
the second respondent is not the managing director thereof and that the
purported transfer of the two buses, MDE 5902 and MDH 2209, belonging to the
company with their respective route permits to the sixth respondent (appellant
in O.S.A No. 61 of 1983) is illegal and for a direction to the sixth respondent
to redeliver the same to the first respondent company and for the appointment
of an administrator to carry on the business of the company. The grounds on
which C.P. No. 18 of 1979 was resisted by the appellants need not be set out in
extenso and it would suffice to refer to the same in the course of this judgment,
while dealing with the contentions of the parties urged in these appeals.
On a
consideration of the materials placed before the court, the learned company
judge found, inter alia, that though the records of the company prior to May 20,
1978, were in the possession of respondents Nos. 2 and 3, they had suppressed
them, that the alleged sale of the two buses and the route permits belonging to
the company to the sixth respondent is no transfer at all and that there is a
total absence of evidence regarding the manner in which the third respondent
was appointed as managing director of the company and in fact there is no
director at all for the company. On the aforesaid findings, the learned company
judge granted the reliefs prayed for in C.P. No. 18 of 1979 and that is how
these appeals have arisen.
We may now
proceed to make a brief reference to the undisputed facts and findings recorded
by the company judge. The first respondent company was incorporated on February
13, 1967, and its original shareholders and directors were the first
petitioner, the third respondent and two others, who left the company shortly
after incorporation, transferring their shares to the second petitioner.
Thereafter, there were only three shareholders, viz., the two petitioners and
the third respondent and all the three of them were directors of the company.
As per the articles of association of the company, the term of office of the
directors of the company is three years and of the managing director five
years. The two buses along with their route permits were virtually the only
assets of the company. Even as indicated by its name, the company was founded
by drivers and conductors and the second respondent is a money-lender carrying
on his business with his son-in-law, the fourth respondent, in hire-purchase
agreements on motor vehicles, etc., for the purpose of securing the advances
made. The fifth respondent is the son of the second respondent and the sixth
respondent is his brother's son. The first petitioner filed C.P. No. 8 of 1976
in this court for winding up the company on the ground that it is just and
equitable to do so. By an order dated April 22, 1977, in C.A. No. 102 of 1976,
this court directed the Official Receiver, Erode, to take possession of the two
buses belonging to the company and run them. On November 17, 1977, this court,
by its order, dismissed C.P. No. 8 of 1976 with a direction to the Official
Receiver, Erode, to hand over the buses to the company. By yet another order
asked for by the third respondent, on December 9, 1977, this court directed the
Official Receiver, Erode, to hand over the buses to the "managing
director" of the company. Subsequently, the first petitioner instituted
O.S. No. 252 of 1978 in the Sub-Court, Erode, against the company, the third
respondent as well as the second petitioner for a declaration that the third
respondent ceased to be the managing director of the company and for an
injunction restraining the third respondent from posing himself as the managing
director of the company. In the course of the order in C.P. No. 18 of 1979, the
learned company judge found that since the incorporation of the company, with
the exception of the annual general meeting held within six months after its
incorporation, no other annual general meeting was ever held and this finding
was also not challenged in the course of these appeals.
In O.S.A. No.
61 of 1983, the principal submission of learned counsel for the sixth
respondent (the appellant in O.S.A. No. 61 of 1983) is that the company court
has no power, in a petition under sections 397 and 398 of the Act, to set aside
the transfer of the buses and the route permits and the learned judge fell into
an error in concluding that such a power is available under section 402(a) of
the Act or at any rate under the residuary clause (g) of section 402 of the
Act. Referring to Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute
Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj), it was further submitted that the
principle of that decision, which was cited before the learned judge but was
not referred to or noticed, ought to have been applied. On the other hand,
learned counsel for the contesting respondents in these appeals submitted that
there was neither a transfer of the buses of the company to the appellant in
O.S.A. No. 61 of 1983 nor was he really a third party and that the decision in
Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd.
[1964] 34 Comp Cas 777 (Guj), has no application whatever.
We may now
proceed to refer to the prayer in the company petition and that is to the
effect that the "purported transfer" of the buses belonging to the
company is illegal. Even in the body of the petition, the said transfer has
been referred to only as "purported sale". If the alleged transfer or
sale of the buses and the route permits is non est in law, then, there is no
need whatever to set aside the sale, for, the title to the buses and the route
permits would have continued to remain with the company itself. Therefore, the
question whether the sixth respondent, in relation to the alleged transfer, is
a third party or not, and the further question whether the company court would
have the power to set aside the alleged transfer in a petition under sections
397 and 398 of the Act, would not arise at all. Before dealing with the
question as to how the transaction in the present case relating to the buses
and the route permits is not a transfer at all and is non est in law, we would
make a reference to the decision in Sheth Mohanlal Ganpatram v. Sayaji Jubilee
Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj), strongly relied
upon by learned counsel for the appellant in O.S.A. No. 61 of 1983. In that
case, the company was promoted for the purpose of running a textile mill and had
entered into an agreement with a firm whereunder the firm agreed to supply
working capital to the company for re-running the mill and to purchase yarn for
the company on commission basis. Owing to sustaining of losses by the mill for
some years and the machinery of the mill having become old and obsolete, the
mill had to be closed down and all its assets were sold and the agreement was
also terminated. After the conclusion of the sale, a minority of the
shareholders of the company took out proceedings under sections 397 and 398 of
the Act alleging that the termination of the agreement and the sale of the
assets of the mill were acts of oppression and mismanagement, prejudicial to
the interest of the company and claimed that the sale should be set aside. It
was in that context, after referring to sections 397, 398 and 402 of the Act,
it was held that though the power of the court under sections 397 and 398 of
the Act was very wide, it was conditioned by the purpose for which it could be
exercised, viz., "with a view to bringing to an end the matters complained
of" in a case under section 397 of the Act and "with a view to
bringing to an end or preventing the matters complained of or apprehended"
under section 398 of the Act and that sections 397 and 398 of the Act postulate
that on the date of the application, there must be a continuing course of
conduct of the affairs of the company, which was oppressive to any shareholder
or prejudicial to the interest of the company. It was also further held that a
past and concluded contract between the company and a third party could not be
set aside on an application under section 397 or 398 of the Act and that
section 402(f) of the Act was not a provision which derogates from the general
power of the court under sections 397 and 398 of the Act and was not
illustrative of any general power in the court to set aside or interfere with a
past and concluded transaction between a company and third parties, which were
no longer continuing wrongs. In the course of the judgment, the court observed
as follows, which was strongly relied on by learned counsel for the appellant
in O.S.A. No. 61 of 1983 (p. 805):
"The
language of sections 397 and 398 leaves no doubt as to the true intendment of
the Legislature and it is transparent that the remedy provided by these
sections is of a preventive nature so as to bring to an end oppression and
mismanagement on the part of controlling shareholders and not to allow its
continuance to the detriment of the aggrieved shareholders of the company. The
remedy is not intended to enable the aggrieved shareholders to set at naught
what has already been done by the controlling shareholders in the management of
the affairs of the company."
After so
observing, the court finally held that the sale of the assets of the mill could
not be said to be a continuing wrong and hence was not liable to be set aside
in proceedings under sections 397 and 398 of the Act. We may now refer to
certain facts in the decision referred to above relating to the sale of the assets
so that the marked differences between that case and the present may be brought
out and appreciated. Admittedly, in the case of Sheth Mohanlal Ganpatram v.
Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj),
there was a genuine sale of the assets of the company in 1961 by the company to
one Bharat Kala Bhandar Ltd. and the sale was also effected after due
advertisement inviting offers, though there was an earlier agreement for sale
of the assets to a third party, which did not materialise. Further, the mill
had to sell all its assets because it continued to sustain losses for a long
number of years, i.e., from 1949 to 1961, except the year 1955 in which the
company made a small profit. In addition, the person to whom the assets of the
mill were sold was admittedly a genuine third party. It was under those
circumstances the plea was raised in that case to set aside the sale and not on
the basis that there was no transfer at all of the assets. Only in the context
of the aforesaid factual background, the decision in Sheth Mohanlal Ganpatram
v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj)
proceeded to lay emphasis on the following clauses found in sections 397(2) and
398(2) of the Act respectively:
"with
a view to bringing to an end the matters complained of" and "with a
view to bringing to an end or preventing the matters complained of or
apprehended" ;
and on what
is contained in section 402(f) of the Act to hold that the company court had no
power to set aside such a sale that took place in the circumstances referred to
earlier. We are of the view that the factual background presented in this case
is totally different from that in Sheth Mohanlal Ganpatram v. Sayaji Jubilee
Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj) and we are of the
view that that decision cannot have any application. With reference to most of
the factual findings rendered by the company judge, there was no serious attack
by learned counsel for the appellant in o. S.A. No. 61 cf 1983, but the attack
was confined to a point of law based on the principle laid down in the decision
in Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd.
[1964] 34 Comp Cas 777 (Guj) referred to earlier and also the interpretation to
be placed on section 290 of the Act and the applicability of regulation 75 of
Table 'A' under the Act, which we shall presently advert to, after drawing
attention to certain factual aspects which would lead to an irresistible
conclusion that there was no transfer at all of the buses or the route permits
in the present case.
In the
counters of respondents Nos. 2 and 3, it has not been stated when actually the
alleged transfer took place or who effected the alleged transfer on behalf of
the company or whether for effecting the alleged transfer, any resolution was
passed by the board of directors of the company. It has to be borne in mind
that the two buses and the route permits alone were the assets of the company.
Though the appellant in O. S. A. No. 61 of 1983 stated in his counter that the
alleged transfer became final on December 3, 1978, it has not been stated as to
who acted on behalf of the company for the alleged transfer or whether any
resolution in that regard was passed by the board of directors of the company.
The second respondent as RW-1 deposed that he was the managing director of the
company from May 20, 1978, he having been co-opted as director and subsequently
made the managing director on the same date. To the question, "Only on May
20, 1978, you became a director, why you were asked to attend the meeting on
May 20, 1978, by Ramasamy" (the third respondent) his answer was as
follows :
"I
demanded return of the money due by the company from Ramasamy on two or three
occasions. He told me that he had called for a meeting and sent notice to the
other two directors and that I might attend the meeting. He said, if you come
there, we will see that you are appointed as managing director so that you
could take over the management of the company."
The reference
to the other two directors is to the two petitioners. But their grievance is
that they did not receive the notices at all, for they had been deliberately
sent to wrong addresses. To the next question, "For the said meeting on
May 20, 1978, who were present at that meeting ?" RW-1 replied:
"Myself
and Ramasamy were alone present at the meeting held on May 20, 1978. The other
two directors were not present. I was co-opted as director."
He also
further admitted that he was not a shareholder when he became a director. There
is no reference in his chief-examination to any resolution having been passed
by the board of directors of the company for the sale of the buses. RW-1 in his
chief-examination merely stated that he decided to sell the buses and in
cross-examination also he reiterated that he had sold away the company buses.
It has also to be borne in mind that while the plea of the appellant in O.S.A.
No. 61 of 1983, in his counter was that the sale became final on December 3,
1978, RW-1 (the second respondent) deposed that the sale took place on December
4, 1978. To a further question, "for selling the buses of the company, did
you advertise in any paper ?", he replied : "I had intimated the
brokers at Erode. No advertisement was made in any newspaper." He also
answered subsequently that he did not receive offers in writing. To another
question, "Did you consult the board for selling the buses of the company
?", he answered : "We held a meeting and decided to sell the buses.",
but he did not give the particulars of the alleged meeting. RW-2 (the third
respondent) deposed that Senniappan, the second respondent, and himself and
others sold away the buses. This is inconsistent with what RW-1 had stated
regarding the person who brought about the alleged sale. Even so, RW-2 also did
not refer to the passing of any resolution by the board of directors for the
sale of the buses. To a specific question, "For the sale of the buses,
have you got any records in the company ?", he stated, "There are no
records." It is also a little difficult to understand how the two buses
and their route permits, which were the only assets of the company, had been
sold for just Rs. 35,000. Even according to exhibit P-27, the counter filed by
the third respondent in C. P. No. 18 of 1979, the buses were earning not less
than Rs. 1,000 per day on the average. RW-1, the second respondent, stated in
his evidence that the daily collections in 1978 was Rs. 350 per day in the case
of one of the buses (Erode Town Service route) and Rs. 450 per day in the case
of the other bus (Erode to Vellakoil route). PW-1 in his chief-examination
stated that the daily collections in one route was Rs. 1,000 and in the other
Rs. 1,200 and there has been no effective cross-examination to whittle down the
effect of his evidence. The route permits by themselves are very valuable and
the company judge had also taken note of this and we may also point out that in
G. Vijayaranga Mudaliar v. CIT [1963] 47 ITR 853, a Division Bench of this
court valued, even several years back, a route permit at Rs. 40,000. Further,
with the ownership of the two permits, the company would have been enabled to
secure further permits also. We thus find that there is absolutely no plea or
acceptable evidence to show how the transfer was effected by the company to the
appellant in O.S.A. No. 61 of 1983. It is well-settled that if there is no
plea, no amount of evidence could be looked into on a plea not put forward. It
is significant that there is no plea as to how and when the third respondent
became the director or managing director from 1967 to 1970 as per article 21 of
the articles of association of the company or even assuming that he was
originally a managing director from 1967 to 1972, as per article 29 of the
articles of association of the company, how actually he became a director or
managing director of the company after 1972. RW-2 claimed in the course of his
evidence that he became the managing director of the company in 1972, but no
documentary evidence was placed before the court to show how he became the
managing director in 1972 and even in the course of his oral evidence, he had
not referred to the mode by which he could have legally become the managing
director of the company, but that he had stated that the other director, Rasool
(the second petitioner), asked him to take over the bus service as managing
director, but he in turn told him that he was an illiterate and unable to run
the buses, to which Rasool told him that in running the buses, he would assist
him. It is further significant to note that no general meeting of the company
was held after the incorporation of the company in 1967. As per section 255(2)
of the Act, in the case of a private company, as the present one, the directors
generally shall, in default of and subject to any regulations in the articles
of the company, be appointed by the company in the general meeting and in the
present case, the articles of the company do not say anything contra. In the
face of the abovesaid admission by the third respondent that there was no
general meeting of the company at all after the incorporation of the company
and in the absence of evidence to show how the third respondent actually became
the managing director of the company, at least subsequent to 1972 and prior to the
alleged meeting on May 20, 1978, he could not be treated as having acted as a
director or managing director of the company at all.
From the
facts and evidence referred to earlier, it is clear that the third respondent
is only an usurper of the office and that he was not a director or managing
director of the company at least after 1972. Then, the alleged meeting of the
board of directors of the company on May 20, 1978, when the second respondent
is stated to have co-opted as a director, is non est, even assuming that such a
meeting took place. It follows that the so-called co-option of the second
respondent as a director of the company and his subsequent election as managing
director of the company as well as the alleged co-option of respondents Nos. 4
and 5 as directors of the company are absolutely null and void and all of them
would not be in a better position than mere usurpers of the office and there
could, therefore, be no scope at all for the application of regulation 75 of
Table "A" of the Companies Act, 1956, which was relied on by learned
counsel for the sixth respondent, and which runs as follows :
"The
continuing directors may act notwithstanding any vacancy in the board, but, if
and so long as their number is reduced below the quorum fixed by the Act for a
meeting of the board, the continuing directors or director may act for the
purpose of increasing the number of directors to that fixed for the quorum, or
of summoning a general meeting of the company, but for no other purpose."
On May 20,
1978, there were no continuing directors or vacancies in the board or their
number being reduced below the quorum within the meaning of the aforesaid
regulation. According to RW-1, for the meeting held on May 20, 1970, the third
respondent and himself alone were present and the other two directors were not
present. The other two directors admittedly were the petitioners and their
grievance was that they were not served with notices and the absence of the
other two directors did not lead to a vacancy in the board nor were the other
two the continuing directors. Therefore, no importance could be attached to the
alleged resolution of the board of directors of the company as found in page 10
in exhibit P-18 dated December 4, 1978, to the effect that the transfer effected
by the managing director (the second respondent) was approved and the learned
company judge rightly did not give any credence to this. There is, therefore,
no difficulty in coming to the conclusion that there was no transfer at all of
the buses and the route permits and that the title to the buses and the route
permits continued to remain only with the company.
We agree with
the learned company judge that a careful consideration of the evidence of RW-3
leaves the court with the impression that he does not know anything about the
transfer or even about the buses and that he also did not care to know whether
there was any resolution of the board of directors authorising the sale of the
buses, at least before the finalisation of the alleged transfer. Even according
to RW-3, there was no written offer for the purchase of the buses. He was also
unaware whether their sale was ever advertised. The learned company judge was,
therefore, right in inferring that the alleged sale was nothing but a pure
adjustment between the two relatives, viz., the second respondent and his
brother's son, the sixth respondent, to subserve their own interest, unmindful
of the interest of the company. RW-3 deposed that he came to know of the sale
of the buses through a broker and this cannot be accepted in view of the
relationship between RWs-1 and 3. RW-3 also accepted that he was not a motor
mechanic and he was not familiar with bus operations. Yet, he claimed that he
alone inspected the buses before purchase, which is also rather strange. The
learned company judge has also referred to the discrepancy in the evidence of
RWs-1 and 3 to the effect that while the evidence of RW-1 was that he gave a
certified copy of the resolution authorising the managing director of the
company to sell the buses to the sixth respondent, as for RW-3 he deposed that
he was unaware of the resolution of the board of directors. All the aforesaid
circumstances clearly point to the conclusion that there was no transfer at all
of the buses and the route permits of the company to the appellant in O.S.A.
No. 61 of 1983 in a manner recognised by law and merely on the basis of the
approval of the transfer by the Regional Transport Authority under the
provisions of the Motor Vehicles Act on a joint application by the second and
the sixth respondents, despite objection by the petitioners, it cannot be held
that the title to the buses and the route permits passed on to the appellant in
O. S. A. No. 61 of 1983 from the first respondent-company.
In view of
what has been stated earlier, the question of applicability of clauses (e), (f)
or (g) of section 402 of the Act would not arise at all and it is unnecessary,
therefore, to examine the correctness of the finding of the learned company
judge that clause (e) or at any rate clause (g) of section 402 of the Act would
apply to the present case. Further, in the light of the earlier discussion, if
the prayer asked for is granted by the company court, it would only be to
revive and reactivate the company and such a relief would only be in
furtherance of the object with which the power under sections 397 and 398 of
the Act has to be exercised, viz., with a view to bring to an end the matters
complained of.
We may now
consider how far the reliance placed upon section 290 of the Act by learned
counsel for the appellant in O. S. A. No. 61 of 1983 would be of assistance in
advancing the case of the appellant. Section 290 of the Act confers validity
upon the acts done by a person as a director, notwithstanding that it may
afterwards be discovered that his appointment was invalid by reason of any
defect or disqualification or had terminated by virtue of any provision in this
Act or in the articles. That section, however, will have no application to the
present case where, as per the earlier discussion, there had been a usurpation
of the office of director and managing director. Section 290 of the Act would
not cover cases where there is a total absence of appointment or a fraudulent
usurpation of authority. Our attention has not been drawn to any provision in
the Act or any decision holding that even in the absence of appointment or
usurpation of the office of director or managing director, the provisions of
section 290 of the Act would apply. Viewed in the light of the facts and
circumstances referred to earlier, the decision relied on by learned counsel
for the appellant in O. S. A. No. 61 of 1983 in Sheth Mohanlal Ganpatram v.
Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj)
cannot have any application at all and also cannot enable the appellant to
claim that the transfer of the buses and the route permits is valid and cannot
be questioned in proceedings arising under sections 397 and 398 of the Act.
We have
already noticed the factual features in this case and therefrom it is clear
that certainly there was oppression and mismanagement as envisaged under
sections 397 and 398 of the Act. The third respondent as RW-2 accepted that the
second respondent and himself were not attending to the affairs of the company
after the sale of the vehicles and this explains in clear and unmistakable
terms their attitude as well as conduct in that, having manoeuvred to lose the
only assets of the company along with the route permits, they had virtually
abandoned the company. The gross neglect of the interest of the company by the
sale of its only assets and the total inattention thereafter to the affairs of
the company clearly justify the affording of the relief under sections 397 and
398 of the Act. We may in this connection refer to the observation of the
learned company judge that if the substratum of the company was manoeuvred to
be lost to it by the scheme evolved by respondents Nos. 2 and 3, it is easy to
find that a clear case has been made out that it is just and equitable that the
company should be wound up. We had earlier noticed that the buses of the
company were earning substantial income in their respective routes and it would
not be in the interest of the shareholders to wind up the company and in order
to rid the company of mismanagement, the reliefs prayed for under sections 397
and 398 of the Act have to be made available. We are unable to accept the
contention of learned counsel for the appellant in O.S.A. No. 39 of 1984 that
C.P. No. 18 of 1979 is not maintainable since there is no plea or proof of the
ingredients of section 397(2)(b) of the Act. From paragraphs 53, 54 and 57 of
the petition, such a plea can be spelt out and, as for proof, there is
overwhelming evidence to fulfil the requirements of sections 397 and 398 of the
Act as referred to earlier. Thus, on a due consideration of the facts and
circumstances of the case and the available materials, we hold that no case is
made out to interfere with the order of the learned company judge. We,
therefore, dismiss these appeals with costs. Counsel's fee one set.
[1991] 70 Comp. Cas. 388 (
v.
National Insurance Co. Ltd.
Mrs. Sunanda Bhandare J.
March 6, 1990
S.C. Malik, Pramod Aggarwal and Vasuda
Indukar for the Petitioners.
P.P.
Malhotra and A.K. Malhotra for the Respondents.
Sunanda
Bhandare J.—This
suit for recovery of Rs. 7,40,606.65 together with costs and interest has been
filed by the plaintiff against the defendant-National Insurance Co. Ltd. The
plaintiff is a company incorporated under the Companies Act, 1956, having its
registered office at E-5,Hauz Khas,
The
plaintiff has a factory at
A
fire broke out in the factory of the plaintiff on the morning of June 2, 1982,
at about 10.30/10.40 a.m. It is alleged that the officers of the plaintiff
present in the factory immediately informed the Fire Brigade, Gurgaon, on the
telephone as well as by deputing representatives and the fire was brought under
control by the Air-Force Fire Station and the Gurgaon Municipal Fire Station at
about 2.30 p.m. However, the said fire caused substantial damage to the main
building, its installation, raw materials, semi-finished/finished goods and to
the goods lying in the customs bonded warehouse, etc. It is further alleged
that the plaintiff on June 3, 1982, informed the Senior Divisional Manager of
the defendant about the fire and requested the defendant to depute its surveyor
immediately to survey the damage. Accordingly, a surveyor was deputed by the
defendant who assessed the loss at Rs. 2,72,458.71. The surveyor, however, had
not calculated the loss caused to the goods lying in the customs bonded
warehouse because the customs authorities were not available for inspection at
the relevant time. It is alleged that the plaintiff time and again requested
the defendant to depute a surveyor to inspect the loss suffered by the
plaintiff in the customs bonded warehouse and pay the claim but despite that
the defendant neither paid the claim nor sent the surveyor to assess the loss
at the customs bonded warehouse. The plaintiff, therefore, issued a notice on
January 22, 1983, through its advocates, Gagrat and Co., calling upon the
defendant to get the survey done in the customs bonded warehouse and for
payment of Rs. 2,72,458.71 with interest at 18% per annum within 15 days of the
said notice. It is alleged that the said notice issued by Gagrat and Co. was
received by the office of the defendant on January 25, 1983. Since the
defendant neither made the payment nor sent the surveyor, the plaintiff
assessed the loss at Rs. 6,27,632.76
The
defendant controverted the allegations made by the plaintiff in the plaint. In
the written statement filed on behalf of the defendant, the defendant
challenged the authority of Shri G. Jhajharia and denied that he is competent
to sign the plaint and institute the suit, engage counsel and do all necessary
acts for due prosecution of the case. It is alleged that the plaintiff company
has not passed any resolution for filing the present suit or expressing its
intention to file the suit. The suit thus being unauthorised is not
maintainable. The defendant in its written statement further alleged that
though the defendant insures the property through its officers and agents for
various kinds of risks, the contract of insurance only matures when a proposal
submitted by the insured is finally accepted by the company and documents
evidencing the contract of insurance are issued by the company. It is alleged
that a contract is not completed by mere tender of proposal for insurance or by
tendering money. The defendant denied that the factory of the plaintiff was
being insured since 1973 and it is alleged that the factory of the plaintiff
was insured from 1978 till 29th December, 1981. This insurance was also
arranged by the bankers of the plaintiff. The insurance expired on 29th
December, 1981, and, thereafter, the plaintiff did not obtain any insurance in
view of the dispute between the plaintiff and its bankers, namely, United Bank
of
The
plaintiff filed a replication once again reiterating the claim made in the
plaint and further stated that the moment the money is tendered and the same is
accepted by the insurance agent of the insurance company, the contract of
insurance is complete. It is alleged that the formal documents are drawn up at
a much later stage but the insurance starts operating from the date on which
the money is tendered and accepted by the insurance agent. It is stated in the
replication that the plaintiff has settled its dispute with the bank. The
plaintiff has denied the knowledge of any investigation that might have been undertaken
by the defendant and thus denied that there was any attempt by the plaintiff to
ante-date the insurance as alleged by the defendant. It is stated in the
replication that since the defendant has failed to disclose the details of
investigation and the plaintiff was hot made a party to the investigation, the
investigation has to be disregarded. The plaintiff has denied that the
insurance was accepted by Shri Dilip Bhattacharjee subject to the approval of
the defendant. The plaintiff has also denied that Shri Dilip Bhattacharjee did
not mention about the issuance of the cover-note in his statement dated June 3,
1982, and denied that the plaintiff tried to obtain an ante-dated insurance
through another agent, Shri P. Sengupta, as alleged by the defendant. The
plaintiff has reiterated that a cheque for the insurance premium of Rs. 12,324
was given on the basis of the calculations made by Shri Bhattacharjee and
contended that non-acceptance of the insurance by the defendant is without any
cause or reason and was only to avoid liability. The plaintiff has alleged that
the non-mention of the cover-note number or certificate of insurance number in
the letter dated June 3, 1983, does not in any manner affect the claim of the
plaintiff. The plaintiff has further reiterated in the replication that the
defendant did not assess the loss in the customs bonded warehouse and denied
the investigation report of Shri M. P. Bakshi. The plaintiff has thus denied
the case of the defendant that no insurance was issued or that there was no
completed contract between the parties.
On
the pleadings of the parties, the following issues were framed :
1. Was the factory of the plaintiff along with the
goods and machinery therein insured with the defendant company on June 2, 1982
?
2. Did a fire take place in the factory premises
of the plaintiff onJune 2, 1982 ? If so, what damage was suffered by the
plaintiff in the fire and of what value ?
3. In case issue No. 1 is proved, is the defendant
company not liable to pay for the loss suffered by the plaintiff in that fire
subject to the conditions of the insurance ?
4. Has the suit been instituted on behalf of the
plaintiff company by an authorised person and the plaint signed and verified by
a competent person ?
5. Relief.
Only
two witnesses were examined by the plaintiff. PW-1 is the bank official, a
representative of the United Bank of India, and PW-2, Shri Ashok Jhajaria,
director of the plaintiff company.
Issue
No. 4 : The plaint has been signed by Shri G. Jhajharia as principal officer of
the plaintiff company. The plaintiff, however, did not examine Shri G.
Jhajharia but examined Shri Ashok Kumar Jhajharia, director of the plaintiff
company, who stated that Shri G. Jhajharia is his elder brother. He has stated
that Shri G. Jhajharia was the director of the plaintiff company from 1975 to
1987. Shri G. Jhajharia ceased to be a director-after his retirement in 1987,
and thus his statement could not be recorded in court. Shri Ashok Kumar
Jhajharia has identified the signatures of Shri G. Jhajharia since he has seen
him writing and signing. He has proved exhibit PW-2/1, which is the resolution
of the board of directors reappointing Shri G. Jhajharia as director and stated
that he continued to act as director from July 7, 1983, till he retired. Shri
Ashok Kumar Jhajharia has further stated that he himself was handling the
day-to-day management of the plaintiff company including the insurance of the
factory. The plaintiff, however, in the plaint has stated that Shri G.
Jhajharia had instituted the suit as director and principal officer of the
company. The plaintiff has not filed any resolution of the plaintiff company
authorising either Shri G. Jhajharia or Shri Ashok Kumar Jhajharia to institute
the present suit.
It
was contended by learned counsel for the plaintiff that under Order 29, rule 1
of the Code of Civil Procedure, the pleadings can be signed and verified on
behalf of the corporation by the secretary or by any director or other
principal officer of the corporation who is able to depose to the facts of the
case. Thus, since Shri G. Jhajharia was the director of the plaintiff company
he was authorised to sign and verify the plaint on behalf, of the plaintiff
company and thus no separate resolution of the plaintiff company was necessary authorising
him to institute the suit. Learned counsel relied on the judgment of this court
in Mercantile Bank Ltd. v. Phool Chand Fateh Chand (Suit No. 11 of
1967—10-8-1973) and submitted that a principal officer of the company is
competent to sign and verify the plaint under the provisions of Order 29, rule
1 of the Code of Civil Procedure without his being specifically empowered by a
resolution to institute the suit. Learned counsel submitted that Shri G.
Jhajharia who was the director of the company was in a position to depose to
the facts of the case and thus competent to file the suit. Learned counsel
further submitted that non-filing of the resolution of the board of directors
authorising Shri G. Jhajharia is a mere technicality which must be ignored. He
relied on S.B. Naronah v. Prem Kumari Khanna, AIR 1980 SC 193 (para 6), and
Bhagwan Swaroop v. Mool Chand, AIR 1983 SC 355, in support of this submission.
Learned counsel further submitted that under Order 3, rule 1 of the Code of
Civil Procedure the suit can be presented either by a party in person or by his
recognised agent or by a pleader appearing, applying or acting, as the case may
be, on his behalf. Thus, since the advocate had filed the suit in whose favour
Shri G. Jhajharia has given the power of attorney, no further resolution was
required. He relied on Mst. Barkate v. Feroz Khan [1944] PLR 96, 98, in support
of this contention.
On
the other hand, it was submitted by learned counsel for the defendant that
signing and verifying the suit is one thing whereas having the authority to
institute the suit is another. There is nothing on record to show that the
director, Shri G. Jhajaria, was authorised by the board of directors of the
plaintiff company to file the suit. The plaintiff has failed to place on record
any such resolution. Institution of a suit is different from filing of a suit.
Furthermore, there is nothing on record to show that Shri G. Jhajharia was able
to depose to the facts of the case or that he was conversant with the facts of
the case. In fact, Shri Ashok Kumar Jhajharia in his statement has himself
stated that he was handling the day-to-day management of the plaintiff company
including the insurance part. Thus, it cannot be said that Shri G. Jhajharia
was conversant with the facts and as such in a position to depose to the same.
Learned counsel referred to sections 14, 26, 28 ; Schedule I and Table A and
section 291 of the Companies Act and contended that all powers of the company
are with the board of directors and an individual director cannot, without a
specific resolution of the board, institute a suit. The power to institute a
suit vests with the board and an individual director can institute a suit only
if he is specifically empowered to do so. Learned counsel relied on the judgments
of this court in Oberoi Hotels (
It
will be useful to reproduce the two provisions of the Code of Civil Procedure,
namely, Order 3, rule 1 and Order 29, rule 1, on which the plaintiff relies.
Order
3, rule 1 of the Code of Civil Procedure reads thus :
"Any
appearance, application or act in or to any court, required or authorised by
law to be made or done by a party in such court, may except where otherwise
expressly provided by any law for the time being in force, be made or done by
the party in person, or by his recognized agent or by a pleader appearing,
applying or acting, as the case may be, on his behalf :
Provided
that any such appearance shall, if the court so directs, be made by the party
in person."
Order
29, rule 1 of the Code of Civil Procedure reads thus :
"In suits by or
against a corporation, any pleading may be signed and verified on behalf of the
corporation by the secretary or by any director or other principal officer of
the corporation who is able to depose to the facts of the case."
Order
3, rule 1 provides that any appearance, application or act in or to any court
required or authorised by law can be made or done by the party in person or by
his recognized agent or by a pleader appearing, applying or acting, as the case
may be, on his behalf. Provided of course, such an appearance, application or
act in or to any court is required or authorised by law to be done or done by a
party in such court. Where, however, there is an express provision of law, then
that provision will prevail. Thus, if an authority is given to a pleader or a
recognised agent as provided by law, the recognised agent or pleader can file
an appearance or file a suit in court if the party himself is not in a position
to file it. In my view, if a party is a company or a corporation, the
recognised agent or a pleader has to be authorised by law to file such a
plaint. Such an authority can be given to a pleader or an agent in the case of
a company by a person specifically authorised in this behalf. In other words, a
pleader or an agent can be authorised to file a suit on behalf of a company
only by an authorised representative of the company. If a director or a
secretary is authorised by law, then he can certainly give the authority to
another person as provided under Order 3, rule 1.
Order
29, rule 1 of the Code of Civil Procedure provides for subcrip-tion and
verification of pleadings and states that in suits by or against the
corporation, any pleadings may be signed and verified on behalf of the
corporation by the secretary or by any director or other principal officer of
the corporation who is able to depose to the facts of the case.
This
court in Oberoi Hotels (
"Learned
counsel for the plaintiff lastly argued that Shri Ram Lal Chaudhary had stated
that he had authority to file the suit as a principal officer of the plaintiff
company even apart from the resolution marked 'A'. He did not say so. But how
does that help ? The authority of a principal officer of a company in relation
to suits filed on behalf of the limited company does not extend beyond what is
laid down in Order 29 of the Code of Civil Procedure. That provision does not
entitle the principal officer of a company to file a suit on its behalf and for
that the authority has to be found either in the articles of association of the
company or in the resolution of its board of directors. In the articles of
association of several companies, provision is generally made authorising their
managing directors and other officers to file and defend suits on their behalf.
Similarly, the board of directors of a company can authorise the institution of
a suit on behalf of the company by a resolution. In the case of some companies
the articles empower the managing director or directors to appoint general
attorneys and general managers and give them authority to institute suits on
behalf of the company. But in the absence of any proof in regard to any such
power having been conferred on Shri Ram Lal Chaudhary, it is not possible to
accept his statement that he was authorised to file the suit as the principal
officer of the plaintiff hotel.
I,
therefore, hold that although the plaint has been signed and verified by a
person duly authorised to do so on behalf of the plaintiff company, it has not
been proved that the suit has been instituted by any such person. The issue is
consequently decided against the plaintiff."
Similarly,
in South India Insurance Co. Ltd. (Suit No. 68 of 1969—19-4-1974), this court
has dealt with a similar objection as raised by the defendant in this case and observed
that a company being a corporate body or a juristic person has to act through
somebody and that person has to be specifically authorised to institute the
suit. In Notified Area Committee, AIR 1935 Lah 345, the Lahore Bench considered
the scope of Order 29, rule 1 of the Code of Civil Procedure and it has been
observed thus (at page 346):
"Similarly, Order
29, rule 1, Civil Procedure Code, also does not help the appellant. It merely
defines the person who is authorised to sign or verify the pleadings on behalf
of the corporation (in this case the committee). It, therefore, comes into
operation only after the proceedings have been validly started and cannot be
utilised to authorise an unauthorised person to institute suits on behalf of
the corporation."
In
Seth Kirpal Chand v. Traders Bank Ltd., AIR 1954 J & K 45, the court, while
dealing with the question that though there is no original authorisation, a
subsequent ratification could render it legitimate, has approved the view taken
by the Division Bench of the Lahore High Court in Notified Area Committee, AIR
1935 Lah 345 and observed thus (at page 47) :
"Here the
initiatiye to institute the suit could be properly transferred to the manager
under article 105 of the articles of association and, therefore, the subsequent
ratification of the act of the agent by the-principal could cure the original
defect."
Thus,
the Division Bench accepted the view that there should be a specific
authorisation in favour of a person permitting him. to institute a suit.
In
In
the case of Food Corporation of India, AIR 1981 P & H 113, while
considering the issue whether an application was filed by a competent per -son,
the court has observed that Order 29, rule 1, does not empower an officer to
conduct the case on behalf of the corporation. Only the limited power to sign
and verify the pleadings has been conferred upon the officer.
I
find that the judgments on which the plaintiff has relied upon, namely,
Mercantile Bank Ltd. (Suit No. 11 of 1967—10-8-1973), S.B. Naronah, AIR 1980 SC
193, Bhagwan Swaroop, AIR 1983 SC 355, and Mst. Barkate [1944] PLR 96, deal
with the question of signing and verification of the plaint and not institution
of the plaint.
In
Mercantile Bank Ltd. (Suit No. 11 of 1967—10-8-1973), the learned single judge
of this court was dealing with the question whether the person who had signed
the pleadings was a principal officer and constituted attorney of the
plaintiff. The learned judge held that Mr. Carey was the principal officer of
the plaintiff company wHo was able to depose to the facts of the case and thus
under Order 29, rule 1 of the Code of Civil Procedure could validly sign,
verify and file the plaint. The question whether the company is required to
specifically pass a resolution empowering Mr. Carey to institute the suit was
not for the consideration of the court. The issue that was raised in the suit
was :
"Is the plaint
signed and verified by a duly authorised person ?"
Since
the court found that, Mr. Carey was the principal officer, it was observed that
under Order 29, rule 1, he could sign, verify and file the plaint.
Learned
single judge while deciding Mercantile Bank's case (Suit No. 11 of
1967—10-8-1973) had relied on the case of Jaipur Udyog Ltd., AIR 1972 Raj 129.
I find that the facts of the case Jaipur Udyog Ltd., AIR 1972 Raj 129, were
totally different. The preliminary objection raised in that case by the
respondent was that the petitions were filed by unauthorised persons as they
were not signed by the secretary or the director of the company concerned and,
therefore, the petitions were not maintainable. On the facts of the case, the
court observed that the evidence clearly showed that the petitions were signed
and verified on behalf of the company by their principal officers who were able
to depose to the facts of the case and as such were entitled to sign the
petitions and present them in the court. After this case as well, no objection
was raised regarding the validity and power of the principal officer to
institute the petitions.
In
the case of National Fertilisers Ltd. (C.R. No. 1406 of 1981—26-2-1982), the
question whether the person who had signed the plaint had the authority to
institute the suit was not for consideration before the court and, therefore,
the court held that the revision petition filed by the advocate on the basis of
the vakalatnama signed by the estate officer of the National Fertilisers Ltd.
was competent.
On
the analysis of the judgments, it is clear that Order 29, rule 1 of the Code of
Civil Procedure does not authorise persons mentioned therein to institute suits
on behalf of the corporation. It only authorises them to sign and verify the
pleadings on behalf of the corporation.
In
my view, the provisions of the Companies Act, 1956, and particularly sections
14, 26, 28 ; Schedule I, Table A and section 291 are very clear.
It
is well-settled that under section 291 of the Companies Act except where
express provision is made that the powers of a company in respect of a
particular matter are to be exercised by the company in general meeting, in all
other cases the board of directors are entitled to exercise all its powers.
Individual directors have such powers only as are vested in them by the
memorandum and articles. It is true that ordinarily the court will not unsuit a
person on account of technicalities. However, the question of authority to
institute a suit on behalf of a company is not a technical matter. It has
far-reaching effects. It often affects the policy and finances of the company.
Thus, unless a power to institute a suit is specifically conferred on a
particular director, he has no authority to institute a suit on behalf of the
company. Needless to say such a power can be conferred by the board of
directors only by passing a resolution in that regard.
Chapter
IV of the Delhi High Court (Original Side) Rules deals with the question of
presentation of suits. Under this rule, a suit can be presented by a duly
authorised agent or by an advocate duly appointed by him for the purpose. This
authorisation, in my view, in the case of a company can be given only after a
decision to institute a suit is taken by the board of directors of the company.
The board of directors may in turn authorise a particular director, principal
officer or the secretary to institute a suit.
The
plaintiff has not placed on record any resolution passed by the company
authorising Shri G. Jhajharia to institute the suit. Shri G. Jhajha-ria did not
come forward to make a statement that he was in a position to depose to the
facts of the case. In the plaint signed by him, he claims to be a principal
officer and director, but there is no evidence on record to indicate that he
had the authority to institute the suit. The memorandum and articles of
association of the plaintiff company are also not placed on record. Even after
the suit was instituted by Shri G. Jhajharia, no resolution was passed by the
company ratifying this action. No such decision of the board of directors is
placed on record in the present case. The plaintiff has examined Shri Ashok
Kumar Jhajharia. He has placed on record, exhibit PW-2/1, which is the
resolution of the board of directors re-appointing Shri G. Jhajharia as the
director but this resolution does not empower Shri G. Jhajharia as a director
to institute the present suit. Shri Ashok Kumar Jhajharia has stated that he
was handling the day-to-day management of the plaintiff company including the
insurance part of it. He, however, does not state that Mr. G. Jhajharia was
handling the day-to-day management or was in charge of the insurance claim.
Thus,
there is no evidence to prove that Shri G. Jhajharia had the authority to
institute the present suit.
Issue
No. 4 is thus decided against the plaintiff and in favour of the defendant.
Issue
No. 2 : It is the case of the plaintiff that fire broke out at the factory of
the plaintiff on June 2, 1982. The plaintiff has placed on record a copy of the
letter dated June 3, 1982, exhibit PW-2/6, and a copy of the letter dated June
3, 1982, exhibit PW-2/7, addressed to the defendant informing about the fire.
Exhibit PW-2/7 contains the rubber stamp of the defendant company acknowledging
the receipt of the said letter though there is no signature of any
representative of the defendant on the said letter. Exhibit PW-2/5 is a copy of
the letter dated June 2, 1982, sent by the plaintiff to the Station House Officer,
Police Station (City), Gurgaon. The defendant has not disputed that a fire took
place in the factory of the plaintiff on June 2, 1982, inasmuch as a surveyor
was appointed by the defendant to assess the damage caused by the said fire and
the surveyor gave his report assessing the loss at Rs. 2,72,458.71. This is
evident from the copy of the letter dated July 21, 1982, exhibit PW-2/9,
addressed by the plaintiff to the defendant. Thus, it can be safely inferred
that the fire did take place in the factory premises of the plaintiff on June
2, 1982. The surveyor has assessed the damage at Rs. 2,72,458.71 which, as
stated herein-above, is indicated by letter dated July 21, 1982. According to
the plaintiff, this damage did not cover the loss suffered by the plaintiff
because of the damage caused to the goods lying at the customs bonded
warehouse. The plaintiff has relied on the correspondence entered into between
the plaintiff and the defendant for getting the loss in the customs bonded
warehouse also surveyed. It is not disputed by the defendant that after Mr.
M.P. Bakshi had surveyed the loss, no further survey was ever conducted by the
defendant. The plaintiff, therefore, got the loss surveyed by their own
surveyor. The plaintiff's surveyor, Shri Darshan Indar Singh Kohli, gave his
report on June 28, 1983, exhibit PW-2/20. The loss suffered according to this
surveyor's report is Rs. 3,55,174.05. The defendant has not challenged this
report of the surveyor. Therefore, the damage suffered by the plaintiff in the
fire would have to be taken as per the two surveyors' reports, i.e., Rs.
2,72,458.71 and Rs. 3,55,174.05.
Issues
Nos. 1 and 3 : The whole case of the plaintiff is that on May 31, 1982, Shri
Dilip Bhattacharjee, the Development Officer of the defendant, visited the
factory of the plaintiff and agreed to insure the factory against theft,
damage, fire, etc. The plaintiff has relied on the visitor's register
maintained in the factory to prove the visit of Shri Dilip Bhattacharjee on May
31, 1982. The photocopy of the entry in the visitor's register is exhibit
PW-2/2. As per the plaint, Shri Dilip Bhattacharjee collected a cheque for Rs.
12,324 on June 1, 1982, towards the premium. He signed the cover-notes in the
presence of Shri A.K. Jhajharia but took away the cover-notes with him on the
promise that he will be giving the insurance policy very soon. The particulars
giving the number of the cover-notes are mentioned in the plaint. PW-2, Shri
Ashok Kumar Jhajharia, in his examination-in-chief has stated that the said
cover-notes were in his possession for about 10 minutes and it is, thereafter,
that Mr. Dilip Bhattacharjee took back the cover-notes.
The
defendant, on the other hand, has denied that Shri Dilip Bhattacharjee visited
the plaintiff on June 1, 1982, as alleged by the plaintiff and has, in fact,
alleged that the plaintiff tried to obtain an insurance after the fire had
already taken place. The defendant has denied that any cover-notes were issued
by Mr. Dilip Bhattacharjee to the plaintiff. The case of the defendant is that
Mr. Dilip Bhattacharjee himself also tried to convince the company, however, in
his statement on June 3, 1982, he did not mention anything about the
preparation or issuance of cover-notes. Thus, the defendant contends that Mr. Dilip
Bhattacharjee did not accept the proposal or the cheque on June 1, 1982, but he
received them later on subject to acceptance and approval by the defendant
company. The defendant has alleged that the plaintiff had also tried to obtain
an ante-dated insurance through another agent of the company, namely, Shri P.
Sengupta, but had failed in that attempt.
It
was contended by learned counsel for the plaintiff that the defendant has not specifically
denied in the written statement that cover-notes were prepared by Mr. Dilip
Bhattacharjee ; thus the defendant having failed to produce these cover-notes
in spite of the fact that notice under Order 12, rule 8 of the Code of Civil
Procedure was given by the plaintiff to the defendant, an adverse inference
must be drawn against the defendant. Learned counsel submitted that since the
plaintiff had acted in good faith with an employee of the defendant, the
plaintiff cannot be penalised simply because the employee was part of a bigger
fraud. Learned counsel submitted that the Bakshi Committee Report is also not
placed on record by the defendant and, therefore, it must be inferred that the
proposal was accepted by Shri Dilip Battacharjee. Learned counsel further
submitted that the moment a cover-note is issued by the insurance company, the
contract of insurance is complete and the insurance company is bound to make
the payment for the loss suffered though the regular policy may not have been
issued. Learned counsel relied on the judgment of the Supreme Court in General
Assurance Society Ltd. v. Chandmull Jain [1966] 36 Comp Cas 468 ; AIR 1966 SC
1644, and submitted that the legal status of a cover-note is that it is an
interim insurance policy. Learned counsel submitted that since the defendant
failed to produce the cover-notes in their possession, an adverse inference is
to be drawn against the defendant. Learned counsel submitted that if a party
fails to produce the best evidence in its possession, an adverse inference
should be drawn. Learned counsel relied on Bawa Singh v. Jagdish Chand
[1960-61] 18 FJR 428 ; AIR 1960 Punj 573, Ram Murty Gupta v. Suresh Chandra
Agrawal, AIR 1973 All 582, Gurnam Singh v. Surjit Singh, AIR 1974 SC 2367,
Irudayam Ammal v. Salayath Mary, AIR 1973 Mad 421 and Bharat Bhushan v. Ved
Prakash, AIR 1978 Delhi 199, in support of this contention.
On
the other hand, learned counsel for the defendant submitted that the
cover-notes were not given to the plaintiff and thus there was no concluded
contract between the parties. He submitted that the alleged cover-notes were
got prepared by the plaintiff in great haste after the fire in an attempt to
wrongfully cover the insurance ante-dated since the defendant company did not
accept the insurance. Shri Dilip Bhattacharjee did not issue the cover-notes.
Learned counsel submitted that the plaintiff had shown Shri Dilip Bhattacharjee
in the list of witnesses but this witness was given up later on by the
plaintiff. Learned counsel further submitted that mere preparation of the
cover-notes was not conclusive unless the cover-notes had been given by the
development officer of the defendant to the plaintiff. Learned counsel
submitted that the cheque was given by the plaintiff to Shri Dilip Bhattacharjee
after the fire and was never encashed. The proposal was never accepted by the
defendant and thus there was no concluded contract between the parties. Learned
counsel submitted that for constituting a concluded contract, meeting of minds
is important and since in the present case there was no meeting of minds
between the plaintiff and the defendant, there was no valid contract between
the parties. Learned counsel relied on Halsbury, volume 25, fourth edition,
para 398, at page 221, section 46VB of the Insurance Act read with rule 58 of
the Insurance Rules and Life Insurance Corporation of India v. Raja Vasireddy
Komalavalli Kamba [1984] 56 Comp Cas 174 ; [1984] 2 SCC 719 in support of his
contention.
The
Supreme Court in General Assurance Society Ltd. [1966] 36 Comp Cas 468 has
observed as follows (at page 478) :
"A
contract of insurance is a species of commercial transaction and there is a
well-established commercial practice to send cover notes even prior to the
completion of a proper proposal or while the proposal is being considered or a
policy is in preparation for delivery. A cover note is a temporary and limited
agreement. It may be self-contained or it may incorporate by reference to the
terms and conditions of the future policy. When the cover note incorporates the
policy in this manner, it does not have to recite the terms and conditions, but
merely to refer to a particular standard policy. If the proposal is for a
standard policy and the cover note refers to it, the assured is taken to have accepted
the terms of that policy. The reference to the policy and its terms and
conditions may be expressed in the proposal or the cover note or even in the
letter of acceptance including the cover-note. The incorporation of the terms
and conditions of the policy may also arise from a combination of references in
two or more documents parsing between the parties. Documents like the proposal,
cover-note and the policy are commercial documents and to interpret them
commercial habits and practice cannot altogether be ignored. During the time
the cover-note operates, the relations of the parties are governed by its terms
and conditions, if any, but more usually by the terms and conditions of the
policy bargained for and to be issued. When this happens the terms of the
policy are incipient but after the period of temporary cover, the relations are
governed only by the terms and conditions of the policy unless insurance is
declined in the meantime. Delay in issuing the policy makes no difference. The
relations even then are governed by the future policy if the cover-notes give
sufficient indication that it would be so. In other respects there is no
difference between a contract of insurance and any other contract except that
in a contract of insurance, there is a requirement of uberrima fides, i.e.,
good faith on the part of the assured and the contract is likely to be
construed contra proferentem, that is, against the company in case of ambiguity
or doubt. A contract is formed when there is an unqualified acceptance of the
proposal. Acceptance may be expressed in writing or it may even be implied if
the insurer accepts the premium and retains it. In the case of the assured, a
positive act on his part by which he recognises or seeks to enforce the policy
amounts to an affirmation of it."
It
was contended by learned counsel for the defendant that the above-mentioned
observations of the Supreme Court were made after considering totally different
facts inasmuch as the Supreme Court was considering whether an insurance cover
could be cancelled by the insurance company.
The
Supreme Court in Life Insurance Corporation of
"When
an insurance policy becomes effective is well-settled by the authorities but
before we note the said authorities, it may be stated that it is clear that the
expression 'underwrite' signifies 'accept liability under'. The dictionary
meaning also indicates that (see in this connection The Concise Oxford
Dictionary, sixth edition, page 1267). It is true that normally the expression
'underwrite' is used in marine insurance but the expression used in Chapter III
of the Financial Powers of the Standing Order, in this case, specifically used
the expression 'underwriting and revivals' of policies in the case of the Life
Insurance Corporation and stated that it was the Divisional Manager who was
competent to underwrite a policy for Rs. 50,000 and above. The mere receipt and
retention of premium until after the death of the applicant or the mere preparation
of the policy document is not acceptance. Acceptance must be signified by some
act or acts agreed to by the parties or from which the law raises a presumption
of acceptance. See in this connection, the statement of law in Corpus Juris
Secundum, volume XLIV, page 986, wherein it has been stated as :
'The
mere receipt and retention of premiums until after the death of the applicant
does not give rise to a contract, although the circumstances may be such that
approval could be inferred from retention of the premium. The mere execution of
the policy is not an acceptance ; an acceptance, to be complete, must be
communicated to the offeror, either directly, or by some definite act, such as
placing the contract in the mail. The test is not intention alone. When the
application so requires, the acceptance must be evidenced by the signature of
one of the company's executive officers.'
Though
in certain human relationships silence to a proposal might convey acceptance,
in the case of an insurance proposal, silence does not denote consent and no
binding contract arises until the person to whom an offer is made says or does
something to signify his acceptance. Mere delay in giving an answer cannot be
construed as an acceptance, as, prima facie, acceptance must be communicated to
the offeror. The general rule is that the contract of insurance will be
concluded only when the party to whom an offer has been made accepts it
unconditionally and communicates his acceptance to the person making the offer.
Whether the final acceptance is that of the assured or the insurer, however,
depends simply on the way in which negotiations for an insurance have
progressed. See in this connection, the statement of law in MacGillivray and
Parkington on Insurance Law, seventh edition, page 94, paragraph 215."
It
was submitted by learned counsel for the plaintiff that the observations of the
Supreme Court in Life Insurance Corporation of India [1984] 56 Comp Cas 174
cannot be relied upon by the defendant because in that case the Supreme Court
was dealing with a case of life insurance and not general insurance.
In
my view, after reading the observations of the Supreme Court in the two
authorities cited hereinabove, whether the case relates to general insurance or
life insurance makes no difference. As observed by the Supreme Court itself in
Life Insurance Corporation of India [1984] 56 Comp Cas 174, the general rule is
that the contract of insurance will be concluded only when the party to whom an
offer has been made accepts it unconditionally and communicates his acceptance
to the person making the offer. Whether it is done by giving a cover- note or
by issuing a letter depends on the facts of each case. In order to hold that
there was a binding contract of insurance, there must be an offer put forward
by one party to the contract and acceptance of it by another. As observed in
MacGillivray and Parkington on Insurance Law, eighth edition, chapter 2, page
87, para 212, the material terms of a contract of insurance are : the
definition of the risk to be covered, the duration of the insurance cover, the
amount and mode of payment of the premium and the amount of insurance payable
in the event of a loss. As to all these there must be a consensus ad idem, that
is to say, there must be either an express agreement or the circumstances must
be such as to admit of a reasonable inference.
In
the present case, admittedly, the factory of the plaintiff was insured by the
bank only till December 29, 1981, for a period between 1978 and December 29,
1981. From December 30, 1981, till June 1, 1982, the factory was not insured.
It is admitted by the plaintiff that no policy was issued by the defendant. It
is also admitted that the cheque which was allegedly given by the plaintiff was
never encashed by the defendant. The short question, therefore, to be
determined is whether Shri Dilip Bhattacharjee issued cover-notes and whether
the same were received by the plaintiff on June 1, 1982, as alleged.
Admittedly, the case of the plaintiff is that Shri Dilip Bhattacharjee took
away the cover-notes on June 1, 1982, itself. Rather, PW-2, Shri Ashok Kumar
Jhajharia, in his statement has stated that Shri Dilip Bhattacharjee handed
over the cover- notes to him on June 1, 1982, and there were in his possession
for 10 minutes and Shri Dilip Bhattacharjee immediately took them back with the
promise that he will issue the policy shortly. Thus, admittedly the cover-notes
are not in the possession of the plaintiff.
On
a perusal of the various documents which have been placed on record by the
plaintiff, I find that in the letters issued by the plaintiff immediately after
the fire broke out on June 2, 1982, no reference is made to the cover-notes or
the insurance policy. The plaintiff examined only two witnesses on September 5,
1988 ; one was Shri R.P. Sharma, Manager, United Bank of India, Connaught
Circus Branch, New Delhi, as PW-1 who has stated that the last policy taken out
by the bank for the factory of the plaintiff expired on December 29, 1981 ; and
the other was that Shri Ashok Kumar Jhajharia himself as PW-2. PW-1 has stated
that the letter dated June 2, 1982, exhibit PW-1/1, was written by the
plaintiff to the bank Exhibit PW-1/1 indicates that the accounts officer of the
plaintiff company had informed the bank on June 2, 1982, that the cover-notes
would be sent by the insurance company directly to the bank. This witness,
however, does not state when this letter was received by the bank and in fact a
suggestion was made by counsel for the defendant that exhibit PW-1/1 was manipulated
between the plaintiff and the bank. In any event, the letter does not give the
particulars as to who gave the cover- notes and also does not give the details
of the insurance cover. This letter only states that the cover-notes would be
sent by the defendant to the bank directly. Thus, even as per this letter, the
cover notes were not with the plaintiff on June 2, 1982, and were still with
the defendant. On a perusal of this letter, I find that though the rubber stamp
"Received" is stamped on this letter, it does not bear any signature of the bank official. In my opinion, this
letter does not help the plaintiff in any manner. PW-2, Shri Ashok Kumar
Jhajharia, in his statement has admitted that the plaintiff had tried to obtain
insurance from another agent, Shri P. Sengupta, of National Insurance Company,
Division No. V, in respect of the same factory and had in fact obtained the
cover-notes from Mr. P. Sengupta on June 1, 1982. According to this witness,
these cover-notes bore the date, May, 1982, and also June, 1982. It is not
clear from the evidence of PW-2 as to how the plaintiff was able to obtain
cover- notes from Mr. P. Sengupta though the plaintiff had not obtained a
policy from Mr. P. Sengupta. In fact, this witness himself says that initially the
plaintiff was trying to get a policy of insurance from Division No. V, i.e.,
from Mr. P. Sengupta, but it was later on decided to shift to Division No. II,
i.e., the defendant company.
Now, I find that though the
plaintiff has proved the visit of Shri Dilip Bhattacharjee to the plaintiff's
factory on May 31, 1982, by referring to a copy of the entry in visitor's
register, exhibit PW-2/2, there is no document to prove the visit of Shri Dilip
Bhattacharjee on June 1, 1982. The plaintiff could prove his visit and the
receipt of cover-notes by Shri Ashok Kumar Jhajharia for 10 to 15 minutes by
examining Shri Dilip Bhattacharjee himself. But the plaintiff has not chosen to
do that and the plaintiff relies only on the statement of PW-2, Shri Ashok
Kumar Jhajharia, for that purpose. I find that Shri Dilip Bhattacharjee was
summoned by the plaintiff and he in fact appeared before the Deputy Registrar
on December 18, 1987. The plaintiff had,
however, not given the particulars of the documents which Shri Dilip Bhattacharjee
was required to produce. The plaintiff later on gave the particulars of the
required documents and this witness was again summoned for the dates of trial
fixed from September 2, 1988, to September 6,
1988. The plaintiff examined PW 1 and PW-2 onSeptember 5, 1988, and closed the
evidence. The plaintiff did not insist onthe examination of Shri Dilip
Bhattacharjee.
It was contended by learned
counsel for the plaintiff that since Shri Dilip Bhattacharjee was in the
employment of the defendant and the cover-notes were also in the possession of
the defendant, it is the defendant who should have examined Shri Dilip
Bhattacharjee and produced the cover-notes.
I do not find any force in
this contention. It is the plaintiff who asserted that cover-notes were issued
by Shri Dilip Bhattacharjee and were received by Shri Ashok Kumar Jhajharia for
10 to 15 minutes on June 1, 1982. Thus, the onus of proving this fact was
entirely on the plaintiff. It would have been a different matter if Shri Dilip
Bhatacharjee was summoned by the plaintiff and if he had not come after receipt
of summons, but that is not the case. Even though Shri Dilip Bhattacharjee was
summoned and he
came, the plaintiff did not choose to examine him. No doubt, as submitted by
learned counsel for the plaintiff himself, an adverse inference must be drawn
because Shri Dilip Bhattacharjee was not examined, but in the circumstances of
the case as narrated hereinabove, an adverse inference has to be drawn against
the plaintiff for not examining Shri Dilip Bhattacharjee. The case of the
defendant throughout has been that no cover-notes were issued by the defendant
to the plaintiff. Since the plaintiff has not been able to prove the receipt of
the cover-notes, there was no necessity for the defendant to produce the
cover-notes even if they were written and prepared and may have been available
in the office of the defendant.
In
my view, even if Shri Dilip Bhattacharjee had written and prepared the cover-
notes, since the cover-notes remained in the office of the defendant and are
not proved to have been given to the plaintiff, the contract between the
parties cannot be held to be concluded. The facts, to my mind, show that there
may have been a proposal for insurance but it was not accepted by the defendant
company before the fire.
Great
emphasis was laid by learned counsel for the plaintiff on the fact that the
defendant sent the surveyor to assess the damage caused because of the fire. I
do not consider this fact relevant for deciding whether there is a valid and
completed contract between the parties or not. Obviously, in the present case,
the surveyor had assessed the damage at the instance of the plaintiff without
prejudice. The correspondence between the parties, exhibit-2/8 to PW-2/16, is
ample evidence of this fact.
In
my view, the circumstances in this case do not admit of a reasonable inference
that there is a binding contract of insurance between the parties.
The
plaintiff having failed to prove the receipt of the cover-notes allegedly
prepared by Shri Dilip Bhattacharjee and having failed to prove that there was
a contract of insurance between the plaintiff and the defendant, issue No. 1 is
decided against the plaintiff and in favour of the defendant.
Since
issue No. 1 is not proved by the plaintiff, the defendant company is not liable
to pay for the loss suffered by the defendant in the fire. Thus, issue No. 3 is
also decided against the plaintiff and in favour of the defendant.
The
plaintiff is thus not entitled to the relief sought and the suit is dismissed
with costs.
[1991] 70 Comp. Cas. 388 (
High Court OF
v.
National Insurance Co. Ltd.
Mrs. Sunanda Bhandare J.
March 6, 1990
S.C. Malik, Pramod Aggarwal and
Vasuda Indukar for the Petitioners.
P.P.
Malhotra and A.K. Malhotra for the Respondents.
Sunanda
Bhandare J.—This
suit for recovery of Rs. 7,40,606.65 together with costs and interest has been
filed by the plaintiff against the defendant-National Insurance Co. Ltd. The
plaintiff is a company incorporated under the Companies Act, 1956, having its
registered office at E-5,Hauz Khas,
The
plaintiff has a factory at
A
fire broke out in the factory of the plaintiff on the morning of June 2, 1982,
at about 10.30/10.40 a.m. It is alleged that the officers of the plaintiff
present in the factory immediately informed the Fire Brigade, Gurgaon, on the
telephone as well as by deputing representatives and the fire was brought under
control by the Air-Force Fire Station and the Gurgaon Municipal Fire Station at
about 2.30 p.m. However, the said fire caused substantial damage to the main
building, its installation, raw materials, semi-finished/finished goods and to
the goods lying in the customs bonded warehouse, etc. It is further alleged
that the plaintiff on June 3, 1982, informed the Senior Divisional Manager of
the defendant about the fire and requested the defendant to depute its surveyor
immediately to survey the damage. Accordingly, a surveyor was deputed by the
defendant who assessed the loss at Rs. 2,72,458.71. The surveyor, however, had
not calculated the loss caused to the goods lying in the customs bonded warehouse
because the customs authorities were not available for inspection at the
relevant time. It is alleged that the plaintiff time and again requested the
defendant to depute a surveyor to inspect the loss suffered by the plaintiff in
the customs bonded warehouse and pay the claim but despite that the defendant
neither paid the claim nor sent the surveyor to assess the loss at the customs
bonded warehouse. The plaintiff, therefore, issued a notice on January 22,
1983, through its advocates, Gagrat and Co., calling upon the defendant to get
the survey done in the customs bonded warehouse and for payment of Rs.
2,72,458.71 with interest at 18% per annum within 15 days of the said notice.
It is alleged that the said notice issued by Gagrat and Co. was received by the
office of the defendant on January 25, 1983. Since the defendant neither made
the payment nor sent the surveyor, the plaintiff assessed the loss at Rs.
6,27,632.76
The
defendant controverted the allegations made by the plaintiff in the plaint. In the
written statement filed on behalf of the defendant, the defendant challenged
the authority of Shri G. Jhajharia and denied that he is competent to sign the
plaint and institute the suit, engage counsel and do all necessary acts for due
prosecution of the case. It is alleged that the plaintiff company has not
passed any resolution for filing the present suit or expressing its intention
to file the suit. The suit thus being unauthorised is not maintainable. The
defendant in its written statement further alleged that though the defendant
insures the property through its officers and agents for various kinds of
risks, the contract of insurance only matures when a proposal submitted by the
insured is finally accepted by the company and documents evidencing the
contract of insurance are issued by the company. It is alleged that a contract
is not completed by mere tender of proposal for insurance or by tendering
money. The defendant denied that the factory of the plaintiff was being insured
since 1973 and it is alleged that the factory of the plaintiff was insured from
1978 till 29th December, 1981. This insurance was also arranged by the bankers
of the plaintiff. The insurance expired on 29th December, 1981, and,
thereafter, the plaintiff did not obtain any insurance in view of the dispute
between the plaintiff and its bankers, namely, United Bank of
The
plaintiff filed a replication once again reiterating the claim made in the
plaint and further stated that the moment the money is tendered and the same is
accepted by the insurance agent of the insurance company, the contract of
insurance is complete. It is alleged that the formal documents are drawn up at
a much later stage but the insurance starts operating from the date on which
the money is tendered and accepted by the insurance agent. It is stated in the
replication that the plaintiff has settled its dispute with the bank. The
plaintiff has denied the knowledge of any investigation that might have been
undertaken by the defendant and thus denied that there was any attempt by the
plaintiff to ante-date the insurance as alleged by the defendant. It is stated
in the replication that since the defendant has failed to disclose the details
of investigation and the plaintiff was hot made a party to the investigation,
the investigation has to be disregarded. The plaintiff has denied that the
insurance was accepted by Shri Dilip Bhattacharjee subject to the approval of
the defendant. The plaintiff has also denied that Shri Dilip Bhattacharjee did
not mention about the issuance of the cover-note in his statement dated June 3,
1982, and denied that the plaintiff tried to obtain an ante-dated insurance
through another agent, Shri P. Sengupta, as alleged by the defendant. The
plaintiff has reiterated that a cheque for the insurance premium of Rs. 12,324
was given on the basis of the calculations made by Shri Bhattacharjee and
contended that non-acceptance of the insurance by the defendant is without any
cause or reason and was only to avoid liability. The plaintiff has alleged that
the non-mention of the cover-note number or certificate of insurance number in
the letter dated June 3, 1983, does not in any manner affect the claim of the
plaintiff. The plaintiff has further reiterated in the replication that the
defendant did not assess the loss in the customs bonded warehouse and denied
the investigation report of Shri M. P. Bakshi. The plaintiff has thus denied
the case of the defendant that no insurance was issued or that there was no
completed contract between the parties.
On
the pleadings of the parties, the following issues were framed :
1. Was the factory of the plaintiff along with the
goods and machinery therein insured with the defendant company on June 2, 1982
?
2. Did a fire take place in the factory premises
of the plaintiff onJune 2, 1982 ? If so, what damage was suffered by the
plaintiff in the fire and of what value ?
3. In case issue No. 1 is proved, is the defendant
company not liable to pay for the loss suffered by the plaintiff in that fire
subject to the conditions of the insurance ?
4. Has the suit been instituted on behalf of the
plaintiff company by an authorised person and the plaint signed and verified by
a competent person ?
5. Relief.
Only
two witnesses were examined by the plaintiff. PW-1 is the bank official, a
representative of the United Bank of India, and PW-2, Shri Ashok Jhajaria,
director of the plaintiff company.
Issue
No. 4 : The plaint has been signed by Shri G. Jhajharia as principal officer of
the plaintiff company. The plaintiff, however, did not examine Shri G.
Jhajharia but examined Shri Ashok Kumar Jhajharia, director of the plaintiff
company, who stated that Shri G. Jhajharia is his elder brother. He has stated
that Shri G. Jhajharia was the director of the plaintiff company from 1975 to
1987. Shri G. Jhajharia ceased to be a director-after his retirement in 1987,
and thus his statement could not be recorded in court. Shri Ashok Kumar Jhajharia
has identified the signatures of Shri G. Jhajharia since he has seen him
writing and signing. He has proved exhibit PW-2/1, which is the resolution of
the board of directors reappointing Shri G. Jhajharia as director and stated
that he continued to act as director from July 7, 1983, till he retired. Shri
Ashok Kumar Jhajharia has further stated that he himself was handling the
day-to-day management of the plaintiff company including the insurance of the
factory. The plaintiff, however, in the plaint has stated that Shri G.
Jhajharia had instituted the suit as director and principal officer of the
company. The plaintiff has not filed any resolution of the plaintiff company
authorising either Shri G. Jhajharia or Shri Ashok Kumar Jhajharia to institute
the present suit.
It
was contended by learned counsel for the plaintiff that under Order 29, rule 1
of the Code of Civil Procedure, the pleadings can be signed and verified on
behalf of the corporation by the secretary or by any director or other
principal officer of the corporation who is able to depose to the facts of the
case. Thus, since Shri G. Jhajharia was the director of the plaintiff company
he was authorised to sign and verify the plaint on behalf, of the plaintiff
company and thus no separate resolution of the plaintiff company was necessary
authorising him to institute the suit. Learned counsel relied on the judgment
of this court in Mercantile Bank Ltd. v. Phool Chand Fateh Chand (Suit No. 11
of 1967—10-8-1973) and submitted that a principal officer of the company is
competent to sign and verify the plaint under the provisions of Order 29, rule
1 of the Code of Civil Procedure without his being specifically empowered by a
resolution to institute the suit. Learned counsel submitted that Shri G. Jhajharia
who was the director of the company was in a position to depose to the facts of
the case and thus competent to file the suit. Learned counsel further submitted
that non-filing of the resolution of the board of directors authorising Shri G.
Jhajharia is a mere technicality which must be ignored. He relied on S.B.
Naronah v. Prem Kumari Khanna, AIR 1980 SC 193 (para 6), and Bhagwan Swaroop v.
Mool Chand, AIR 1983 SC 355, in support of this submission. Learned counsel
further submitted that under Order 3, rule 1 of the Code of Civil Procedure the
suit can be presented either by a party in person or by his recognised agent or
by a pleader appearing, applying or acting, as the case may be, on his behalf.
Thus, since the advocate had filed the suit in whose favour Shri G. Jhajharia
has given the power of attorney, no further resolution was required. He relied
on Mst. Barkate v. Feroz Khan [1944] PLR 96, 98, in support of this contention.
On
the other hand, it was submitted by learned counsel for the defendant that
signing and verifying the suit is one thing whereas having the authority to
institute the suit is another. There is nothing on record to show that the
director, Shri G. Jhajaria, was authorised by the board of directors of the
plaintiff company to file the suit. The plaintiff has failed to place on record
any such resolution. Institution of a suit is different from filing of a suit.
Furthermore, there is nothing on record to show that Shri G. Jhajharia was able
to depose to the facts of the case or that he was conversant with the facts of
the case. In fact, Shri Ashok Kumar Jhajharia in his statement has himself
stated that he was handling the day-to-day management of the plaintiff company
including the insurance part. Thus, it cannot be said that Shri G. Jhajharia
was conversant with the facts and as such in a position to depose to the same.
Learned counsel referred to sections 14, 26, 28 ; Schedule I and Table A and
section 291 of the Companies Act and contended that all powers of the company
are with the board of directors and an individual director cannot, without a
specific resolution of the board, institute a suit. The power to institute a
suit vests with the board and an individual director can institute a suit only
if he is specifically empowered to do so. Learned counsel relied on the
judgments of this court in Oberoi Hotels (India) Pvt. Ltd. v. Observer
Publications (P.) Ltd. (Suit No. 469 of 1966—26-11-1968), South India Insurance
Co. Ltd. v. Globe Motors (Suit No. 68 of 1969—19-4-1974), the judgment of the
Punjab and Haryana High Court in National Fertilizers Ltd. v. M.C. Bhatinda
(C.R. No. 1406 of 1981—26-2-1982) and Jaipur Udyog Ltd. v. Union of India, AIR
1972 Raj 129, in support of this contention. Learned counsel further submitted
that Shri G. Jhajharia has signed the plaint as principal officer but there is
no evidence on record that he was the principal officer nor there is any
evidence to show that he was conversant with the facts of the case. Learned
counsel referred to Chapter IV of the Delhi High Court (Original Side) Rules
and submitted that Shri G. Jhajharia had no authority to present the suit under
these Rules as well. Learned counsel submitted that Order 29, rule 1 of the
Code of Civil Procedure only talks about signing and verification of the
pleadings on behalf of the corporation but does not talk about institution of
suits. Learned counsel relied on Notified Area Committee, Okara v. Kidar Nath,
AIR 1935 Lah 345, Delhi and London Bank Ltd. v. A. Oldham [1893J ILR 21 Cal 60,
State of Jammu and Kashmir v. Shree Karan Singh Woollen Mills Ltd., AIR 1960 J
& K 47 and Food Corporation of India v. Sardarni Baldev Kaur, AIR 1981 P
& H 113, and submitted that the judgments referred to by learned counsel
for the plaintiff only deal with the question of signing and verification of
the plaint and are on totally different facts.
It
will be useful to reproduce the two provisions of the Code of Civil Procedure,
namely, Order 3, rule 1 and Order 29, rule 1, on which the plaintiff relies.
Order
3, rule 1 of the Code of Civil Procedure reads thus :
"Any
appearance, application or act in or to any court, required or authorised by
law to be made or done by a party in such court, may except where otherwise
expressly provided by any law for the time being in force, be made or done by
the party in person, or by his recognized agent or by a pleader appearing,
applying or acting, as the case may be, on his behalf :
Provided
that any such appearance shall, if the court so directs, be made by the party
in person."
Order
29, rule 1 of the Code of Civil Procedure reads thus :
"In suits by or
against a corporation, any pleading may be signed and verified on behalf of the
corporation by the secretary or by any director or other principal officer of
the corporation who is able to depose to the facts of the case."
Order
3, rule 1 provides that any appearance, application or act in or to any court
required or authorised by law can be made or done by the party in person or by
his recognized agent or by a pleader appearing, applying or acting, as the case
may be, on his behalf. Provided of course, such an appearance, application or
act in or to any court is required or authorised by law to be done or done by a
party in such court. Where, however, there is an express provision of law, then
that provision will prevail. Thus, if an authority is given to a pleader or a
recognised agent as provided by law, the recognised agent or pleader can file
an appearance or file a suit in court if the party himself is not in a position
to file it. In my view, if a party is a company or a corporation, the
recognised agent or a pleader has to be authorised by law to file such a
plaint. Such an authority can be given to a pleader or an agent in the case of
a company by a person specifically authorised in this behalf. In other words, a
pleader or an agent can be authorised to file a suit on behalf of a company
only by an authorised representative of the company. If a director or a
secretary is authorised by law, then he can certainly give the authority to
another person as provided under Order 3, rule 1.
Order
29, rule 1 of the Code of Civil Procedure provides for subcrip-tion and
verification of pleadings and states that in suits by or against the
corporation, any pleadings may be signed and verified on behalf of the
corporation by the secretary or by any director or other principal officer of
the corporation who is able to depose to the facts of the case.
This
court in Oberoi Hotels (India) Pvt. Ltd. (Suit No. 469 of 1966—26-11-1968),
while dealing with the scope of Order 29 of the Code of Civil Procedure has
observed as follows :
"Learned
counsel for the plaintiff lastly argued that Shri Ram Lal Chaudhary had stated
that he had authority to file the suit as a principal officer of the plaintiff company
even apart from the resolution marked 'A'. He did not say so. But how does that
help ? The authority of a principal officer of a company in relation to suits
filed on behalf of the limited company does not extend beyond what is laid down
in Order 29 of the Code of Civil Procedure. That provision does not entitle the
principal officer of a company to file a suit on its behalf and for that the
authority has to be found either in the articles of association of the company
or in the resolution of its board of directors. In the articles of association
of several companies, provision is generally made authorising their managing
directors and other officers to file and defend suits on their behalf.
Similarly, the board of directors of a company can authorise the institution of
a suit on behalf of the company by a resolution. In the case of some companies
the articles empower the managing director or directors to appoint general
attorneys and general managers and give them authority to institute suits on behalf
of the company. But in the absence of any proof in regard to any such power
having been conferred on Shri Ram Lal Chaudhary, it is not possible to accept
his statement that he was authorised to file the suit as the principal officer
of the plaintiff hotel.
I,
therefore, hold that although the plaint has been signed and verified by a
person duly authorised to do so on behalf of the plaintiff company, it has not
been proved that the suit has been instituted by any such person. The issue is
consequently decided against the plaintiff."
Similarly,
in South India Insurance Co. Ltd. (Suit No. 68 of 1969—19-4-1974), this court
has dealt with a similar objection as raised by the defendant in this case and observed
that a company being a corporate body or a juristic person has to act through
somebody and that person has to be specifically authorised to institute the
suit. In Notified Area Committee, AIR 1935 Lah 345, the Lahore Bench considered
the scope of Order 29, rule 1 of the Code of Civil Procedure and it has been
observed thus (at page 346):
"Similarly, Order
29, rule 1, Civil Procedure Code, also does not help the appellant. It merely
defines the person who is authorised to sign or verify the pleadings on behalf
of the corporation (in this case the committee). It, therefore, comes into
operation only after the proceedings have been validly started and cannot be
utilised to authorise an unauthorised person to institute suits on behalf of
the corporation."
In
Seth Kirpal Chand v. Traders Bank Ltd., AIR 1954 J & K 45, the court, while
dealing with the question that though there is no original authorisation, a
subsequent ratification could render it legitimate, has approved the view taken
by the Division Bench of the Lahore High Court in Notified Area Committee, AIR
1935 Lah 345 and observed thus (at page 47) :
"Here the
initiatiye to institute the suit could be properly transferred to the manager
under article 105 of the articles of association and, therefore, the subsequent
ratification of the act of the agent by the-principal could cure the original
defect."
Thus,
the Division Bench accepted the view that there should be a specific
authorisation in favour of a person permitting him. to institute a suit.
In
University of Kashmir v. Ghulam Nabi Mir, AIR 1978 (NOC) 114 (J & K), the
court has observed that signing and verification of the plaint is different
from filing the suit by a competent person.
In
the case of Food Corporation of India, AIR 1981 P & H 113, while
considering the issue whether an application was filed by a competent per -son,
the court has observed that Order 29, rule 1, does not empower an officer to
conduct the case on behalf of the corporation. Only the limited power to sign
and verify the pleadings has been conferred upon the officer.
I
find that the judgments on which the plaintiff has relied upon, namely,
Mercantile Bank Ltd. (Suit No. 11 of 1967—10-8-1973), S.B. Naronah, AIR 1980 SC
193, Bhagwan Swaroop, AIR 1983 SC 355, and Mst. Barkate [1944] PLR 96, deal
with the question of signing and verification of the plaint and not institution
of the plaint.
In
Mercantile Bank Ltd. (Suit No. 11 of 1967—10-8-1973), the learned single judge
of this court was dealing with the question whether the person who had signed
the pleadings was a principal officer and constituted attorney of the
plaintiff. The learned judge held that Mr. Carey was the principal officer of
the plaintiff company wHo was able to depose to the facts of the case and thus
under Order 29, rule 1 of the Code of Civil Procedure could validly sign,
verify and file the plaint. The question whether the company is required to
specifically pass a resolution empowering Mr. Carey to institute the suit was
not for the consideration of the court. The issue that was raised in the suit
was :
"Is the plaint
signed and verified by a duly authorised person ?"
Since
the court found that, Mr. Carey was the principal officer, it was observed that
under Order 29, rule 1, he could sign, verify and file the plaint.
Learned
single judge while deciding Mercantile Bank's case (Suit No. 11 of
1967—10-8-1973) had relied on the case of Jaipur Udyog Ltd., AIR 1972 Raj 129.
I find that the facts of the case Jaipur Udyog Ltd., AIR 1972 Raj 129, were
totally different. The preliminary objection raised in that case by the
respondent was that the petitions were filed by unauthorised persons as they
were not signed by the secretary or the director of the company concerned and,
therefore, the petitions were not maintainable. On the facts of the case, the
court observed that the evidence clearly showed that the petitions were signed
and verified on behalf of the company by their principal officers who were able
to depose to the facts of the case and as such were entitled to sign the
petitions and present them in the court. After this case as well, no objection
was raised regarding the validity and power of the principal officer to
institute the petitions.
In
the case of National Fertilisers Ltd. (C.R. No. 1406 of 1981—26-2-1982), the
question whether the person who had signed the plaint had the authority to
institute the suit was not for consideration before the court and, therefore,
the court held that the revision petition filed by the advocate on the basis of
the vakalatnama signed by the estate officer of the National Fertilisers Ltd.
was competent.
On
the analysis of the judgments, it is clear that Order 29, rule 1 of the Code of
Civil Procedure does not authorise persons mentioned therein to institute suits
on behalf of the corporation. It only authorises them to sign and verify the
pleadings on behalf of the corporation.
In
my view, the provisions of the Companies Act, 1956, and particularly sections
14, 26, 28 ; Schedule I, Table A and section 291 are very clear.
It
is well-settled that under section 291 of the Companies Act except where
express provision is made that the powers of a company in respect of a
particular matter are to be exercised by the company in general meeting, in all
other cases the board of directors are entitled to exercise all its powers.
Individual directors have such powers only as are vested in them by the
memorandum and articles. It is true that ordinarily the court will not unsuit a
person on account of technicalities. However, the question of authority to
institute a suit on behalf of a company is not a technical matter. It has
far-reaching effects. It often affects the policy and finances of the company.
Thus, unless a power to institute a suit is specifically conferred on a
particular director, he has no authority to institute a suit on behalf of the
company. Needless to say such a power can be conferred by the board of
directors only by passing a resolution in that regard.
Chapter
IV of the Delhi High Court (Original Side) Rules deals with the question of
presentation of suits. Under this rule, a suit can be presented by a duly
authorised agent or by an advocate duly appointed by him for the purpose. This
authorisation, in my view, in the case of a company can be given only after a
decision to institute a suit is taken by the board of directors of the company.
The board of directors may in turn authorise a particular director, principal
officer or the secretary to institute a suit.
The
plaintiff has not placed on record any resolution passed by the company
authorising Shri G. Jhajharia to institute the suit. Shri G. Jhajha-ria did not
come forward to make a statement that he was in a position to depose to the
facts of the case. In the plaint signed by him, he claims to be a principal
officer and director, but there is no evidence on record to indicate that he
had the authority to institute the suit. The memorandum and articles of
association of the plaintiff company are also not placed on record. Even after
the suit was instituted by Shri G. Jhajharia, no resolution was passed by the
company ratifying this action. No such decision of the board of directors is
placed on record in the present case. The plaintiff has examined Shri Ashok
Kumar Jhajharia. He has placed on record, exhibit PW-2/1, which is the
resolution of the board of directors re-appointing Shri G. Jhajharia as the
director but this resolution does not empower Shri G. Jhajharia as a director
to institute the present suit. Shri Ashok Kumar Jhajharia has stated that he
was handling the day-to-day management of the plaintiff company including the
insurance part of it. He, however, does not state that Mr. G. Jhajharia was
handling the day-to-day management or was in charge of the insurance claim.
Thus,
there is no evidence to prove that Shri G. Jhajharia had the authority to
institute the present suit.
Issue
No. 4 is thus decided against the plaintiff and in favour of the defendant.
Issue
No. 2 : It is the case of the plaintiff that fire broke out at the factory of
the plaintiff on June 2, 1982. The plaintiff has placed on record a copy of the
letter dated June 3, 1982, exhibit PW-2/6, and a copy of the letter dated June
3, 1982, exhibit PW-2/7, addressed to the defendant informing about the fire.
Exhibit PW-2/7 contains the rubber stamp of the defendant company acknowledging
the receipt of the said letter though there is no signature of any
representative of the defendant on the said letter. Exhibit PW-2/5 is a copy of
the letter dated June 2, 1982, sent by the plaintiff to the Station House Officer,
Police Station (City), Gurgaon. The defendant has not disputed that a fire took
place in the factory of the plaintiff on June 2, 1982, inasmuch as a surveyor
was appointed by the defendant to assess the damage caused by the said fire and
the surveyor gave his report assessing the loss at Rs. 2,72,458.71. This is
evident from the copy of the letter dated July 21, 1982, exhibit PW-2/9,
addressed by the plaintiff to the defendant. Thus, it can be safely inferred
that the fire did take place in the factory premises of the plaintiff on June
2, 1982. The surveyor has assessed the damage at Rs. 2,72,458.71 which, as
stated herein-above, is indicated by letter dated July 21, 1982. According to
the plaintiff, this damage did not cover the loss suffered by the plaintiff
because of the damage caused to the goods lying at the customs bonded
warehouse. The plaintiff has relied on the correspondence entered into between
the plaintiff and the defendant for getting the loss in the customs bonded
warehouse also surveyed. It is not disputed by the defendant that after Mr.
M.P. Bakshi had surveyed the loss, no further survey was ever conducted by the
defendant. The plaintiff, therefore, got the loss surveyed by their own
surveyor. The plaintiff's surveyor, Shri Darshan Indar Singh Kohli, gave his
report on June 28, 1983, exhibit PW-2/20. The loss suffered according to this
surveyor's report is Rs. 3,55,174.05. The defendant has not challenged this
report of the surveyor. Therefore, the damage suffered by the plaintiff in the
fire would have to be taken as per the two surveyors' reports, i.e., Rs.
2,72,458.71 and Rs. 3,55,174.05.
Issues
Nos. 1 and 3 : The whole case of the plaintiff is that on May 31, 1982, Shri
Dilip Bhattacharjee, the Development Officer of the defendant, visited the
factory of the plaintiff and agreed to insure the factory against theft,
damage, fire, etc. The plaintiff has relied on the visitor's register
maintained in the factory to prove the visit of Shri Dilip Bhattacharjee on May
31, 1982. The photocopy of the entry in the visitor's register is exhibit
PW-2/2. As per the plaint, Shri Dilip Bhattacharjee collected a cheque for Rs.
12,324 on June 1, 1982, towards the premium. He signed the cover-notes in the
presence of Shri A.K. Jhajharia but took away the cover-notes with him on the
promise that he will be giving the insurance policy very soon. The particulars
giving the number of the cover-notes are mentioned in the plaint. PW-2, Shri
Ashok Kumar Jhajharia, in his examination-in-chief has stated that the said
cover-notes were in his possession for about 10 minutes and it is, thereafter,
that Mr. Dilip Bhattacharjee took back the cover-notes.
The
defendant, on the other hand, has denied that Shri Dilip Bhattacharjee visited
the plaintiff on June 1, 1982, as alleged by the plaintiff and has, in fact,
alleged that the plaintiff tried to obtain an insurance after the fire had
already taken place. The defendant has denied that any cover-notes were issued
by Mr. Dilip Bhattacharjee to the plaintiff. The case of the defendant is that
Mr. Dilip Bhattacharjee himself also tried to convince the company, however, in
his statement on June 3, 1982, he did not mention anything about the
preparation or issuance of cover-notes. Thus, the defendant contends that Mr. Dilip
Bhattacharjee did not accept the proposal or the cheque on June 1, 1982, but he
received them later on subject to acceptance and approval by the defendant
company. The defendant has alleged that the plaintiff had also tried to obtain
an ante-dated insurance through another agent of the company, namely, Shri P.
Sengupta, but had failed in that attempt.
It
was contended by learned counsel for the plaintiff that the defendant has not
specifically denied in the written statement that cover-notes were prepared by
Mr. Dilip Bhattacharjee ; thus the defendant having failed to produce these
cover-notes in spite of the fact that notice under Order 12, rule 8 of the Code
of Civil Procedure was given by the plaintiff to the defendant, an adverse
inference must be drawn against the defendant. Learned counsel submitted that
since the plaintiff had acted in good faith with an employee of the defendant,
the plaintiff cannot be penalised simply because the employee was part of a
bigger fraud. Learned counsel submitted that the Bakshi Committee Report is
also not placed on record by the defendant and, therefore, it must be inferred
that the proposal was accepted by Shri Dilip Battacharjee. Learned counsel
further submitted that the moment a cover-note is issued by the insurance
company, the contract of insurance is complete and the insurance company is
bound to make the payment for the loss suffered though the regular policy may
not have been issued. Learned counsel relied on the judgment of the Supreme
Court in General Assurance Society Ltd. v. Chandmull Jain [1966] 36 Comp Cas
468 ; AIR 1966 SC 1644, and submitted that the legal status of a cover-note is
that it is an interim insurance policy. Learned counsel submitted that since
the defendant failed to produce the cover-notes in their possession, an adverse
inference is to be drawn against the defendant. Learned counsel submitted that
if a party fails to produce the best evidence in its possession, an adverse inference
should be drawn. Learned counsel relied on Bawa Singh v. Jagdish Chand
[1960-61] 18 FJR 428 ; AIR 1960 Punj 573, Ram Murty Gupta v. Suresh Chandra
Agrawal, AIR 1973 All 582, Gurnam Singh v. Surjit Singh, AIR 1974 SC 2367,
Irudayam Ammal v. Salayath Mary, AIR 1973 Mad 421 and Bharat Bhushan v. Ved
Prakash, AIR 1978 Delhi 199, in support of this contention.
On
the other hand, learned counsel for the defendant submitted that the
cover-notes were not given to the plaintiff and thus there was no concluded contract
between the parties. He submitted that the alleged cover-notes were got
prepared by the plaintiff in great haste after the fire in an attempt to
wrongfully cover the insurance ante-dated since the defendant company did not
accept the insurance. Shri Dilip Bhattacharjee did not issue the cover-notes.
Learned counsel submitted that the plaintiff had shown Shri Dilip Bhattacharjee
in the list of witnesses but this witness was given up later on by the
plaintiff. Learned counsel further submitted that mere preparation of the
cover-notes was not conclusive unless the cover-notes had been given by the
development officer of the defendant to the plaintiff. Learned counsel
submitted that the cheque was given by the plaintiff to Shri Dilip
Bhattacharjee after the fire and was never encashed. The proposal was never
accepted by the defendant and thus there was no concluded contract between the
parties. Learned counsel submitted that for constituting a concluded contract,
meeting of minds is important and since in the present case there was no
meeting of minds between the plaintiff and the defendant, there was no valid
contract between the parties. Learned counsel relied on Halsbury, volume 25,
fourth edition, para 398, at page 221, section 46VB of the Insurance Act read
with rule 58 of the Insurance Rules and Life Insurance Corporation of India v.
Raja Vasireddy Komalavalli Kamba [1984] 56 Comp Cas 174 ; [1984] 2 SCC 719 in
support of his contention.
The
Supreme Court in General Assurance Society Ltd. [1966] 36 Comp Cas 468 has
observed as follows (at page 478) :
"A
contract of insurance is a species of commercial transaction and there is a
well-established commercial practice to send cover notes even prior to the
completion of a proper proposal or while the proposal is being considered or a
policy is in preparation for delivery. A cover note is a temporary and limited
agreement. It may be self-contained or it may incorporate by reference to the
terms and conditions of the future policy. When the cover note incorporates the
policy in this manner, it does not have to recite the terms and conditions, but
merely to refer to a particular standard policy. If the proposal is for a
standard policy and the cover note refers to it, the assured is taken to have
accepted the terms of that policy. The reference to the policy and its terms
and conditions may be expressed in the proposal or the cover note or even in
the letter of acceptance including the cover-note. The incorporation of the
terms and conditions of the policy may also arise from a combination of
references in two or more documents parsing between the parties. Documents like
the proposal, cover-note and the policy are commercial documents and to
interpret them commercial habits and practice cannot altogether be ignored.
During the time the cover-note operates, the relations of the parties are
governed by its terms and conditions, if any, but more usually by the terms and
conditions of the policy bargained for and to be issued. When this happens the
terms of the policy are incipient but after the period of temporary cover, the
relations are governed only by the terms and conditions of the policy unless
insurance is declined in the meantime. Delay in issuing the policy makes no
difference. The relations even then are governed by the future policy if the
cover-notes give sufficient indication that it would be so. In other respects
there is no difference between a contract of insurance and any other contract
except that in a contract of insurance, there is a requirement of uberrima
fides, i.e., good faith on the part of the assured and the contract is likely
to be construed contra proferentem, that is, against the company in case of
ambiguity or doubt. A contract is formed when there is an unqualified
acceptance of the proposal. Acceptance may be expressed in writing or it may
even be implied if the insurer accepts the premium and retains it. In the case
of the assured, a positive act on his part by which he recognises or seeks to
enforce the policy amounts to an affirmation of it."
It
was contended by learned counsel for the defendant that the above-mentioned
observations of the Supreme Court were made after considering totally different
facts inasmuch as the Supreme Court was considering whether an insurance cover
could be cancelled by the insurance company.
The
Supreme Court in Life Insurance Corporation of India [1984] 56 Comp Cas 174 has
observed as follows (at page 181) :
"When
an insurance policy becomes effective is well-settled by the authorities but
before we note the said authorities, it may be stated that it is clear that the
expression 'underwrite' signifies 'accept liability under'. The dictionary
meaning also indicates that (see in this connection The Concise Oxford
Dictionary, sixth edition, page 1267). It is true that normally the expression
'underwrite' is used in marine insurance but the expression used in Chapter III
of the Financial Powers of the Standing Order, in this case, specifically used
the expression 'underwriting and revivals' of policies in the case of the Life
Insurance Corporation and stated that it was the Divisional Manager who was
competent to underwrite a policy for Rs. 50,000 and above. The mere receipt and
retention of premium until after the death of the applicant or the mere
preparation of the policy document is not acceptance. Acceptance must be
signified by some act or acts agreed to by the parties or from which the law
raises a presumption of acceptance. See in this connection, the statement of
law in Corpus Juris Secundum, volume XLIV, page 986, wherein it has been stated
as :
'The
mere receipt and retention of premiums until after the death of the applicant
does not give rise to a contract, although the circumstances may be such that
approval could be inferred from retention of the premium. The mere execution of
the policy is not an acceptance ; an acceptance, to be complete, must be
communicated to the offeror, either directly, or by some definite act, such as
placing the contract in the mail. The test is not intention alone. When the application
so requires, the acceptance must be evidenced by the signature of one of the
company's executive officers.'
Though
in certain human relationships silence to a proposal might convey acceptance,
in the case of an insurance proposal, silence does not denote consent and no
binding contract arises until the person to whom an offer is made says or does
something to signify his acceptance. Mere delay in giving an answer cannot be
construed as an acceptance, as, prima facie, acceptance must be communicated to
the offeror. The general rule is that the contract of insurance will be
concluded only when the party to whom an offer has been made accepts it
unconditionally and communicates his acceptance to the person making the offer.
Whether the final acceptance is that of the assured or the insurer, however,
depends simply on the way in which negotiations for an insurance have
progressed. See in this connection, the statement of law in MacGillivray and
Parkington on Insurance Law, seventh edition, page 94, paragraph 215."
It
was submitted by learned counsel for the plaintiff that the observations of the
Supreme Court in Life Insurance Corporation of India [1984] 56 Comp Cas 174
cannot be relied upon by the defendant because in that case the Supreme Court
was dealing with a case of life insurance and not general insurance.
In
my view, after reading the observations of the Supreme Court in the two
authorities cited hereinabove, whether the case relates to general insurance or
life insurance makes no difference. As observed by the Supreme Court itself in
Life Insurance Corporation of India [1984] 56 Comp Cas 174, the general rule is
that the contract of insurance will be concluded only when the party to whom an
offer has been made accepts it unconditionally and communicates his acceptance
to the person making the offer. Whether it is done by giving a cover- note or
by issuing a letter depends on the facts of each case. In order to hold that
there was a binding contract of insurance, there must be an offer put forward by
one party to the contract and acceptance of it by another. As observed in
MacGillivray and Parkington on Insurance Law, eighth edition, chapter 2, page
87, para 212, the material terms of a contract of insurance are : the
definition of the risk to be covered, the duration of the insurance cover, the
amount and mode of payment of the premium and the amount of insurance payable
in the event of a loss. As to all these there must be a consensus ad idem, that
is to say, there must be either an express agreement or the circumstances must
be such as to admit of a reasonable inference.
In
the present case, admittedly, the factory of the plaintiff was insured by the
bank only till December 29, 1981, for a period between 1978 and December 29,
1981. From December 30, 1981, till June 1, 1982, the factory was not insured.
It is admitted by the plaintiff that no policy was issued by the defendant. It
is also admitted that the cheque which was allegedly given by the plaintiff was
never encashed by the defendant. The short question, therefore, to be
determined is whether Shri Dilip Bhattacharjee issued cover-notes and whether
the same were received by the plaintiff on June 1, 1982, as alleged.
Admittedly, the case of the plaintiff is that Shri Dilip Bhattacharjee took away
the cover-notes on June 1, 1982, itself. Rather, PW-2, Shri Ashok Kumar
Jhajharia, in his statement has stated that Shri Dilip Bhattacharjee handed
over the cover- notes to him on June 1, 1982, and there were in his possession
for 10 minutes and Shri Dilip Bhattacharjee immediately took them back with the
promise that he will issue the policy shortly. Thus, admittedly the cover-notes
are not in the possession of the plaintiff.
On
a perusal of the various documents which have been placed on record by the plaintiff,
I find that in the letters issued by the plaintiff immediately after the fire
broke out on June 2, 1982, no reference is made to the cover-notes or the
insurance policy. The plaintiff examined only two witnesses on September 5,
1988 ; one was Shri R.P. Sharma, Manager, United Bank of India, Connaught
Circus Branch, New Delhi, as PW-1 who has stated that the last policy taken out
by the bank for the factory of the plaintiff expired on December 29, 1981 ; and
the other was that Shri Ashok Kumar Jhajharia himself as PW-2. PW-1 has stated
that the letter dated June 2, 1982, exhibit PW-1/1, was written by the
plaintiff to the bank Exhibit PW-1/1 indicates that the accounts officer of the
plaintiff company had informed the bank on June 2, 1982, that the cover-notes
would be sent by the insurance company directly to the bank. This witness,
however, does not state when this letter was received by the bank and in fact a
suggestion was made by counsel for the defendant that exhibit PW-1/1 was
manipulated between the plaintiff and the bank. In any event, the letter does
not give the particulars as to who gave the cover- notes and also does not give
the details of the insurance cover. This letter only states that the
cover-notes would be sent by the defendant to the bank directly. Thus, even as
per this letter, the cover notes were not with the plaintiff on June 2, 1982,
and were still with the defendant. On a perusal of this letter, I find that
though the rubber stamp "Received" is stamped on this letter, it does
not bear any signature of the bank official.
In my opinion, this letter does not help the plaintiff in any manner. PW-2,
Shri Ashok Kumar Jhajharia, in his statement has admitted that the plaintiff
had tried to obtain insurance from another agent, Shri P. Sengupta, of National
Insurance Company, Division No. V, in respect of the same factory and had in
fact obtained the cover-notes from Mr. P. Sengupta on June 1, 1982. According
to this witness, these cover-notes bore the date, May, 1982, and also June, 1982.
It is not clear from the evidence of PW-2 as to how the plaintiff was able to
obtain cover- notes from Mr. P. Sengupta though the plaintiff had not obtained
a policy from Mr. P. Sengupta. In fact, this witness himself says that
initially the plaintiff was trying to get a policy of insurance from Division
No. V, i.e., from Mr. P. Sengupta, but it was later on decided to shift to
Division No. II, i.e., the defendant company.
Now, I find that though the
plaintiff has proved the visit of Shri Dilip Bhattacharjee to the plaintiff's
factory on May 31, 1982, by referring to a copy of the entry in visitor's
register, exhibit PW-2/2, there is no document to prove the visit of Shri Dilip
Bhattacharjee on June 1, 1982. The plaintiff could prove his visit and the receipt
of cover-notes by Shri Ashok Kumar Jhajharia for 10 to 15 minutes by examining
Shri Dilip Bhattacharjee himself. But the plaintiff has not chosen to do that
and the plaintiff relies only on the statement of PW-2, Shri Ashok Kumar
Jhajharia, for that purpose. I find that Shri Dilip Bhattacharjee was summoned
by the plaintiff and he in fact appeared before the Deputy Registrar on
December 18, 1987. The plaintiff had, however,
not given the particulars of the documents which Shri Dilip Bhattacharjee was required
to produce. The plaintiff later on gave the particulars of the required
documents and this witness was again summoned for the dates of trial fixed from
September 2, 1988, to September 6, 1988. The
plaintiff examined PW 1 and PW-2 onSeptember 5, 1988, and closed the evidence.
The plaintiff did not insist onthe examination of Shri Dilip Bhattacharjee.
It was contended by learned
counsel for the plaintiff that since Shri Dilip Bhattacharjee was in the
employment of the defendant and the cover-notes were also in the possession of
the defendant, it is the defendant who should have examined Shri Dilip
Bhattacharjee and produced the cover-notes.
I do not find any force in
this contention. It is the plaintiff who asserted that cover-notes were issued
by Shri Dilip Bhattacharjee and were received by Shri Ashok Kumar Jhajharia for
10 to 15 minutes on June 1, 1982. Thus, the onus of proving this fact was
entirely on the plaintiff. It would have been a different matter if Shri Dilip
Bhatacharjee was summoned by the plaintiff and if he had not come after receipt
of summons, but that is not the case. Even though Shri Dilip Bhattacharjee was
summoned and he
came, the plaintiff did not choose to examine him. No doubt, as submitted by
learned counsel for the plaintiff himself, an adverse inference must be drawn
because Shri Dilip Bhattacharjee was not examined, but in the circumstances of
the case as narrated hereinabove, an adverse inference has to be drawn against
the plaintiff for not examining Shri Dilip Bhattacharjee. The case of the
defendant throughout has been that no cover-notes were issued by the defendant
to the plaintiff. Since the plaintiff has not been able to prove the receipt of
the cover-notes, there was no necessity for the defendant to produce the cover-notes
even if they were written and prepared and may have been available in the
office of the defendant.
In
my view, even if Shri Dilip Bhattacharjee had written and prepared the cover-
notes, since the cover-notes remained in the office of the defendant and are
not proved to have been given to the plaintiff, the contract between the
parties cannot be held to be concluded. The facts, to my mind, show that there
may have been a proposal for insurance but it was not accepted by the defendant
company before the fire.
Great
emphasis was laid by learned counsel for the plaintiff on the fact that the
defendant sent the surveyor to assess the damage caused because of the fire. I
do not consider this fact relevant for deciding whether there is a valid and
completed contract between the parties or not. Obviously, in the present case,
the surveyor had assessed the damage at the instance of the plaintiff without
prejudice. The correspondence between the parties, exhibit-2/8 to PW-2/16, is
ample evidence of this fact.
In
my view, the circumstances in this case do not admit of a reasonable inference
that there is a binding contract of insurance between the parties.
The
plaintiff having failed to prove the receipt of the cover-notes allegedly
prepared by Shri Dilip Bhattacharjee and having failed to prove that there was
a contract of insurance between the plaintiff and the defendant, issue No. 1 is
decided against the plaintiff and in favour of the defendant.
Since
issue No. 1 is not proved by the plaintiff, the defendant company is not liable
to pay for the loss suffered by the defendant in the fire. Thus, issue No. 3 is
also decided against the plaintiff and in favour of the defendant.
The
plaintiff is thus not entitled to the relief sought and the suit is dismissed
with costs.
[1989] 65 COMP. CAS. 553 (BOM.)
v.
Registrar of Companies
G.H. GUTTAL J.
Company Petitions Nos. 502, 506,
526, 527, 528, 529
and 530 of 1984. (Company
Applications Nos.
322, 323, 331, 332, 333, 334 and
335 of 1984)
JULY 28, 1988
P.L. Nain and Virag V. Tulzapurkar for the petitioners.
B.J. Rele and Neeta V.
Masurkar for the Registrar of Companies.
G.H. Guttal J.—The directors of Amar Dye-Chem. Ltd. (in liquidation) have
filed these petitions for an order that they be relieved from any criminal
proceedings that might be brought against them for default, negligence,
misfeasance, etc., in compliance with the provisons of section 58A of the
Companies Act and the Companies (Acceptance of Deposits) Rules, 1975. The
applications are made under section 633 of the Companies Act. The Companies
Act, 1956, and the Companies (Acceptance of Deposits) Rules, 1975, are
hereinafter referred to as "the Act" and "the Rules",
respectively.
J.H. Doshi and H.J. Doshi,
who are, respectively, the petitioners in Company Petitions Nos. 502 of 1984
and 506 of 1984 were, at the relevant time, full time directors of the company.
The former was the chairman of the company. The petitioners in Company
Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984, were appointed as
directors of the company on January 11, 1984. They were not directors of the
company on the date on which the winding-up order was made. The petitioners in
Company Petitions Nos. 526 of 1984 and 527 of 1984 were directors in their
capacity as professional men and were not full-time directors of the company.
Company Applications Nos. 322 of 1984 (in Company Petition No. 502 of 1984), 323
of 1984 (in Company Petition No. 506 of 1984), Company Application No. 33 of
1984 (in Company Petition No. 528 of 1984), Company Application No. 334 of 1984
(in Company Petition No. 529 of 1984), Company Application No. 335 of 1984 (in
Company Petition No. 530 of 1984), Company Application No. 332 of 1984 (in
Company Petition No. 527 of 1984), and Company Application No. 331 of 1984 (in
Company Petition No. 526 of 1984), are for interim orders to the effect that
the applicants be relieved from any criminal proceedings arising out of their
default in compliance with section 58A of the Act and the Rules of 1975.
The admitted facts are as
under:
(i) The company is engaged in the manufacture and
distribution of dyes, intermediates and chemicals. The company supplies the
products mainly to the textile industry.
(ii) The total of the acceptances of new deposits during July
1983, and October, 1983, was for Rs. 2,94,000 in excess of the permissible limit.
The total of renewals of old deposits between July 1983, and June, 1984, was
for Rs. 46,72,500 in excess of the legal limit.
(iii) In respect of the acceptance of fresh
deposits of Rs. 2,94,000 and renewals of old deposits of Rs. 46,72,500 between
July, 1983, and October, 1983, the company has contravened section 58A of the
Companies Act.
(iv) The
aggregate amount of deposits which was not repaid as on June 30, 1984, was Rs.
45,68,000.
(v) In their return of deposits as on March 31, 1984, filed
with the Registrar of Companies, the company has admitted that a total of Rs.
21,74,664 excess deposits remained unpaid to the depositors.
(vi) In the return of deposits as on March 31, 1984, the
company has stated that the deposits of Rs. 10,72,000 claimed by the depositors
had been deferred with the consent of the shareholders.
(vii) The amount of deposits accepted or
renewed under rule 3(2)(ii) during the year ending March 31, 1985, was Rs.
78,16,000. During April, May, June, 1984, the company accepted or renewed
deposits of the value of Rs. 15,75,000 from the public and accepted Rs.
3,28,000 from shareholders.
(viii) No
deposits were repaid after September 30, 1983.
Thus, there is an admitted
default in acceptance of deposits.
The arguments advanced by
counsel for the petitioners may be summarised as under:
(1) The directors who are petitioners in Company Petitions
Nos. 528 of 1984, 529 of 1984 and 530 of 1984, were appointed on January 11,
1984. They were not directors on the date on which the winding-up order was
made. Therefore, they should be relieved from liability for the acts of the
company.
(2) The petitioners in Company Petitions Nos. 526 of 1984 and
527 of 1984, and those referred to at (1) above were appointed as directors in
their professional capacity and were not full-time directors. Since they were
not concerned with the day to day management of the affairs of the company,
they cannot be held responsible for any act leading to criminal proceedings.
(3) There were special circumstances beyond the control of
the company which caused loss of production and strained the economy of the
company. There was a strike and "go slow" by the workers between 1981
and December 27, 1982, when the company commenced production. However, the
period during which the textile workers' strike affected the sales has not been
stated. These factors caused losses and drove the company to invite deposits.
(4) For the reasons stated in (3) above, the petitioners
should be held to have acted honestly and reasonably within the meaning of
section 633 of the Act.
Mr. Rele, appearing for the
Regional Director of the Company Law Board, drew my attention to the provisions
of the Act and the Rules, and urged that in law there is no distinction between
the liability of full-time directors and directors appointed by virtue of their
professional skill. Having regard to the facts of the case, the directors
cannot be said to have acted honestly and reasonably.
In view of the admitted
violation of section 58A of the Act and Rule 3 of the Rules, it is not
necessary to deal with the facts any further. I will immediately proceed to consider
whether the elements of section 633(1) have been fulfilled.
In order to understand the
nature of the liability of the members of the board of directors, certain
provisions of the Companies Act which highlight the responsibility of directors
need to be borne in mind. Section 58A enacts very stringent provisions in
regard to acceptance of deposits. For example,
advertisements inviting deposits, disclosure of the financial position of the
company, application of the Rules even to renewal of deposits highlight the
intention to protect the interests of the investing public. It follows,
therefore, that the officers of the company are enjoined to follow the
provisions strictly.
Similarly, rule 3 employs
language which is prohibitory in its tenor and, therefore, demands strict
compliance.
Does the law make any
distinction between full-time directors and directors who lend their special
skills by accepting membership of the board of directors? The answer is
provided by certain provisions of the Act. Let me consider them.
"Officer", the
word used in section 633, includes "any director, managing agent,
secretaries and treasurers, manager or secretary, or any person in accordance
with whose directions or instructions the board of directors or any one or more
of the directors is or are accustomed to act ......". Thus,
"any director" is an officer of the company. The Legislature which
defined the word "Officer" has made no distinction based on full-time
and part-time performance of duty.
The powers of the company
are exercised by the board of directors.' It shall not exercise any power or do
any act which is required to be exercised of done by the company in general
meetings.
Here again no distinction founded on part-time participation as member of the
board is discernible. A meeting of the board of directors shall be held at
least once in three months. In such
meeting, every member participates in voting and takes decisions without
distinction as to whether he is a part-time or full-time director.
At every annual general
meeting of the company held in pursuance of section 166, the board of directors
is enjoined to lay before the company a balance-sheet. Every balance-sheet and
every profit and loss account of a company shall be signed on behalf of the
board of directors by not less than two directors of the company one of whom
shall be the managing director where there is one. The
balance-sheet and profit and loss account are required to be signed by not less
than two directors. One of them may be a part-time director.
"Director" has been denned to include "any person occupying the
position of director by whatever name called".
The enactment, viz.,
section 58A, which demands strict compliance, the definition of
"Officer" which makes no distinction based on part-time performance
of duties, the equality of the responsibilities of the members of the board of
directors and the definition of "director" which admits of no
differentiation between part-time and full-time directors, has to be construed
according to its plain meaning. For this purpose, one must ask the question :
Does any interpretative criterion point away from what these sections mean? The
words mean what they say. If there is nothing to modify, nothing to alter,
nothing to qualify the language which a statute contains, the words and
sentences must be construed in their ordinary and natural meaning. The words
should be given the meaning which a normal speaker of the English language
would understand them to bear in their context.
The plain meaning of
director is the person occupying the position of director—call him a part-time
director or a full time director. The rules of construction do not call for any
modification or qualification of this meaning. Therefore, every petitioner
herein is a director of the company. Any distinction based on part-time
performance of duties is unrealistic, opposed to the usage of English prose and
would lead to absurd results.
Mr. Nain sought support to his
argument from Trisure India Ltd., In re [1983] 54 Comp Cas 197 (Bom). The
directors were accused of a conspiracy to manipulate the accounts and
intentional misstatements in the prospectus. It was found subsequently that the
books of the company were fabricated and falsified to show a false picture. The
figures of profits and sales shown in the prospectus were based on the
fabricated records. The decision of the trial court not to relieve the
directors from the liability to prosecution was based on events discovered
subsequently. This was the main reason why the Division Bench decided to
relieve the directors from liability for criminal action. The conclusions of
the Division Bench on the facts may be summarised as under:
(a) The directors who were in America did not approve of the
method by which the Indian director carried on business and raised money. The
managing director in India was asked to discontinue the practice.
(b) The petitioning directors did not take immediate drastic
action as, in theiropinion, the irregularities were not serious.
(c) The directors were not required to go through the account
books, nor were they under any obligation to examine the sale statistics.
(d) The failure to send returns of production to the
directors in America was never considered to be important. This failure assumed
importance only after the fraud was discovered. Such failure was not sufficient
to arouse suspicion of the American directors against the manner of maintaining
accounts in India. The failure of the directors to supervise had nothing to do
with the detection of sales figures or misstatements in the prospectus. These
could not have been detected by the directors without examining the account
books which they were under no obligation to do.
(e) The frauds were not known to the directors at the time
when the prospectus was signed by them. The subsequent discovery did not make
them responsible.
It is against the
background of these facts that the judgment has to be understood. All the facts
in that case pointed at Hegde—the managing director. The directors who were in
America could not have been fixed with the knowledge of the events which were
discovered after the prospectus was signed by them. The absence of any
obligation on them to scrutinise the accounts personally, their judgment not to
consider the irregularities as serious and their reliance on the other director
who signed the prospectus, were factors which went into the making of the
decision. In the present case, the facts are different. Nowhere in the petition
is it averred that the petitioners were ignorant about the fact that the
deposits and renewals exceeded the permissible limit, thereby violating section
58 A and rule 3. The annual general meetings were held. The meetings of the
board were held and all the documents, such as balance-sheets were placed
before them at such meetings. Besides, the amount of deposits and paid up
capital were not such facts which needed to be discovered by a close scrutiny
of the books of accounts. The probabilities leave no doubt that the petitioners
knew that the deposits exceeded the permissible limit and that they should not
have accepted or renewed the deposits. The judgment in Trisure India Ltd.
[1983] 54 Comp Cas 197 (Bom), does not assist the petitioners at all.
This is not to suggest that
none of the petitioners herein should be relieved from criminal proceedings.
The point is whether, as a matter of law, the part-time directors carry no
responsibilities which may lead to criminal proceedings. If they are liable,
the question of relief from criminal action becomes part of the court's
discretion. In the matter of proceedings for negligence, default, breach of
duty, misfeance and breach of trust, the Act and the rules admit of no
distinction between members of the board of directors based on their part-time
or full-time performance of duties. Their liability for any proceedings for
such acts is equal.
The next question is
whether, in accepting the deposits in breach of the Act and the Rules, the
petitioners acted honestly and reasonably.
Even if the production
suffered due to go-slow tactics of the workers and the strike, this situation
ended on December 27, 8982, or early in 1983. There is no explanation as to why
new deposits to the tune of Rs. 2,94,000 were accepted after July, 1983. It is
not the case of the petitioners that in July, 1983, also, this situation
continued. Even if it is assumed that the company was in need of money and,
therefore, new deposits were accepted, there is no explanation as to why the sanction
of the company in general meeting was not taken. Then, between July, 1983, and
October, 1983, the deposits of Rs. 46,72,500 were renewed. If the company was
unable to repay the old deposits, it is not reasonable to borrow money and that
too, without the sanction of the company. The return of deposits dated March
31, 1984, shows that a total of Rs. 21,74,664 is the amount of excess deposits
which remained unpaid. Again, in April, May, and June, 198 4, the company
accepted or renewed deposits of the value of Rs. 15,75,000 from the public and
Rs. 3,28,000 from shareholders. All this has been done notwithstanding the
financial position of the company which showed that the company was not in a
position to repay the deposits and that it was not entitled to borrow money in
excess of the limit permitted by law. The meetings of the board of directors
were held every year and the picture was clear to the directors as to whether
they were full-time directors or part time directors. It is not the case of the
part-time directors that they were unable to know the financial picture in
respect of the deposits without scrutiny of the account books. The statements
of profit and loss and the balance-sheet must have shown that there were
deposits in excess of the limit. Yet the board of directors proceeded to
sanction the acceptance of new deposits and renewal of the old ones. No
circumstances which suggest that this was reasonable conduct are discernible
from the petition.
It was urged that the sum
of Rs. 46,72,500 represents renewal of deposits. According to Mr. Nain, the
renewals made between July, 1983, and June, 1984, do not constitute
"acceptance" of deposits. This submission is untenable. When a
company is unable to repay the deposits and, therefore, renews them, what it
does is to accept the old deposits for a longer period. The word
"renew" means "to acquire again". Hence, renewal of fixed
deposits amounts to receiving fresh deposits within the meaning of section 58A
of the Act.
Having regard to the
provisions of the law, I do not find any distinction, in principle, between the
case of a full-time director and the case of a part-time director of a company.
Cases like Trisure India Ltd. [1983] 54 Comp Cas 197 (Bom), are in a different
category. The distinction made in that case was based on the fact that the
petitioning-directors were sought to be held liable because of events
discovered subsequently, and the court, found that, on the date on which the
prospectus was signed, there was nothing which could attribute, to the
directors, knowledge of the fraud. So far as the petitioners in Company
Petitions Nos. 502 of 1984 and 506 of 1984 are concerned, they were associated
personally with the management of the company and were, therefore, not only
cognizant of, but are liable for, the acceptance of the deposits contrary to
the provisions of law.
Notwithstanding the pressure on the company's finances, they cannot be
permitted to shut their eyes to what was obvious to everyone who examines the
affairs of the company even superficially.
Even if all the directors
are, in law, liable for their acts, the question of relieving them is still one
of discretion. Now, the question is whether, in exercise of my discretion, I
should relieve the officers of the company from liability for legal
proceedings. The petitioners, except the petitioners in Company Petition No.
502 of 1984 and Company Petition No. 506 of 1984, were part time directors.
This fact is the basis of Mr. Nain's argument. The petitioners in Company
Petition No. 502 of 1984 and Company Petition No. 506 of 1984 were directly
concerned with the day to day affairs of the company. The petitioners in
Company Petitions Nos. 526 of 1984, 527 of 1984, 528 of 1984, 529 of 1984 and
530 of 1984 were not expected to look after the day to day affairs of the
company. If the responsibility of all the directors, whether they perform part
time duties or full time duties is equal, should any of the directors be
relieved from the liability in respect of negligence, breach of trust,
misfeasance, etc.? This is always a question of judicial discretion. What are
the cases in which part-time directors should be relieved? The answer would
depend upon the circumstances of each case and no rigid formula can be laid
down. In this case, the directors who perform part time functions may be
relieved from liability because no evidence of the fact that they had exercised
any control in the matter has been brough forth. But, in a given case, evidence
about their knowledge of the facts which constitute negligence, breach of
trust, misfeasance, etc., may be brought forth. In such cases, they should not
be relieved from liability for acts of negligence, misfeasance, etc. I should
not be understood to have held that part time directors, by reason of their
part time status, should invariably be relieved from the liability for
negligence, breach of duty, misfeasance, breach of trust, etc.
In my opinion, it will be
unreasonable to fasten these directors with the liability for their defaults,
negligence, misfeasance or breach of trust which might have been caused because
of the conduct of the petitioners in Company Petitions Nos. 502 of 1984 and 506 of 1984, who
were admittedly in charge of the day-to-day affairs of the company.
The
petitioners in Company Petitions Nos. 528 of 1984, 529 of 1984 and 530 of 1984
were not directors of the company on January 11, 1984, on which date the
winding-up order was made. These petitioners also cannot be held liable for the
acts of the company. They, too, will have to be relieved.
For
all these reasons, I make the following order:
(i) Company Petitions Nos. 502 of 1984
and 506 of 1984 are dismissed. Similarly, Company Application No., 322 of 1984
(in Company Petition No. 502 of 1984) and Company Application No. 323 of 1984
(in Company Petition No. 506 of 1984) are dismissed.
The petitioners shall
pay costs of each of these petitions and applications to the Official
Liquidator and the Regional Director of the Company Law Board, quantified at
Rs. 300 each.
(ii) Company Petition No. 526 of 1984, No.
527 of 1984, No. 528 of 1984, No. 529 of 1984 and No. 530 of 1984 are made
absolute in terms of prayer (a).
(iii) There shall be no order on Company
Application No. 331 of 1984 (in Company Petition No. 526 of 1984), Company
Application No. 332 of 1984 (in Company Petition No. 527 of 1984), Company
Application No. 333 of 1984 (in Company Petition No. 528 of 1984), Company
Application No. 334 of 1984 (in Company Petition No. 529 of 1984) and Company
Application No. 335 of 1984 (in Company Petition No. 530 of 1984).
(iv) This
order shall not come into operation for three weeks.
[1996]
86 COMP. CAS 371 (BOM)
HIGH COURT OF
BSN (
v.
Janardan Mohandas Rajan Pillai
S.M.
JHUNJHUNUWALA J.
CHAMBER SUMMONS NO. 1071 OF 1992 IN SUIT NO. 3389 OF 1992.
JANUARY
22, 1993
J.I. Mehta, Mrs. Zia Mody, G.E.
Vahanvati, Dr. D.Y. Chandrachud, I.M. Chagla, S.J. Shah, D.J. Khambatta, R.J.
Gagrat, V.N. Kulkarni and Mrs. R.D. Chandrachud for Defendant.
Ram
Jethmalani, F.S. Nariman, A.P. Chinoy, N.H. Seervai and
JUDGMENT
Jhunjhunuwala
J.—By this
chamber summons, defendants Nos. 1 and 2 who are directors of Britannia
Industries Ltd., the seventh defendant, in the suit seek that:
(i) the names of plaintiffs Nos. 1 and
2 be struck out and/or deleted from the cause title of the plaint filed in the
suit;
(ii) the portions of the pleadings put
forth in the plaint as more particularly mentioned in the schedule to the
chamber summons be struck out and/or deleted; and
(iii) the
verification clause of the plaint filed be struck out and plaint be returned as
defective.
The first plaintiff is a company, incorporated under
the laws of the United Kingdom. The first plaintiff holds 50% of the share
capital of a company called "Associated Biscuits International Holdings
Ltd." (for short, "ABIH") which is also incorporated under the
laws of the United Kingdom. ABIH holds 100% of the share capital of a company
called "Associated Business International Ltd." (for short,
"ABIL") a company also incorporated under the laws of the United
Kingdom. ABIL in turn holds directly or indirectly through Nat West Nominees
Ltd. (for short, "Nat West) 38.15% of the issued capital of the seventh
defendant-company. The second plaintiff though not a shareholder is a director
of the seventh defendant-company having been nominated on the board of
directors of the seventh defendant by the first plaintiff. The third plaintiff
holds 294 shares in the seventh defendant-company. Defendants Nos. 1 to 6 are
directors of the seventh defendant-company. The first defendant is the chairman
of the board of directors of the seventh defendant-company. The second
defendant is the wife of the first defendant. Apart from defendants Nos. 1 to
6, the board of directors of the seventh defendant-company comprises Mr. J.
Gagrat, Mr. Sawai Bhavani Singh of Jaipur, Mr. Pierre Bonnet, Mr. Claude Le
Gouis, who are not parties to the suit, and the second plaintiff. The seventh
defendant-company is a public limited company duly incorporated under the
provisions of the Indian Companies Act, 1913, and is an existing company under
the provisions of the Companies Act, 1956. The eighth defendant is a
partnership firm. The ninth defendant is a company incorporated in Singapore.
The tenth defendant is also a company incorporated in the British Virgin
Islands. The eleventh defendant is also a company incorporated in Liberia. The
twelfth defendant is brother-in-law of the first defendant and was appointed as
general manager, exports of the seventh defendant in the year 1991.
According
to the plaintiffs, as averred in the plaint filed, defendants Nos. 1 to 6 who
were at all material times directors of the seventh defendant company are
interested and/or concerned in or with defendants Nos. 9, 10 and 11. Defendants
Nos. 1 to 6 are directors of the seventh defendant company arranged for:
(i) all transactions of export of
cashew and soya meal by the seventh defendant to be routed only through
defendants Nos. 9, 10 and 11;
(ii) a sum of as much as approximately
Rs. 25 crores to be advanced and made available to themselves by the seventh
defendant in the guise of providing six months unsecured interest
free/concessional rate credit only to defendants Nos. 9, 10 and 11;
(iii) the profit that would have normally been
earned by the seventh defendant on all such transactions to be diverted to
themselves through defendants Nos. 9, 10 and 11.
It
is further averred that defendants Nos. 1 to 6 have illegally, wilfully and
fraudulently suppressed and failed to disclose their interest and concern in or
with defendants Nos. 9, 10 and 11 and the transactions undertaken by the
seventh defendant with defendants Nos. 9, 10 and 11 and as a consequence of
non-disclosure of interest, defendants Nos. 1 to 6 have vacated their office as
directors of the seventh defendant-company under the provisions of the
Companies Act, 1956. It is also averred that since defendants Nos. 1 to 6 and
12 have caused wrongful loss to the seventh defendant and have caused wrongful
gains for themselves by or under the contracts and/or arrangements between the
seventh defendant on the one hand and defendants Nos. 9, 10 and 11 on the other
hand, defendants Nos. 1 to 6 and 12 be ordered and decreed to pay the sum of US
dollar 8 million equivalent to Rs. 25 crores to the seventh defendant.
The
plaintiffs have filed the suit, inter alia, praying for a declaration that
defendants Nos. 1 to 6 have vacated their office as directors of the seventh
defendant-company; for an order restraining defendants Nos. 1 to 6 from acting
as directors of the seventh defendant company; for an order directing
defendants Nos. 1 to 6 and 12 to furnish particulars and accounts of the
transactions undertaken by the seventh defendant with defendants Nos. 9, 10 and
11; for accounts of the loss caused by defendants Nos. 1 to 6 and 12 to the
seventh defendant and the wrongful gains that they have allegedly secured for
themselves; for an order and decree against defendants Nos. 1 to 6 and 12 for
payment of such amounts as compensation and damages as may be ascertained; for
an order and decree against defendants Nos. 1 to 6 and 12 for payment of the
sum of US dollar 8 million equivalent to Rs. 25 crores to the seventh
defendant; for interim and ad interim reliefs specified in the plaint filed.
It
may be mentioned here that on behalf of plaintiffs Nos. 1 and 2, the plaint
filed has been signed by one R.A. Shah who is a practising solicitor of this
court and a partner in the firm of Crawford Bayley and Co., solicitors and
advocates for the plaintiffs in the suit. The plaint filed has been verified by
the said R.A. Shah in his capacity as constituted attorney of plaintiffs Nos. 1
and 2. Even the vakalatnama filed in the suit has been signed by the said R.A.
Shah on behalf of plaintiffs Nos. 1 and 2 and accepted by him as partner in the
said firm of Crawford Bayley and Co. The plaint filed has been countersigned by
the said firm of Crawford Bayley and Co., as advocates for the plaintiffs
through the said R.A. Shah as partner therein. It may also be stated that
though according to the plaintiffs, the first plaintiff controls 50% interest
in 38.15% of the issued capital of the seventh defendant company through ABIL
and ABIH, neither the first plaintiff nor the second plaintiff is a
shareholder/member of the seventh defendant company and the second plaintiff,
without being a shareholder, is a nominee of the first plaintiff on the board
of directors of the seventh defendant company.
In
the facts of the case the following points arise for consideration:
(i) Whether the names of plaintiffs
Nos. 1 and 2 are liable to be struck out and/or deleted from the cause title of
the plaint under the provisions of Order 1, rule 10 of the Code of Civil
Procedure, 1908;
(ii) Whether the portions of the
pleadings in the plaint as more particularly set out in the schedule to the
chamber summons are liable to be struck out under the provisions of Order 6,
rule 16 of the Code of Civil Procedure, 1908;
(iii) Whether the plaint filed has been
properly and validly signed on behalf of plaintiffs Nos. 1 and 2. If not, the
effect thereof;
(iv) Whether
the plaint filed has been properly and validly verified. If not, the effect
thereof.
Before
proceeding to consider the abovementioned points, it may be mentioned here that
initially the first plaintiff on the one hand and plaintiffs Nos. 2 and 3 on
the other hand, intended to appear in the proceedings of this chamber summons
through separate set of learned counsel. Mr. Ram Jethmalani, learned counsel,
has mentioned his appearance for and on behalf of the first plaintiff whereas
Mr. Nariman, learned counsel, has mentioned his appearance for and on behalf of
plaintiffs Nos. 2 and 3. However, in view of the objection taken on behalf of
defendants Nos. 1 to 7 and 12 to the effect that where more persons than one
joined as co-plaintiff in a suit, each of the plaintiffs has not got an
individual right of engaging his own advocate or counsel and conducting the
case independently of the other plaintiffs, Mr. Ram Jethmalani, while conceding
the said proposition, made a statement to the effect that his appearance along
with Mr. Nariman, Mr. Chinoy, Mr. Seervai and Mr. Diwan be recorded to show
cause for and on behalf of all the plaintiffs.
Mr.
Mehta on behalf of defendants Nos. 1 and 2, Mr. Vahanvati on behalf of
defendants Nos. 3, 4, 5, 6 and 12 and Mr. Chagla on behalf of the seventh
defendant have submitted that plaintiffs Nos. 1 and 2 not being shareholders of
the seventh defendant company and their names admittedly not being entered on
the register of members of the seventh defendant company as holders of shares,
have no locus standi to file and/or maintain the suit and as such, their names
are liable to be struck out and/or deleted from the cause title of the plaint
filed in the suit under the provisions of Order 1, rule 10(2) of the Code of
Civil Procedure, 1908. It is further submitted that the second plaintiff in his
capacity merely as director of the seventh defendant company is not entitled to
institute and/or maintain the suit, he, in that capacity having no locus standi
to do so. Initially, Mr. Ram Jethmalani and later on Mr. Chinoy on behalf of
the plaintiffs have submitted that the joinder of the present three plaintiffs
is perfectly in accord with Order 1, rule 1 of the Code of Civil Procedure,
1908. On behalf of the plaintiffs, it is further submitted that it is not
denied by either of the defendants that the third plaintiff has a cause of
action. It is not denied that the plaint does disclose a cause of action and
the defendants have not sought any relief under Order VII, rule 11 of the Civil
Procedure Code. It is further submitted on behalf of the plaintiffs that once
the cause of action is admitted, it may inhere in the first plaintiff as in
their submissions, the first plaintiff is a substantial shareholder by reason
of having 50% interest in 38.15% of the issued capital of the seventh defendant
company, the remaining half being vested in the first defendant and his
nominees. It is further submitted that a derivative action has been held to lie
at the instance of the beneficial owner of shares. In the submission of Mr.
Chinoy, it is a corollary of the principle that when the wrong is done to the
company and its assets are in jeopardy and the company is or is likely to be
damnified, somebody else can protect the company's interest, if the company is
in the control of the wrongdoers. That somebody should not be a busybody or a
mere interloper. He may be a formal shareholder, he may be a real owner of
shares, though technically not on the register of shareholders, or he may be a
director, who is not a party to the wrongdoing. Mr. Chinoy has further
submitted that the cause of action in the suit substantially rests on the
breach of the statutory provisions of sections 299 and 295 of the Companies
Act, 1956, by defendants Nos. 1 to 6 and so long as the person suing has some
interest, the civil remedy is available to him. It is further submitted that
section 153 of the Companies Act, 1956, does not prevent a company from
choosing to recognise equitable interest. It certainly does not constitute a
bar on the court's power to recognise equitable interest in shares. Mr. Chinoy
further submitted that a director is bound to protect the interest of the
company. His acquiescence in wrong doing lands him in personal liability. A
director, to save himself from personal liability, must take all steps
including taking legal action. When a company director files a suit, he is not
enforcing a right, he is performing a duty. It is also submitted that Order 1,
rule 10 of the Civil Procedure Code has nothing to do with cause of action or
want of it. The rule is a part of Order 1, the heading of which is
"parties to suit". This expression is not synonymous with a plaintiff
who has no cause of action or a plaintiff wrongly suing. The expression
"improperly joined" in Order 1, rule 10(2) refers to the joinder of a
plaintiff in breach of Order 1, rule 1. Hence, in the submission of Mr. Chinoy,
Order 1, rule 10(2) applies not where a plaintiff's suit is to be dismissed but
where a plaintiff has to be dismissed from the suit. It is further submitted
that on any view being taken both plaintiffs Nos. 1 and 2 are necessary and
proper parties, and they have been properly joined in the suit as the
plaintiffs.
Order
1, rule 1 and Order 1, rule 10(2) of the Civil Procedure Code,
read
as under:
Order
1, rule 1:
"All persons may
be joined in one suit as the plaintiffs where—
(a) any right to relief in respect of, or arising
out of, the same act or transaction or series of acts or transactions is
alleged to exist in such persons, whether jointly, severally or in the
alternative; and
(b) if
such persons brought separate suits, any common question of law or fact would arise."
Order 1, rule 10(2):
"The court may
at any stage of the proceedings, either upon or without the application of
either party, and on such terms as may appear to the court to be just, order
that the name of any party improperly joined, whether as plaintiff or
defendant, be struck out, and that the name of any person who ought to have
been joined, whether as plaintiff or defendant, or whose presence before the
court may be necessary in order to enable the court effectually and completely
to adjudicate upon and settle all the questions involved in the suit, be
added."
Under
Order 1, rule 1, two or more persons may be joined as the plaintiffs in a suit
if the right to relief alleged to exist in each plaintiff arises from the same
act or transaction and there is a common question of law or of fact, (emphasis supplied)
Therefore, before a person can be joined as a plaintiff in a suit, it is
necessary that a right to relief claimed therein must exist in favour of such
person. Under Order 1, rule 10(2) of the Civil Procedure Code, the court can at
any stage of the proceedings order that the name of any party improperly
joined, whether as the plaintiff or the defendant, be struck out. The impropriety
referred to in this rule is in introducing a party who has no right to relief
claimed in the suit. The court, under this rule, has jurisdiction to strike out
the name of any person whose presence in the suit is likely to cause
embarrassment. Defendants Nos. 1 and 2 are not seeking dismissal of the suit in
the chamber summons. They are only seeking that the names of plaintiffs Nos. 1
and 2 who are improperly joined, having no right to the reliefs claimed in the
suit, be struck out. As held by the Madras High Court in the case of Jujishti
Panda v. Lakshmana Dola Behara, AIR 1933 Mad 435, under Order 1, rule 10(2), it
is the plaintiffs who are dismissed from the suit and not that the suit is
dismissed against them. If plaintiffs Nos. 1 and 2 have a right to the reliefs
claimed in the suit, their names from the cause title cannot be struck out.
However, if plaintiffs Nos. 1 and 2 have no right to the reliefs claimed in the
suit, their names have got to be struck out from the cause title at this stage since
it can be done at any stage of the proceedings. Order XIV, rules 1 and 2 of the
Civil Procedure Code do not and cannot render statutory provisions and wordings
contained in Order 1, rule 10 and Order VI, rule 16 of the Civil Procedure Code
nugatory. In the case of Dhartipakar Madan Lal Agarwal v. Shri Rajiv Gandhi,
AIR 1987 SC 1577, it has been held by the Supreme Court that pleadings can be
struck out at any time under Order VI, rule 16 of the Civil Procedure Code.
This
leads us to consider as to whether the first plaintiff and/or the second
plaintiff are the shareholders and/or members of the seventh defendant company
having right to the reliefs claimed in the suit.
Under
section 2(27) and section 41 of the Companies Act, 1956 (for short, "the
said Act"), a member is defined. Section 2(27) provides as follows:
" 'member', in
relation to a company, does not include a bearer of a share-warrant of the
company issued in pursuance of section 114."
Section
41 provides as follows:
"(1) The subscribers of the memorandum of a company
shall be deemed to have agreed to become members of the company, and on its
registration, shall be entered as members in its register of members.
(2) Every other person who agrees in writing to
become a member of a company and whose name is entered in its register of
members, shall be a member of the company."
Under
Indian company law, the word "member" is synonymously used with the
word "shareholder". Therefore, it is only a person who is on the
register of members of the company who is a member/shareholder of the company.
Neither the first plaintiff nor the second plaintiff is a person who is on the
register of members of the seventh defendant company. Hence, plaintiffs Nos. 1
and 2 are not shareholders/members of the seventh defendant company. Further,
under the said Act, certain rights are given only to members, e.g., the right
to vote, apply for winding up, get notice of annual general meetings, to remain
present at the annual general meeting, to receive dividend, to apply for investigation
of company affairs, to inspection and to form part of quorum. Plaintiffs Nos. 1
and 2 not being members cannot exercise any of the aforesaid rights nor any
other rights conferred only on members by the said Act. It is now well settled
law that no claims by one whose name is not on the register of members of a
company be made against the company. In the case of Howrah Trading Co. Ltd. v.
CIT [1959] 29 Comp Cas 282; [1959] 36 ITR 215; AIR 1959 SC 775, it has been
held by the apex court that the words "member",
"shareholder" and "holder" of a share have been used
interchangeably under the provisions of the Indian Companies Act, 1913. It is
further held that the words "holder of a share" are really equal to the
word "shareholder" and the expression "holder of a share"
denotes, in so far as the company is concerned, only a person who, as a
shareholder, has his name entered on the register of members. The Supreme Court
in the case of Balkrishan Gupta v. Swadeshi Polytex Ltd., AIR 1985 SC 520; [1985]
58 Comp Cas 563 has further held that even if a receiver is appointed of shares
he has no right to vote and only the member on the register has the right to
vote. It has also been held that ownership of a share denotes the relation
between a person and any right that is vested in him. As held by the Supreme
Court in the case of Narandas Karsondas v. S.A. Kamtam, AIR 1977 SC 774, in
India, there is no distinction between legal and equitable estates. The law of
India knows nothing of that distinction between legal and equitable property in
the sense in which it was understood when equity was administered by the Court
of Chancery in England. Relying upon Rani Chhatra Kumari v. Mohan Bikram Shah,
AIR 1931 PC 196, it has been held that under the Indian laws, there can be but
one owner that is, legal owner. In Killick Nixon Ltd. v. Bank of India [1985]
57 Comp Cas 831, a Division Bench of this court has held that under section
41(2) of the said Act, a person whose name is entered in the register of
members shall be a member of the company. The contentions of the plaintiffs
that the court can take cognisance of a trust as per Dharwar Bank v. Mahomed
Hayat [1931] 1 Comp Cas 199 (Bom); 33 BLR 250 is contrary to section 153 of the
said Act which has an overriding effect because of section 9 of the said Act.
In any event, there is no trust qua plaintiffs Nos. 1 and 2. No such trust can
be said to have arisen or exist under the Indian law in favour of plaintiffs
Nos. 1 and 2. The only exception was given by the Supreme Court in the case of
World Wide-Agencies Pvt. Ltd. v. Margaret T. Desor [1990] 67 Comp Cas 607; AIR
1990 SC 737 where, under section 397 a legal representative whose name was not
on the register of members but whose name ought to have been brought was
considered to be a person who could apply under section 397 of the said Act. In
that case letters of administration were obtained, the company's articles
recognised interest and title of legal representatives and the court held that
a right has devolved on legal representatives. In the instant case, plaintiffs
Nos. 1 and 2 have no such right in law either to be on the register of members
or to be brought on the register of members of the seventh defendant company.
Neither the courts in India nor in UK have allowed a non-member to maintain a
derivative action. Plaintiffs Nos. 1 and 2 also do not fit into the exceptions
laid down in Bhajekar v. Shinkar, AIR 1934 Bom 243; 36 BLR 483 and Satyavart
Sidhantalankar v. Arya Samaj, Bombay [1947] 17 Comp Cas 21 (Bom); 48 BLR 341.
A
member as defined under section 41 of the said Act can maintain an action
against the company,—
(i) to
enforce a personal right, e.g., the right to vote at or to attend a meeting;
(ii) a representative action under Order
1, rule 8 of the Civil Procedure Code, on behalf of himself and other
shareholders. Such action can be maintained if the same is a derivative action.
In such a derivative action a shareholder can seek reliefs in favour of the
company. Such action, therefore, is not to enforce a personal right of the
shareholder.
The
question then is, what is a derivative action and who can maintain it. In Foss
v. Harbottle [1843] 2 Hare 461, it has been held that it is the company which has
a right to maintain an action in its corporate name. It has further been held
that the court will not interfere in the internal management of the company.
This principal rule is subject only to limited exceptions as laid down therein.
None of the exceptions apply to the facts of the instant case. In Mozley v.
Alston [1847] 1 Ph 790, it was held that a suit in which injury was alleged to
be suffered by a corporation could not be sustained by individual members
unless at least it was shown that the company could not or would not institute
proceedings in their corporate character. Further held that a shareholder could
not ask the court to injunct directors from acting as such. In Pender v.
Lushington [1877] 6 Ch 70, it was held that "member" means
"member for the time being of the company . . . and it means prima facie a
registered shareholder or stock holder. . . so that a member is a man who is on
the register . . . The result appears to me to be manifest, that the company
has no right whatever to enter into the question of the beneficial ownership of
shares". In the said case, it was held that a meeting of the company
should be called to decide whether or not the company's name should be used as
the plaintiffs. In MacDougall v. Gardiner [1875] 1 Ch 13, it was held that
"if the thing complained of is a thing which in substance the majority of
the company are entitled to do or if something has been done irregularly which
the majority of the company are entitled to do legally . . . there can be no
use in having a litigation about it, the ultimate end of which is only that a
meeting has to be called and then ultimately the majority gets its
wishes". It was further held that "nothing connected with internal
disputes between the shareholders is to be made the subject of a bill by some
one shareholder on behalf of himself and others unless there be something
illegal, oppressive, or fraudulent—unless there is something ultra vires on the
part of the company qua the company or on the part of the majority of the company
so that they are not fit persons to determine; but that every litigation must
be in the name of the company, if the company really desire it ... and it is
the company, as a company, which has to determine whether it will make anything
that is wrong to the company a subject-matter of litigation, or whether it will
take steps to prevent the wrong from being done". Further held that
"there may be a great many wrongs committed in a company—there may be
claims against directors. . . there may be a variety of things which a company
may well be entitled to complain of but which as a matter of good sense they do
not think it right to make the subject of litigation ; and it is the company as
a company which has to determine whether it will make anything that is wrong to
the company a subject-matter of litigation, or whether it will take steps
itself to prevent the wrong from being done." In Prudential Assurance Co.
Ltd. v. Newman Industries Ltd. [1982] Ch 204, it was held that the trial judge
"ought to have determined as a preliminary issue whether the plaintiffs
were entitled to sue on behalf of Newman by bringing a derivative action. It
cannot have been right to have subjected the company to a 30-day action ... in
order to enable him to decide whether the plaintiffs were entitled in law to
subject the company to a 30-day action. Such an approach defeats the whole
purpose of the rule in Foss v. Harbottle [1843] 2 Hare 461; [1843] 67 ER 189
and sanctions the very mischief that the rule is designed to prevent. By the time
a derivative action is concluded, the rule in Foss v. Harbottle [1843] 2 Hare
461; [1843] 67 ER 189 can have little, if any, role to play".
In
view of the well-settled position in law, it is only the seventh defendant
company which is entitled to maintain an action for the wrong allegedly done to
it and plaintiffs Nos. 1 and 2 have no locus standi to maintain the above suit.
The only exception to the aforesaid rule which permits a shareholder to
maintain an action for the wrong alleged to have been done to the seventh
defendant company is if the shareholder can show that wrongdoers are in control
of the seventh defendant company and the seventh defendant company would hence
be unable to maintain any action. In the facts of the present case, the seventh
defendant had at the board of directors' meeting held on 30th November, 1992,
decided to take all necessary steps required to ascertain any alleged loss
caused to the seventh defendant and furthermore to recover such loss. Neither
in the plaint nor in the affidavit-in-reply to the chamber summons filed by the
plaintiff, it is contended that wrongdoers are in control of the seventh
defendant company. Since plaintiffs Nos. 1 and 2 are not shareholders of the
seventh defendant, they are not entitled to maintain the suit which can at the
highest be maintained only by a shareholder if the same falls within the
exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461; [1843] 67 ER
189.
On
behalf of the plaintiffs, Mr. Chinoy has fairly conceded that there is no
Indian or English authority which allows a non-shareholder/member to maintain a
derivative action. However, efforts were made to justify the action of
plaintiffs Nos. 1 and 2 by relying on the judgments of American courts where in
some American States "double" or "triple" derivative
actions have been permitted. Reliance has been placed on HFG Company v. Pioneer
Pub. Co. 162 F2d 536 (State of Illinois); Goldstein v. Groesbreck 142 F2d 422
(State of New York); U.S. Lines Inc. 96 F2d 148 (State of New York) and Kaufman
v. Wolfson 151 NYS 2d 530 (State of New York) which are all State decisions
where State substantive law does not prohibit a non-member from maintaining
such an action. Under Indian law, it is settled that only a member on the
register of members can sue and, therefore, the American cases relied upon by
the plaintiffs can have no application. In the case of Joseph Kuruvilla
Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371; 32 Comp Cas 514, the
apex court of our country has held as under (at page 1397):
"The aid of
American concepts, laws and precedents in the interpretation of our laws is not
always without its dangers and they have therefore to be relied upon with some
caution if not with hesitation because of the difference in the nature of those
laws and of the institutions to which they apply."
Under
section 153 of the said Act, "no notice of any trust, express, implied or
constructive, shall be entered on the register of members. . ." Under
section 153B of the said Act, it is provided that where shares are held in
trust by any person, a declaration shall be made in the manner prescribed and a
copy thereof sent by the trustee to the company concerned. Under section
187C(1) of the said Act, a person whose name is entered on the register of members
but who does not hold the beneficial interest in those shares shall make a
declaration to the company specifying the name and particulars of the person
who holds the beneficial interest in such shares. Also a person holding a
beneficial interest in the shares of a company shall make a declaration to the
company under subsection 187C(2) of the said Act within 30 days after becoming
such beneficial owner. In the instant case, the first plaintiff which claims to
be the beneficial owner of shares in the seventh defendant company, has not
made any declaration either under section 153B or under section 187C(2) of the
said Act nor has ABIL which is registered as the holder of 38.15% shares of the
seventh defendant company, made any declaration as required by section 187C(1)
of the said Act. It may also be stated that the claim of the plaintiffs that
the first plaintiff is the real owner of the shares standing in the name of
ABIL is directly counter to section 4(1) of the Benami Transactions
(Prohibition) Act, 1988, which reads as under:
"4. Prohibition
of the right to recover property held benami—(1) No suit, claim or action to
enforce any right in respect of any property held benami against the person in
whose name the property is held or against any other person shall lie by or on
behalf of a person claiming to be the real owner of such property."
Mr.
Chinoy, learned counsel for the plaintiffs, submitted that in the facts of the
case, all that was required was to lift the corporate veil of the seventh
defendant company to find out who the real or de facto shareholders of the
seventh defendant company were. However, in view of the fact that neither the
first plaintiff nor the second plaintiff are shareholders of the seventh
defendant company, reliance placed by Mr. Chinoy on the averments made
particularly in paragraphs 2, 4, 9 and 12(a) of the affidavit of Nicolas Moulin
filed in reply to the chamber summons cannot give locus standi to plaintiffs
Nos. 1 and 2 to maintain the present suit inasmuch as a suit similar in nature
to the present one can only be maintained by a shareholder of the seventh
defendant company. As per the pattern of shareholding in the seventh defendant
company given by the plaintiffs in the plaint filed as well as in the affidavit
of the said Nicolas Moulin, ABIL holds directly or indirectly through Nat West
38.15% of the issued capital of the seventh defendant company which is a
distinct company with a separate corporate identity. In the case of Salomon v.
Salomon and Co. [1897] AC 22, it is settled that a company is a distinct and
separate entity and courts would lift the corporate veil only in exceptional
circumstances. The judgment in Salomon v. Salomon and Co. [1897] AC 22 still
holds the field and has been followed by the Supreme Court in Tata Engineering
and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas 458; AIR 1965 SC
40. In para 24 thereof, the Supreme Court has stated as under (at page 468 of
34 Comp Cas):
"The true legal
position in regard to the character of a Corporation or a company which owes
its incorporation to a statutory authority, is not in doubt or dispute. The
Corporation in law is equal to a natural person and has a legal entity of its
own. The entity of the Corporation is entirely separate from that of its shareholders;
it bears its own name and has a seal of its own; its assets are separate and
distinct from those of its members; it can sue and be sued exclusively for its
own purpose; its creditors cannot obtain satisfaction from the assets of its
members; the liability of the members or shareholders is limited to the capital
invested by them, similarly the creditors of the members have no right to the
assets of the Corporation. This position has been well-established ever since
the decision in the case of Salomon v. Salomon and Co. [1897] AC 22 was
pronounced in 1897; and indeed, it has always been the well recognised
principle of common law. However, in the course of time, the doctrine that the
Corporation or a company has a legal and separate entity of its own has been
subjected to certain exceptions by the application of the fiction that the veil
of the Corporation can be lifted and its face examined in substance. The
doctrine of the lifting of the veil thus marks a change in the attitude that
law had originally adopted towards the concept of the separate entity or
personality of the Corporation. As a result of the impact of the complexity of
economic factors, judicial decisions have sometimes recognised exceptions to
the rule about the juristic personality of the Corporation. It may be that in
course of time these exceptions may grow in number and to meet the requirements
of different economic problems, the theory about the personality of the
Corporation may be confined more and more."
In
support of his submission that this court should "remove the corporate
veil", Mr. Chinoy has put reliance on the case of State of U.P. v.
Renusagar Power Co., AIR 1988 SC 1737; [1991] 70 Comp Cas 127 wherein the
Supreme Court observed that the doctrine of lifting the corporate veil is
expanding in the context of modern jurisprudence. In para 63 thereof, it has
been observed as under (at page 159 of 70 Comp Cas):
"It is high time
to reiterate that, in the expanding horizon of modern jurisprudence, the
lifting of the corporate veil is permissible. Its frontiers are unlimited. It
must, however, depend primarily on the realities of the situation. The aim of
the legislation is to do justice to all the parties. The horizon of the
doctrine of lifting of the corporate veil is expanding. Here, indubitably, we
are of the opinion that it is correct that Renusagar was brought into existence
by Hindalco in order to fulfil the condition of industrial licence of Hindalco
through production of aluminium. It is also manifest from the facts that the
model of the setting up of power station through the agency of Renusagar was
adopted by Hindalco to avoid complications in case of take over of the power
station by the State or the Electricity Board. As the facts make it abundantly
clear that all the steps for establishing and expanding the power station were
taken by Hindalco, Renusagar is a wholly owned subsidiary of Hindalco and is
completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are
controlled by Hindalco. Renusagar has, at no point of time, indicated any
independent volition. Whenever felt necessary, the State or the Board have
themselves lifted the corporate veil and have treated Renusagar and Hindalco as
one concern and the generation in Renusagar as the own source of generation of
Hindalco. In the impugned order the profits of Renusagar have been treated as
the profits of Hindalco."
In
that case, the court held on the facts that the holding company and the
subsidiary were to be treated as one and the same because the subsidiary was
created to generate and supply energy and power to the holding company in order
to enable it to maintain its production commitment to the State and, therefore,
generation of power was considered for the purpose of excise to be the holding
company's own source of supply and not supply from a separate entity. It was
there held that there was no separate or independant existence and all
day-to-day affairs were controlled. The same is not the situation as regards
ABIH, ABIL/Nat West and the first plaintiff in the instant case. Mr. Mehta,
learned counsel appearing for defendants Nos. 1 and 2, has justifiably put
reliance on the case of LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548;
AIR 1986 SC 1370, wherein tests are laid down as to when a court will pierce
the corporate veil, i.e., where the defendant has to be further probed into.
The corporate veil is lifted against an entity if the entity is hiding behind
the veil so as to escape liability or penalty. None of the tests laid down in
Escorts Ltd.'s case, AIR 1986 SC 1370 apply to the instant case wherein the
first plaintiff is seeking to get locus standi to maintain the present suit by
asking this court to lift not only its own corporate veil but also the
corporate veil of ABH, ABIL, Nat West. The Supreme Court in Escorts Ltd.'s
case, AIR 1986 SC 1370 has cited with approval Pennington on Company Law
wherein he has stated (at page 1417):
"Four inroads
have been made by the law on the principle of the separate legal personality of
companies. By far the most extensive of these has been made by legislation
imposing taxation. The Government, naturally enough, does not willingly suffer
schemes for the avoidance of taxation which depend for their success on the
employment of the principle of separate legal personality, and in fact
legislation has gone so far that in certain circumstances taxation can be
heavier if companies are employed by the taxpayer in an attempt to minimise his
tax liability than if he uses other means to give effect to his wishes.
Taxation of companies is a complex subject, and is outside the scope of this
book. The reader who wishes to pursue the subject is referred to the many
standard text books on corporation tax, income-tax, capital gains tax and
capital transfer tax.
The other inroads on
the principle of separate corporate personality have been made by two sections
of the Companies Act, 1948, by judicial disregard of the principle where the
protection of public interests is of paramount importance, or where the company
has been formed to evade obligations imposed by the law, and by the courts
implying in certain cases that a company is an agent or trustee for its
members."
The
Delhi High Court in the case of Carrasco Investments Ltd. v. Special Director,
Enforcement Directorate, [1994] 79 Comp Cas 631; [1992] 2 Comp LJ 339, on which
reliance has been placed by Mr. Vahanvati, learned counsel appearing for
defendants Nos. 3 to 6 and 12, considered a case wherein there was an agreement
for purchase by one foreign company of the shares of another foreign company to
indirectly acquire control of 38.7% of the share capital of an Indian company.
It was contended that this arrangement actually amounted to indirectly
purchasing the shares of the Indian company. It was held (at page 653 of Comp
Cas):
"We do not find
it permissible or even necessary to tear the corporate veil of the R.G. Shaw
companies to hold that in acquiring the shares of the R.G. Shaw companies,
Carrasco in fact acquired the shares of Shaw Wallace. We are supported in this
view by a decision of the Supreme Court in LIC v. Escorts Ltd. [1986] 59 Comp
Cas 548 ; AIR 1986 SC 1370."
The
doctrine of the lifting of a corporate veil cannot be applied to a plaintiff
who is not a shareholder of a company but claims that if the veil of the
corporate personality of the plaintiff is lifted, the real holder will emerge.
The corporate veil is lifted when in defence proceedings, such as for the
evasion of tax, an entity relies on its corporate personality as a shield to
cover its wrong doings. The submission made on behalf of the plaintiffs that
the corporate veil of the first plaintiff be lifted has no legal foundation and
cannot be accepted.
The
second plaintiff is a non-proprietary director of the seventh defendant and can
have no right beyond those conferred on him by statute, viz., the said Act. A
non-proprietary director cannot:—
(a) apply
for the winding up of the company under section 439 of the said Act;
(b) sue
for oppression, mismanagement under sections 397 and 398 of the said Act.
He
has no right to receive notice of annual general meetings unless he is a
member. He cannot form part of a quorum and he has no right to vote. He has no
right to apply to the Central Government for investigation of the affairs of
the company. He has no right to dividends declared. He acts as a delegate of
the board and not in his own rights. He is not entitled to inspection of
minutes book of a general meeting of the company. He is not an agent or a
trustee of the shareholders. A non-proprietary director has the following
rights under the said Act:
(a) to
be heard prior to his removal;
(b) to
receive notice of board meetings;
(c) to
be given notice of the resolution proposed to be passed by circulation; and
(d) to
inspect books of account.
A
non-proprietary director is entitled to sue the company only in certain cases.
In Pulbrook v. Richmond Consolidated Mining Co. [1878] 9 Ch 610, it was held
that where a director who is improperly and without cause excluded by his
brother directors from the board, he is entitled to an order restraining such
directors from so excluding him. The second plaintiff is not attempting to
enforce any of his individual statutory rights. Like any other employee of a
company a non-shareholder director owes duties to the company but has no right
to exercise any of the powers which a shareholder who is a proprietor of the
company can exercise. The case of Jackson v. Minster Bank Ltd, [1885] 15 LR Ir
356 relied upon by Mr. Chinoy is an Irish case. The case of Jackson (supra) and
also the case of Joint Stock Discount Co. v. Brown [1869] LR Eq. Cases 381 also
relied upon by Mr. Chinoy are contrary to settled Indian law and as such, have
neither persuasive nor binding effect. These cases even do not hold that a
non-shareholder director can maintain a derivative action on behalf of the
company. Even the articles of association of a company constitute contract
between the company and its members but do not confer any rights on a person
other than a member. The articles of association do not confer any rights on a
non-proprietary director of the company.
Mr.
Chinoy submitted that a declaratory decree in the suit can be passed without
the plaintiffs establishing a cause of action in the strict sense of the term.
In support of his submission, Mr. Chinoy has relied upon the case of Guaranty
Trust Company of New York v. Hannay and Co. [1915] 2 KB 536 as also on the case
of Vemareddi Ramaraghava Reddy v. Konduru Seshu Reddy, AIR 1967 SC 436 and on
the case of Supreme General Films Exchange Ltd. v. His Highness Maharaja Sir
Brijnaih Singhji Deo of Maihar, AIR 1975 SC 1810. These cases do lay down that
the declarations can be granted even though no consequential relief is capable
of being granted to the plaintiff. That does not mean that without any cause of
action, a plaintiff can file a suit to get a declaratory decree therein. In the
case of Guaranty Trust Co. of New York [1915] 2 KB 536, a declaration that a
particular tax was not leviable or illegal was held capable of being granted although
the plaintiff did not seek consequential reliefs therein. In the case of
Vemareddi Ramaraghava Reddy, AIR 1967 SC 436, a worshipper was allowed to sue
for a declaration that a compromise decree entered into on behalf of a deity
was void as not binding though he did not ask for the property transferred
thereunder to be transferred back to him as that right would only be with the
deity. In the case of Supreme General Films Exchange Ltd., AIR 1975 SC 1810,
the plaintiff had filed a suit claiming a declaration that a lease executed in
favour of the defendant therein in respect of a theatre by its former owners
was void and ineffective against the plaintiff's rights under decrees obtained
in other suits in execution whereof the said theatre was attached. The Supreme
Court on the facts held that the plaintiff possessed sufficient legal interest
in the theatre as a mortgagee as well as an assignee of a decree holder who had
got the property attached before he filed his suit, so as to enable him to sue
for the declarations he sought.
In
the facts, I hold that plaintiffs Nos. 1 and 2 have no right to the reliefs
claimed in the suit and their names are liable to be struck out from the cause
title even at this stage.
Order
VI, rule 16 of the Civil Procedure Code reads as under:
"Striking out
pleadings:
The court may at any
stage of the proceedings order to be struck out or amended any matter in any
pleading—
(a) which
may be unnecessary, scandalous, frivolous or vexatious, or
(b) which
may tend to prejudice, embarrass or delay the fair trial of the suit, or
(c) which
is otherwise an abuse of the process of the court."
Thus,
at any stage of the proceedings, the court has power to strike out any matter
in any pleading which in the opinion of the court is unnecessary, scandalous,
frivolous or vexatious or which tends to prejudice, embarrass or delay the fair
trial of the suit or which is otherwise an abuse of the process of the court.
A
suit is always based on a cause of action. "A cause of action" means
every fact, which, if traversed, it would be necessary for the plaintiff to
prove in order to support his right to a judgment of the court. In other words,
it is a bundle of facts which taken with the law applicable to them gives the
plaintiff a right to relief against the defendant. In the plaint, the
plaintiffs were required to state only such facts which constitute the
"cause of action" for the reliefs claimed therein. The plaintiffs
have claimed the relief of declaration that defendants Nos. 1 to 6 have vacated
their office as directors of the seventh defendant company since, according to
the plaintiffs, defendants Nos. 1 and 2 in violation of section 299 of the said
Act have not disclosed their interest or concern in the contracts or
arrangements between the seventh defendant company on the one hand and
defendants Nos. 9, 10 and 11 on the other hand and have also prayed for order
and injunction against defendants Nos. 1 to 6 to restrain them from acting as
directors of the seventh defendant company. Since, according to the plaintiffs,
defendants Nos. 1 to 6 and 12 have caused wrongful loss to the seventh
defendant and wrongful gains to themselves through the instrumentality of
defendants Nos. 9, 10 and 11, the plaintiffs have also sought the reliefs of
accounts and ascertainment of loss and/or damages caused and decree against
defendants Nos. 1 to 6 and 12 for payment thereof to the seventh defendant. The
plaintiffs have, however, made several statements in the plaint relating and/or
anywise pertaining to "shareholders agreement relating to ABI Holdings
Ltd., dated December 21, 1989" (for short, 'the shareholders agreement'),
and otherwise which do not anywise constitute cause of action in respect of the
reliefs claimed in the suit. As a matter of fact, a separate suit in respect
thereof has already been instituted abroad in a court of law which is pending.
The statements and averments made by the plaintiff as more particularly
mentioned in the schedule annexed to the chamber summons do not constitute
cause of action formulated in the plaint nor do the same support the cause of
action set out in the plaint filed nor would the same form part of evidence in
chief which the plaintiffs would be bound to lead for the purpose of obtaining
the reliefs asked for nor are the same necessary or relevant or germane to the
reliefs sought in the suit. Such statements and averments are irrelevant,
unnecessary, scandalous, frivolous and tend to prejudice or embarrass the
contesting defendants and as such are liable to be struck out from the plaint
at this stage under the provisions of Order VI, rule 16 of the Civil Procedure
Code.
In
the case of P.D. Shamdasani v. Central Bank of India Ltd. (No. 2), AIR 1944 Bom
197, Coyajee J. of our court formulated the following test for considering an application
of this kind, —
"(a) Whether the allegations made constitute the
cause of action formulated in the plaint?
(b) Whether
the allegations made support the cause of action in the pleading?
(c) Whether the allegation or the statement
could form part of the evidence-in-chief which the plaintiff would be bound to
lead for the purpose of obtaining the relief asked for?" (emphasis supplied)
In
the said case, it was held that the words complained of being both scandalous
and irrelevant the only order that could be passed would be of expunging such
pleadings. The said judgment has in terms been followed by Dhanuka J. in his
judgment delivered on 20th and 23rd April, 1992, in Arbitration Petition No.
210 of 1989 in Award No. 160 of 1989 in the matter of Oil and Natural Gas
Commission v. Offshore Enterprises Inc. In R.R. Tewari v. Vijaiyalaxmi, AIR
1986 All 325, it is held that Order VI, rule 16(b) of the Civil Procedure Code
permits striking out of pleadings which may, inter alia, embarrass the fair
trial of the suit. The said position is reiterated in the case of Dhartipakar
Madan Lal Agarwal v. Shri Rajiv Gandhi, AIR 1987 SC 1577. It is held that those
paras in the petition which do not disclose any cause of action, are liable to
be struck off under Order VI, rule 16 as the court is empowered at any stage of
the proceedings to strike out or delete a pleading which is unnecessary,
scandalous, frivolous or vexatious or which may tend to prejudice, embarrass or
delay the fair trial of the petition or suit. In Knowles v. Roberts [1888] 38
Ch 263, it was held that (at page 270):
"It seems to me
that the rule that the court is not to dictate to parties how they should frame
their case, is one that ought always to be preserved sacred but that rule is,
of course, subject to this modification and limitation, that the parties must
not offend against the rules of pleading which have been laid down by the law; and
if a party introduces a pleading which is unnecessary and it tends to
prejudice, embarrass and delay the trial of the action, it then becomes a
pleading which is beyond his right ... It becomes, therefore, the duty of the
judge who has to apply the rule (Order XIX, rule 27-Rules of Supreme Court,
1883), to apply his power in a fit case; and a fit case will be that which
fulfils the definition of the rule and in which there are no other
circumstances which make it inappropriate and inconvenient or unjust to apply
the power."
The
cases cited by the plaintiffs relate to Order VII, rule 11 of the Civil
Procedure Code where the entire plaint (and not part) is required to be
rejected as disclosing no cause of action. Order VII, rule 11 cannot,
therefore, be extrapolated to apply to Order I, rule 10 or Order VI, rule 16.
In the case of Millington v. Loring [1880] 6 QB 190, on the facts, it has been
held that the facts alleged in the plaint were "material facts" and
as such were properly pleadable. It has been further held that the statements
neither being scandalous nor tending to prejudice or embarrass the fair trial
of the action could not be struck out. The case of Dyson v. Attorney-General
[1911] 1 KB 410 also relied upon by Mr. Chinoy deals with striking out pleadings
as disclosing no cause of action. The provisions of the Rules of Supreme Court,
1883, mentioned in Dyson's case are equivalent to Order VII, rule 11 of the
Civil Procedure Code. It was in this context that the court had taken the view
that it could not dismiss an action because it thinks that the plaintiff would
not succeed and cannot be driven from the judgment seat in this manner. In the
instant case, no relief under Order VII, rule 11 of the Civil Procedure Code
has been claimed in the chamber summons and as such, the ratio laid down in
Dyson's case has no applicability. Reliance has also been placed by Mr. Chinoy
on the Division Bench judgment of this court in the case of Bomi Munchershaw
Mistri v. Kesharwani Co-operative Housing Society Ltd. [1988] 3 Bom CR 238
which also deals with a case where the entire plaint was sought to be struck
off. Although this prayer was brought under Order VI, rule 16 (because earlier
an identical application was brought under Order VII, rule 11 — which was
dismissed), the court said that it would not take the plaint off the record
unless the cause of action was incontestably bad. In this context Dyson's case
was cited. In the same context, Bomi, Mistri's case followed Williams and
Humbert Ltd. v. W. & H. Trade Marks (Jersey) Ltd. [1986] 1 All ER 129 (HL),
which squarely deals with RSC Ord. 18, r. 19 (English equivalent of Order VII,
rule 1 of the Civil Procedure Code) and, therefore, has no application. In the
case of Purshottam Vishindas Raheja v. Life Insurance Corporation of India, AIR
1982 Bom 523, on which reliance has also been placed by Mr. Chinoy, it has been
held that under Order VII, rule 11 of the Civil Procedure Code the entire
plaint has to be dismissed. It is not applicable to the facts of the instant case.
In Varajlal Bhaishanker v. Ramdat Harikrishna [1901] ILR 26 Bom 259, relied
upon by Mr. Chinoy, it was held that misjoinder of two different plaintiffs to
sue two different defendants for two different assaults was not permissible
since they had not the same cause of action. This also has no application to
the facts of the instant case. On behalf of the plaintiffs, reliance has also
been placed on the case of Manohar Lal v. Roshan Lal, AIR 1938 Lah 799, where
the court held that after the full trial a necessary party cannot be dismissed
as a plaintiff under Order I, rule 10 of the Civil Procedure Code but that his
claim should be dismissed. This case, on the contrary, supports defendants Nos.
1 and 2 as it shows that different considerations arise prior to the suit being
heard as against after the trial begins.
As
mentioned hereinabove, the plaint has been signed by the said Mr. R.A. Shah for
and on behalf of plaintiffs Nos. 1 and 2. The said Mr. R.A. Shah is a
practising solicitor of this court and is a partner in the firm of Crawford
Bayley and Co., solicitors and advocates for the plaintiffs. The plaint is
verified also by the said Mr. R.A. Shah in his capacity as constituted attorney
of plaintiffs Nos. 1 and 2. It may also be mentioned here that the vakalatnama
filed in the suit has been signed by the said R. A. Shah for and on behalf of
plaintiffs Nos. 1 and 2 and as aforesaid, the said vakalatnama has also been
accepted by the said Mr. R.A. Shah in his capacity as the partner in the said
firm of Crawford Bayley and Co. Although under the provisions of the Code of
Civil Procedure as applicable to this court, the solicitors and/or advocates
practising in this court can be appointed as power of attorney holders, yet the
question which arises for consideration is should an advocate or solicitor sign
the vakalatnama, plaint and verify the plaint for and on behalf of the same
plaintiffs for whom he also appears in the suit in which the plaint and the
vakalatnama are filed. Recently, this question has been extensively considered
by Dhanuka J. in his well considered judgment in the case of Oil and Natural
Gas Commission v. Offshore Enterprises Inc. delivered on 18th December, 1992
(Arbitration Petition No. 210 of 1989 in Award No. 66 of 1989). As held by
Dhanuka J., advocates in their personal capacity are enjoined to act with
complete impartiality and detachment and not entitled to identify themselves
with their clients or cause personally. The paramount duty of an advocate is to
assist the court in its task of administering justice. It is further held that
in the event of there being any conflict between interest and duty, the
advocate must yield in favour of his duty to assist the cause of fair and
impartial justice. On the other hand, a constituted attorney is entitled to
identify himself with the donor of the power of attorney and act in the same
manner as the suitor-litigant is entitled to act. Construing the provisions of
the Civil Procedure Code harmoniously and in a manner so as to prevent
confusion, anomaly and misunderstanding, Dhanuka J. has held that the law does
not permit the combination of the two capacities in the same cause. On the
contrary, the law prohibits such combination and rightly so. In my view, an
advocate cannot act in a dual capacity and cannot be a mixture of two
characters. Since the vakalatnama as also the plaint have been signed by the
said Mr. R.A. Shah for and on behalf of plaintiffs Nos. 1 and 2, in the facts
stated hereinabove, in my view, neither the vakalatnama nor the plaint filed in
the suit have been properly signed by plaintiffs Nos. 1 and 2.
In
the case of Raj Kumar Dhar v. Colonel A. Stuart Lewis, AIR 1958 Cal 104, it has
been held that verification of pleadings is an important matter which may have
serious consequences. The object of verification is to fix responsibility on
the party verifying and to prevent false pleadings being recklessly filed or
false allegations being recklessly made. It must have some sanctity and for
that purpose the rule makes provisions by insisting upon the competency of the
person verifying where he is somebody other than the actual party concerned by
requiring him to prove to the satisfaction of the court his acquaintance with
the facts of the case. This is all the more imperative where the competency of
the person verifying is challenged by the other side. It has further been held
that where the plaint contains serious allegations of fraud against the
defendants and the verification is sought to be made by an agent under a power
of attorney by merely putting on record the power of attorney, it is wholly
insufficient for the purpose, as the plaintiff's agent simpliciter holding an
authority to sign the verification under the power of attorney would be
incompetent to verify the plaint. It has further been held that in the
circumstances the plaintiff should be required to verify the plaint himself so
that he may accept full responsibility for it under the law. In the case of
Consolidated Foods Corporation v. Brandon and Co. Pvt. Ltd. [1960] 62 BLR 799,
the aforesaid position has been reiterated. In my view, the present
verification of the plaint is contrary to the provisions of Order 6, rule 15 of
the Code of Civil Procedure. However, it would be proper in the facts of the
case to give an opportunity to the plaintiffs to have the plaint verified in
accordance with law and in conformity with the provisions of Order 6, rule 15
of the Code of Civil Procedure if the plaintiffs so desire.
On
behalf of the plaintiffs, it is submitted that there has been delay on the part
of defendants Nos. 1 and 2 in taking out the present chamber summons, which
delay has been deliberately caused to avoid the hearing of the notice of motion
which the plaintiffs had taken out in the suit. It is also submitted that the
chamber summons is not maintainable and is liable to be dismissed. I find no
substance in either of the submissions made on behalf of the plaintiffs. As
aforesaid, the chamber summons of the nature taken out on behalf of defendants
Nos. 1 and 2 can in law be taken out at any stage of the proceedings of the
suit. Order 1, rule 10(2) and Order 6, rule 16 of the Code of Civil Procedure,
1908, enable defendants Nos. 1 and 2 to maintain the present chamber summons if
on the merits the case for the reliefs claimed therein is made out by
defendants Nos. 1 and 2. In the facts stated hereinabove there is no doubt that
defendants Nos. 1 and 2 have made out a case for maintaining the present
chamber summons.
Besides
the authorities referred to hereinabove, other authorities have also been cited
at the Bar by learned counsel appearing in the proceedings of this chamber
summons. Since the other authorities cited by learned counsel are not found to
be relevant for the proceedings of the present chamber summons, the same have
not been referred to by me in this order.
It
is not possible to part with this order without appreciating the efforts made
by all learned counsel appearing in placing in meticulous and forthright manner
relevant facts and law before the court for its consideration. The written
submissions submitted have also been of great assistance to the court.
In
the result, the chamber summons is made absolute in terms of prayers (a) and
(c). So far as prayer (b) is concerned, liberty is granted to the plaintiffs to
cure the defects by reverifying the plaint in accordance with the law and
provisions of Order 6, rule 15 of the Code of Civil Procedure, 1908, within a
period of two weeks failing which the prothonotary and senior master of this
court is directed to return the plaint to the learned advocates for the
plaintiffs as defective.
In
the circumstances of the case, there shall be no order as to costs of the
chamber summons.
Mr.
Diwan, learned counsel also appearing for the plaintiffs, applies for stay of
operation of this order for a period of two weeks. Since there is no merit in
the application, the same is rejected.
[1970] 40 COMP. CAS. 715 (SC)
v.
Coal Products (P.) Ltd.
J. M. SHELAT AND C. A. VAIDIALINGAM, JJ.
DECEMBER 20, 1968
K. L. Mehta and S. K. Mehta for the
appellant.
C. K.
Daphtary and A. K. Sen, B. K. Bachawar, G. L. Sanghi, O. C. Mathur and J. B.
Dadachanji for the respondent.
Vaidialingam,
J.—These appeals, by the defendant
in the suit concerned; arise by special leave, out of the orders passed by the
Division Bench of the Calcutta High Court dated March 1, 1968, and March 25,
1968, respectively. Civil Appeal No. 1412 of 1968 is directed against the order
of the Division Bench in Appeal No. 196 of 1967. Civil Appeal No. 1413 of 1968
is directed against the order of the said Division Bench refusing to grant a
certificate for leave to appeal to this court against the decision in Appeal
No. 196 of 1967. The High Court refused to grant the certificate on the ground
that the order dated March 1, 1968, in Appeal No. 196 of 1967 is not a final
order and hence the party is not entitled to the grant of a certificate.
The short
facts leading up to Civil Appeal No. 1412 of 1968 may be stated. The
respondent-company was incorporated in or about August 25, 1945, under the
Indian Companies Act, 191.3. The registered office of the company is at Victory
Colliery, in
The learned
judge had directed by that order that "the account in the Bank of India
shall be operated by Kishorilal Goenka and Nav Rattan Goenka as it is being
done now; the account in the United Commercial Bank Ltd. shall be operated by
Ram Autar Jalan in the same manner as it is now being done". Ram Autar
Jalan, mentioned in this order, it may be stated, is the appellant before us.
The respondent, on coming to know that the appellant was acting as a director
of the company, asked for information, on or about June 28, 1966, from the
United Commercial Bank as to how Ram Autar Jalan was operating the bank account
on behalf of the company. The bank, by its letter dated September 12, 1966,
ultimately furnished to the respondent a copy of an extract of the resolution
of the company dated August 31, 1964, which had been furnished to them and on
the basis of which Ram Autar Jalan was operating the bank accounts.
The
respondent herein instituted, on the Original side of the High Court of
Calcutta, on September 12, 1966, Suit No. 1871 of 1966. The defendant to the
action is Ram Autar Jalan, the appellant before us. The respondent-company,
after setting out the particulars about the incorporation of the company, its
authorised capital, etc., referred to certified copies of the returns filed by
the company with the Registrar of Joint Stock Companies, West Bengal, from
which the names of the shareholders and the names and particulars of the
directors of the company will appear. According to the plaintiff, since the
last return filed by it before the Registrar of Joint Stock Companies, there
has been no change in the board of directors which comprised of Kishorilal
Goenka, Paramcshwari Debi Goenka, Nav Rattan Goenka, Bhagwati Debi and Sunil
Kumar Ganguli. The plaintiff further stated that the defendant, Rani Autar
Jalan, was wrongfully claiming to be a director of the company and was
professing to act as such since August 31, 1964. The plaintiff further averred
that the defendant was neither appointed as a director in any meeting of the
company, nor co-opted as a director of the company and the claim of the
defendant came to be known by the plaintiff only in or about August-September,
1966. It was further stated by the plaintiff that article 104 of the articles
of association of the company deals with the qualifications of a director. It
is the plaintiff's case that the defendant did not hold, on August 31, 1964,
any shares in the company, nor has the defendant obtained any shares till the
date of the suit. Therefore, it was averred that even if the defendant had been
appointed as a director on August 31, 1964, as claimed by him, inasmuch as he
had not acquired the qualification shares within two months, the defendant
should be treated as having vacated the office of a director. The plaintiff
further alleged that the defendant had been wrongfully and without any
authority purporting to act as the director of the company and had been
wrongfully dealing with the funds and interfering with the management of the
plaintiff by opening bank accounts in the name of the company and operating the
same, which acts, according to the plaintiff, were detrimental and prejudicial
to the interests of the plaintiff. The plaintiff ultimately sought in the suit
reliefs by way of perpetual injunction against the defendant restraining him
from acting as director and from operating bank accounts or dealing with the
funds of the company or using the seal or otherwise interfering with the
management of the plaintiff-company.
On the same
day, the plaintiff filed an application in the suit asking for an injunction
restraining the appellant from, in any manner, operating the current account in
the name of Coal Products Private Ltd. in the United Commercial Bank Ltd.,
Burrabazaar Branch, Calcutta, and also for an injunction restraining him from
acting as a director and dealing with the funds of, or using the seal or
otherwise interfering in the management of the company, till the disposal of
the suit and also for other reliefs. It may be stated here that the plaintiff
was the company, Coal Products (P) Ltd., and the plaint was verified by Basudev
Jhajharia, the manager and as such the principal officer of the company.
The defendant
opposed the application for injunction on various grounds by his
counter-affidavit dated July 19, 1966. The grounds of opposition were as
follows : Basudev Jhajharia is not the manager nor the principal officer of the
company and, as such, he is not entitled to institute the suit. Only directors
have power under article 131(9) of the articles of association to institute
legal proceedings on behalf of the company and the directors have no power to
delegate their authority. The directors of the company are Kishorilal Goenka,
Parameshwari Debi Goenka, Bhagwati Debi Goenka and Ram Autar Jalan (defendant).
The defendant held 1,000 shares at the material time. In or about 1963,
Kishorilal Goenka arbitrarily divided the collieries of the company into two
groups, viz., the G. L. Group and the M. J. Group. The management of the M. J.
Group was directly controlled by Kishorilal and the G. L. Group was being
controlled by the defendant under the instructions of Kishorilal. Kishorilal
Goenka, in order to facilitate the grouping of the collieries, suggested that
the defendant should be a director of the company and that 1,000 shares out of
the shares held by the defendant's sister, Bhagwati Debi, were to be
transferred in the name of the defendant. Accordingly, 1,000 fully paid up
shares of Rs. 10 each, bearing numbers 48001 to 49000, covered by Certificate
No. 5, were transferred by Bhagwati Debi to the defendant on October 30, 1963.
At the board meeting held on August 31, 1964, Bhagwati Debi transferred the
said shares in the name of the defendant by a deed of transfer dated October
30, 1963. Certificate No. 5, together with the deed of transfer duly executed
in favour of the defendant by Bhagwati Debi and signed by him were lodged by
the defendant with the plaintiff company for necessary transfer being effected
in his name. Kishorilal Goenka, the managing director, informed the defendant
that the transfer of the shares in his name had been effected in the books of
the company and that the share certificate would be forwarded in due course ;
but the defendant had not received from the company the said certificate in
spite of the promise mad^. by the managing director. The defendant has been and
continues to be a shareholder of the company, holding 1,000 fully paid up
shares since October 30, 1963. Prior to August 31, 1964, one Sunil Kumar
Ganguli was a director of the company holding 500 equity shares of Rs. 10 each.
Sunil Kumar Ganguli, to the knowledge of Kishorilal, transferred, by a deed
dated August 31, 1964, his shares in favour of Bhagwati Debi Goenka and upon
such transfer he ceased to be a member and, consequently, a director of the
company. At the meeting of the board held on August 31, 1964, the defendant was
appointed a director in place of the said Sunil Kumar Ganguli and since that
date he has been a director and acting as such, to the knowledge of Kishorilal.
On August 31, 1964, another resolution was passed authorising the opening of
the current account in the United Commercial Bank Ltd., empowering the
defendant and Bhagwati Debi to operate the said account, singly and severally.
On September 2, 1964, the Chief Inspector of Mines, Dhanbad, was informed about
the defendant having been appointed as a director in the place of Sunil Kumar
Ganguli on August 31, 1964. The nominated owner, under section 76 of the Mines
Act, for G. L. group was also intimated to be the defendant. On September 12,
1964, the Registrar of Joint Stock Companies, West Bengal, was intimated about
the appointment of the defendant as director on August 31, 1964. The United
Commercial Bank Ltd. was furnished, on September 28, 1964, with a certified
copy of the resolution dated August 31, 1964, appointing the defendant as a
director of the company and also authorising the opening of an account in the
said bank in the name of the company and further authorising the defendant and
Bhagwati Debi, directors of the company, to operate the said account, singly
and severally. On September 29, 1954, a lease deed was executed by the
defendant, as director on behalf of the company in favour of the Coal Mines
Labour Housing Board. A further communication was sent on December 19, 1964, by
the defendant, as a director of the company, to the Chief Inspector of Mines,
in respect of which certain information was asked for from the M.J. group
colliery, which was under the control of Kishorilal. The sending of the said
communication, by the Chief Inspector of Mines, to the M.J. group credits
Kishorilal with knowledge of the defendant functioning as a director of the
company. The defendant being a shareholder and a lawfully elected director of
the company, cannot be restrained by any injunction, as asked for by the
plaintiff.
From the
stand taken by the defendant it is clear that he (i) claims to have 1,000
shares transferred by Bhagwati Debi in his favour by a transfer deed on October
30, 1963, and that he lodged the same with the company for effecting the
necessary changes in its registers; (ii) that Sunil Kumar Ganguli, who was a
shareholder and director till August 31, 1964, transferred on that date his
entire holding of 500 shares in favour of the defendant's sister, Bhagwati
Debi, and, as such, S.K. Ganguli ceased to be a director; (iii) that at the
board meeting held on August 31, 1964, the defendant was appointed as director
in the place of Ganguli; and (iv) that the various communications referred to
by him will establish that he has been acting as a director from August 31,
1964.
From the
facts stated above it is evident that the question that arose for consideration
before the learned trial judge was whether the plaintiff, to entitle it to get
an order of interim injunction, has prima facie established that the defendant
did not have the necessary share qualification on August 31, 1964, to make him
eligible for directorship and that the defendant, in law, had no right to
function as a director. A consideration of this question will also involve the
subsidiary aspect, namely, whether Sunil Kumar Ganguli ceased to be a director
on August 31, 1964, because it is the claim of the defendant that it was in the
place of Sunil Kumar Ganguli that he was elected as a director.
Before we
refer to the orders of the learned trial judge and the Division Bench on
appeal, it is necessary to note that the parties appear to have fallen apart
and are fighting several litigations. On June 20, 1966, Hari-shankar Goenka,
son of Bhagwati Debi, filed Company Petition No. 147 of 1966 for winding up the
plaintiff-company. Harishankar filed Company Application No. 164 of 1966 for
the appointment of a provisional liquidator and for other reliefs, in the said
company petition. On June 20, 1966, the company judge had appointed the
official liquidator as the special officer of the company. On June 27, 1966, the
company judge gave certain further directions in which it is stated " that
the account in the Bank of India shall be operated by Kishorilal and Nav Rattan
Goenka as it is being done now ; the account in the United Commercial Bank
shall be operated by Ram Autar Jalan in the same manner as it is now being done
".
The said
Harishankar Goenka has instituted Suit No. 1272 of 1966 in the Calcutta High
Court challenging the issue of new shares by Kishorilal in his name and in the
names of his wife and son, Nav Rattan Goenka. He has also obtained an order of
injunction of June 27, 1966, restraining Kishorilal, Parameshwari Debi and Nav
Rattan Goenka from exercising any rights or powers in respect of the new shares
so issued.
On September
10, 1966, the appellant before us instituted in the City Civil Court, Calcutta,
Title Suit No. 573 of 1966 for an injunction restraining the company and its
directors, including Kishorilal, from conducting the board meeting scheduled to
take place on September 12, 1966. His claim was that, though he was a director
of the company, no notice had been given of the board meeting for September 12,
1966, and he came to know about the meeting from his sister, Bhagwati
Debi, who received a notice on September 9, 1966.
The fourth suit is the present suit, filed by the
company on September 12, 1966.
On November 21, 1966, the present appellant
instituted Suit No. 2304 of 1966 in the Calcutta High Court against the
company, Kishorilal and Bhagwati Debi for a declaration that he is the holder of
a thousand ordinary (equity) shares of the company, represented by Certificate
No. 5 relating to share numbers 48001 to 49000 and that he is a director of the
company since August 31, 1964. In the suit he further asked for rectification
of the share register of the company by including his name as a shareholder of
the company. He further claims an injunction restraining the company and
Kishorilal from interfering with his right to act as a director and shareholder
of the company and also asks for damages.
Another suit has also' been brought to our notice,
and that is Suit No. 2103 of 1968 filed by Bhagwati Debi in the High Court,
against the company and its directors. She also appears to have obtained some
interim orders on August 14, 1968.
In support of their claim for injunction, the
plaintiff produced before the learned trial judge the registers of the company
to establish that the defendant was not a shareholder and that he has never
been appointed a director. They also produced materials to show that Sunil
Kumar Ganguli who, according to the defendant, had ceased to be a director with
effect from August 31, 1964, continued to be a director of the company. The
minutes of the board meeting dated October 30, 1963, produced by the plaintiff
showed that the said meeting was attended by Kishorilal Goenka, Bhagwati Debi
and Parameshwari Debi. At that meeting in the place of one Hari Shankar
Mahesheka, the board co-opted Sunil Kumar Ganguli as a director of the company
and he was authorised to operate the bank account with the Bank of India Ltd.
At the board meeting on August 31, 1964, the directors who were present were
Kishorilal Goenka, Bhagwati Debi, Parameshwari Debi and Sunil Kumar Ganguli.
The board, by resolution of that date, authorised the opening of a bank account
with the United Commercial Bank Ltd., Burrahbazaar Branch, Calcutta, and
authorised Bhagwati Debi, director, to operate the account singly. The
plaintiff also produced copy of the letter addressed by it on June 28, 1966, to
the United Commercial Bank asking for information as to how a bank account was
opened in the name of the company and how it was being operated by the
defendant. Though the bank appears to have declined to give this information,
later on, by its letter dated September 12, 1966, the bank furnished the
plaintiff with a copy of the resolution which had been furnished to it at the
time of opening of the account. That copy of the resolution appears to have
been certified by the defendant. It is
on the basis of all these materials that the plaintiff urged that the defendant
is not a shareholder, that he has not been appointed a director and that he has
no right to act as such.
The learned
trial judge was not prepared, at this stage, to accept the contention of the defendant
regarding the competency of the suit, as that question will have to be decided
at the trial. In this connection, the learned judge adverted to the fact that
no application had been filed by the defendant to strike out the suit on the
ground that the suit, as instituted, was not competent. Regarding the
contention of the plaintiff that the defendant had not acquired and did not
possess the necessary share qualification, the learned judge disposed of it by
stating that it was a question of fact. The learned judge referred to the
allegations made by the defendant charging Kishorilal with various fraudulent
acts, including tampering with the books of the company. While accepting the
fact that the register of shareholders of the company, produced by the
plaintiff, is undoubtedly prima facie evidence of matters directed or
authorised to be stated therein under section 164 of the Companies Act, the
learned judge stated that he did not consider it proper to rely entirely on
that prima facie evidence in this case and to act on the same. The learned
judge then proceeded to consider the de facto claim made by the defendant of
having acted as a director from 1964 and held that it was very improbable that
Kishorilal would not have known about this till 1966, as claimed by him.
The learned
judge then refers to the order of Mitra J. passed on June 27, 1966, in the
company petition, authorising the defendant to operate the account in the
United Commercial Bank and takes the view that if an order is passed restraining
the defendant from functioning as a director, such an order will come into
conflict with the order of Mitra J. dated June 27, 1966. The learned judge
further proceeds to state that as the defendant has been functioning as a
director from August 31, 1964, the balance of convenience is for permitting him
to continue as such.
The learned
judge, so far as we can see, has neither adverted to nor considered the
question as to whether the plaintiff has prima facie established that in law
the defendant was not entitled to function as a director for the reasons stated
by them. It is more or less on the reasoning set out above that the learned
trial judge dismissed the application filed by the plaintiff.
On appeal,
the Division Bench has not agreed with the decision of the learned trial judge.
. The learned judges refer to the order of Mitra J. dated June 27, 1966, and
advert to the fact that because of this order the plaintiff has confined the
relief of injunction only to restraining the defendant from acting as a
director. The learned judges consider the claim made by the defendant about his
having become a shareholder and appointed as a director and also the case of
the plaintiff that such a claim cannot be recognised in view of the articles of
association and the registers of the company produced by it.
The learned
judges are of the view that as the plaintiff has impeached the appointment and
authority of the defendant, the plaintiff will have to make out prima facie
that those allegations are justified, so as to entitle them to get an order of
injunction. The learned judges, after a fairly elaborate consideration of the
relevant articles of association and the provisions of the Companies Act, and
the documents produced by the company are satisfied that the plaintiff has made
out a case that the defendant is not a shareholder of the company and that he
has not been appointed as director. In support of this conclusion the learned
judges rely upon the minutes, dated August 31, 1964, produced by the company wherein
there is no resolution appointing the defendant as a director. The learned
judges also accept the case of the plaintiff that Ganguli continued to be a
director of the company even as late as June 30, 1965. For this purpose the
learned judges rely on the returns filed by the plaintiff before the Registrar
of Joint Stock Companies on June 30, 1965. The learned judges also refer to the
return, dated April 4, 1966 regarding the appointment of Nav Rattan Goenka as a
director on December 28, 1965, and this return was signed by Sunil Kumar
Ganguli, as a director. Therefore, the learned judges reject the claim of the
defendant that Sunil Kumar Ganguli ceased to be a director with effect from
August 31, 1964, and that he has been appointed as director in the place of
Sunil Kumar Ganguli. The learned judges are also of the view that there is no
delay in the institution of the suit as the plaintiff knew about the defendant
claiming rights as a director only as per the letter dated September 12, 1966,
of the United Commercial Bank.
The letter
dated December 19, 1964, to the Chief Inspector of Mines, sent by the defendant
and which, according to him, had been sent to Kishorilal Goenka has been
adverted to by the learned judges and they are of the view that the copy of the
letter sent by the Chief Inspector to Kishorilal does not refer to the
defendant as a director of the company. The learned judges also refer to the
fact that Bhagwati Debi has not filed any supporting affidavit to establish
about the resolution of August 31, 1961, regarding the appointment of the
defendant as a director. They also refer to the fact that the defendant himself
has not given any particulars as to how exactly he lodged the transfer deed
stated to have been executed in his favour by Bhagwati Debi in October, 1963.
The learned judges are also of the view that if the defendant had really got a
transfer of shares, as claimed by him, on October 30, 1963, he would have taken
early steps to have the necessary changes effected in the books of the company
and he would not have waited, as he has done, till November, 1966, for
obtaining relief for rectification of the share register. Having due regard
to the order of Mitra J., dated June 27, 1966, the learned judges have granted
an order of interim injunction in terms of prayer (g) with the modification
that the defendant will be at liberty to operate the banking accounts in terms
of the order dated June 27, 1966. The learned judges have also made it clear
that the order of injunction will not prevent the defendant from acting as
agent or authorised attorney of Bhagwati Debi if she wants to appoint the
defendant as agent or authorised attorney on her behalf. That is, the defendant
has been restrained from functioning as a director of the company.
Mr. Sarjoo Prasad, learned counsel for the
defendant-appellant, urged that the appellate court was not justified in
reversing the order of the learned trial judge. Counsel urged that instead of
considering whether the plaintiff had made out a prima facie case for the grant
of an interim injunction, the entire burden had been cast on the defendant. The
learned counsel also commented upon the fact that Kishorilal or any other
director of the company had not come forward to controvert the allegations made
by the defendant. He also urged that from 1964 the appellant had been
functioning as a director as the various communications relied on by him would
clearly show. These aspects have not been properly dealt with by the appellate
court.
Mr. Daphtary, learned counsel appearing for the
company, has drawn our attention to the fact that the appellate court has made
a very correct approach in considering whether the plaintiff has made out a
prima facie case for the grant of injunction and it is from that point of view
that the various items of materials placed before the court, by both parties,
have been considered and a conclusion arrived at that the defendant must be
restrained from functioning as a director.
We are not inclined to accept the contentions of Mr.
Sarjoo Prasad. The learned trial judge has not directly considered the
question, having due regard to the share registers and other documents produced
by the company, whether the plaintiff cannot be considered to have prima facie
established that the defendant is not a shareholder of the company and that he
has not been validly appointed as a director of the company. When the whole
question was whether the defendant was in law entitled to function as a
director, the learned trial judge, instead of considering this important
aspect, has given more weight to the fact that the defendant has been de facto
functioning as a director. The learned trial judge was not also justified in
brushing aside the share registers and other minutes books produced by the
plaintiff to establish that the defendant was neither a shareholder nor had he
been appointed a director. We are not able to appreciate the reasoning of the
learned trial judge. The learned trial judge has been very much influenced by
the order of Mitra J., dated June 27, 1966, and, according to the learned judge, this order practically recognises the
defendant as a director. A close reading of the entire proceedings before the
company court, which have been placed before us, will show that the order of
Mitra J. has been passed without prejudice to the rights of the parties. In
fact even the plaintiff restricted the relief for injunction under clause (g)
to the defendant being not allowed to act as a director because of the fact
that he has been allowed to operate the bank account under the orders dated
June 27, 1966. When once from the records produced by the company it is evident
prima facie at this stage that the defendant is not shown as a shareholder and
that he has not been appointed a director, as claimed by him, and that Sunil
Kumar Ganguli did not cease to be a director from August 31, 1964, in our
opinion, the appellate court was perfectly justified in granting the injunction
restraining the defendant from functioning as a director. The appellate court
was also perfectly justified in drawing an adverse inference against the
defendant about his having become a shareholder, having due regard to the fact
that he had instituted a suit for rectification of the share register only as
late as November 21, 1966, though he claimed to have obtained a transfer of
shares as early as October 30, 1963. His plea that he delivered the transfer
deed to Kishorilal Goenka and that the latter assured him that the necessary
changes had been effected in the registers of the company, are all matters to
be investigated in the trial of the suit.
We are in
entire agreement with the conclusions arrived at, at this stage, by the
appellate Bench as we are satisfied that a correct approach has been made by it
for considering the matters arising at the interlocutory stage of the
proceedings. The result is Civil Appeal No. 1412 of 1968 fails, and is
dismissed with costs. As the merits have been gone into by us in Civil Appeal
No. 1412 of 1968, the other appeal, C.A. No. 1413 of 1968, becomes unnecessary
and that appeal is dismissed. We make it clear that we express no opinion on
the order of the High Court, dated March 25, 1968, out of which C.A. No. 1413
of 1968 arises. There will be no order as to costs in C.A. No. 1413 of 1968.
[1995] 83 COMP. CAS. 897 (MAD.)
V.
Manoj
Sonthalia
AR
LAKSHMANAN, J.
APRIL 13, 1993
JUDGMENT
AR. LAKSHMANAN, J. - Applications Nos. 841 and 5129 of 1992 were filed by the sixth defendant in the suit for the following reliefs:
Application No. 841 of 1992:
To pass an order of injunction restraining the plaintiff/respondent herein from exercising any powers or functions in excess of what has been conferred upon him by resolution dated September 5, 1992, by the board of directors of the third defendant company, pending disposal of the above suit.
Application No. 5129 of 1992:
To vacate the order dated October 1, 1992, passed by this court to the extent that in interim direction has been made to maintain the status quo as on October 1, 1992, so far as the office and powers of the plaintiff as the joint managing director of the third defendant is concerned.
The plaintiff in C.S. No. 1246 of 1992 is the only respondent in these two applications.
Application No. 5998 of 1992 was filed by the plaintiff for the following relief:
This court should be pleased to ensure that the applicant's powers as joint managing director of the third defendant company as on June 24, 1992, are maintained pending disposal of the above suit. The sixth defendant is the only respondent in that application.
The short facts are as follows:
The plaintiff has filed C.S. No. 1246 of 1992, against
the first defendant company (in short "NPBS"), four other newspaper
companies and six other persons. There are in all 14 defendants. This suit is
primarily concerned with the validity of a board meeting of the second
defendant, Indian Express (
The plaintiff has also filed C.S. No. 1247 of 1992 against NPBS and nine others. The defendants include Nusli Wadia, Venu Srinivasan and Mrs. Saroj Goenka and her three daughters. This suit challenges the transfer of shares in the aforesaid board meeting held on January 5, 1991, and also seeks for a declaration that 24.32 per cent. shares have been held in trust for the benefit of the plaintiff's brother.
Serious allegations have been made regarding the holding of the board meeting on January 5, 1991, and the extraordinary general meeting on January 23, 1991. According to the plaintiff, no notice has been given in respect of these meetings and the same were conducted clandestinely. The resolutions passed therein were filed before the Registrar of Companies through the office of Sundaram Clayton Ltd., of which the eighth defendant is the managing director. According to the plaintiff, this was done with the intention to suppress from the plaintiff and his mother the fact of the illegal share transfer. The are sons as to why the meetings and the resolutions passed are invalid have been set out in detail in the plaint. Therefore, I am not repeating the same here. Similarly, in the other suit (C.S. No. 1247 of 1992), it is stated that the shares were neither intended to be nor were transferred as there was no consideration for the same. According to the plaintiff, the shares were retained only in trust. The reasons as to why the share transfers are null and void have been set out in the plaint in that suit, with which we are not presently concerned.
Several applications were heard on September 30, 1992, and October 1, 1992, by my learned brother, J. Kanakaraj J. The learned judge passed an interim order directing the maintenance of status quo as on October 1, 1992. Another interim order was passed by my learned brother, Thanikkachalam J., on October 28, 1992, in O.A. Nos. 841 and 5129 of 1992 as under:
"After hearing learned counsel appearing on both sides, all the parties are directed to abide by the resolution dated June 24, 1992, September 5, 1992, and September 13, 1992, and maintain status quo as directed by this court on October 1, 1992. The respondent is permitted to file counters in these applications in two weeks.
Post these applications after two weeks."
O.A. Nos. 841 and 5129 of 1992 were filed by the sixth defendant for an interim injunction restraining the plaintiff from exercising any powers or functions in excess of what has been conferred upon him by resolution dated September 5, 1992, passed by the board of directors of the third defendant company or in the alternative to vacate the order passed by J. Kanakaraj J. on October 1, 1992, on the ground that the plaintiff had violated the undertaking given to the court. The two violations referred to were:
(i) the applicant/plaintiff accepted the resignation of Mr. A.C. Venkatakrishnan;
(ii) the applicant/plaintiff had declared bonus and ex gratia payment for the employees.
It was urged before my learned brother Thanikkachalam J. that the power of the plaintiff was restricted to recruitment, appointment, promoting or altering the terms and conditions of employees and hence, there was no bar on accepting the resignation and that the plaintiff had not acted in excess of his power. As far as payment of bonus is concerned, this was done under a wage settlement arrived at under section 18 of the Industrial Disputes Act and those persons drawing more than Rs. 2,500 were entitled to get ex gratia payment as Deepavali bonus. After hearing the arguments, Thanikkachalam J. directed that the parties should bide by board resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992, the status quo ordered by J. Kanakaraj J. was continued.
According to the plaintiff, the resolutions have to be read in the background of the board meeting held on September 26, 1990, wherein the late R.N. Goenka declared both his grandsons (the sixth defendant and the plaintiff) as his successors and emphasised the fact that both should work together as a team and with a sense of mission and that R.N. Goenka's desire was made binding by amending the articles of association of the first defendant company. In fact, even in the resolutions of April 7, 1991, referred to by the sixth defendant, the resolutions give equal powers for borrowing funds, etc., to both the plaintiff and the sixth defendant and that the full powers continued till June 24, 1992, when the directions of R.N. Goenka to work as a team was destroyed by the sixth defendant usurping complete control and powers and that by subsequent resolutions dated September 5, 1992, and September 13, 1992, substantial powers of management of the plaintiff as joint managing director were taken away making him a joint managing director only in name.
It is urged by the plaintiff that by three resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992, the powers of the plaintiff as joint managing director were systematically eliminated. It is further urged that the resolutions were not to be acted upon as, according to the plaintiff, the method of delegation of powers was to be discussed by the plaintiff and the sixth defendant. Although no such discussion took place, by a circular dated July 25, 1992, various centers of "Indian Express" were informed only of the resolution without mentioning the further discussions that had to take place.
As regards the resolutions dated September 5, 1992, the plaintiff submits that no such resolution was passed, which has been set out in paragraphs 2 and 3 of the counter. According to the plaintiff, this resolution has been subsequently fabricated.
As regards the circular resolution dated September 13, 1992, it is contended that within eight days of the board meeting, a circular resolution was passed taking away the powers of signing cheques. By this resolution, the plaintiff can sign cheques above Rs. 2 lakhs only jointly with some employees at Bombay, which, according to the plaintiff, is a deliberate act of humiliation. The plaintiff's counsel also submits that the correctness of the resolution is doubtful. It is further stated by the plaintiff that the above resolutions are also contrary to the provisions of the Companies Act, particularly section 291. Under the said section, the board can delegate powers subject to the provisions contained in the Act or in the memorandum, articles, etc. Section 2(26) defines a managing director as a director entrusted with substantial powers of management, the words "substantial powers of management" were substituted for "any power of management" by the Companies (Amendment) Act, 1960. Therefore, according to Mr. Arvind P. Datar, learned counsel for the plaintiff, the board of directors cannot pass resolutions taking away substantial powers of management of a managing director or a joint managing director. Such resolutions, which take away substantial powers, will be void, therefore, on joint reading of section 291 read with section 2(26) of the Companies Act, the resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992, will not be valid in so far as they take away the substantial powers of management. It is further argued that the plaintiff has furthers personal bank guarantees of Rs. 10 crores and accepted to sign further guarantees for Rs. 26 crores for Indian Express (Bombay) Limited and has also furnished personal guarantees in excess of Rs. 10 crores for the third defendant, of which he is the joint managing director.
It is, therefore, contended that the plaintiff's power is restored with substantial powers of management which he enjoyed before June 24, 1992, so that he may function as a joint managing director. He also submits that this court may impose any safeguards it deems fit while restoring the powers of the plaintiff.
The sixth defendant, who is the only contesting respondent in Application No. 5998 of 1992 submits that no case has been made out for the grant of relief and that the plaintiff is seeking orders for restoration of his alleged powers of management contrary to the valid resolutions of the board. According to the sixth defendant, he himself has individually held 50.40 per cent. shares since 1986 and 50.58 per cent. shares since December, 1989. They relied on the annual returns submitted by the company and signed by the parties. It is stated that the case of the plaintiff that 24.32 per cent. shares transferred by R.N. Goenka to the plaintiff and the sixth defendant in joint names (12.16 per cent. to the plaintiff and the sixth defendant and 12.16 per cent. to the sixth defendant and the plaintiff) were for the benefit of Anilkumar Sonthalia has only to be stated to be rejected as such, which according to the sixth defendant, is contrary to the express provisions of the Companies Act, particularly section 187C. It is to be noticed that the said Anilkumar Sonthalia is not a party to the present proceedings. The said Anilkumar has not even filed an affidavit in support of the contention of the plaintiff. The admitted facts are as set out in the pleadings. The sixth defendant is the admitted owner of 62.72 per cent. shares and the plaintiff has no shares. According to the plaintiff, at best he would be entitled to 37.12 per cent. shares of NPBS. On November 12, 1990, the plaintiff wrote a letter to the seventh defendant (Nusli Wadia). The seventh defendant forwarded the same vide his letter dated January 2, 1991. The copy of the said letter of the seventh defendant has also been marked to the sixth defendant and the plaintiff. The plaintiff does not deny or dispute that he had sent the letter dated November 12, 1990, and hence, according to the sixth defendant, the plaintiff cannot now make a grievance of the effect of his own voluntary acts.
In so far as the transfer effected on January 5, 1991, is concerned, according to the sixth defendant, the same is reflected in the annual return which is signed by C. Rajendra Kumar, company secretary, whose affidavit is relied on by the plaintiff. According to Mr. P. Chidambaram, learned senior counsel, the minutes of the board of directors meeting held on September 26, 1990, contain only a pious wish of R.N. Goenka. It is, according to learned senior counsel, not a resolution. The plaintiff in his capacity as a director alleges no knowledge of the board of meeting of January 5, 1991, which according to Mr. P. Chidambaram, learned senior advocate, is falsified by the minutes of the next board meeting of the first defendant company on April 7, 1991, presided over by the plaintiff. The seventh defendant was present at the meeting. The plaintiff did not ask the seventh defendant why and how he was present. Also leave of absence was given to defendants Nos. 8 and 9. The plaintiff has signed the minutes as chairman. Subsequently, the meetings of the board have been held on several dates in 1991 and 1992, which have been attended by defendants Nos. 7 and 8 and leave of absence has been given to the ninth defendant. The plaintiff at no time asked defendants Nos. 7 and 8 why and how they were present. It is stated that the plaintiff does not hold any shares in the first defendant company as on date. However, he continues as a director by virtue of invitation and courtesy and he can remain as a director only by the courtesy and invitation of the other directors and/or shareholders of the company.
According to the sixth defendant the documents filed in the proceedings conclusively establish as under:
(a) The plaintiff does not hold any shares today.
(b) The sixth defendant has always had since 1986 an absolute majority in the first defendant company in his awn name and right.
(c) The sixth defendant is the effective owner of 62.72 per cent. of shares of the first defendant company.
(d) The first and third defendant companies are board managed companies and the board of directors may exercise all the powers by virtue of section 291 of the Companies Act and the articles of association of the company.
(e) All powers exercised by the sixth defendant today as chairman, executive director and managing director were given to him by the board of directors.
(f) The fundamental principles of corporate democracy, which are at the very foundation of the company law, were recognised by this court earlier and between March, 1991, and September, 1992, the plaintiff and Mrs. Saroj Goenka sat on the board of directors of the first and third defendant and did not demur. In fact, the minutes show that the new directors appointed on January 5, 1991, were welcomed on the board.
(g) There is no allegation that the board of directors misconducted itself. It is only when the board dealt with the powers of the applicant that false allegations are levelled against the board.
These are the contentions of both parties. Let me now consider the submissions made by both parties at length.
The applicant in Application No. 5998 of 1992 is the plaintiff and the applicant in Applications Nos. 841 and 5129 of 1992 is the sixth defendant in the suit. The main prayer in the suit C.S. No. 1246 of 1992 is concerned with the validity of the meeting of the board of directors of the first defendant company held on January 5, 1991, and the board of directors' meeting of the second defendant company held on January 23, 1991, and certain other resolutions for appointing additional directors. The plaintiff had also filed C.S. No. 1247 of 1992 against the first defendant and six others challenging the transfer of shares in the meeting of the board of directors held on January 5, 1991, and for a declaration that 24.32 per cent. shares have been held in trust for the benefit of the plaintiff's brother Mr. Anil K. Sonthalia.
In order to appreciate the controversies between the parties and the contentions raised by Mr. Harish N. Salve, learned senior advocate and Mr. Arvind P. Datar for the plaintiff, Mr. P. Chidambaram, learned senior advocate for the sixth defendant, Mr. Navroz H. Seervai, learned senior advocate for the seventh defendant and Mr. Arun Jetley, learned senior advocate for defendants Nos. 1 to 3, it is necessary to refer to the following facts.
Admittedly, the late Mr. R.N. Goenka is the founder of the Indian Express group of companies, which is publishing "Indian Express" in English and other newspapers in Tamil, Telugu, Kannada, Marathi and Gujarathi from different cities. The first defendant was incorporated on August 10, 1970, and it is the parent (apex) company of the Indian Express group and controls defendants Nos. 2 to 5. The second defendant is the subsidiary company of the first defendant and the third defendant is the subsidiary of the second defendant. There is also no controversy that on December 24, 1976, the late R.N. Goenka transferred 76.56 per cent. of his shares in Nariman Point Building Services and Trading (P.) Ltd., Madras (in short "NPBS") to the sixth defendant and the plaintiff. 50.40 per cent. was given to the sixth defendant and 24.96 per cent. to the plaintiff and the balance of 24.32 per cent. was retained by late R.N. Goenka and the balance of 0.32 per cent. was held in equal shares by the daughters, i. ., Mrs. Krisha Khaitan, who expired during 1987, and Mrs. Radha Devi Sonthalia, the fourteenth defendant and the mother of the plaintiff.
On August 28, 1989, the late R.N. Goenka (hereinafter in short called "RNG") transferred 24.32 per cent. retained by him in favour of the plaintiff and the sixth defendant. The shares were transferred in two parts. In the first part, the sixth defendant is the first joint shareholder and in the second part, the plaintiff is the first joint shareholder. The plaintiff along with his letter dated November 12, 1990, addressed to the seventh defendant enclosed 6,240 equity shares of the first defendant, 3,040 equity shares of the first defendant standing in the joint names of the plaintiff and the sixth defendant, and 4,000 preference shares of the first defendant. It is mentioned in the said letter, the share certificates were enclosed to the seventh defendant as desired by the late R.N. Goenka on September 26, 1990, in the presence of the seventh defendant. It is also mentioned in the said letter that sending the share certificates as mentioned therein would restore the faith and trust that seemed to have been lost by the grandfather. Incidentally, it must be pointed out that this letter is found in the compilation of the plaintiff's additional documents at page 55. There is also no dispute or denial of execution of the said letter and in fact, the plaintiff would also place reliance on the said letter. It is thereafter, a meeting of the board of directors of the first defendant company was held on January 5, 1991, at Bombay. At the said meeting, defendants Nos. 7 to 9 were appointed as additional directors and they participated in the said meeting after their appointment. The late R.N. Goenka and the sixth defendant had participated. In the said meeting, certain shares were transferred in the name of R.N. Goenka, which were standing in the names of the plaintiff and the sixth defendant either individually or jointly. According to the plaintiff, the said meeting is invalid because he had no notice of the said meeting and, therefore, there was no occasion for grating leave of absence. It is relevant to notice that the whole case of the plaintiff rests on the validity or otherwise of the aforesaid meeting held on January 5, 1991.
It is rightly pointed out by Mr. P. Chidambaram that the controversy between the parties started only from January 5, 1991. There is also no controversy that the sixth defendant has been holding 50.40 per cent. shares of NPBS even in 1986 and 50.56 per cent. in September, 1989. It is also not in dispute that he became the first joint shareholder of 12.16 per cent. in 1989, and is entitled to exercise his rights as the first joint share holder in respect of the said 12.16 per cent. In fact, the plaintiff and the sixth defendant had also signed the annual return of NPBS made up to March 31, 1988, and December 27, 1989, evidencing the aforesaid shareholding. These annual returns are found in pages 1 to 16 of compilation 'B' furnished by the sixth defendant. The return as on November 30, 1991, has been sent to the Registrar of Companies on December 30, 1991, by one Rajendra Kumar, secretary of the company. In this return, the plaintiff has not signed but the sixth defendant and the company secretary had signed.
Next comes the meeting of the board of directors of NPBS held on April 7, 1991, and the plaintiff was elected as the chairman of the said meeting. It is interesting to find that defendants Nos. 6 and 7 participated in the said meeting and leave of absence was granted, inter alia, to defendants Nos. 8 and 9. It is also significant to notice that the plaintiff did not question as to how the seventh defendant was present and as to why leave of absence was given to defendants Nos. 8 and 9 (Mrs. Mulgakar and Mr. Venu Srinivasan). The plaintiff has signed the minutes of the meeting as is seen from pages 26 and 27 of the compilation 'B'. Admittedly, the meetings of the board of directors were held in 1991 and in 1992. These meetings have been attended by defendants Nos. 7 and 8 and leave of absence was given to the ninth defendant.
A meeting of the board of directors of the third defendant/Indian Express (Madurai) Ltd., was held on June 24, 1992, and the said meeting was attended by defendants Nos. 6, 7, 10 and 11 apart from the plaintiff. In the said meeting, the appointment of the sixth defendant as the managing editor at the meeting held on September 24, 1991, was reaffirmed and the sixth defendant was given certain powers and was put in charge of editorial staff to the exclusion of all others. Even prior to that, the sixth defendant was appointed as executive director at the meeting of the board held on November 1, 1989. The plaintiff was also present at the board meeting held on September 24, 1991, at which the sixth defendant was appointed as managing editor unanimously. This meeting was attended by the plaintiff and defendants Nos. 6 to 8. Mrs. Saroj Goenka, the daughter in-law of R.N. Goenka, was elected as chairperson of the said meeting.
On September 5, 1992, the board of directors of the third defendant company was held at Bombay. This meeting was attended by the plaintiff and defendants Nos. 6 to 8, 11 and 13. In the said meeting the sixth defendant was appointed as chairman of the board of directors. This resolution was carried by a majority and the plaintiff and Mrs. Saroj Goenka voted against the proposal. It was further resolved at the said meeting to delimit the powers of the plaintiff and Mrs. Saroj Goenka. By the subsequent circular resolutions dated September 13, 1992, the financial powers of the sixth defendant, the plaintiff and Saroj Goenka were delimited.
The following facts will emerge from what is stated above:
(a) Defendants Nos. 1 and 3 are board-managed companies and the board of directors are entitled to exercise all the powers by virtue of section 291 of the Companies Act and the articles of association of the company.
(b) The sixth defendant has been indisputably holding majority shares in the first defendant company even ignoring the disputed share transfers.
(c) The plaintiff does not hold any share in the first defendant company.
(d) The plaintiff h s been accepting the appointment of defendants Nos. 7 to 9 as directors in the first defendant company by his own conduct by participations in several meetings of the board of directors along with the said defendants.
(e) The sixth defendant was appointed as executive director on November 1, 1989, during the lifetime of the late R.N. Goenka and as managing editor unanimously at the meeting held on September 24, 1991, which was reaffirmed on June 24, 1992, after the demise of R.N. Goenka.
(f) The sixth defendant was appointed as chairman at the meeting held on September 5, 1992, by majority.
(g) The powers and functions are spelt out by the board if directors at the meetings held on June 24, 1992, and September 5, 1992, and subsequently by the circular resolution dated September 13, 1992.
It is the duty of this court to recognise the corporate democracy of a company in managing its affairs. It is not for this court to restrict the powers of the board of directors. The board of directors in various resolutions have appointed the sixth defendant as executive director, managing editor and chairman. It will not be open to this court to interdict the functions of the board-managed company. As rightly contended by Mr. P. Chidambaram, learned senior advocate, it will not be open to this court to interfere with the day-to-day functions, management and administration of a company unless it is established that the decisions taken by the board are ultra vires the Act or the articles of association of the company. At this interlocutory stage this court is concerned only with the prima facie case and balance of convenience as disclosed by the documents produced by both parties. It is for the plaintiff to let in oral evidence at the time of trial and establish his case.
Mr. Harish N. Salve and followed by Mr. Arvind P. Datar would submit by referring to articles of association 2A, 18A, 34A, 35A, 36 and 43A of the company and submit that both the plaintiff and the sixth defendant were declared as successors of R.N. Goenka and they were directed to work as a team with a sense of mission. It was further contended that the share certificates with blank transfer forms were sent on November 12, 1990, with a view to enable R.N. Goenka to retain the shares in trust and that no transfer to R.N. Goenka was ever intended. Regarding the board meeting held on January 5, 1991, it was submitted that no notice, which is mandatory under section 286 of the Companies Act, was given to the plaintiff and the fourteenth defendant. On the very same ground, the extraordinary general meeting and the board meeting held on January 23, 1991, is also sought to be assailed, He also invited my attention to pages 331, 346, 442 and 446 of compilation 'A' in C.S. No. 1246 of 1992 filed by the plaintiff.
According to Mr. Arvind P. Datar, the plaintiff was not informed about the appointment of additional directors or about the transfer of shares. Learned counsel for the plaintiff raised an impassioned plea that the plaintiff has given a personal guarantee on behalf of the company to the tune of several crores of rupees and that he has been stripped of his powers as joint managing director in stages and that he has been subjected to humiliation. All these events, according to learned counsel, are against the theme of the late Goenka that the plaintiff and the sixth defendant, who are his grandsons, should "work as a team". Therefore, it is contended that the plaintiff should be given powers befitting his status as joint managing director.
I have given my anxious consideration to the above contention. I am unable to countenance any one of them. No doubt, it would not have been the intention of the late Ramnath Goenka to make the plaintiff a nonentity or a zero in relation to the affairs of the company. It is not for the court to dictate to the board as to how it should function. When the matter comes before the court, the court is not concerned with inter se relationship of the parties. But, it has to keep in mind the corporate democratic principles, this court strongly feels that both the sixth defendant and the plaintiff should sink their differences and disputes and work unitedly to preserve and further develop the empire built by the late Ramnath Goenka.
Mr. Navroz H. Seervai for the seventh defendant and Mr. Arun Jetly for defendants Nos. 1 to 3 adopted the arguments of the learned senior advocate, Mr. P. Chidambaram. Mr. Arun Jetly, learned senior counsel, invited my attention to section 187(c) of the Companies Act and submitted that the case of the plaintiff that 24.32 per cent. shares were held for the benefit of Anil Kumar Sonthalia cannot be accepted in view of section 187(c) of the Act. However, this is matter which has to be decided in the application filed in C.S. No. 1247 of 1992.
If the grievance of the plaintiff is that this is a case of oppression of the minority by the majority, then, it is for him to move the appropriate forum constituted under the Companies Act.
Mr. P. Chidambaram, learned senior counsel, raised a preliminary objection with regard to the right of the plaintiff being heard in Application No. 5998 of 1992. According to him, the plaintiff has disobeyed the directions contained in the order dated October 1, 1992, of my learned brother, J. Kanakaraj J. and of my learned brother, K.A. Thanikkachalam J., dated October 28, 1992, and, therefore, the plaintiff is not entitled to the equitable relief. Since I have dealt with and decided the applications on the merits, there is no need to go into this argument of learned senior counsel, Mr. P. Chidambaram.
For the foregoing reasons, Application No. 5998 of 1992 is dismissed, and in view of the earlier order passed in Applications Nos. 841 of 1992 and 5129 of 1992, no further orders are necessary to be passed except to state that the plaintiff will exercise his powers or functions in accordance with the resolutions dated September 5, 1992, passed by the board of directors of the third defendant company. The order dated October 1, 1992, of J. Kanakaraj J. is only an interim order and the same is subject to this order and for the reasons stated herein. Hence, Application No. 841 of 1992 is ordered and no further directions are necessary in Application No. 5129 of 1992.
[1995] 83 COMP. CAS. 897 (MAD.)
V.
Manoj
Sonthalia
AR
LAKSHMANAN, J.
APRIL 13, 1993
JUDGMENT
AR. LAKSHMANAN, J. - Applications Nos. 841 and 5129 of 1992 were filed by the sixth defendant in the suit for the following reliefs:
Application No. 841 of 1992:
To pass an order of injunction restraining the plaintiff/respondent herein from exercising any powers or functions in excess of what has been conferred upon him by resolution dated September 5, 1992, by the board of directors of the third defendant company, pending disposal of the above suit.
Application No. 5129 of 1992:
To vacate the order dated October 1, 1992, passed by this court to the extent that in interim direction has been made to maintain the status quo as on October 1, 1992, so far as the office and powers of the plaintiff as the joint managing director of the third defendant is concerned.
The plaintiff in C.S. No. 1246 of 1992 is the only respondent in these two applications.
Application No. 5998 of 1992 was filed by the plaintiff for the following relief:
This court should be pleased to ensure that the applicant's powers as joint managing director of the third defendant company as on June 24, 1992, are maintained pending disposal of the above suit. The sixth defendant is the only respondent in that application.
The short facts are as follows:
The plaintiff has filed C.S. No. 1246 of 1992, against
the first defendant company (in short "NPBS"), four other newspaper
companies and six other persons. There are in all 14 defendants. This suit is
primarily concerned with the validity of a board meeting of the second
defendant, Indian Express (
The plaintiff has also filed C.S. No. 1247 of 1992 against NPBS and nine others. The defendants include Nusli Wadia, Venu Srinivasan and Mrs. Saroj Goenka and her three daughters. This suit challenges the transfer of shares in the aforesaid board meeting held on January 5, 1991, and also seeks for a declaration that 24.32 per cent. shares have been held in trust for the benefit of the plaintiff's brother.
Serious allegations have been made regarding the holding of the board meeting on January 5, 1991, and the extraordinary general meeting on January 23, 1991. According to the plaintiff, no notice has been given in respect of these meetings and the same were conducted clandestinely. The resolutions passed therein were filed before the Registrar of Companies through the office of Sundaram Clayton Ltd., of which the eighth defendant is the managing director. According to the plaintiff, this was done with the intention to suppress from the plaintiff and his mother the fact of the illegal share transfer. The are sons as to why the meetings and the resolutions passed are invalid have been set out in detail in the plaint. Therefore, I am not repeating the same here. Similarly, in the other suit (C.S. No. 1247 of 1992), it is stated that the shares were neither intended to be nor were transferred as there was no consideration for the same. According to the plaintiff, the shares were retained only in trust. The reasons as to why the share transfers are null and void have been set out in the plaint in that suit, with which we are not presently concerned.
Several applications were heard on September 30, 1992, and October 1, 1992, by my learned brother, J. Kanakaraj J. The learned judge passed an interim order directing the maintenance of status quo as on October 1, 1992. Another interim order was passed by my learned brother, Thanikkachalam J., on October 28, 1992, in O.A. Nos. 841 and 5129 of 1992 as under:
"After hearing learned counsel appearing on both sides, all the parties are directed to abide by the resolution dated June 24, 1992, September 5, 1992, and September 13, 1992, and maintain status quo as directed by this court on October 1, 1992. The respondent is permitted to file counters in these applications in two weeks.
Post these applications after two weeks."
O.A. Nos. 841 and 5129 of 1992 were filed by the sixth defendant for an interim injunction restraining the plaintiff from exercising any powers or functions in excess of what has been conferred upon him by resolution dated September 5, 1992, passed by the board of directors of the third defendant company or in the alternative to vacate the order passed by J. Kanakaraj J. on October 1, 1992, on the ground that the plaintiff had violated the undertaking given to the court. The two violations referred to were:
(i) the applicant/plaintiff accepted the resignation of Mr. A.C. Venkatakrishnan;
(ii) the applicant/plaintiff had declared bonus and ex gratia payment for the employees.
It was urged before my learned brother Thanikkachalam J. that the power of the plaintiff was restricted to recruitment, appointment, promoting or altering the terms and conditions of employees and hence, there was no bar on accepting the resignation and that the plaintiff had not acted in excess of his power. As far as payment of bonus is concerned, this was done under a wage settlement arrived at under section 18 of the Industrial Disputes Act and those persons drawing more than Rs. 2,500 were entitled to get ex gratia payment as Deepavali bonus. After hearing the arguments, Thanikkachalam J. directed that the parties should bide by board resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992, the status quo ordered by J. Kanakaraj J. was continued.
According to the plaintiff, the resolutions have to be read in the background of the board meeting held on September 26, 1990, wherein the late R.N. Goenka declared both his grandsons (the sixth defendant and the plaintiff) as his successors and emphasised the fact that both should work together as a team and with a sense of mission and that R.N. Goenka's desire was made binding by amending the articles of association of the first defendant company. In fact, even in the resolutions of April 7, 1991, referred to by the sixth defendant, the resolutions give equal powers for borrowing funds, etc., to both the plaintiff and the sixth defendant and that the full powers continued till June 24, 1992, when the directions of R.N. Goenka to work as a team was destroyed by the sixth defendant usurping complete control and powers and that by subsequent resolutions dated September 5, 1992, and September 13, 1992, substantial powers of management of the plaintiff as joint managing director were taken away making him a joint managing director only in name.
It is urged by the plaintiff that by three resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992, the powers of the plaintiff as joint managing director were systematically eliminated. It is further urged that the resolutions were not to be acted upon as, according to the plaintiff, the method of delegation of powers was to be discussed by the plaintiff and the sixth defendant. Although no such discussion took place, by a circular dated July 25, 1992, various centers of "Indian Express" were informed only of the resolution without mentioning the further discussions that had to take place.
As regards the resolutions dated September 5, 1992, the plaintiff submits that no such resolution was passed, which has been set out in paragraphs 2 and 3 of the counter. According to the plaintiff, this resolution has been subsequently fabricated.
As regards the circular resolution dated September 13, 1992, it is contended that within eight days of the board meeting, a circular resolution was passed taking away the powers of signing cheques. By this resolution, the plaintiff can sign cheques above Rs. 2 lakhs only jointly with some employees at Bombay, which, according to the plaintiff, is a deliberate act of humiliation. The plaintiff's counsel also submits that the correctness of the resolution is doubtful. It is further stated by the plaintiff that the above resolutions are also contrary to the provisions of the Companies Act, particularly section 291. Under the said section, the board can delegate powers subject to the provisions contained in the Act or in the memorandum, articles, etc. Section 2(26) defines a managing director as a director entrusted with substantial powers of management, the words "substantial powers of management" were substituted for "any power of management" by the Companies (Amendment) Act, 1960. Therefore, according to Mr. Arvind P. Datar, learned counsel for the plaintiff, the board of directors cannot pass resolutions taking away substantial powers of management of a managing director or a joint managing director. Such resolutions, which take away substantial powers, will be void, therefore, on joint reading of section 291 read with section 2(26) of the Companies Act, the resolutions dated June 24, 1992, September 5, 1992, and September 13, 1992, will not be valid in so far as they take away the substantial powers of management. It is further argued that the plaintiff has furthers personal bank guarantees of Rs. 10 crores and accepted to sign further guarantees for Rs. 26 crores for Indian Express (Bombay) Limited and has also furnished personal guarantees in excess of Rs. 10 crores for the third defendant, of which he is the joint managing director.
It is, therefore, contended that the plaintiff's power is restored with substantial powers of management which he enjoyed before June 24, 1992, so that he may function as a joint managing director. He also submits that this court may impose any safeguards it deems fit while restoring the powers of the plaintiff.
The sixth defendant, who is the only contesting respondent in Application No. 5998 of 1992 submits that no case has been made out for the grant of relief and that the plaintiff is seeking orders for restoration of his alleged powers of management contrary to the valid resolutions of the board. According to the sixth defendant, he himself has individually held 50.40 per cent. shares since 1986 and 50.58 per cent. shares since December, 1989. They relied on the annual returns submitted by the company and signed by the parties. It is stated that the case of the plaintiff that 24.32 per cent. shares transferred by R.N. Goenka to the plaintiff and the sixth defendant in joint names (12.16 per cent. to the plaintiff and the sixth defendant and 12.16 per cent. to the sixth defendant and the plaintiff) were for the benefit of Anilkumar Sonthalia has only to be stated to be rejected as such, which according to the sixth defendant, is contrary to the express provisions of the Companies Act, particularly section 187C. It is to be noticed that the said Anilkumar Sonthalia is not a party to the present proceedings. The said Anilkumar has not even filed an affidavit in support of the contention of the plaintiff. The admitted facts are as set out in the pleadings. The sixth defendant is the admitted owner of 62.72 per cent. shares and the plaintiff has no shares. According to the plaintiff, at best he would be entitled to 37.12 per cent. shares of NPBS. On November 12, 1990, the plaintiff wrote a letter to the seventh defendant (Nusli Wadia). The seventh defendant forwarded the same vide his letter dated January 2, 1991. The copy of the said letter of the seventh defendant has also been marked to the sixth defendant and the plaintiff. The plaintiff does not deny or dispute that he had sent the letter dated November 12, 1990, and hence, according to the sixth defendant, the plaintiff cannot now make a grievance of the effect of his own voluntary acts.
In so far as the transfer effected on January 5, 1991, is concerned, according to the sixth defendant, the same is reflected in the annual return which is signed by C. Rajendra Kumar, company secretary, whose affidavit is relied on by the plaintiff. According to Mr. P. Chidambaram, learned senior counsel, the minutes of the board of directors meeting held on September 26, 1990, contain only a pious wish of R.N. Goenka. It is, according to learned senior counsel, not a resolution. The plaintiff in his capacity as a director alleges no knowledge of the board of meeting of January 5, 1991, which according to Mr. P. Chidambaram, learned senior advocate, is falsified by the minutes of the next board meeting of the first defendant company on April 7, 1991, presided over by the plaintiff. The seventh defendant was present at the meeting. The plaintiff did not ask the seventh defendant why and how he was present. Also leave of absence was given to defendants Nos. 8 and 9. The plaintiff has signed the minutes as chairman. Subsequently, the meetings of the board have been held on several dates in 1991 and 1992, which have been attended by defendants Nos. 7 and 8 and leave of absence has been given to the ninth defendant. The plaintiff at no time asked defendants Nos. 7 and 8 why and how they were present. It is stated that the plaintiff does not hold any shares in the first defendant company as on date. However, he continues as a director by virtue of invitation and courtesy and he can remain as a director only by the courtesy and invitation of the other directors and/or shareholders of the company.
According to the sixth defendant the documents filed in the proceedings conclusively establish as under:
(a) The plaintiff does not hold any shares today.
(b) The sixth defendant has always had since 1986 an absolute majority in the first defendant company in his awn name and right.
(c) The sixth defendant is the effective owner of 62.72 per cent. of shares of the first defendant company.
(d) The first and third defendant companies are board managed companies and the board of directors may exercise all the powers by virtue of section 291 of the Companies Act and the articles of association of the company.
(e) All powers exercised by the sixth defendant today as chairman, executive director and managing director were given to him by the board of directors.
(f) The fundamental principles of corporate democracy, which are at the very foundation of the company law, were recognised by this court earlier and between March, 1991, and September, 1992, the plaintiff and Mrs. Saroj Goenka sat on the board of directors of the first and third defendant and did not demur. In fact, the minutes show that the new directors appointed on January 5, 1991, were welcomed on the board.
(g) There is no allegation that the board of directors misconducted itself. It is only when the board dealt with the powers of the applicant that false allegations are levelled against the board.
These are the contentions of both parties. Let me now consider the submissions made by both parties at length.
The applicant in Application No. 5998 of 1992 is the plaintiff and the applicant in Applications Nos. 841 and 5129 of 1992 is the sixth defendant in the suit. The main prayer in the suit C.S. No. 1246 of 1992 is concerned with the validity of the meeting of the board of directors of the first defendant company held on January 5, 1991, and the board of directors' meeting of the second defendant company held on January 23, 1991, and certain other resolutions for appointing additional directors. The plaintiff had also filed C.S. No. 1247 of 1992 against the first defendant and six others challenging the transfer of shares in the meeting of the board of directors held on January 5, 1991, and for a declaration that 24.32 per cent. shares have been held in trust for the benefit of the plaintiff's brother Mr. Anil K. Sonthalia.
In order to appreciate the controversies between the parties and the contentions raised by Mr. Harish N. Salve, learned senior advocate and Mr. Arvind P. Datar for the plaintiff, Mr. P. Chidambaram, learned senior advocate for the sixth defendant, Mr. Navroz H. Seervai, learned senior advocate for the seventh defendant and Mr. Arun Jetley, learned senior advocate for defendants Nos. 1 to 3, it is necessary to refer to the following facts.
Admittedly, the late Mr. R.N. Goenka is the founder of the Indian Express group of companies, which is publishing "Indian Express" in English and other newspapers in Tamil, Telugu, Kannada, Marathi and Gujarathi from different cities. The first defendant was incorporated on August 10, 1970, and it is the parent (apex) company of the Indian Express group and controls defendants Nos. 2 to 5. The second defendant is the subsidiary company of the first defendant and the third defendant is the subsidiary of the second defendant. There is also no controversy that on December 24, 1976, the late R.N. Goenka transferred 76.56 per cent. of his shares in Nariman Point Building Services and Trading (P.) Ltd., Madras (in short "NPBS") to the sixth defendant and the plaintiff. 50.40 per cent. was given to the sixth defendant and 24.96 per cent. to the plaintiff and the balance of 24.32 per cent. was retained by late R.N. Goenka and the balance of 0.32 per cent. was held in equal shares by the daughters, i. ., Mrs. Krisha Khaitan, who expired during 1987, and Mrs. Radha Devi Sonthalia, the fourteenth defendant and the mother of the plaintiff.
On August 28, 1989, the late R.N. Goenka (hereinafter in short called "RNG") transferred 24.32 per cent. retained by him in favour of the plaintiff and the sixth defendant. The shares were transferred in two parts. In the first part, the sixth defendant is the first joint shareholder and in the second part, the plaintiff is the first joint shareholder. The plaintiff along with his letter dated November 12, 1990, addressed to the seventh defendant enclosed 6,240 equity shares of the first defendant, 3,040 equity shares of the first defendant standing in the joint names of the plaintiff and the sixth defendant, and 4,000 preference shares of the first defendant. It is mentioned in the said letter, the share certificates were enclosed to the seventh defendant as desired by the late R.N. Goenka on September 26, 1990, in the presence of the seventh defendant. It is also mentioned in the said letter that sending the share certificates as mentioned therein would restore the faith and trust that seemed to have been lost by the grandfather. Incidentally, it must be pointed out that this letter is found in the compilation of the plaintiff's additional documents at page 55. There is also no dispute or denial of execution of the said letter and in fact, the plaintiff would also place reliance on the said letter. It is thereafter, a meeting of the board of directors of the first defendant company was held on January 5, 1991, at Bombay. At the said meeting, defendants Nos. 7 to 9 were appointed as additional directors and they participated in the said meeting after their appointment. The late R.N. Goenka and the sixth defendant had participated. In the said meeting, certain shares were transferred in the name of R.N. Goenka, which were standing in the names of the plaintiff and the sixth defendant either individually or jointly. According to the plaintiff, the said meeting is invalid because he had no notice of the said meeting and, therefore, there was no occasion for grating leave of absence. It is relevant to notice that the whole case of the plaintiff rests on the validity or otherwise of the aforesaid meeting held on January 5, 1991.
It is rightly pointed out by Mr. P. Chidambaram that the controversy between the parties started only from January 5, 1991. There is also no controversy that the sixth defendant has been holding 50.40 per cent. shares of NPBS even in 1986 and 50.56 per cent. in September, 1989. It is also not in dispute that he became the first joint shareholder of 12.16 per cent. in 1989, and is entitled to exercise his rights as the first joint share holder in respect of the said 12.16 per cent. In fact, the plaintiff and the sixth defendant had also signed the annual return of NPBS made up to March 31, 1988, and December 27, 1989, evidencing the aforesaid shareholding. These annual returns are found in pages 1 to 16 of compilation 'B' furnished by the sixth defendant. The return as on November 30, 1991, has been sent to the Registrar of Companies on December 30, 1991, by one Rajendra Kumar, secretary of the company. In this return, the plaintiff has not signed but the sixth defendant and the company secretary had signed.
Next comes the meeting of the board of directors of NPBS held on April 7, 1991, and the plaintiff was elected as the chairman of the said meeting. It is interesting to find that defendants Nos. 6 and 7 participated in the said meeting and leave of absence was granted, inter alia, to defendants Nos. 8 and 9. It is also significant to notice that the plaintiff did not question as to how the seventh defendant was present and as to why leave of absence was given to defendants Nos. 8 and 9 (Mrs. Mulgakar and Mr. Venu Srinivasan). The plaintiff has signed the minutes of the meeting as is seen from pages 26 and 27 of the compilation 'B'. Admittedly, the meetings of the board of directors were held in 1991 and in 1992. These meetings have been attended by defendants Nos. 7 and 8 and leave of absence was given to the ninth defendant.
A meeting of the board of directors of the third defendant/Indian Express (Madurai) Ltd., was held on June 24, 1992, and the said meeting was attended by defendants Nos. 6, 7, 10 and 11 apart from the plaintiff. In the said meeting, the appointment of the sixth defendant as the managing editor at the meeting held on September 24, 1991, was reaffirmed and the sixth defendant was given certain powers and was put in charge of editorial staff to the exclusion of all others. Even prior to that, the sixth defendant was appointed as executive director at the meeting of the board held on November 1, 1989. The plaintiff was also present at the board meeting held on September 24, 1991, at which the sixth defendant was appointed as managing editor unanimously. This meeting was attended by the plaintiff and defendants Nos. 6 to 8. Mrs. Saroj Goenka, the daughter in-law of R.N. Goenka, was elected as chairperson of the said meeting.
On September 5, 1992, the board of directors of the third defendant company was held at Bombay. This meeting was attended by the plaintiff and defendants Nos. 6 to 8, 11 and 13. In the said meeting the sixth defendant was appointed as chairman of the board of directors. This resolution was carried by a majority and the plaintiff and Mrs. Saroj Goenka voted against the proposal. It was further resolved at the said meeting to delimit the powers of the plaintiff and Mrs. Saroj Goenka. By the subsequent circular resolutions dated September 13, 1992, the financial powers of the sixth defendant, the plaintiff and Saroj Goenka were delimited.
The following facts will emerge from what is stated above:
(a) Defendants Nos. 1 and 3 are board-managed companies and the board of directors are entitled to exercise all the powers by virtue of section 291 of the Companies Act and the articles of association of the company.
(b) The sixth defendant has been indisputably holding majority shares in the first defendant company even ignoring the disputed share transfers.
(c) The plaintiff does not hold any share in the first defendant company.
(d) The plaintiff h s been accepting the appointment of defendants Nos. 7 to 9 as directors in the first defendant company by his own conduct by participations in several meetings of the board of directors along with the said defendants.
(e) The sixth defendant was appointed as executive director on November 1, 1989, during the lifetime of the late R.N. Goenka and as managing editor unanimously at the meeting held on September 24, 1991, which was reaffirmed on June 24, 1992, after the demise of R.N. Goenka.
(f) The sixth defendant was appointed as chairman at the meeting held on September 5, 1992, by majority.
(g) The powers and functions are spelt out by the board if directors at the meetings held on June 24, 1992, and September 5, 1992, and subsequently by the circular resolution dated September 13, 1992.
It is the duty of this court to recognise the corporate democracy of a company in managing its affairs. It is not for this court to restrict the powers of the board of directors. The board of directors in various resolutions have appointed the sixth defendant as executive director, managing editor and chairman. It will not be open to this court to interdict the functions of the board-managed company. As rightly contended by Mr. P. Chidambaram, learned senior advocate, it will not be open to this court to interfere with the day-to-day functions, management and administration of a company unless it is established that the decisions taken by the board are ultra vires the Act or the articles of association of the company. At this interlocutory stage this court is concerned only with the prima facie case and balance of convenience as disclosed by the documents produced by both parties. It is for the plaintiff to let in oral evidence at the time of trial and establish his case.
Mr. Harish N. Salve and followed by Mr. Arvind P. Datar would submit by referring to articles of association 2A, 18A, 34A, 35A, 36 and 43A of the company and submit that both the plaintiff and the sixth defendant were declared as successors of R.N. Goenka and they were directed to work as a team with a sense of mission. It was further contended that the share certificates with blank transfer forms were sent on November 12, 1990, with a view to enable R.N. Goenka to retain the shares in trust and that no transfer to R.N. Goenka was ever intended. Regarding the board meeting held on January 5, 1991, it was submitted that no notice, which is mandatory under section 286 of the Companies Act, was given to the plaintiff and the fourteenth defendant. On the very same ground, the extraordinary general meeting and the board meeting held on January 23, 1991, is also sought to be assailed, He also invited my attention to pages 331, 346, 442 and 446 of compilation 'A' in C.S. No. 1246 of 1992 filed by the plaintiff.
According to Mr. Arvind P. Datar, the plaintiff was not informed about the appointment of additional directors or about the transfer of shares. Learned counsel for the plaintiff raised an impassioned plea that the plaintiff has given a personal guarantee on behalf of the company to the tune of several crores of rupees and that he has been stripped of his powers as joint managing director in stages and that he has been subjected to humiliation. All these events, according to learned counsel, are against the theme of the late Goenka that the plaintiff and the sixth defendant, who are his grandsons, should "work as a team". Therefore, it is contended that the plaintiff should be given powers befitting his status as joint managing director.
I have given my anxious consideration to the above contention. I am unable to countenance any one of them. No doubt, it would not have been the intention of the late Ramnath Goenka to make the plaintiff a nonentity or a zero in relation to the affairs of the company. It is not for the court to dictate to the board as to how it should function. When the matter comes before the court, the court is not concerned with inter se relationship of the parties. But, it has to keep in mind the corporate democratic principles, this court strongly feels that both the sixth defendant and the plaintiff should sink their differences and disputes and work unitedly to preserve and further develop the empire built by the late Ramnath Goenka.
Mr. Navroz H. Seervai for the seventh defendant and Mr. Arun Jetly for defendants Nos. 1 to 3 adopted the arguments of the learned senior advocate, Mr. P. Chidambaram. Mr. Arun Jetly, learned senior counsel, invited my attention to section 187(c) of the Companies Act and submitted that the case of the plaintiff that 24.32 per cent. shares were held for the benefit of Anil Kumar Sonthalia cannot be accepted in view of section 187(c) of the Act. However, this is matter which has to be decided in the application filed in C.S. No. 1247 of 1992.
If the grievance of the plaintiff is that this is a case of oppression of the minority by the majority, then, it is for him to move the appropriate forum constituted under the Companies Act.
Mr. P. Chidambaram, learned senior counsel, raised a preliminary objection with regard to the right of the plaintiff being heard in Application No. 5998 of 1992. According to him, the plaintiff has disobeyed the directions contained in the order dated October 1, 1992, of my learned brother, J. Kanakaraj J. and of my learned brother, K.A. Thanikkachalam J., dated October 28, 1992, and, therefore, the plaintiff is not entitled to the equitable relief. Since I have dealt with and decided the applications on the merits, there is no need to go into this argument of learned senior counsel, Mr. P. Chidambaram.
For the foregoing reasons, Application No. 5998 of 1992 is dismissed, and in view of the earlier order passed in Applications Nos. 841 of 1992 and 5129 of 1992, no further orders are necessary to be passed except to state that the plaintiff will exercise his powers or functions in accordance with the resolutions dated September 5, 1992, passed by the board of directors of the third defendant company. The order dated October 1, 1992, of J. Kanakaraj J. is only an interim order and the same is subject to this order and for the reasons stated herein. Hence, Application No. 841 of 1992 is ordered and no further directions are necessary in Application No. 5129 of 1992.
[1995]
84 COMP. CAS. 559 (MAD.)
HIGH COURT OF
v.
AR.
LAKSHMANAN, J.
ORIGINAL APPLICATION NOS. 760 TO 764 AND 768 OF 1992 AND
APPLICATION NOS. 4718 AND 4719 OF 1992 IN C.S. NO. 1246 OF
1992
K. Parasaran and Arvind P. Datar
for the Applicant.
R.
Krishnamurthi , P. Chidambaram, G.E. Vahan
Vati, Arun Jaithey, Darius Khambatta, Navroz Seervai for the Respondent.
AR.
Lakshmanan, J.—The
above applications were filed by the plaintiff in the suit for various reliefs
pending disposal of the suit.
The
short facts are as follows : The plaintiff/applicant filed C.S. No. 1246 of
1992 against the first defendant/first respondent company (in short
"NPBS"), four other newspaper companies and six other persons. The
suit is primarily concerned with the validity of a board meeting of the second
defendant/Indian Express, Bombay Limited, Bombay, held on January 23, 1991, and certain
resolutions for appointing additional directors. The plaintiff/applicant also
prays for declaration and permanent injunction in respect of various acts
committed by the sixth defendant/sixth respondent along with other directors,
particularly Nusli Wadia (seventh defendant) and Venu Srinivasan (eighth
defendant). Many interlocutory applications have been filed by the
plaintiff/applicant in this suit.
The
plaintiff/applicant had also filed C.S. No. 1247 of 1992 against NPBS and nine
others. The defendants include Nusli Wadia, Venu Srinivasan, Mrs. Saroj Goenka
and her three daughters. This suit challenges the transfer of shares in the
aforesaid board meeting held on January 5, 1991, and also seeks for a
declaration that 24.32 per cent. shares have been held in trust for the benefit
of the plaintiff's brother.
Serious
allegations have been made regarding the holding of the board meeting on January
5, 1991, and the extraordinary general meeting on January 23, 1991. According
to the plaintiff, no notice has been given in respect of these meetings and the
same were conducted clandestinely. The resolutions passed therein were filed
before the Registrar of Companies through the office of Sundaram Clayton
Limited, of which the eighth defendant is the managing director. According to
the plaintiff, this was done with the intention to suppress from the plaintiff
and his mother the fact of the illegal share transfer. The reasons as to why
the meetings and the resolutions passed are invalid have been set out in detail
in the plaint. Therefore, I am not repeating the same here. Similarly, in the
other suit (C.S. No. 1247 of 1992), it is stated that the shares were neither
intended to be nor were transferred as there was no consideration for the same.
According to the plaintiff, the shares were retained only in trust. The reasons
as to why the share transfers are null and void have been set out in the plaint
in that suit, with which we are not presently concerned.
The
prayers in the present applications are as follows :
O.A.
No. 760 of 1992 : To restrain by an order of temporary injunction respondents
Nos. 7, 8 and 9/defendants Nos. 7, 8 and 9 from exercising any powers as
directors of the first respondent/first defendant company.
O.A.
No. 761 of 1992 : To restrain by an order of temporary injunction respondents
Nos. 7, 8 and 9/defendants Nos. 7, 8 and 9 from exercising any powers of the
second respondent/second defendant company pending disposal of the suit.
O.A.
No. 762 of 1992 : To pass an order of temporary injunction restraining
respondents Nos. 10, 11 and 12/defendants Nos. 10, 11 and 12 from acting or
exercising any of the powers as directors and/or alternative directors of
respondents Nos. 1 to 5/defendants Nos. 1 to 5 companies pending disposal of
the suit.
O.A.
No. 763 of 1992 : To pass an order of temporary injunction restraining the
sixth respondent/sixth defendant from exercising powers as managing editor,
chairman and executive director in so far as the third and fourth
respondents/third and fourth defendants companies are concerned pending
disposal of the suit.
O.A.
No. 764 of 1992 : To pass an order of temporary injunction restraining the
operation of the resolution passed at the board meetings of the second and
third respondents/second and third defendants dated June 24, 1992, September 5,
1992, and September 13, 1992, reducing or curtailing the powers of the
plaintiff/applicant as joint managing director and further directing
continuance of status quo pending disposal of the suit.
O.A.
No. 768 of 1992 : To pass an order of temporary injunction restraining
respondents Nos. 6 to 12/defendants Nos. 6 to 12 from interfering in any manner
in the plaintiff/applicant's powers as joint managing director of the third
respondent/third defendant company pending disposal of the suit.
Application
No. 4718 of 1992 : To direct the restoration of all powers vested in the
applicant/plaintiff in respondents Nos. 1 to 5/defendants Nos. 1 to 5
consequent to the resolutions passed in the board meeting of the first
respondent/first defendant held on September 26, 1990, pending disposal of the
suit.
Application
No. 4719 of 1992 : To direct the applicant/plaintiff, Mrs. Saroj Goenka and the
sixth respondent/sixth defendant to be appointed as joint representatives of
the respondent/defendant companies under section 187 of the Companies Act.
A
common affidavit has been filed in all the above applications. According to the
applicant/plaintiff, in furtherance of conspiracy, the alleged board meeting
was held on January 5, 1991, wherein far reaching resolutions were passed, viz.
(a) Appointing defendants Nos. 7 to 9 as
directors and thereby making the plaintiff and his mother/the fourteenth
defendant a helpless minority.
(b) 6,240 equity shares and 4,000
preference shares belonging to the plaintiff and 3,040 equity shares standing
in the joint names of the plaintiff and the sixth defendant were transferred to
the name of RNG. Despite the serious nature of the resolutions being passed,
neither the plaintiff nor his mother was given any notice of the board meeting
and were informed about the same only in March, 1991.
(c) It is further contended as under :
No notice in writing was given of the board meetings, which is a mandatory
requirement.
(d) The appointment of three additional
directors was sought to be confirmed at the extraordinary general body meeting
to be held on January 23, 1991. No notice of this meeting was given to the plaintiff
and his mother and the minutes of the meeting have not been shown to the
plaintiff till date.
(e) The ninth defendant was shown as
having been appointed as director. He has been included only because of his
close association with RNG and to give a facade of legality/responsibility over
the illegal appointment.
(f) Form 32 has to be filed with the
Registrar of Companies in respect of appointment of new directors. But, in
respect of appointment of three additional directors, this form was filed on
February 13, 1991, by the secretarial staff of Sundaram Clayton Limited, of
which the eighth defendant is the managing director.
(g) Defendants Nos. 7 to 9 were made as
directors of the second defendant company by an alleged board meeting held on
January 23, 1991, where RNG was to have been the chairman. No notice of this
meeting was given to the plaintiff or to Mrs. Goenka. An extraordinary general
meeting was allegedly held on February 21, 1991, of which again no notice was
given.
(h) The appointment of defendants Nos. 6
to 8 as directors is completely illegal. The alleged board meeting itself is a
nullity and all resolutions purported to have been passed there are void and
without effect.
(i) The administrative powers of the
managing director and joint managing director of respondents Nos. 3 and 4 have
been reduced so as to deprive them of substantial powers of management and to
render their offices a nullity with intent to humiliate the plaintiff and Mrs.
Saroj Goenka.
(j) Defendants Nos. 6 to 8 have managed
to gain control of respondents Nos. 1 and 2/defendants Nos. 1 and 2 companies.
In furtherance of their conspiracy, they have appointed R.A. Shah/the twelfth
defendant as a director of the second defendant at the board meeting held on
June 24, 1992.
(k) The manner in which the first
defendant owns or controls the other defendant companies has been set out in
the plaint.
(l) At the board meeting held on
September 26, 1990, RNG formally laid down the plan for succession and
subsequently the articles of the first defendant were also amended to implement
the decisions taken at the board meeting.
(m) After the death of RNG, and
particularly after the enormity of the fraud was revealed on March 17, 1992, the
sixth defendant has adopted a hostile attitude against the plaintiff and Mrs.
Saroj Goenka. He has also embarked upon a course of action to systematically
humiliate the plaintiff by removing all the administrative powers vested in him
as joint managing director of the southern newspapers. The actions taken by the
sixth defendant have been fully set out in paragraph 21(a) to (d) of the
affidavit.
(n) The plaintiff became aware of the
appointment of defendants Nos. 7 to 9 as additional directors in March, 1991.
At that time, no action was taken keeping in mind the critical state of RNG's
health.
(o) The enormity of the fraud played by
defendants Nos. 6 to 8 depriving the plaintiff of his, shares became clear only
after he received the minutes of the board meeting of the first defendant
company held on January 5, 1991. Thereafter, steps were taken by several well
wishers to avoid any legal proceedings being taken in the matter so as to
maintain the peace and harmony of the family, Several discussions were also
held with senior members of the Times of India group to settle the disputes
amicably. All these attempts were rendered futile because of the recalcitrant
attitude of the sixth defendant.
(p) By the first week of September,
1992, it was clear that there was no chance of settlement and thereafter the
plaintiff was constrained to file the above suit for the necessary reliefs.
In
the above circumstances, the plaintiff has filed the present applications for
the reliefs mentioned therein.
A
common counter-affidavit has been filed by Vivek Goenka/sixth defendant/sixth
respondent denying all the allegations contained in the affidavit filed in
support of these applications.
Mr.
K. Parasaran, learned senior counsel for the plaintiff/applicant, reiterated
the contentions raised by the plaintiff in the affidavit filed in support of
these applications.
I
shall now take up O.A. No. 760 of 1992 which is to injunct defendants Nos. 7 to
9 from exercising powers as directors of the first defendant/first respondent
company and deal with the factual aspects of the matter. In answer to the said
prayer, Mr. P. Chidambaram, learned senior counsel appearing for the sixth
defendant/sixth respondent submits as under : Defendants Nos. 7 to
9/respondents Nos. 7 to 9 were inducted at the board meeting held on January 5,
1991. The plaintiff denies knowledge about the said meeting. This is falsified
by the following facts :
(a) The plaintiff himself admits that at
the board meeting held on March 16, 1991, of IENB, he was informed of induction
of defendants Nos. 7 to 9 on the board of the first defendant company.
(b) In the board meeting held on April
7, 1991, the plaintiff was present. The plaintiff took the chair. The seventh
defendant was present and leave of absence to defendants Nos. 8 and 9 was
granted.
(c) In the board meeting held on June
26, 1991, the plaintiff was present. The eighth defendant was in the chair. The
seventh defendant was present.
(d) In the board meeting held on
September 24, 1991, the plaintiff was again present. The seventh defendant was
in the chair. The eighth defendant was present.
(e) In the board meeting held on
February 4, 1992, the plaintiff was present. The seventh defendant was in the
chair and the eighth defendant was present.
(f) In the board meeting held on June
24, 1992, the plaintiff was present. The seventh defendant was in the chair and
the eighth defendant was present.
(g) In the board meeting held on
September 5, 1992, the plaintiff was present. The seventh defendant was in the
chair. The plaintiff objected to the seventh defendant taking the chair but not
to his being present at the meeting as director. The eighth defendant was also
present and no objection was taken by the plaintiff. Until the suit was filed,
the plaintiff never challenged the induction or attendance of defendants Nos. 7
and 8 or leave of absence granted to the ninth defendant at the board meetings,
in any letter or proceeding.
In
answer to the submissions made by Mr. P. Chidambaram, Mr. K. Parasaran, learned
senior counsel, submits that the plaintiff was given only the minutes of the
board meeting of IENB/second defendant and that the minutes of the meeting
dated January 5, 1991, of the first defendant company were deliberately
suppressed and not furnished till March 17, 1992, which, according to the
learned senior counsel, concealed the fraud being played upon the plaintiff.
Further, the fact of defendants Nos. 7 to 9 being elected as directors at the
extraordinary general body meeting of the first defendant company was completely
concealed. According to the plaintiff, no notice of this meeting was given to
the plaintiff and his mother and no container theory was put forth for this
meeting. In so far as it relates to the board meeting held on April 7, 1991, it
is contended that the minutes of the previous board meeting held on January 23,
1991, were not read and confirmed and the election of defendants Nos. 7 to 9
through the extraordinary general body meeting of the first defendant company
held on January 23, 1991, was also deliberately suppressed. It is stated that
the plaintiff came to know of the transfer of shares only after the death of
RNG on October 5, 1991.
O.A.
No. 761 of 1992 was filed to injunct defendants Nos. 7 to 9/ respondents Nos. 7
to 9 from exercising powers as directors of the second defendant/second
respondent company. It is seen from the documents filed that defendants Nos. 7
to 9 were inducted as directors in the board meeting held on January 23, 1991.
The plaintiff denies knowledge of the said meeting, which, according to Mr. P.
Chidambaram, learned senior counsel for the sixth defendant, is falsified by
the following facts :
(a) In the board meeting held on March
16, 1991, the plaintiff was present. Mrs. Saroj Goenka was in the chair and
defendants Nos. 7 to 9 were present. This is mentioned in paragraph 24 of the
plaint.
(b) At the board meeting held on June
26, 1991, the plaintiff was present. The seventh defendant took the chair and
the eighth defendant was present.
(c) At the board meeting held on
September 24, 1991, the plaintiff was present. Mrs. Saroj Goenka was in the
chair. Defendants Nos. 7 and 8 were present. It is at this meeting, the sixth
defendant, Vivek Goenka was appointed as managing editor of all the publications of the
second defendant company. It may even be recalled at this stage that a similar
resolution was passed on the same date in respect of the publications of the
third defendant company as well.
(d) At the board meeting held on
September 5, 1992, the plaintiff was present. The seventh defendant was in the
chair. The eighth defendant was present. At this meeting, the sixth defendant,
Vivek Goenka, was redesignated as managing director of the second defendant
company.
Mr.
K. Parasaran, learned senior counsel for the plaintiff, in reply submits that
the appointment of defendants Nos. 7 to 9 was deliberately suppressed and that
the sixth defendant became a permanent representative of the second defendant
company by fabricating the minutes of the first defendant company dated August
31, 1990. My attention was drawn to pages 29 and 34 of the plaintiff's
documents. Thus, it is contended that the seventh defendant's self-appointment
as sole representative of the first defendant company and the consequent
extraordinary general body meeting held on February 21, 1991, were deliberately
concealed as part of a fraudulent conspiracy. Though the participation of the
plaintiff in the board meetings was admitted, it was argued, that he
participated in the said meetings ignorant of the fraud being played upon him.
It is further contended that after RNG's death, at the subsequent board
meetings, the plaintiff objected to the presence of the seventh defendant or
taking the chair. In fact, he represented to Nusli Wadia/seventh defendant
about the practice of fabricating the minutes. But, no reply was received from
him to the plaintiff's letter dated September 11, 1992.
It
is seen from the proceedings extracted above of the various board meetings that
the plaintiff has attended several meetings and that he can claim no equity in
his favour. In fact, the plaintiff has nothing to do with the second defendant
company and RNG himself has proposed the appointment of additional directors.
It is also very relevant to notice that no application for injunction in
respect of the third defendant company was filed. Defendants Nos. 7 to 9 are
also the directors of the third defendant company and the plaintiff does not
ask for a similar prayer for the third defendant company.
O.A.
No. 762 of 1992 has been filed by the plaintiff to injunct defendants Nos. 10
to 12/respondents Nos. 10 to 12 from exercising powers as directors/alternate
directors in defendants Nos. 1 to 5/respondents Nos. 1 to 5 companies.
According to Mr. K. Parasaran, learned senior counsel for the plaintiff, the prayer has
been framed comprehensively as A defendants Nos. 10 to 12 are directors in some
companies and alternate directors in other companies and the appointment of
these persons was strongly objected to but the final minutes do not record the
dissent. It is further argued that no injunction against defendants Nos. 7 to 9
in respect of the third defendant company was asked for because the plaintiff
was led to believe that RNG was present at the meeting held on June 24,1991,
and had signed a circular resolution dated June 26, 1991. Though he was
present, he was not made the chairman. The plaintiff was not present and
believed that RNG had signed the minutes. The medical records produced for June
24, 1991, would show that RNG was examined on that date by Dr. Doongajee. On
March 11, 1991, this doctor states, RNG was able to recognise the relatives but
unable to even remember anything. When the newspaper was read to him, he could
not retain anything and the newspaper was read again. The medical evidence
recorded on February 23, 1993, would reveal that the appointment of defendants
Nos. 7 and 9 was not in order since RNG could not have been present or have
participated in the meeting. Thus, it is submitted that these facts were
deliberately suppressed from the plaintiff and that the fraud was revealed only
later.
I
am of the view that the prayer asked for in O.A. No. 762 of 1992 is
misconceived, as rightly contended by Mr. P. Chidambaram, learned senior
counsel for the sixth defendant, in so far as defendants Nos. 4 and 5 companies
are concerned. Defendants Nos. 10 to 12 are not directors of these two
companies. The most significant aspect of this application read with other
applications is that there is no prayer seeking an injunction against
defendants Nos. 7 to 9 in respect of the third defendant company, which is the
most crucial company so far as the plaintiff is concerned. In so far as the
first defendant company is concerned, defendants Nos. 10 and 12 were inducted
as directors on June 24, 1992, and the plaintiff was present at the said
meeting. According to the minutes placed before this court, there was no
dissent. According to the version of Mrs. Saroj Goenka of the minutes, she and
the plaintiff dissented. It is also not disputed that the eleventh defendant is
not a director of the first defendant company and hence, I am of the view, the
prayer in this behalf is misconceived as rightly urged by Mr. P. Chidambaram.
In
so far as the second defendant company is concerned, defendants Nos. 10 and 12 were
inducted as directors on June 24, 1992, in the very presence of the plaintiff.
It is also not disputed that the eleventh defendant is not a director of the
second defendant company and hence, this application in this behalf is misconceived. In so far as
the third defendant company is concerned, defendants Nos. 10 and 11 were
inducted as directors on June 24, 1992, in the presence of the plaintiff. The
twelfth defendant is not a director of the third defendant company and hence,
the prayer in this behalf is also misconceived. I am of the view that no
injunction as prayed for is justified since the plaintiff having been a party
to the appointment of these people as directors, it is not open to him to
challenge these appointments. The plaintiff is also picking and choosing the
appointment of directors as mentioned above.
O.A.
No. 763 of 1992 has been filed by the plaintiff to injunct the sixth defendant,
Vivek Goenka, from exercising powers as managing editor and chairman and
executive director in so far as defendants Nos. 3 and 4 companies are
concerned. According to Mr. K. Parasaran, learned senior counsel for the
plaintiff, this prayer was sought for because the sixth defendant increasingly
interfered in the day-to-day affairs of the third defendant company and has
appointed one P.M. Rajagopalan as the chief executive with more powers than the
managing director/joint managing director. On January 28, 1993, he has also
appointed one Narasimhan as the president and virtually all the departments
were directed to report to him directly or through P. M. Rajagopalan. Almost
all the powers of the plaintiff in the third defendant company have been
eliminated, vide resolutions dated June 24, 1992, September 5, 1992, and
September 13, 1992. These have been challenged in Application No. 5998 of 1992,
wherein status quo of the plaintiff as on June 24, 1992, is sought to be
restored.
In
answer to the submissions made by Mr. K. Parasaran, learned senior counsel for
the plaintiff, Mr. P. Chidambaram, learned senior counsel for the sixth
defendant, submits that so far as the fourth defendant company is concerned,
the prayer is misconceived. As rightly contended by him, the sixth defendant is
not the chairman and executive director of the fourth defendant company. The
only directors of the fourth defendant company are Mrs. Saroj Goenka, the
plaintiff and the sixth defendant. The resolution was passed by that board
appointing the sixth defendant as managing editor, with the approval of both
Mrs. Saroj Goenka and the plaintiff.
In
so far as the third defendant company is concerned, the sixth defendant was
appointed as managing editor at the board meeting held on September 24, 1991,
and it was also reiterated at the board meeting held on June 24, 1992. So far
as the chairman and executive director arc concerned, the sixth defendant was
appointed as the executive director of the third defendant company at the board meeting held on
November 1, 1989, and has been functioning as such for the last 3½ years. He
was appointed as chairman at the board meeting held on September 5, 1992. Above
all, the plaintiff was present and the seventh defendant was in the chair. No
grounds have been urged to grant injunction against the sixth defendant for
functioning as managing editor and/or chairman and executive director of the
third defendant company.
At
this stage, it is pertinent to notice the order passed by me on April 13, 1993,
dismissing Application No. 5998 of 1992 (since reported in Vivek Goenka v.
Manoj Sonthalia [1993] 2 MLJ 1, 6 ; [1995] 83 Comp Cas 897) filed by the
plaintiff. That application was filed to ensure that the plaintiff's powers as
joint managing director of the third defendant company as on June 24, 1992,
should be maintained pending disposal of the suit. The sixth defendant was the
only respondent in that application. It is useful to extract paragraph 27 of my
order in that application (at page 908 of 83 Comp Cas) :
"It
is the duty of this court to recognise the corporate democracy of a company in
managing its affairs. It is not for this court to restrict the powers of the
board of directors. The board of directors in various resolutions have
appointed the sixth defendant as executive director, managing editor and
chairman. It will not be open to this court to interdict the functions of the
board managed company. As rightly contended by Mr. P. Chidambaram, learned
senior advocate, it will not be open to this court to interfere with the
day-to-day functions, management and administration of a company unless it is
established that the decisions taken by the board are ultra vires the Act or
the articles of association of the company. At this interlocutory stage this
court is concerned only with the prima facie case and balance of convenience as
disclosed by the documents produced by both parties. It is for the plaintiff to
let in oral evidence at the time of trial and establish his case."
As
pointed out by Mr. P. Chidambaram, learned senior counsel for the sixth
defendant, the plaintiff had taken part in the board meetings held on June 24,
1992, and September 5, 1992. The protest was only on September 5, 1992.
Resolutions were passed by majority. In so far as the meeting held on June 24,
1992, is concerned, no objection was raised for the appointment of the sixth
defendant as managing editor and hence, I am of the view, the. plaintiff is not
entitled to any equitable or discretionary relief as prayed for in the above
application. Therefore, I hold that this application is misconceived and the
same is liable to be rejected.
O.A. No. 764 of 1992 has
also to be rejected for the same reasoning given in my order dated April 13,
1993, in Applications Nos. 841, 5129 and 5998 of 1992.
O.A. No. 768 of 1992 has
been filed by the plaintiff to injunct defendants Nos. 6 to 12/respondents Nos.
6 to 12 from interfering with the plaintiff's powers as joint managing director
of the third respondent/third defendant company. As observed by me earlier,
this application also has to abide by the decision rendered by me in
Applications Nos. 841, 5129 and 5998 of 1992 dated April 13, 1993 (since
reported in Vivek Goenka v. Manoj Sonthalia [1993] 2 MLJ 1 ; [1995] 83 Gomp Cas
897).
It is contended by Mr. K.
Parasaran, learned senior counsel for the plaintiff, that the plaintiff became
a director of the third defendant company in 1980 itself. The board meeting
dated June 24, 1991, is seriously disputed in the light of the medical
evidence, which came to be disclosed on February 23, 1993. Again, it is
repeated that the appointment of defendants Nos. 10 to 12 on June 24, 1992, has
been disputed. The minutes have been fabricated and in any event, defendants
Nos. 10 to 12 were appointed by virtue of the illegal majority obtained by
inducting defendants Nos. 7 to 9. The appointments of defendants Nos. 6 to 12
is itself disputed. The appointment of defendants Nos. 7 to 9 in the first
defendant and the second defendant companies at the respective extraordinary
general body meetings held on January 23, 1991, and February 13, 1992, is
clearly illegal and liable to be set aside and no container theory in respect
of these meetings has also been put forth. Therefore, it is argued, that
injunction should be granted restraining defendants Nos. 6 to 12 from
interfering with the plaintiff's powers as joint managing director of the third
defendant company.
According to Mr. P.
Chidambaram, learned senior counsel for the sixth defendant, the sixth
defendant became a director of the third defendant company in the year 1985.
Defendants Nos. 7 to 9 were inducted as directors of the third defendant
company by a circular resolution dated June 24, 1991, which has been signed by
RNG, sixth defendant, Mrs. Saroj Goenka and the plaintiff. This, in my view, is
the principal reason why the plaintiff is not able to challenge and, therefore,
has not challenged the appointment of defendants Nos. 7 to 9 as directors of
the third defendant company. So far as defendants Nos. 10 to 12 are concerned,
I have already dealt with the same while dealing with O.A. No. 762 of 1992 and,
hence, I am not repeating the same here.
As
rightly submitted by Mr. P. Chidambaram, learned senior counsel for the sixth
defendant, defendants Nos. 6 to 12 were validly appointed as directors of the
third defendant company and, hence, they are entitled to function as such and
take part in the management of the said company. Section 291 of the Companies
Act deals with the general powers of the board and the restrictions thereon.
The gist of the section is that except where express provision is made that the
powers of a company in respect of any particular matter are to be exercised by
the company in general meetings, in all other cases, the board of directors are
entitled to exercise all its powers. When the validity of the appointment is
not in doubt, no injunction, in my view, can be granted as prayed for. Hence,
this application is also liable to be dismissed.
Application
No. 4718 of 1992 has been filed by the plaintiff for a direction for
restoration of all powers vested in the plaintiff in defendants Nos. 1 to 5
companies consequent to the resolution passed at the board meeting of the first
defendant company held on September 26, 1990. Mr. K. Parasaran, learned senior
counsel for the plaintiff, submits that the minutes constitute the succession
plan of RNG and that the said plan was implemented by amending the articles,
interlocking the rights and interests of the plaintiff and the sixth defendant,
and making RNG supreme till his life time. In any event, it is the plaintiff's
case, that the handing over of the shares to Nusli Wadia was to be done by both
the grandsons. However, only the plaintiff's shares were illegally transferred
to RNG's name by virtue of the conspiracy between defendants Nos. 6 and 7. Even
the shares held in the joint names were not transferred where Vivek Khaitan's
name was shown as the first shareholder. He submits that the minutes are not a
pious wish and hence, as recorded in the minutes, defendants Nos. 1 to 5
companies have to be run by the plaintiff and the sixth defendant as a team and
any resolution in violation of this specific directive would be contrary to the
RNG's succession plan.
Mr.
P. Chidambaram, learned senior counsel for the sixth defendant, in reply to the
above argument contends that the whole prayer is misconceived and the minutes
referred to are the minutes of the board meeting of the first defendant
company. The said minutes, according to Mr. P. Chidambaram, contain only the
pious wish of late RNG. They do not constitute the resolution and the same is
also not enforceable in a court of law. In any event, the subsequent change in
the shareholding pattern of the first defendant company would prevail over a
pious wish expressed by the late RNG. Notwithstanding the pious wish, on the
same day, viz., on
September 26, 1990, after the meeting, RNG in the presence of the seventh
defendant, asked the plaintiff to transfer back the shares to him, which is
admitted by the plaintiff by his letter dated November 12, 1990, to the seventh
defendant. In the same letter, the plaintiff also admits that it seemed he had
lost the confidence of RNG and hoped that the act of his sending the shares
together with the share transfer deeds as desired by his grandfather "will
restore the faith and the trust that I seem to have lost".
According
to Mr. P. Chidambaram, all these are irrelevant in so far as defendants Nos. 2
to 5 companies are concerned. A pious wish expressed at the board meeting of
the third defendant company is not relevant to the management of defendants
Nos. 2 to 5 companies. Above all, it is submitted, that no powers were vested
in the plaintiff in defendants Nos. 1 to 5 companies consequent on the
resolution dated September 26, 1990. Hence, in my view, the question of
restoration of such powers does not arise.
Application
No. 4719 of 1992 is filed by the plaintiff for a direction that the plaintiff,
Mrs. Saroj Goenka and the sixth defendant shall be appointed as joint
representatives of all the respondent companies under section 187 of the
Companies Act. Mr. K. Parasaran, learned senior counsel for the plaintiff,
elaborating the said prayer, submits that the sixth defendant, Vivek Goenka,
appoints himself as the sole representative of defendants Nos. 1 and 2
companies by fabricating the minutes and by getting appointed as the sole
representative of the second defendant company, the sixth defendant uses the
illegally obtained majority to appoint himself as the sole representative in
other respondent companies as well, and if his appointment in the second
defendant company is set aside, then, his appointment in several companies also
will have to be set aside.
I
am of the view, that the prayer in this behalf is totally misconceived. Under
section 187 of the Companies Act, a body corporate may appoint only one
representative. There is no question of appointing joint representatives. In so
far as the first defendant company is concerned, as rightly contended by Mr. P.
Chidambaram, section 187 of the Companies' Act is not applicable because it is
composed of shareholders who are individuals, who will exercise their power to
elect/appoint directors who will manage and represent the company. In so far as
the second defendant company is concerned, it is the first defendant company
which has to appoint its representative, which means that the board of
directors of the first
defendant company will appoint a representative to represent the first
defendant company in the meetings of the second defendant company. Similarly,
in so far as the third defendant company is concerned, it is the board of
directors of the second defendant company who will appoint a representative to
represent the second defendant company in the meetings of the third defendant
company.
In
so far as the fourth defendant company is concerned, it was originally a wholly
owned subsidiary of the fifth defendant company and as long as it was so, it
was the board of directors of the fifth defendant company who would appoint a
representative. It is also stated that between June, 1992, and January, 1993,
the fourth defendant company was sold to the first defendant company and has
become a subsidiary of the first defendant company. Hence, it is the board of
the first defendant company which will appoint a representative to represent it
at the meetings of the fourth defendant company. So far as the fifth defendant
company is concerned, it is a wholly owned subsidiary of the third defendant
company and, hence, it is the board of directors of the third defendant company
which will appoint a representative to represent it at the meetings of the
fifth defendant company. Thus, I am of the view, that the prayer in this
application is also wholly misconceived and cannot be granted for the aforesaid
reasons.
Mr.
P. Chidambaram, learned senior counsel for the sixth defendant submits, that
the plaintiff's objective in injuncting defendants Nos. 7 to 9 is because he
wants to control the board of directors although he is a minority shareholder.
In reply, it was argued on behalf of the plaintiff that the plaintiff's
objective is not to control the company but to ensure that the persons who have
been elected in a fraudulent and illegal manner are removed. Although the
plaintiff is a minority shareholder, he is entitled to participate in the
management of the company along with the sixth defendant, which is made clear
by the board resolution and the subsequent amendment of articles on September
26 and 27, 1990, respectively, which states that the plaintiff and the sixth
defendant have to work as a team and that they were his successors to run the
newspapers. The exclusion of the plaintiff from the management of the companies
would be a ground to wind up the company under the just and equitable clause.
For this proposition, the learned senior counsel for the plaintiff has cited
the decisions in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL)
and Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwala, AIR 1976 SC 565 ;
[1976] 46 Comp Cas 91.
It
is contended by Mr. K. Parasaran, learned senior counsel for the plaintiff,
that once a prima facie case of fraud is established, the interim relief asked
for should follow, otherwise, the perpetrators of fraud will reap the benefits
of fraud during the interregnum. It is further urged that the Companies Act
does not require that the board of directors must reflect the shareholding pattern.
The proper legal position is that the shareholders who are in a majority can
elect directors of their choice. The Act does not authorise the majority to
eliminate the minority by wrongful means. In a family owned company, a large
shareholder cannot be removed from management on the plea of corporate
democracy.
Mr.
P. Chidambaram, learned senior counsel for the sixth defendant, submits that
all the defendant companies have the power to appoint additional directors and,
therefore, defendants Nos. 7 to 9 have been validly appointed. In reply to this
argument, Mr. K. Parasaran, learned senior counsel for the plaintiff, submits
that there is no dispute about the power to appoint additional directors, but
the same has been done by fraudulent exercise of that power. The real case,
according to the learned senior counsel for the plaintiff, is regarding the
conspiracy and fraud perpetrated by the sixth defendant with the active
connivance of defendants Nos. 7 and 8 against the plaintiff. Mr. K. Parasaran
further submits that the conspiracy has started not on January 5, 1991, but
much earlier and as soon as RNG settled the succession issue on September 26,
1990. The same was to convert a unitary ownership of the sixth defendant and
the plaintiff into the sole ownership of the sixth defendant and also to
convert the team of the plaintiff and the sixth defendant into an exclusive
performance of the sixth defendant.
Regarding
the appointment of additional directors, it is stated by Mr. K. Parasaran,
learned senior counsel for the plaintiff, that the plaintiff never knew that
first the appointments were part of a larger design and even during the period
from January 5, 1991, to October 5, 1991, he was always given the impression
that the three persons were appointed as additional directors in defendants
Nos. 1 and 2 companies at two board meetings. But, the fact that defendants
Nos. 7 to 9 were elected as directors of the first defendant company at an
extraordinary general body meeting of the first defendant company on January
23, 1991, was concealed from the plaintiff. The illegal transfer of shares was
also deliberately suppressed from the plaintiff till the 13th day after RNG's
death. The minutes of January 5, 1991, meeting were deliberately suppressed
from the plaintiff. If the board meetings of the period January 5, 1991, to
October 5, 1991, are
examined, it will be seen that all the resolutions related to management of
various companies and there is no interference in the powers of the plaintiff.
Thus, all the meetings were conducted in such a manner so as to conceal the
election of defendants Nos. 7 to 9 as directors and the illegal transfer of
shares. The plaintiff had no knowledge of the fraud of confiscation of his
shares by the purported transfer of shares. As the plaintiff had no knowledge
of the fraud or conspiracy during the period, no question of estoppel or
acquiescence on the part of the plaintiff can arise at all. No one can be held
to acquiesce in a fraud against him. Learned senior counsel for the plaintiff
has also made a reference to Halsbury's Laws of England, 4th edition, volume
16, paragraphs 1472 and 1473, in this context. Thus, it was argued that there
can be no waiver/estoppel/acquiescence if a person had no knowledge of the
fraud being committed or of his rights being violated.
I
am unable to accept the argument of learned senior counsel for the plaintiff.
The suppression of the plaintiff's own participation in approving the
appointment of defendants Nos. 7 to 9 in defendants Nos. 3 and 5 companies on
June 24, 1991, and June 26, 1991, respectively, assumes significance not only
from the point of view of the maintainability of the plaintiff's challenge to
the resolution of the board of directors of the third defendant company but
also from the point of view of the credibility of the plaintiff and the
positive attempt on the part of the plaintiff to mislead this court in material
respects. The circular resolutions for the appointment of defendants Nos. 7 to
9 on the board of defendants Nos. 3 and 5 companies clearly establish the
following :
(a) RNG
had initiated the move to appoint these three persons as additional directors.
(b) He
was present at the meeting of the third defendant company held on June 24,
1991.
(c) It was considered by all the directors including the plaintiff that it was desirable to appoint defendants Nos. 7 to 9 on the board of directors on account of their eminence, in that, such appointment was to be made in the various companies in the group for uniformity of policy and better co-ordination of the operations of the companies. In fact, defendants Nos. 7 and 8 are described in the circular resolution as well-known industrialists.
(d) The suppression of the plaintiff's
own participation in the said resolution becomes even more significant if
reference is made to the averments made in the plaint. It becomes clear that
the plaintiff has mentioned those facts purposely.
I
fail to understand as to how the plaintiff can make certain assertions in the
plaint that the appointment of defendants Nos. 7 to 9 on the boards of
defendants Nos. 3 and 5 companies is illegal and fraudulent. The whole case of
the alleged illegal shift of the balance of power in defendants Nos. 1 to 5
companies and the challenge to the appointment of defendants Nos. 7 to 9 is
misconceived and it is not open to the plaintiff to urge this. In the plaint,
the plaintiff not only failed to refer to his own participation in the
appointment of defendants Nos. 7 to 9 in defendants Nos. 3 and 5 companies but
also makes a bold assertion that such appointment was "concealed from
him."
The
principal contention of Mr. K. Parasaran, learned senior counsel for the
plaintiff, is that there was a conspiracy conceived during RNG's lifetime to
divest the plaintiff of his 37 per cent. shareholding. In answer to this
contention, it was argued by Mr. P. Chidambaram, learned senior counsel for the
sixth defendant, that whatever allegations of fraud and conspiracy are made by
the plaintiff, the level of proof and the burden against him is very heavy.
Each circumstance leading up to the conspiracy must be consistent only with the
conspiracy theory sought to be established and must exclude every other
hypothesis to the contrary. Reference was also made to the decision in S.P.
Bhatnagar v. State of Maharashtra, AIR 1979 SC 826 ; Chandmal v. State of
Rajasthan, AIR 1976 SC 917 and Sharad Birdichand Sarda v. State of Maharashtra,
AIR 1984 SC 1622.
The
following facts will also clearly establish, as contended by Mr. P.
Chidambaram, learned senior counsel for the sixth defendant, that the
allegations of conspiracy made by the plaintiff cannot be sustained and the
question of estoppel or acquiescence on the part of the plaintiff can arise :
(a) The plaintiff's version is that the
board meeting of September 26, 1990, and the annual general body meeting of
September 27, 1990, were free from any controversy. This version is clearly
negatived by the fact that in his letter of November 12, 1990, the plaintiff
admits that RNG had, on September 26, 1990, asked him to return the shares and
that RNG had lost faith in him. The plaintiff had tried to impose upon RNG the
minutes prepared by Mr. Gurumurthy in which there was a marked emphasis upon
the creation of a trust and that the plaintiff and the sixth defendant were to
have equal status in the company. On account Of this controversy, RNG had lost faith
in Mr. Gurumurthy, who had to disassociate himself from the "Express"
group of companies in October, 1990.
(b) The plaintiffs assertion that the
letter dated November 12, 1990, and the share transfer forms were extracted
from the plaintiff by the seventh defendant on the ground that both the
plaintiff and the sixth defendant were to execute transfer deeds in favour of
RNG which is ex facie false as would appear from the letter dated November 12,
1990, which speaks of only loss of confidence in the plaintiff and not in the
sixth defendant. The plaintiff, by letter dated November 12, 1990, sent the
transfer deeds with regard to his exclusive shares or shares where he was the
first holder and not with regard to 12.16 per cent. shares of which the sixth
defendant was the first holder. From November 12, 1990, till date, the
plaintiff has never sought to enquire as to what happened to the transfer deeds
executed by him or alternatively put on record that the transfer deeds were
never intended to be acted upon. The plaintiff further has never requested that
the sixth defendant was also to transfer his holdings.
(c) The suggestion that the articles of
association, which were amended on September 27, 1990, were never sought to be
re-amended during the lifetime of RNG is an irrelevant circumstance. The
substantial part of amendments of the articles dealt with the conferring upon
RNG certain privileges. There could never have been any ground to take any
action to amend that. In any case, the sixth defendant had never any desire to
transfer his shareholdings to any third party and, therefore, there was never
any occasion to seek any amendment of the articles as amended on September 27,
1990.'Furthermore, it is clear from the document that the 37 per cent. shares
vested in RNG and he had not decided to transfer these shares to any other
person during his lifetime. The fact that this was not done would not only show
that there was no conspiracy but would militate against it.
(d) Allegations that the factum of the
meeting dated January 5, 1991, was
kept a secret are without any basis. The notice of the meeting was circulated.
The decisions of the meeting were acted upon. Even on his own showing, the
plaintiff, on March 16, 1991, was fully aware of the fact that such a meeting
had been held and directors had been appointed. The plaintiff was always aware
of the minutes of the meeting. His case that the minutes were kept away and not
shown to him is falsified by two contradictory assertions in the two plaints.
Moreover, if what the plaintiff says has any semblance of truth, it is
inconceivable that a director of the company wanting to obtain a copy of the minutes which are
denied to him, would not put a demand on record demanding a copy of the
minutes.
(e) The alleged circumstance that
directors were brought into various companies in absolute secrecy is falsified
by the conduct of the plaintiff himself. I have already made reference to the
submissions already advanced in this regard by Mr. P. Chidambaram.
(f) Allegations that Mr. Venu
Srinivasan's office was used to file the annual returns of the company are
explained by the simple fact that the plaintiff and certain officers close to
him in the Madras office, viz., Mr. L. Seshan and Mr. N. Rajendrakumar were not
sending the record when asked for by RNG in Bombay. They were not co-operating
either with RNG or with the sixth defendant. They could not be trusted at this
stage for filing the returns.
(g) The assertion that the cancelled
pronote was not sent back to the plaintiff by RNG is an absolutely irrelevant
circumstance and is not indicative of conspiracy. The pronote which was given
in consideration of RNG transferring 37 per cent. shareholding to the plaintiff
was cancelled. A letter to that effect was duly signed by RNG and sent to the
plaintiff. The fact that only a letter was sent and the pronote was not sent is
not a circumstance indicating conspiracy since in view of the cancellation, the
pronote ceased to have any effect in law.
(h) The alleged circumstance that Mr. L.
Seshan prepared the statement of assets and liabilities of RNG after his death
and showed the shares as not transferred clearly corroborates the fact that Mr.
Seshan is actively in collusion with the plaintiff as is demonstrated by his
conduct.
The
meeting dated September 24, 1991 of the board of directors of the Indian
Express (Madurai) Private Limited held at Bombay is a crucial meeting for the
following reasons : The meeting was attended by RNG, the sixth defendant and
Mrs. Saroj Goenka. Leave of absence was granted to the plaintiff. Mrs. Saroj
Goenka was elected as chairperson for the meeting. The chairperson mentioned
that additional directors have been appointed in the holding company (first
defendant company) and, therefore, the directors should consider the
appointment of additional directors on the board of the third defendant company
as well. She then tabled before the meeting, copies of the circular resolution which
has been circulated to all the directors. She also mentioned that RNG, Vivek
Khaitan and herself have all approved and accorded their consent to the
circular resolution
appointing Nusli N. Wadia (seventh defendant), Venu Srinivasan (eighth
defendant) and Shrikrishna Mulgaokar (ninth defendant) as additional directors
of the company with effect from June 24, 1991. The text of the circular
resolution was then recorded by the board meeting. This is the meeting by which
the plaintiff also became the joint managing director. A resolution to the said
effect was also unanimously passed appointing the plaintiff, who was the
executive director, as the re-designated joint managing director of the company
from June 24, 1991, on the terms and conditions detailed therein in regard to
his powers and duties. It is thus seen that the board itself can appoint
additional directors and that the powers of the board have been validly
exercised, which, in my view, does not call for any interference.
Mr.
K. Parasaran, learned senior counsel for the plaintiff/applicant has cited the
decision in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1, 4,
5 ; AIR 1973 SC 2389. In the said case, the services of the general manager
were terminated at a board meeting. That meeting was convened without giving
notice to one of the directors. The next day, the chairman sent a telegram to
the general manager stating that his services had been terminated.
Subsequently, at the next board meeting, the action of the chairman, who terminated
the services by his letter and telegram, was ratified. It was held that the
first board meeting, which was convened without giving notice to one of the
directors, was invalid and the resolution passed to terminate the services of
the general manager would be inoperative. However, on the peculiar facts of
that case, it was held that the termination of services was effected by the
chairman's telegram and letter which were subsequently ratified.
Relying
on the above decision, Mr. K. Parasaran submits that the board meetings of
January 5, 1991, of the first defendant company and of January 23, 1991, of the
second defendant company would be invalid and the resolutions passed therein
are inoperative as no notice was given to the plaintiff and his mother, who are
the other directors of the first defendant company, and to the plaintiff and
Mrs. Saroj Goenka, who are the other directors of the second defendant company.
According to Mr. P. Chidambaram, learned senior counsel for the sixth
defendant, the above decision is in favour of the sixth defendant and against
the plaintiff. It is seen from para 14 of the said decision that it was open to
a regularly constituted meeting of the board of directors to ratify that action
which, though unauthorised, was done on behalf of the company and that the
ratification would always relate back to the date of the act ratified and
so it must be held that the
services of the appellant were validly terminated on December 17, 1953, and
that the appellant was not entitled to the declaration prayed for by him, and
the trial court as well as the High Court were right in dismissing the claim.
In the instant case, it is seen from the records that the minutes of the
earlier meetings were discussed at the subsequent meetings. It is also proved
that the plaintiff has attended several meetings and hence, he is not entitled
to challenge the decision taken at the board meetings since the decision taken
at the previous board meetings has been subsequently ratified in the next
meeting.
The
next decision relied on by Mr. K. Parasaran, learned senior counsel for the
plaintiff, is in American Cyanamid Co. v. Ethicon Ltd. [1975] 1 All ER 504.
This decision is by the House of Lords. There is no dispute with regard to the
principles laid down by the House of Lords governing the grant of interlocutory
injunction, which have been set out in detail in the said judgment. The House
of Lords held that there was no rule of law which stipulated that a court
should not grant interlocutory injunctions on a balance of convenience unless
the plaintiff establishes a prima facie case or a probability that he would be
successful at the trial of the action. The House of Lords further held that it
was sufficient if the court was satisfied that the claim was not frivolous or
vexatious and that there was a serious question to be tried and once this is
established, the grant of interlocutory injunction would be passed on the
balance of convenience. I am of the view that the said decision is not
applicable to the facts of the case on hand and is distinguishable on facts. I
have already held on facts that the plaintiff has not made out a prima facie
case for the grant of injunction in his favour and that the balance of
convenience is also not in his favour.
The
decision in Dalpat Kumar v. Prahlad Singh [1992] 2 MLJ 49 ; [1992] 1 SCC 719
was also cited by Mr. K. Parasaran, wherein three principles to be applied for
grant of temporary injunction have been laid down by the apex court.
Mr.
P. Chidambaram, learned senior counsel for the sixth defendant, in support of
his contention cited the decision in Imperial Oil Soap and General Mills Co.
Ltd. v. Wazir Singh, AIR 1915 Lahore 478. In the above case, the company had
filed a suit for recovery of certain sums of money. The plaint was signed by
one of the directors. It was contended that the said director had no authority
to institute the suit on behalf of the company. The defendant who had raised
this objection was also a shareholder. The High Court observed that this
defendant had actually participated in the appointment of the director who was
representing the company. Further, this person had also functioned as director
for several years. In such cases, the parties were held not entitled to
question the powers of individual directors. Similarly, the shareholders who
had joined in the appointment as directors without taking exception would be
estopped from objecting to the validity of his appointment. In my opinion, this
decision is really in favour of the defendants and not in favour of the
plaintiff/applicant as contended by learned senior counsel for the plaintiff.
It is specifically established that the plaintiff has joined in the appointment
of defendants Nos. 7 to 9 and defendants Nos. 10 to 12 and has also
participated in the board meetings subsequent to their appointment. The only
contention raised by the plaintiff/applicant is that the appointment was made
without his knowledge and the same was kept concealed from him as part of the
conspiracy. I have already held that this is a matter which has to be gone into
in detail only at the time of trial and that the theory of conspiracy has to be
established only after a full-fledged trial. It is useful to refer to two
passages of the judgment of the Division Bench of the Lahore High Court :
"When
a company is shown to have accepted a certain person for many years as its
director and has never on any occasion repudiated any of his acts as such, it
is not open to one who has no concern with the company to challenge the
appointment of such director or to contest his authority to act on behalf of
the company.
When
a shareholder of a company takes part in nearly all the general meetings of the
company and joins in the annual appointment of its director without taking
exception to his appointment, he is under the circumstances debarred by his
conduct from objecting to the validity of the director's appointment or to his
authority to act for and on behalf of the company."
Mr.
P. Chidambaram then relied on the decision in John Shaw and Sons (Salford) Ltd.
v. Peter Shaw and John Shaw [1935] 2 KB 113. The principles of section 291 of
the Act have been set out in the above judgment. The relevant passage is
reproduced :
"A
company is an entity distinct alike from its shareholders and its directors.
Some of its powers may, according to its articles, be exercised by directors,
certain other powers may be reserved for the shareholders in general meeting.
If powers of management are vested in the directors, they and they alone can
exercise these powers..."
Mr.
P. Chidambaram, learned senior counsel for the sixth defendant then relied on
the decision in Peninsular Life Assurance Co., In re [1936] 6 Comp Cas 32
(Bom). In that case, the application was for rectification of the share
register. The applicant claimed about an irregularity of a meeting stating that
notice had not been given in respect of a board meeting. This point was taken
only when the matter was part-heard. The objection was not taken even while
filing inspection of all the records. The court observed that the shareholder
should have proved that notice was not given to the opposing directors. In the
present case, it is true, that the objections regarding the meeting have been
taken in the plaint. The conduct of the plaintiff in this case will show that
objection was not taken by him when the additional directors were present at
the meetings. The burden of proof is on him to show that he had no notice. In
the decision in Shuttleworth v. Cox Brothers and Co. Ltd. [1927] 2 KB 9, it was
held that it was not for the court to manage the affairs of the company and
that is for the shareholders and the directors. It is argued on behalf of the
plaintiff that in the light of the above case, the court was concerned with the
alteration of the articles of a company and hence, the said decision will also
not be applicable to the facts of the present case. I am unable to accept the
said contention. The decision has been relied on by learned senior counsel for
the sixth defendant only for the purpose of showing that it is for the
shareholders to decide whether it is for the benefit of the company and not for
the court and that it was also not for the court to manage the affairs of the company
and it is for the shareholders and the directors. In my opinion, the principle
laid down in the above decision is applicable to the facts of the present case.
Three
case-laws governing the principles of grant of injunction have been cited by
Mr. P. Chidambaram, learned senior counsel for the sixth defendant. They are in
United Commercial Bank v. Bank of India, AIR 1981 SC 1426 ; [1982] 52 Comp Cas
186 ; Hazrat Surat Shah Urdu Education Society v. Abdul Saheb [1988] 4 JT 232
(SC) and Dalpat Kumar v. Prahlad Singh [1992] 1 SCC 719. In the instant case,
as already held by me, the plaintiff has failed to establish that he would be
put to irreparable loss unless interim injunction was granted.
Mr.
G.E. Vahan Vati, learned senior counsel appearing for the first defendant/first
respondent, made three submissions :
(a) The
decision with regard to the company as regards shares ;
(b) the
decision with regard to the appointment of directors ;
(c) the
decision with regard to the alleged shareholding of the plaintiff.
Points
1 and 2 relate to the transfer of shares and the alleged shareholding of Anil
Kumar Sonthalia. A separate suit has been filed alleging conspiracy for
divesting the plaintiff of his shareholding and also the shareholding of Anil
Kumar Sonthalia, brother of the plaintiff, in regard to his shareholding. A
number of applications have also been filed in the said suit, which are pending
in this court. Hence, the contentions raised by learned senior counsel for the
first defendant are not dealt with in this order and the same will be dealt
with in the applications filed in the share transfer suit. So far as the
appointment of additional directors is concerned, Mr. G.E. Vahan Vati, learned
senior counsel, adopted the arguments of other learned senior counsel who
appeared on behalf of the other defendants/respondents. Learned senior counsel
has also invited my attention to the relevant paragraphs in the minutes of the
board meetings and also other connected papers, which I have already referred
to while dealing with the arguments of Mr. P. Chidambaram.
In
a connected matter in Applications Nos. 841, 5129 and 5998 of 1992, by order
dated April 13, 1993 (since reported in Vivek Goenka v. Manoj Sonthalia [1995]
83 Comp Cas 897), I have already dealt with the points in extenso and have
observed that since the defendant/respondent companies are board-managed
companies, the board of directors may exercise all the powers by virtue of
section 291 of the Companies Act and the articles of association of the company
and that the fundamental principle of corporate democracy, which is at the very
foundation of the company law, was recognised by this court earlier and between
March, 1991, and September, 1992, the plaintiff and Mrs. Saroj Goenka sat on
the board of directors of the first and the third defendant companies and did
not demur. In fact, the minutes show that the new directors appointed on
January 5, 1991, were welcomed on the board. The main prayer in C. S. No. 1246
of 1992 is concerned with the validity of the meeting of the board of directors
of the first defendant company held on January 5, 1991, and the board of
directors meeting of the second defendant company held on January 23, 1991, and
certain other resolutions for appointing additional directors. In my view, it
will not be open to this court to interfere with the day to day functions,
management and administration of a company unless it is established that the
decisions taken by the board are ultra vires the Act or the articles of
association of the company. I have consistently taken this view in my earlier
orders. At this interlocutory stage, this court is concerned only with the prima facie case and
the balance of convenience as disclosed by the documents produced by both the
parties and it is for the plaintiff to let in oral evidence at the time of
trial and establish his case.
The
following important circumstances will conclusively militate against the
conspiracy theory strenuously put forward by learned senior counsel for the
plaintiff and highly suggestive of the hypothesis given by the sixth defendant
to the effect that the plaintiff's relations with RNG got strained on account
of the reasons mentioned in the pleadings. They are :
(a) Gurumurthi's draft of the minutes of
the board meeting dated September 26, 1990, bears the corrections in hand by
R.A. Shah and the plaintiff.
(b) The
contents of the letter dated November 12, 1990.
(c) The
letter dated January 2, 1991, of RNG cancelling the pronote.
(d) The
notice of the meeting dated January 5, 1991, sent to the plaintiff.
(e) The knowledge/acquiescence and even
active participation of the plaintiff in the appointment of the directors to
various companies.
(f) The
disillusionment of RNG with the Madras office in not sending the documents.
(g) Gurumurthi's
disassociation from "Indian Express" on account of these factors in
October, 1990 ; and
(h) The
contents of Shri Achyut Patwardhan's letter.
During
the hearing of the case, I suggested whether the plaintiff's power as joint
managing director can be increased as a temporary measure and that the suit
itself can be taken up and disposed of at the earliest stage. At the next
hearing, Mr. R. Krishnamurthi, learned senior counsel for the sixth defendant,
Mr. G.E. Vahan Vati, learned senior counsel for the first defendant and Mr.
Navroz Seervai, learned senior counsel for the seventh defendant, appeared
before me and represented that the financial powers of the plaintiff can be
increased to some extent for which course Mr. Arvind P. Datar, learned counsel appearing
for the plaintiff, was not agreeable. This court has suggested this only as an
interim measure. Both the parties were not willing to give up their stand.
Hence, I could not
move about reapproachment between the parties. This is only by the way.
I
make it clear that the views expressed by me in this common order are only for
the purpose of disposing of the above applications on a prima facie
consideration of the materials placed before this court at this interlocutory
stage.
For the foregoing reasons, I hold that
there are no merits in the applications filed by the plaintiff/applicant.
Accordingly, all the applications are dismissed. However, there will be no
order as to costs.
[2001] 32 scl 524 (guj.)
High Court of
Saurashtra Cement Chemical Industries Ltd.
v.
Esma Industries Ltd.
M.B. Shah and R.K. Abichandani, JJ.
Section
290 of the Companies Act, 1956 - Directors - Validity of acts of - Whether if power to purchase shares is
exercised by directors not for benefit of company but simply and solely for
their personal aggrandisment, Court will interfere and prevent them from doing
so - Held, yes - Whether where MOU for purchase of shares was recorded between
some directors of appellant-company and holders of shares in question before
appellant-company was informed or its board of directors had passed resolution
purporting to purchase shares in question, it would clearly be case where
signatory directors were trying to shift their personal burden or obligation to
appellant-company and prima facie there was breach of trust, which,
notwithstanding incidental benefit to appellant-company, would per se be bad -
Held, yes - Whether in such a case injunction granted restraining appellant-company
from divesting its funds for purchase of shares in question was justified -
Held, yes
A Memorandum of
Understanding dated 30-4-1992 was recorded between the TMIL (a company
belonging to ‘M’ group) and GIIC, both being promoters of CCGL, that recited
that GIIC had agreed to sell its entire shareholding of 82,69,999 equity shares
of CCGL at average price of Rs. 54.30 per share to TMIL which would be solely
and wholly responsible for the management of CCGL. The shares were required to
be purchased within sixty days from the date of agreement and in case of delay,
interest at the rate of 24 per cent per annum was payable. As stated above,
TMIL belonged to ‘M’ group of which group two were directors of the appellant-
company SCCIL. The board of directors of the appellant-company proposed to
purchase the shares of CCGL from GIIC in terms of MOU. Thereupon the
respondent-company ESMA, which had 3.27 per cent shares in the
appellant-company, filed a company petition under sections 397 and 398 contending
that the directors were conducting the affairs of SCCIL in an oppressive manner
and in a manner prejudicial to that company on various grounds mentioned in the
said petition. It further filed company application seeking interim relief by
way of injunction restraining the SCCIL and its directors from divesting the
funds of the company and funds of its subsidiaries for purchase of shares of
CCGL contending that funds of SCCIL were being divested to meet the personal
obligation of the directors belonging to ‘M’ group under the MOU. Single Judge
of the Gujarat High Court allowed the interim relief and the appeal against it
was dismissed by the Division Bench. On special leave petition, the matter was
remanded by the Supreme Court to the High Court for hearing.
On the question of
continuing the interim relief.
From the discussion
by the Supreme Court in the case of
Needle Industries (India) Ltd. v. Needle Industries (Newey) India Holding
Ltd. [1981] 51 Comp. Cas. 743, it is apparent that the directors are not
entitled to use their powers of issuing shares for the purpose of maintaining
their control or the control of themselves and their friends over the affairs
of the company. What is considered objectionable is the use of such powers
merely for an extraneous purpose like maintenance or acquisition of control
over the affairs of the company. In such cases, an enquiry as to whether the
additional capital was presently required or whether purchase of such shares
was necessary is most relevant to the ultimate question. The primary duty of
the directors is to act in the interests of the company and in good faith even
though they also benefit as a result of such exercise. But if such power is
exercised by them solely for their personal aggrandisement, then the Court
would interfere and prevent the directors from doing so.
In the instant case,
there was nothing to indicate that, on 30-4-1992, when the memorandum of
understanding was executed between the ‘M’ group and the GIIC, SCCIL was
informed or the board of directors of the SCCIL had passed a resolution at the
relevant time that the SCCIL should purchase the equity shares of CCGL from the
GIIC as the nominees of the ‘M’ group. Therefore, at the relevant time, the ‘M’
group never intended that what they did was in the interest of the SCCIL. On
the contrary, it could be said that the memorandum of understanding was solely
for the benefit of the ‘M’ group. For getting the benefit, they were trying to
shift the burden or obligation to the SCCIL. Therefore, even applying the ratio
laid down by the Supreme Court in the case of Needle Industries (India) Ltd.
[1981] 51 Comp. Cas. 743, prima facie, it was apparent that there was breach of
trust by the ‘M’ group in seeing that their obligation to purchase the equity
shares of CCGL was transferred to SCCIL. Even on assumption that SCCIL might
indirectly or incidentally benefit because of purchase of shares of CCGL by the
‘M’ group, such a course would be per se bad.
In view of the
discussion in Needle Industries India Ltd.’s
case (supra) there can be no dispute as to the principle that the directors’
power is a fiduciary power, and although an exercise of such power may be
formally valid, it may be attacked on the ground that it was not exercised for
the purpose for which it was granted. Further, it is a crystallised principle
that the directors are not entitled to use their powers of issuing shares (in
the instant case ‘purchasing of shares’ from the funds of the company) merely
for the purposes of maintaining their control or the control of themselves and
their friends over the affairs of the company. That is to say, what is
considered objectionable is the use of such powers merely for an extraneous
purpose like maintenance or acquisition of control over the affairs of the
company.
Admittedly, the
instant case was not a case where directors had acted in obedience to their
duty to comply with the law of the land. Further, it could not be said that,
while discharging their duty, the directors incidentally got the benefit of
acquiring and maintaining control over the CCGL.
From the memorandum
of understanding, it was apparent that the said agreement was solely between
the ‘M’ group and the GIIC. It nowhere stated that the ‘M’ group were purchasing
the shares of CCGL on behalf of the SCCIL or that they were empowered to enter
into such type of agreement on behalf of SCCIL. Even from the case of Nanalal
Zaver [1950] 20 Comp. Cas. 179 (SC), it is clear that, if the power to purchase
shares is exercised by the directors not for the benefit of the company but
simply and solely for their personal aggrandisement, the Court will interfere
and prevent the directors from doing so. The very basis of the Court’s
interference in such a case is the existence of the relationship of a trustee
and of cestui que trust as between the
directors and the company. The appellant had not shown any resolution passed
by the SCCIL authorising the ‘M’ group to purchase the shares of the CCGL from
the GIIC before the memorandum of understanding was executed between the ‘M’
group and the GIIC.
One would get the
correct answer if one posed the question as to who would get control of CCGL.
The answer obviously would be that the ‘M’ group and not the SCCIL would get
the control over CCGL.
Considering the
facts stated above, obviously the ‘M’ group were the only beneficiaries
because the memorandum of understanding was between the ‘M’ group and the
GIIC. The fact that merely because the ‘M’ group were in the management of the
SCCIL and because of their getting managerial control of CCGL, the SCCIL might
get some business benefit, would be of no consequence or, in any case, it would
be incidental.
With regard to the
question of balance of convenience, for continuing the interim relief granted,
considering the controversy between the parties and the prima facie case which was made out as stated
hereinabove, this would be a fit case for continuing the interim relief. If the
‘M’ group were having such financial capacity as contended by them, then it
would be open to them to purchase the shares of the CCGL worth Rs. 12.5 crores
from their funds. Hence, this was not a fit case for vacating the interim
relief.
In the result the
appeals were dismissed.
Life Insurance
Corpn. of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC), Howard Smith
Ltd. v. Ampol Petroleum Ltd. [1974] 1 All ER 1126, Needle Industries (India)
Ltd. v. Needle Industries (Newey) India Holdings Ltd. [1981] 51 Comp. Cas. 743
(SC), Teck Corpn. Ltd. [1973] 33 DLR (3d) 288, Nanalal Zaver v. Bombay Life
Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 (SC), Cine Industries &
Recording Co. Ltd. In re [1942] 12 Comp. Cas. 215 (Bom.), Mohanlal Dhanjibhai
Mehta v. Chunilal B. Mehta [1962] 32 Comp. Cas. 970 (Guj.), Vadilal Raghavji v.
Manaklal Mansukh Bhai AIR 1925 Bom. 188 and Cook v. Deeks [1916] 1 AC 554 (PC).
P.
Chidambaram and K.N. Raval for the Appellant. Aspi
Chinoy, M.C. Bhatt, Sandip Singhi, P.G. Desai, B.R. Shah, N.D. Nanavati and K.N.
Raval for the Respondent.
Shah,
J.
- The question involved in these appeals is whether injunc-tion granted by the
learned single judge should be continued till the company petition filed under
sections 397 and 398 of the Companies Act, 1956, (‘the Act’) is decided. The
hearing of the application for grant or refusal of an injunction pending the
hearing of the main matter would not normally take much time. Still, however,
the matter is required to be heard at length because of heavy stake, the so-called
public interest and the vexed questions of law involved in the matter, even
though the main company petition is fixed for final hearing shortly. In this
background, it would be appropriate to begin with the underlying observations
made by Chinnappa Reddy, J. in the case of Life Insurance Corpn. of India v.
Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) as under :
“Problems of high
finance and broad fiscal policy, which truly are not and cannot be the province
of the court for the very simple reason that we lack the necessary expertise
and, which, in any case, are none of our business are sought to be transformed
into questions involving broad legal principles in order to make them the
concern of the court.... The court room becomes their battle ground and corporate
battles are fought under the attractive banners of justice, fair play and the
public interest. . . . .” (p. 559)
2. In paragraph 2, it is further observed
as under :
“In the case before
us, as if to befit the might of the financial giants involved, innumerable
documents were filed in the High Court, a truly mountainous record was built up
running to several thousand pages and more have been added in this Court.
Indeed, and there was no way out, we also had the advantage of listening to
learned and long drawn out, intelligent and often ingenious arguments advanced
and dutifully heard by us. In the name of justice, we paid due homage to the
causes of the high and mighty by devoting precious time to them, reduced, as we
were, at times to the position of helpless spectators...” (p. 560)
3. Similar is the situation in
the present case. At length, the matter was heard by the learned single judge.
Thereafter, the appeal was heard by the Division Bench of this Court. The
special leave petition was heard by the Supreme Court, and on remand we are
again required to devote a long time for hearing on the interim relief.
However, we would be failing in our duty if we do not mention that the
arguments of learned counsels for both the parties were intelligent, ingenious
and precise and were made in a pleasing manner.
4. The material short facts,
which are required to be taken into consideration for deciding this appeal, are
as under : ESMA Industries (P.) Ltd. is holding 3.27 per cent (at present)
shares in Saurashtra Cement and Chemicals Industries Limited (“SCCIL”). It has
filed Company Petition
No. 62 of 1986 under sections 397 and 398, 1956, for certain directions by,
inter alia, contending that respondent Nos. 2 and 3 (Mrs. M.N. Mehta and D.N.
Mehta) are in charge of the management of respondent No. 1 company and were
conducting the affairs of the company in an oppressive manner and in a manner
prejudicial to the company on various grounds mentioned in the said petition.
5. Thereafter, the company
petition was amended and also Company Application No. 852 of 1993 was filed
wherein the petitioners sought interim relief restraining the SCCIL and its
directors from diverting the funds of the company and the funds of its
subsidiaries for the purchase of shares of Cement Corporation of Gujarat
Limited (‘CCGL’). It is contended that the application was necessary as it was
felt that the funds of SCCIL were being diverted to meet the personal
obligation of respondent Nos. 2 and 3 (Mr. M.N. Mehta and Mr. D.N. Mehta) because
of the memorandum of understanding (MOU) dated 30-4-1992, entered into between
the Mehta International Limited (‘TMIL’) and the Gujarat Industrial Investment
Corporation Limited (‘GIIC’).
I. Firstly it is
contended that the Mehtas (respondent Nos. 2 and 3) should not be permitted to
assert that their action was bona fide and was in the interest of the company
because it is for the furtherance of their self-interest of maintaining the
management of CCGL:
The question of law
which is highlighted before this Court is : Whether purchase of shares in the
Cement Corporation of Gujarat Limited by the SCCIL would be per se bad because the shares are sought to be
purchased by the SCCIL at the instance of the Mehtas who are directors of SCCIL
and who are bound to purchase the shares of CCGL held by the GIIC on the basis
of the memorandum of understanding. It is contended that the Mehtas are
transferring their obligations to purchase shares of the CCGL to SCCIL for
maintaining control of management over the CCGL. It is also contended that
because of the MOU between the GIIC and the Mehtas, the Mehtas are required to
purchase the shares held by the GIIC in the CCGL and as the Mehtas are
financially not in a position to purchase the said shares or for ulterior
motives, they are transferring their obligation to purchase the shares of the
CCGL to the SCCIL in breach of their fiduciary duty. For this purpose, reliance
is placed on the principles laid down by the Privy Council in the case of
Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] 1 All ER 1126, wherein the
Court has observed as under (page 1133):
“In their Lordships’
opinion neither of the extreme positions can be maintained. It can be accepted,
as one would only expect, that the majority of cases in which issues of shares
are challenged in the courts are cases in which the vitiating element is the
self-interest of the directors, or at least the purpose of the directors to
preserve their own control of the management.
Further, it is
correct to say that where the self-interest of the directors is involved, they
will not be permitted to assert that their action was bona fide thought to be,
or was, in the interest of the company; pleas to this effect have invariably
been rejected just as trustees who buy trust property are not permitted to
assert that they paid a good price”. (Emphasis supplied)
6. Mr. Chinoy, the learned
counsel for the respondents, submitted that the aforesaid principle is accepted
by the Supreme Court in the case of Needle Industries (India) Ltd. v. Needle
Industries (Newey) India Holdings Ltd. [1981] 51 Comp. Cas. 743 (SC). It is,
therefore, contended that, indisputably, the Mehtas (TMIL) who are directors of
the SCCIL are having self-interest of maintaining control over the management
of CCGL and as they are required to purchase the shares of CCGL held by the
GIIC as per the MOU, they could not be permitted to assert that their action
was bona fide or that it was in the interest of the SCCIL. He submitted that,
as held by the Privy Council, pleas to this effect have invariably been
rejected just as trustees who buy trust property are not permitted to assert
that they paid a good price.
7. As against this, it is contended by Mr.
Chidambaram, learned counsel for the appellants, that:
(i) the
board of directors (15 directors) of SCCIL has taken a decision to purchase the
shares of CCGL;
(ii) the
said decision is taken in the interest of the company for various reasons;
(iii) the other 13 directors who were parties to
the decision taken by the board of directors are not made parties to the
present proceedings and there is no allegation against them;
(iv) the decision to purchase the shares was
taken in the interest of the company because the SCCIL is producing cement and
its installed capacity at present is 11 lakhs MT of cement per day while CCGL
is also a company producing cement and having an installed capacity to produce
12 lakhs MT of cement per day. However, for acquiring such a plant, it would
require Rs. 400 crores. But because of the arrangement for getting control over
the management of such plant, at present the SCCIL is required to invest only
Rs. 45 crores;
(v) it would be a far-fetched inference that
by purchase of shares by the SCCIL, the Mehtas are going to get any benefits.
The reason to purchase the shares of CCGL is to see that the CCGL is not
controlled by outsiders who are interested in having business competition with
the SCCIL; and
(vi) the decision to purchase the shares of
CCGL by the board of directors of SCCIL is intra vires and is not against the
provisions of law. There is no allegation of fraud nor is there any allegation
to the effect that the purchase of shares would be against the public interest.
8. For appreciating the
aforesaid contentions, we would first refer to the memorandum of understanding
dated 30-4-1992, between the Mehta International Limited (TMIL) and the Gujarat
Industrial Investment Corporation Limited (GIIC), which inter alia, recites
that, in terms of the shareholders’ agreement dated 9-4-1981, between them,
TMIL and GIIC are the promoters of Cement Corporation of Gujarat Limited
(CCGL): there were differences of opinion between them which have resulted in
various court proceedings; therefore, in the interest of CCGL and in the public
interest, GIIC and TMIL have decided to resolve the differences and agreed that
TMIL will be solely and wholly responsible for the management of CCGL and that
the GIIC have decided to disinvest their shares in favour of TMIL as provided
in the shareholders’ agreement on the conditions mentioned in the MOU. Clause
No. 1, inter alia, provides that GIIC has agreed to sell its entire shareholding
of 82,69,999 equity shares to TMIL. Clause No. 3 reads as under :
“3. The Corporation
shall sell to TMIL and its associates and TMIL and its associates shall buy
from the Corporation the entire 82,69,999 equity shares of Rs. 10 each fully
paid up at a price to be determined in accordance with clause No. 4 as a spot
delivery contract. These shares shall be bought by and transferred in favour
of such persons, firms or companies as TMIL may decide to which the Corporation
has agreed.”
9. As per clause No. 4 the
Corporation has worked out the average price of shares at Rs. 54.30 per share.
Clause Nos. 5 and 6, inter alia, provide that the entire consideration shall be
paid by TMIL within sixty days from the date of price fixed as per clause Nos.
3 and 4 without any interest. In case of delay in payment by TMIL beyond the
said period of sixty days, TMIL shall pay simple interest at the rate of 24 per
cent per annum commencing after sixty days from the date of the price
determined as per clause No. 4 on unpaid amount till the date of actual payment.
Clause No. 13 provides that the GIIC shall immediately propose the name of Shri
M.N. Mehta or his nominee as chairman of CCGL and ensure his election to that
post at a board meeting. Clause Nos. 15 and 16 read as under :
“15. GIIC, TMIL and
CCGL shall jointly represent to the authorities including the BIFR, public
financial institutions, banks and Central Government of this understanding with
a request to ensure all possible help to CCGL for the rehabilitation under the
management of TMIL....
16. GIIC shall
forthwith inform the BIFR that its proposal to revive CCGL on its own stands
withdrawn and that GIIC will in terms of this memorandum of understanding,
support a new proposal to BIFR being put forward by TMIL.”
10. Clause 22 further provides
that if for any reason the transfer of shares from GIIC to Tmil does not take place, in whole or
in part, or any clause of this understanding is not capable of being
implemented, the steps taken under the memorandum shall be irreversible in
spite of non-performance of any clause of this agreement.
11. From the above terms of the
MOU, it is apparent that the MOU is executed between the Mehtas and the GIIC
and, admittedly, the SCCIL is not party to the MOU. From this MOU, it is
further clear that:
(1) the obligation to purchase shareholding
of 82,69,999 equity shares of CCGL from the GIIC at the rate of Rs. 54.30 per
share is that of the Mehtas (TMIL);
(2) the Mehtas are required to purchase the
shares within sixty days from the date of agreement. If there is delay, they
are required to pay 24 per cent interest per annum;
(3) Shri M.N. Mehta is elected as chairman
of the CCGL on the basis of clause No. 13. The other directors as nominated by
the Mehtas are required to be appointed; and
(4) GIIC, TMIL and CCGL are required to
jointly represent to the BIFR and other financial institutions to ensure all
possible help to CCGL for rehabilitation under the management of TMIL.
12. The aforesaid terms of the
MOU, in our view, leave no doubt that the Mehtas were and are under the obligation
to purchase the equity shares of CCGL from the GIIC at the rate of Rs. 54.30
per share. One of the reasons to purchase the said shares is to have the sole
control of the management of CCGL. Admittedly, the said MOU is implemented and
Shri M.N. Mehta is appointed as chairman of the CCGL. Considering these facts,
it would be reasonable to draw an inference that self-interest of the Mehtas is
involved in the purchase of shares of CCGL from GIIC. This arrangement was made
for acquiring or maintaining their control over the CCGL. For the purpose of
complying with the terms of the MOU, they have managed to see that the SCCIL
purchases the shares of CCGL. Hence, there is a breach of fiduciary
relationship and even if their action was bona fide or in the interest of the
company, that plea should be rejected.
13. However, the learned counsel
Mr. Chidambaram vehemently submitted that the law laid down by the Privy
Council in the case of Howard Smith Ltd. (supra) is not accepted by the Supreme
Court in the case of Needle Industries (India) Ltd. (supra) and is
distinguished by the Supreme Court. In the case of Needle Industries (India)
Ltd. (supra) one of the questions was whether the directors of Needle
Industries (India) Ltd. in issuing the rights shares abused the fiduciary power
which they possessed as directors to issue shares. While considering the said
contention, the Court has referred to various decisions. It would be necessary
to reproduce the main discussion because the law on the subject is discussed in
a nutshell and, in our view, the Supreme Court has relied upon the ratio laid
down in the case of Howard Smith Ltd. (supra). The relevant observations in
paragraphs 105 to 111 are as under (pages 808-813 of 51 Comp. Cas.) :
“In Punt v. Symons
[1903] 2 CH 506 (Ch. D) which applied the principle of Fraser v. Whalley [1864]
71 ER 361 it was held that :
‘Where shares had
been issued by the directors not for the general benefit of the company, but
for the purpose of controlling the holders of the greater number of shares by
obtaining a majority of voting power they ought to be restrained from holding
the meeting at which the votes of the new shareholders were to have been used.’
But
Byrne, J. Stated:
‘There may be occasions
when directors may fairly and properly issue shares in the case of a company
constituted like the present for other reasons. For instance, it would not be
at all an unreasonable thing to create a sufficient number of shareholders to
enable statutory powers to be exercised.’
In the instant case,
the issue of rights shares was made by the directors for the purpose of
complying with the requirements of the FERA and the directives issued by the
Reserve Bank under that Act. The Reserve Bank had fixed a deadline and NIIL had
committed itself to complying with the Bank’s directive before that deadline.
Peterson, J. applied
the principal enunciated in Fraser v. Whalley [1864] 71 ER 361 and in Punt v.
Symons [1903] 2 Ch 506 (Ch. D) in the case of Piercy v. S. Mills & Co. Ltd.
[1920] 1 Ch 77 (Ch. D). The learned judge observed at page 84:
‘The basis of both
cases is, as I understand, that directors are not entitled to use their powers
of issuing shares merely for the purpose of maintaining their control or the
control of themselves and their friends over the affairs of the company, or
merely for the purpose of defeating the wishes of the existing majority of
shareholders.’
The fact that by the
issue of shares the directors succeed also or incidentally in maintaining their
control over the company or in newly acquiring it, does not amount to an abuse
of their fiduciary power. What is considered objectionable is the use of such
powers merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company.
** ** **
Before we advert to
the decision of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd.
[1974] AC 821 we would like to refer to the decision of the High Court of
Australia in Harlowe’s Nominees P. Ltd. v.
Woodside (Lakes Entrance) Oil Co. [1968] 121 CLR 483 and to the Canadian
decision of Berger, J. of the Supreme Court of British Columbia, in the case of
Teck Corporation Ltd. v. Millar [1973] 33 DLR (3d) 288 both of which were
considered by Lord Wilberforce in Howard Smith Ltd. v. Ampol Petroleum Ltd.
[1974] AC 821. On a consideration of the English decisions, including those in
Punt v. Symons [1903] 2 Ch 506 (Ch. D) and Piercy v. S. Mills & Co. Ltd.
[1920] 1 Ch 77 (Ch. D), Barwick, C.J. said in Harlowe’s Nominees P. Ltd. v.
Woodside (Lakes Entrance) Oil Co. [1968] 121 CLR 483, 493 :
‘The principle is
that although primarily the power is given to enable capital to be raised when
required for the purposes of the company, there may be occasions when the directors
may fairly and properly issue shares for other reasons, so long as those
reasons relate to a purpose of benefiting the company as a whole, as
distinguished from a purpose, for example, of maintaining control of the
company in the hands of the directors themselves or their friends. An enquiry
as to whether additional capital was presently required is often most relevant
to the ultimate question upon which the validity or invalidity of the issue
depends; but the ultimate question must always be whether in truth the issue
was made honestly in the interests of the company.’
We agree with the
principle so stated by the Australian High Court and, in our opinion, it
applies with great force to the situation in the present case. In Teck Corpn.
Ltd. v. Millar [1973] 33 DLR (3d) 288 the Court examined several decisions of
the English courts and of other courts including the one in Hogg [1967] 37
Comp. Cas. 157 (Ch. D). The headnote of the last report [33 DLR (3d) 288] at
page 289 reads thus :
‘Where directors of
a company seek, by entering into an agreement to issue new shares, to prevent a
majority shareholder from exercising control of the company, they will not be
held to have failed in their fiduciary duty to the company if they act in good
faith in what they believe, on reasonable grounds, to be the interest of the
company. If the directors’ primary purpose is to act in the interest of the
company, they are acting in good faith even though they also benefit as a
result.’
In Howard Smith Ltd.
[1974] AC 821 (PC), no new principle was evolved by Lord Wilberforce who,
distinguishing the decisions in Teck Corpn. [1972] 33 DLR (3d) 288 and
Harlowe’s Nominees [1968] 121 CLR 483 (Australia) said (page 837 of [1974] AC):
‘By contrast to the
cases of Harlowe’s Teck, the present case, on the evidence, does not, on the
findings of the trial judge, involve any consideration of management, within
the proper sphere of the directors. The purpose found by the judge is simply
and solely to dilute the majority voting power held by Ampol and Bulkships so
as to enable a then minority of shareholders to sell their shares more
advantageously. So far as authority goes, an issue of shares purely for the
purpose of creating voting power has repeatedly been condemned.’
The dictum of Byrne,
J. In Punt v. Symons [1903] 2 Ch 506 (Ch. D), that ‘there may be reasons other
than to raise capital for which shares may be issued’ was approved at page 836
and it was observed at page 837:
‘Just as it is
established that directors, within their management powers, may take decisions
against the wishes of the majority of shareholders, and indeed that the
majority of shareholders cannot control them in the exercise of these powers
while they remain in office (Automatic Self Cleansing Filter Syndicate Co. Ltd.
v. Cuninghame [1906] 2 Ch 34 (CA)), so it must be unconstitutional for
directors to use their fiduciary powers over the shares in the company purely
for the purpose of destroying an existing majority, or creating a new majority
which did not previously exist. To do so is to interfere with that element of
the company’s constitution which is separate from and set against their powers.
If there is added, moreover, to this immediate purpose, in ulterior purpose to
enable an offer for shares to proceed, which the existing majority was in a
position to block, the departure from the legitimate use of fiduciary power
becomes not less, but all the greater. The right to dispose of shares at a
given price is essentially an individual right to be exercised on individual
decision and on which a majority, in the absence of oppression or similar
impropriety, is entitled to prevail.’
In our judgment the
decision of the Privy Council in Howard Smith [1974] AC 821, instead of helping
the holding company goes a long way in favour of the appellants. The directors
in the instant case did not exercise their fiduciary powers over the shares
merely or solely for the purpose of destroying an existing majority or for
creating a new majority which did not previously exist. The expressions
‘merely’, ‘purely’, ‘simply’ and ‘solely’ virtually lie strewn all over page
837 of the report in Howard Smith Ltd. The directors here exercised their power
for the purpose of preventing the affairs of the company from being brought to
a grinding halt, a consummation devoutly wished for by Coats in the interest of
their extensive world-wide business.
In Nanalal Zaver v.
Bombay Life Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 (SC), Das, J., in his
separate but concurring judgment deduced the following principle on the basis
of the English decisions (page 203):
‘It is well
established that directors of a company are in a fiduciary position vis-a-vis
the company and must exercise their power for the benefit of the company. If
the power to issue further shares is exercised by the directors not for the
benefit of the company but simply and solely for their personal aggrandisement
and to the detriment of the company, the court will interfere and prevent the
directors from doing so. The very basis of the court’s interference in such a
case is the existence of the relationship of a trustee and of cestui que trust
as between the directors and the company. (pages 419-420 of [1950] SCR).
It is true that Das,
J. held that the Singhanias were complete strangers to the company and
consequently the directors owed no duty, much less a fiduciary duty, to them.
But we are unable to agree with the contention that the observations extracted
above from the judgment of Das, J. are obiter. The learned judge has set forth
the plaintiffs’ contention under three sub-heads (page 415 of [1950] SCR). At
the bottom of page 419 of SCR he finished the discussion of the 2nd sub-head
and said: ‘This leads me to a consideration of the third sub-head on the
assumption that... the additional motive was a bad motive.’
The question was
thus argued before the Court and was squarely dealt with. Before we leave this
topic, we would like to mention that the mere circumstance that the directors
derive benefit as shareholders by reason of the exercise of their fiduciary
power to issue shares, will not vitiate the exercise of that power. As observed
by Gower in Principles of Modern Company Law, 4th edn., page 578 :
‘As it was happily
put in an Australian case they are not required by the law to live in an
unreal region of detached altruism and to act in a vague mood of ideal
abstraction from obvious facts which must be present in the mind of any honest
and intelligent man when he exercises his power as a director.’
The Australian case
referred to above by the learned author is Mills v. Mills ([1938] 60 CLR 150)
which was specifically approved by Lord Wilberforce in Howard Smith [1974] AC
821 (PC). In Nanalal Zaver [1950] SCR 391; 20 Comp. Cas. 179 (SC) too [Das, J.
stated at page 425 of SCR (page 185 of AIR)]: that the true principle was laid
down by the Judicial Committee of the Privy Council in Hirsche v. Sims [1894]
AC 654, 660-661 thus (page 207 of 20 Comp. Cas.) :
‘If the true effect
of the whole evidence is that the defendants truly and reasonably believed at
the time that what they did was for the interest of the company, they are not
chargeable with dolus malus or breach of
trust merely because in promoting the interest of the company they were also
promoting their own, or because they afterwards sold shares at prices which
gave them large profits.’
Whether one looks at
the matter from the point of view expressed by this Court in Nanalal Zaver
[1950] 20 Comp. Cas. 179 (SC), or from the point of view expressed by the Privy
Council in Howard Smith [1974] AC 821, the test is the same, namely, whether
the issue of shares is simply or solely for the benefit of the directors. If
the shares are issued in the larger interest of the company, the decision to
issue the shares cannot be struck down on the ground that it has incidentally
benefited the directors in their capacity as shareholders. We must, therefore,
reject Shri Seervai’s argument that in the instant case, the board of directors
abused its fiduciary power in deciding upon the issue of rights shares.” (p.
808)
14. From the aforesaid
discussion, in our view, it is difficult to hold that in the case of Needle
Industries (India) Ltd. (supra) the Supreme Court has distinguished the law
laid down by the Privy Council in the case of Howard Smith Ltd. (supra) that
where the self-interest of the directors is involved, they will not be
permitted to assert that their action was bona fide thought to be, or was, in
the interest of the company; pleas to this effect have invariably been rejected
just as trustees who buy trust property are not permitted to assert that they
paid a good price.
15. Further, from the aforesaid
discussion by the Supreme Court with regard to exercise of the powers by the directors
of a company, it is apparent that the directors are not entitled to use their
powers of issuing shares for the purpose of maintaining their control or the
control of themselves and their friends over the affairs of the company. What
is considered objectionable is the use of such powers merely for an extraneous
purpose like maintenance or acquisition of control over the affairs of the
company. In such cases, an enquiry as to whether the additional capital was
presently required or whether purchase of such shares was necessary is most
relevant to the ultimate question. The primary duty of the directors is to act
in the interests of the company and in good faith even though they also benefit
as a result of such exercise. But, if such power is exercised by them solely
for their personal aggrandisement, then the court would interfere and prevent
the directors from doing so.
16. In any case, there is nothing
to indicate that, on 30-4-1992, when the memorandum of understanding was
executed between the Mehtas and the GIIC, the SCCIL was informed or the board
of directors of the SCCIL had passed a resolution at the relevant time that the
SCCIL should purchase the equity shares of CCGL from the GIIC as the nominees
of the Mehtas. Therefore, at the relevant time, the Mehtas never intended that
what they did was in the interest of the SCCIL. On the contrary, it can be said
that the memorandum of understanding was solely for the benefit of the Mehtas.
For getting the benefit, they are trying to shift the burden or obligation to
the SCCIL. Therefore, even applying the ratio laid down by the Supreme Court in
the case of Needle Industries (India) Ltd.’s case (supra) prima facie it is
apparent that there is breach of trust by the Mehtas in seeing that their
obligation to purchase the equity shares of CCGL is transferred to SCCIL. Even
on an assumption that the SCCIL may indirectly or incidentally benefit because
of purchase of shares of CCGL by the Mehtas as is sought to be contended by
learned counsel Mr. Chidambaram, such a course would be per se bad.
17. In view of the aforesaid
discussion in Needle Industries (India) Ltd.’s case (supra) there can be no
dispute as to the principle that the directors’ power is a fiduciary power,
and although an exercise of such power may be formally valid, it may be
attacked on the ground that it was not exercised for the purpose for which it
was granted. Further, from the above quoted paragraphs wherein various
decisions are cited, it is a crystallised principle that the directors are not
entitled to use their powers of issuing shares (in the instant case ‘purchasing
of shares’ from the funds of the company) merely for the purpose of maintaining
their control or the control of themselves and their friends over the affairs
of the company. That is to say, what is considered objectionable is the use of
such powers merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company. Admittedly, this is not a case where
respondent Nos. 2 and 3 have acted in obedience to their duty to comply with
the law of the land. Further, it cannot be said that, while discharging their
duty, respondent Nos. 2 and 3 incidentally got the benefit of acquiring and
maintaining the control over the CCGL. However, learned counsel Mr. Chidambaram
referred to the passage from the case of Teck Corpn. Ltd. [1973] 33 DLR (3d) 288 to contend that the
ultimate question must always be whether the shares were purchased by the
directors honestly in the interests of the company. In our view, from the
memorandum of understanding, it is apparent that the said agreement is solely
between the Mehtas and the GIIC. It nowhere states that the Mehtas were
purchasing the shares of CCGL on behalf of the SCCIL or that the Mehtas were
empowered to enter into such type of agreement on behalf of the SCCIL. Even
from the passage quoted above from the case of Nanalal Zaver v. Bombay Life
Assurance Co. Ltd. [1950] 20 Comp. Cas. 179 (SC), it is clear that, if the
power to purchase shares is exercised by the directors not for the benefit of
the company but simply and solely for their personal aggrandisement, the Court
will interfere and prevent the directors from doing so. The very basis of the
court’s interference in such a case is the existence of the relationship of a
trustee and of cestui que trust as between the directors and the company. In
any set of circumstances the learned counsel for the appellant has not shown
any resolution passed by the SCCIL authorising the Mehtas to purchase the shares
of the CCGL from the GIIC before the memorandum of understanding was executed
between the Mehtas and the GIIC.
18. In our view, the learned
counsel Mr. Chinoy was right in submitting that we would get the correct answer
if we posed the question as to who would get control of CCGL? The answer obviously
would be that the Mehtas, and not the SCCIL, would get the control over CCGL.
For this purpose, considering the affidavits filed by both the parties at the
time of hearing of the matter, it is apparent that, if the SCCIL purchases the
shares of CCGL as suggested by the Mehtas, then also at the most the SCCIL may
have a 17 per cent shareholding, as stated by the appellants, or a 15 per cent
shareholding as stated by Jitin Loparain on behalf of the respondents. As
against this, learned counsel Mr. Chidambram submitted that in these days even
15 per cent or 17 per cent shareholding in a company would have its own impact
because the shareholding of the public is about 21 per cent only and, therefore,
the said percentage of shareholding is a substantial one which would enable the
SCCIL to exercise its control over the management of CCGL. In our view, the
question is not whether the SCCIL would have any say in the management of the
CCGL; but the question in the instant case is who gets the benefit by purchase
of equity shares of CCGL by the SCCIL. In our view, considering the facts
stated above obviously the Mehtas are the only beneficiaries because the
memorandum of understanding is between the Mehtas and the GIIC. The fact that
merely because the Mehtas are in the management of the SCCIL and they may get
managerial control of CCGL, the SCCIL may get some business benefit, would be
of no consequence or in any case it would be incidental. Considering the aforesaid
facts, in our view the submission of learned counsel Mr. Chidambaram that:
(i) the
board of directors (15 directors) have taken a decision to purchase the shares
of CCGL;
(ii) 13
directors are not joined as parties; and
(iii) the so-called reasons to purchase the
shares of CCGL, would be insignificant. In the company petition under section
397 of the Act, what is challenged is the action of the company and not of the
individual members. In any case, the concerned individual directors against
whom the allegations are made are joined as parties to the company petition.
19. At this stage, we may note
that the learned counsel Mr. Chinoy has submitted vehemently that the decision
to purchase the shares of the CCGL at the rate of Rs. 54.30 per share is per se
bad because the price at the relevant time was Rs. 30 or less than Rs. 30. This
contention is vehemently disputed by the learned counsel Mr. Chidambaram by
pointing out various facts that the average price was worked out approximately
at Rs. 17. In our view, at this interim stage, it would be difficult to decide
this contention by appreciating the facts relied upon by both the parties as it
would require detailed investigation. In any case, as observed by the Supreme
Court in the case of Needle Industries (India) Ltd.’s case (supra) (page 818) :
“. . . it is also
not true to say, as a statement of law, that the directors have no power to
issue shares at par, if their market price is above par. These are primarily
matters of policy for the directors to decide in the exercise of their
discretion and no hard and fast rule can be laid down to fetter that
discretion.” (p. 818)
The court has also
clarified that such discretionary powers in company administration are in the
nature of fiduciary powers and must, for that reason, be exercised in good
faith.
The learned counsel
Mr. Chidambaram submitted that to purchase the shares of the CCGL by the SCCIL
is a question of internal management of the company and is the concern of the
company. The company is a better judge of the business prospects of a trading
venture than the court can ever hope to be. He, therefore, submitted that the
Court should not interfere at this stage with regard to the internal management
of the company. For this purpose, he relied upon the decision of the Bombay
High Court in the case of Cine Industries & Recording Co. Ltd., In re
[1942] 12 Comp. Cas. 215, wherein the court has observed as under (page
228) :
“. . . The court
constantly bears in mind that the internal management of the company is its
own concern, and it is a much better judge of business prospects of a trading
venture than the court can ever hope to be. If, therefore, the majority of the
shareholders show confidence in the management of the company and have faith
in its future prospects, the court has rarely interfered. . . .” (p. 228)
20. The aforesaid judgment is
followed by this Court in the case of Mohanlal Dhanjibhai Mehta v. Chunilal B.
Mehta [1962] 32 Comp. Cas. 970 (Guj.).
21. For meeting this contention, the
learned counsel Mr. Chinoy has vehemently submitted that the submissions of
learned counsel for the appellant is without any substance because in the
present case, even if the act is approved by the majority, it is in breach of
fiduciary duty of the directors and on the face of it, it would be bad. He
submitted that a similar contention is dealt with by the Division Bench of the
Bombay High Court in the case of Vadilal Raghavji v. Maneklal Mansukhbhai AIR
1925 Bom. 188.
22. In the aforesaid case of Vadilal
Raghavji (supra) the Court has held that the minority has a right to sue one of
the shareholders forming the majority for acts of misappropriation of the
company’s goods on the part of that shareholder, even though the majority
approved of his acts. While dealing with this contention, the Court observed
(page 190) :
“. . . The
allegations might in certain circumstances amount to criminal breach of trust
or to theft. And to test the question whether a majority can bind a minority
under these circumstances, I put it to Sir Chimanlal Setalvad whether supposing
a case was one of actual theft and the fiduciary agent had actually stolen the
assets of the company, counsel still contended that the majority of the
shareholders could bind the minority not to recover those stolen assets of the
company. Counsel was forced to argue that the majority could bind the
minority.... On general principles this proposition is clearly erroneous. The
assets of the company, so far as they represent profits, may be distributed by
way of dividend, capital assets may be distributed in a winding up or in
certain other limited ways under the Indian Companies Act....” (p. 190)
23. The Court further observed
that in those cases in which the assets of the company are being improperly
distributed by an attempt to pay them into the pockets of the majority of shareholders
of the company or their friends at the expense of the minority, the Court can
interfere. The Court referred to the following passage from the decision of the
Privy Council in the case of Cook v. Deeks [1916] 1 AC 554, 564:
“If, as their
Lordships find on the facts, the contract in question was entered into under
such circumstances that the directors could not retain the benefit of it for
themselves, then it belonged in equity to the company and ought to have been
dealt with as an asset of the company. Even supposing it be not ultra vires of
a company to make a present to its directors, it appears quite certain that
directors holding a majority of votes would not be permitted to make a present
to themselves. This would be to allow a majority to oppress the minority. To
such circumstances the cases of North-West Transportation Co. v. Beatty [1887]
12 AC 589 and Burland v. Earle [1902] AC 83 (PC) have no application. In the
same way, if directors have acquired for themselves property or rights which
they must be regarded as holding on behalf of the company, a resolution that
the rights of the company should be disregarded in the matter would amount to
forfeiting the interest and property of the minority of shareholders in favour
of the majority and that by the votes of those who are interested in securing
the property for themselves. Such use of voting power has never been sanctioned
by the courts, and, indeed, was expressly disapproved in the case of Menier v.
Hooper’s Telegraphic Works [1874] LR 9 Ch 350.” [Emphasis supplied]
24. In view of the aforesaid
discussion, in our view, prima facie, it appears that the funds of the SCCIL
are diverted for the personal benefits of the Mehtas who have executed the memorandum
of understanding with the GIIC for purchase of shares of CCGL. Assuming that
because of purchase of shares of CCGL by the Mehtas, the SSCIL may get some
commercial benefit but that benefit would be an incidental one. The Mehtas
would be getting the right to manage CCGL and it can never be said that the
SCCIL is getting the right to manage CCGL.
II. BIFR
Scheme :
Now, we
will deal with the next aspect of the matter, that is to say :
(a) why the BIFR did not consider the
earlier proposal of amalgamation of CCGL with the SCCIL, as prudent ?
(b) whether
the SCCIL was a party to the scheme framed by the BIFR for revival of the CCGL
?
25. With regard to the first part
of the question, the learned counsel Mr. Chidambaram relied upon the resolution
dated 8-8-1991, passed by the board of directors of SCCIL. By the said
resolution, the board had approved the proposal to submit an application
through the Mehta Group to the BIFR either for take over of CCGL or merging the
same with the SCCIL. For this purpose, he further relied upon the order passed
by the BIFR in the proceedings held on 11-11-1991. The record of the
proceedings is produced at annexure I to the further affidavit filed by Mr. B.
N. Attara, duly authorised representative of the appellant-company, in Civil
Application No. 12 of 1994. The relevant consideration is in paragraph 11.
From the order of the BIFR, it is apparent that the BIFR has not accepted the
proposal of the SCCIL for merger of the CCGL mainly on the ground that the
SCCIL is itself a sick industrial company and it may take some time before its
net worth becomes positive. The Bench has further observed that there was no
rationale in considering merger of a sick company (with huge accumulated losses
and liability) with another sick company (with a doubtful ability to make
requisite funds available for rehabilitation on a long-term viable basis). No
other discussion by the BIFR is there in the said order. It, therefore, appears
to us that the BIFR rejected the scheme for amalgamation of SCCIL with CCGL
only because SCCIL itself was a sick unit in August, 1991.
26. The next aspect is whether
the SCCIL was a party to the scheme framed by the BIFR. The learned counsel Mr.
Chidambaram vehemently submitted that, even though the name of SCCIL is not
mentioned in the beginning of the proceedings recorded by the BIFR, it would
not mean that the SCCIL was not a party to the said scheme finalised by the
BIFR on October 26, 1993. For this purpose, he relied upon a number of
paragraphs of the scheme framed by the BIFR which is produced at annexure B to
the company petition. As against this, learned counsel Mr. Chinoy submitted
that at no point of time was the SCCIL a party to the scheme framed by the
BIFR. For this purpose, he contended that there is no resolution passed by the
board of directors of the SCCIL or by the company to the effect that the SCCIL
should take part before the BIFR for reframing a scheme for revival of the
CCGL. He submitted that under sub-section (2) of section 19 of the Sick
Industrial Companies (Special Provisions) Act, 1985, the BIFR is required to
circulate to every person required by the scheme to provide financial
assistance for his consent within a period of sixty days from the date of such
circulation. He pointed out that the BIFR has never circulated the scheme to
the SCCIL nor has SCCIL given consent to it by passing any resolution. He
lastly submitted that if any representation is made by the Mehtas before the
BIFR on behalf of the SCCIL, then it is without authority. According to his
contention, the Mehtas (the promoters and their associates) alone would be
bound by the said scheme. He submitted that the SCCIL cannot be termed as an
associate of the Mehtas nor is it a subsidiary company of TMIL. The SCCIL is a
different and distinct entity. As against this, the learned counsel Mr. Chidambaram
pointed out the resolution dated
22-10-1993, passed by the board of directors of SCCIL to the effect that Shri
M.N. Mehta, Chairman, Shri A.A. Trivedi, Director (Corporate
Finance) and Shri Kirti N. Raval, advocate, were severally authorised to represent
the SCCIL at the BIFR hearings and support the scheme for revival of CCGL and
agree to such commitments on behalf of the company as are within the approved
parameters and represent before the BIFR for deletion/relaxation of the
restricted condition Nos. E-5 and 7 of the scheme. For this purpose, he also
referred to the agenda of the said meeting wherein it is specifically stated
that the draft rehabilitation scheme of CCGL was enclosed for the members’
perusal to contend that the draft scheme prepared by the BIFR was circulated to
the members of the board of directors of the SCCIL. He, therefore, submitted
that the SCCIL was a party to the scheme framed by the BIFR and that on behalf
of the SCCIL, the persons mentioned in the resolution passed by the board of
directors on 22-10-1993, remained present to represent the SCCIL before the
BIFR. As against this, the learned counsel Mr. Chinoy contended that the
conditions, which were imposed on the SCCIL as per the draft scheme, were
deleted in the final scheme, which would indicate that the SCCIL was not a
party to the scheme.
27. Prima facie, from the final
scheme framed by the BIFR, it appears that the SCCIL was not a party to the
scheme. Prima facie, it appears that the promoters according to the scheme, are
the Mehta International Limited (TMIL) and the liability under the scheme is
that of the promoters and not of the SCCIL. By reading paragraph 2 of the
proceedings of the BIFR, it appears that counsel for the CCGL (company) had
submitted that though the promoters had brought in Rs. 5 crores by 22-10-1993,
they had delayed the first instalment of Rs. 2.5 crores, the funds of Rs. 5
crores were brought in by SCCIL and were not out of internal accruals of the
company; it is further contended that the amount of Rs. 1.6 crores was,
however, out of internal accruals of the company. Paragraph 3 narrates what
counsel for the promoters has submitted. Nowhere in the said order is there any
mention that on behalf of the SCCIL any representations were made before the
BIFR or that the SCCIL had agreed to be the promoter of the scheme or to render
financial assistance to CCGL. On the contrary, in paragraph 8, it is
specifically mentioned as under:
“On the request of
the company the Bench agreed to delete the word “SCCIL” in clause (v) and
delete clause (vii) of para 3E of the draft scheme. The Bench observed that the
company should identify measures for effecting cost savings and submit its
report along with the half-yearly progress report. The representative of the
promoters and the company agreed to undertake necessary obligations as
envisaged in the scheme.”
(As
stated earlier in the scheme “company” means “CCGL” and the “promoter” means
“TMIL”)
28. We also note that the
correspondence produced by the appellants between the BIFR and the Chairman
would not have much bearing in deciding whether the SCCIL was party to the
scheme framed by the BIFR. We may also note that it is contended by learned
counsel for the appellants that, when—
(i) the
SCCIL states that it was a party to the scheme;
(ii) the
BIFR states that the SCCIL was a party to the scheme;
(iii) the financial institutions state that on
the basis of the scheme, the SCCIL was a party before the BIFR proceedings;
there is no reason to hold that the SCCIL was not a party to the scheme.
29. Prima facie, in our view, the
scheme framed by the BIFR is a quasi-judicial order. It is a speaking one and
what is stated in that order is required to be considered and not the
subsequent correspondence. At this stage, we would not deal with the contention
of the learned counsel Mr. Chinoy that the letters written on behalf of the BIFR
are without any authority. At this stage, in our view, we are not required to
finally decide this question because it may depend upon other resolutions or
other documentary evidence which may be brought on record by the parties.
III.
Violation of section 372 of the Companies Act :
The next question
which requires consideration is whether the arrangement to purchase shares of
CCGL by the SCCIL through its subsidiaries is inconsistent with the ambit and
scope of section 372 of the Companies Act, 1956 ? If yes, what is its effect at
the present stage ?
30. For this purpose, the learned
counsel Mr. Chinoy relied upon the resolution dated 27-11-1992, passed by the
board of directors of SCCIL. The relevant part is as under :
“At the meeting of
the board of directors held on July 24, 1992, the board was informed that it is
intended to acquire 30 per cent stake of CCGL which will result in achieving
the synergies between the two companies and pave the way for common marketing
strategies to meet the challenges of competition. Subsequently, at the annual
general meeting of the company held on September 29, 1992, the members had
passed a unanimous resolution authorising the board to invest the funds of the
company not exceeding Rs. 50 crores by way of subscription, purchase or
otherwise acquisition, in the shares of any other body or bodies corporate.
Gujarat Industrial and Investment Corporation (GIIC) holds 82.70 lakh shares in
Cement Corporation of Gujarat Ltd. (CCGL) who have expressed the desire to
disinvest the shareholding. As a first step, it is proposed to acquire 45 per
cent of GIIC’s stake in CCGL (37.12 lakh equity shares) at a cost of Rs. 20.35
crores through three investment subsidiaries of the company.” [Emphasis
supplied]
31. It is further stated as under :
“The total
investment from SCCIL and/or its subsidiaries in CCGL would amount to Rs.
43.3175 crores which would mean that SCCIL and/or its subsidiaries would pay an
average of Rs. 17.36 per share and acquire a 20 per cent stake in CCGL over a
period of one year.”
32. From the above, it is sought
to be contended that the SCCIL has first resolved to acquire 37.12 lakhs equity
shares of CCGL at the cost of
Rs. 20.35 crores through three investment subsidiaries of the company. Learned
counsel Mr. Chinoy submitted that there is violation of section 372
straightaway. On this question, both counsels have submitted detailed written
submission.
33. In our view, for deciding the
application for interim order, it is not necessary to consider the submissions
made by the learned counsels for the parties at this stage. However, it should
be noted that, from the wording of section 372(1) of the Act, it would be
difficult to straightaway arrive at the conclusion that there is violation of
the statutory provisions of section 372(1) by purchase of shares through the
three subsidiaries of the SCCIL. With regard to violation of statutory
provisions by the subsidi-aries as alleged by the learned counsel Mr. Chinoy,
it would require investigation of facts. This is more so, because it is
contended by the learned counsel Mr. Chidambaram that even if there is some
violation of section 372, the Court would not interfere and at the most a
penalty as provided under the Act would be imposed. This question also requires
to be considered in detail. Hence, in our view, as the matter is fixed for
final hearing, it would be just and proper to leave this question at this stage
for its decision at the final hearing.
IV.
Balance of convenience :
Now, we would deal
with the question of balance of convenience for continuing the interim relief
granted earlier. Mr. Chidambaram, the learned counsel for the appellants,
submitted that:
(i) If the injunction granted earlier is
continued, then the SCCIL would lose a golden opportunity to have control over
the CCGL. This cannot be compensated in terms of money. He submitted that it
is a golden opportunity for the SCCIL because the SCCIL is engaged in the
business of manufacturing cement and by investing only Rs. 45 crores, the SCCIL
would get commercial advantage in running its business. He further submitted
that this opportunity would be lost because the other competitors in the
business of manufacturing cement such as Gujarat Ambuja Cement. Larsen and
Toubro, ACC, Tata Chemicals, Birla Jute and Cement Industries, etc., are
interested in taking over the management of the CCGL. They have also submitted
their offers before the BIFR.
(ii) In any case, the SCCIL may be permitted
to purchase shares worth Rs. 7.50 crores (remaining part of Rs. 12.50 crores by
way of promoters’ contribution as Rs. 5 crores are already invested) and Rs.
4.135 crores (for purchase of rights shares). It is his contention that the
SCCIL had already invested Rs. 22.45 crores and the investment of the remaining
sum may be kept in abeyance.
(iii) The purchase of shares is approved by the
annual general meeting of the SCCIL. It is approved by the financial
institutions and BIFR. Therefore, the court should not interfere with it.
(iv) By vacating the interim relief, the
petitioner is not going to suffer any loss. He submitted that, in any case, Mr.
M.N. Mehta has filed an affidavit and undertaking to the effect that, if the
matter is finally decided and the court so directs, the TMIL and the associate
companies forming part of the Mehta group shall ensure the purchase of shares
that will be hereafter acquired by the SCCIL in such a manner that the SCCIL
does not suffer any loss as a result of purchase of the shares in dispute.
34. As against this, the learned counsel Mr.
Chinoy submitted that :
(i) purchase of shares by the SCCIL for
seeing that the Mehta Group fulfils its obligation under the MOU or that the
Mehtas acquire and retain the control of the CCGL is per se bad because it is a
breach of fiduciary duty.
(ii) The
SCCIL is not having sufficient funds, because—
(a) the SCCIL was required to issue
debentures worth Rs. 58 crores and is required to pay 18 per cent interest on
them;
(b) payment of sales tax to the tune of Rs.
45 crores is deferred for which the SCCIL is required to pay 12 per cent
interest;
(iii) At the most, as per the scheme, after
some years the SCCIL may get a 2 per cent return on the investment made in the
CCGL. Hence, this investment is on the face of it not for the commercial
purposes.
(iv) The annual general meeting had not passed
any resolution empowering its directors to purchase shares of CCGL. There is
suppression on the part of the directors in not informing the shareholders that
they envisaged purchase of shares of a sick unit and that too for acquiring or
maintaining managerial control by the Mehtas;
(v) In a case where there is breach of trust
by the trustees, the question of irreparable injury is not required to be
considered.
35. In our view, considering the controversy
between the parties and the prima facie case which is made out as stated
hereinabove, this would be a fit case for continuing the interim relief. Prima
facie, as held above, it appears that for acquiring and/or maintaining the
control over CCGL, the Mehtas have agreed to purchase shares of CCGL from GIIC
as per the MOU. The SCCIL has not independently decided to purchase the shares
of CCGL. As stated above, the SCCIL may get in future (which is doubtful) some
commercial benefits. But that would hardly be a ground for refusing the
interim relief. Prima facie, from the record as it stands, it appears that the
SCCIL was not a party to the scheme framed by the BIFR. Further, Mr. Chinoy has
rightly relied upon the provisions of sections 38(3)(a) and 41(h) of the
Specific Relief Act, 1963, which are as under, to contend that in a case where
there is breach of trust, the court should grant injunction without considering
the question of irreparable injury :
“38. (3) When the defendant
invades or threatens to invade the plaintiff’s right to, or enjoyment of,
property the court may grant a perpetual injunction in the following cases,
namely :—
(a) where
the defendant is trustee of the property for the plaintiff;
41. (h) An injunction
cannot be granted, when equally efficacious relief can certainly be obtained by
any other usual mode of processing except in case of breach of trust.”
[Emphasis supplied]
36. He further rightly relied
upon the submissions made by the appellants in the grounds of appeal that the
Mehtas have no constraints of funds being a 500 million dollars turnover group
worldwide with sufficient interest in India also, to contend that, if the
Mehtas are having 500 million dollars turnover, then they would not find any
difficulty to bring Rs. 12.5 crores for purchase of shares, which arises
because of their commitment as per the MOU. In our view also, if the Mehtas are
having such financial capacity as contended by them, then it would be open to
them to purchase the shares of the CCGL worth Rs. 12.5 crores from their funds.
Hence, in our view, this would not be a fit case for vacating the interim
relief.
37. In this interim order, some
detailed discussion was required because of elaborate arguments. However, we
clarify that the observations and findings on facts are made only for deciding
the application for interim relief and are not conclusive.
38. In the result, the appeals are dismissed
with no order as to costs.
[1957] 27 COMP. CAS. 340 (PEPSU.)
v.
Hindsons (
CHOPRA
J.
MARCH
13, 1956
CHOPRA J. - This is
a petition under section 162 of the Indian Companies Act, 1913 to wind up the
Hindsons (
The issued
capital is 2,500 shares of Rs. 100 each and the capital subscribed, or credited
as paid-up, is Rs. 1,24,000 consisting of 1,240 fully paid-up shares of Rs. 100
each.
The objects of
the company were manifold ; but of them the principal one was to carry on the
business in tractors and to run a workshop by acquiring and taking over the
assets and goodwill of a private concern, known as Hindson Automobiles,
According to
the agreement with the said firm, the company, besides paying in cash for the
purchase of its assets, allotted two hundred fully paid-up shares of Rs. 100
each to each of its four promoters for the transfer of goodwill of the firm,
valued at Rs. 80,000. The same day, viz., 1st February, 1954, two hundred fully
paid-up shares were allotted to Shri Swarn J. Singh against cash payment of Rs.
20,000 and he was co-opted as a director. The five directors were thereafter
appointed to act as the company’s working directors, on a remuneration of Rs.
500 per month each.
In the minutes
of 1st January, 1955, fifty fully paid-up shares each were allotted to Shri Sat
Pal and his brother Mr. Raj Pal and hundred such shares were allotted to their
mother Shrimati Pritam Devi, against their loan of Rs. 20,000 already advanced
to the company. In the next meeting held on 9th January, 1955, Shri Sat Pal,
who was already acting as the company’s legal adviser on a remuneration of Rs.
200 per mensem, was also co-opted as a director. This appointment of his was
confirmed in a general meeting of the shareholders of the following day.
The total
number of directors thus came to six ; five of them were the working directors.
For an year or so, the affairs went on smoothly. In the middle of January,
1955, Fateh Chand, petitioner, started a separate business of his own dealing
with International Tractors, in the name of Bir Trading Corporation, Patiala.
Only a few days thereafter the petitioner addressed a letter to the company
saying, “kindly consider me from today, 27th January, 1955, as a sleeping
partner and oblige.” This letter was placed before the board on 13th February,
1955.
In view of
“the direct competitive business” started by the petitioner, his resignation
was accepted and it was further resolved that “in accordance with his desire he
should be treated as an ordinary shareholder of the company.” The change in the
directorate was duly intimated to the Registrar on 24th February, 1955.
On 29th April,
1955, the petitioner addressed a letter to the company saying that he had
resigned merely from the office of a working director and that he still
continued to be its ordinary director. The company wrote back to say that the
idea was simply an after-thought and against actual facts and that the
petitioner had ceased to be a director from the day he resigned. This
accelerated the trouble that was brewing for some time and it rose to its
climax when, on 15th May, 1955, the directors decided to hold on extraordinary
general meeting for consideration of a resolution to amend the articles in
certain matters.
One of these
was to authorise the shareholders, in an ordinary or extraordinary general
meeting, to expropriate the shares of any member or members who carried on or
proposed to carry on any competitive business. This meeting was to be held on
9th July, 1955. In the nature of things, the petitioner took it as a move to
expropriate his shares and to bring about his total exclusion from the company
and its affairs.
The present
petition was the presented on 4th July, 1955, together with an application for
an interim order to restrain the company from holding the proposed meeting on
the said date. In reply to the summons, the respondent company denied that the
proposal was meant to expropriate the petitioner and further stated that they
had already decided not to hold the meeting on 9th July. The matter was
consequently dropped and the application dismissed.
The petitioner
relied upon clause (6) of section 162 of the Companies Act, and alleges that in
view of the present state of affairs it is just and equitable that the company
should be wound up. The circumstances relied upon are :
(i) Illegal allotment of
shares to Shri Sat Pal, Shri Raj Pal and Shrimati Pritam Devi, inasmuch as the
mandatory provisions of section 105C were not complied with.
(ii) Unwarranted and
wrongful exclusion of the petitioner from the office of a director and the
subsequent attempt to expropriate his shares.
(iii) The number of
directors was reduced to less than four, the minimum number provided by the
articles-Shri Sat Pal did not hold the necessary qualification, and Shri Swarn
J. Singh had ceased to be a director when he was not elected in the next
following annual general meeting.
(iv) The director were
recklessly wasting the funds of the company “with a view to harm the interest
of the petitioner and to benefit themselves.”
Mr. Tulli,
learned counsel for the petitioner, started by asserting that the company,
though a limited one, was for all practical purposes nothing more than a
“domestic and family concern.” It was turned into a limited company mainly to
take over and run the business previously carried on in partnership by its four
promoters. The directors, who form the entire body of shareholders, are
inter-related. The capital of the company is so owned as to make the company in
substance a partnership.
It is,
therefore, urged that the circumstances which justify the dissolution of a
partnership, would apply to the exercise of discretion under the just and
equitable clause and to wind up the company. State of animosity precluding all
reasonable hope of reconciliation and friendly co-operation between the
partners, justifiable lack of confidence by one in the other partners and the
total exclusion of one partner from participation in the affairs of the
partnership are generally regarded as good grounds to put an end to the
partnership. The same principles, it is stressed, ought to apply to the present
case and if any of those circumstances are found to exist, the company should
be wound up.
Mr. Kapur,
learned counsel for the respondent company, has not dispute as to the
principles which apply to the dissolution of a partnership and also to their
application to a limited company which by its very nature and constitution is
no more than a partnership. Counsel, however, contends that the respondent
company does not fall under that category and that, in any case, none of the
circumstances justifying its dissolution does exist. In view of the actual
facts of the case, I am inclined to think the contention is not without force.
In re Yenidje
Tobacco Co. Ltd. is the leading authority relied upon by Mr. Tulli in this
connexion. There, only two persons agreed to amalgamate their private business
and form a private limited company. They were the only shareholder and the
directors of the company. They fell out and a long drawn litigation was going
on between them. They were not even on speaking terms and complete deadlock
had, therefore, arisen. One director formed the quorum. In case of difference,
the matter was every time to be referred to arbitration. It was held that if
this were a case of partnership there would clearly be grounds for a
dissolution, and that the same principle ought to be applied where there was in
substance a partnership in the guise of a private company. LORD COZENS-HARDY
M.R. at page 431 observes :
“Is it
possible to say that it is not just and equitable that state of things should
not be allowed to continue, and that the court should not intervene and say
this is not what the parties contemplated by the arrangement into which they
entered ? They assumed, and it is the foundation of the whole of the agreement
that was made, that the two would act as reasonable men with reasonable
courtesy and reasonable conduct in every day towards each other, and
arbitration was only to be resorted to with regard to some particular dispute
between the directors which could not be determined in any other way.
Certainly, having regard to the fact that the only two directors will not speak
to each other, and no business which deserves the name of business in the
affairs of the company can be carried on, I think the company should not be
allowed to continue.”
WARRINGTON
L.J. in his concurring judgment at page 435 observed as follows :
“I am prepared
to say that in a case like the present, where there are only two persons
interested, where there are no shareholders other than those who, where there
are no means of overruling by the action of a general meeting of shareholders
the trouble which is occasioned by the quarrels of the two directors and
shareholders, the company ought to be ought up if there exists such a ground as
would be sufficient for the dissolution of a private partnership at the suit of
one of the partners against the other. Such ground exists in the present one. I
think, therefore, that it is just and equitable that the company should be
wound up.”
In Loch v.
John Blackwood Ltd., one man’s private concern was turned into a limited
company by the trustees as desired by him in his will. The board of directors
consisted of McLaren, his wife Mrs. McLaren and his clerk Yearwood. The total
amount of the company’s capital was forty thousand in $1 shares. Twenty
thousand of these were allotted to the testator’s sister, Mrs. McLaren. Ten
thousand each should have gone to Mr. Rodger and Mrs. Loch, the testator’s
nephew and niece respectively ; but in fact, out of their shares, one share was
allotted to Mr. McLaren and one each to his clerk and solicitor.
The company,
although it had taken the form of a public company, was practically “a domestic
and family concern.” The preponderance of voting power lay with McLaren, and it
was impossible for Mrs. Loch, the petitioner, to obtain any relief by calling a
general meeting of the company. LORD SHAW at page 793 of his judgment quoted
the following passage from a Scotland decision as it was found aptly applicable
to the circumstances of the case :
“But then this
is not a company that is formed by appeal to the public. It is what, for want
of better name, I may call a domestic company. The only real partners are the
three brothers of a family ; the other shareholders have only a nominal
interest for the purpose of complying with the provisions of the Act. In such a
case it is quite obvious that all the reasons that apply to the dissolution of
private companies, on the grounds of incompatibility between the views or
methods of the partners, would be applicable in terms to the division amongst
the shareholders of this company, and I agree with your Lordships that this is
a case in which it would be just and equitable that this company should be
wound up, and the partners allowed to take out their money and trade separately
if they please.”
In In re Davis
and Collett Ltd., the petitioner and the respondent held the capital of the
company substantially in equal shares. It was held that where the capital of a private
company is so owned as to make the company in substance a partnership and one
director has purported by means of irregularities to acquire complete control
of the company and to exclude the other director from the management of it may
be “just6 and equitable” within the meaning of the section that the company
should be wound up.
Great Indian
Motor Works Ltd. v. Chandi Das Nundy is the last decision relied upon by Mr.
Tulli. There, the entire body of shareholder consisted of the petitioner, his
brother, Mr. Kristo, three sons of Kristo and a first cousin of Kristo’s wife.
The three directors were the two brothers and the brother-in-law of Mr. Kristo.
The whole business of the company was being engineered for the benefit of Mr.
Kristo who held the majority. The company was not being run fairly for the
benefit of its shareholders. Principles for the dissolution of partnership
were, therefore, applied, and it was held that where two persons cannot agree
and cannot carry on business and also where one partner was acting dishonestly
towards the other as acting unfairly, the court will always wind upon the
partnership.
Here, in this
case, the state of affairs is absolutely different. The respondent company can
by no means be regarded as “a domestic or family concern”. The company’s
capital is not distributed amongst the members of one and the same family. Some
of the shareholder are total strangers. Swarn J. Singh holds fully paid-up
shares worth of fully paid-up shares. Swarn J. Singh, if at all, may be distantly
related to the petitioner himself. Sat Pal or any other member of his family
has not been shown to bear any relationship with others. As against their
shares of Rs. 40,000 paid for in cash, it shall be remembered, the petitioner,
like other three promoters, holds no more than ten shares, besides the two
hundred shares allotted to him against the goodwill of the earlier partnership.
Even the four promoters, though previously they carried on business in
partnership, are not all inter- related. Out of them Fateh Chand petitioner and
Ram Lal are collaterals in the fourth or fifth degree. The former and the
latter’s brother are married to the sisters of Anand Kumar. Whatever relation
they may have, it is such as to place the rest of them in one group they may
have, it is not such as to place the rest of them in one group against the
petitioner. Moreover, Anand Kumar would be more interested in the petitioner
than in Ram Lal. Prem lal, the fourth promoter, is a Vaish (the others being
Kshatrias) and a total stranger.
With the
exception of Raj Pal and Shrimati Pritam Devi, all these shareholders were at
one time acting as directors. The management of the company also cannot,
therefore, be said to be, ever to have been in the hands of a particular
director or set of directors. Unless it be for some fault or action of the
petitioner himself, the rest of the directors are not shown to have any
apparent or conceivable common cause to form a party against the petitioner or
to be antagonistic to him or his interest.
If there is an
honest difference of views between the petitioner and the other directors, and
the petitioner, on that account, has lost confidence in them the view of the
majority must prevail ; and the petitioner can have no cause for any
justifiable complaint. His remedy would ordinarily lie in appealing to the
general body, which forms the domestic tribunal in case of a limited concern.
There is no
allegation, much less proof, of any misappropriation or malversation of funds
by the directors, or that any one of them, because of the preponderance of his
voting power, is managing the affairs of the company for his personal
advantage. The mere fact that the petitioner can be or is being out-voted by
the majority in the internal management of the company, or that he is being
singled out by the rest of the directors, ought not to be regarded a sufficient
ground to wind up the company under the just and equitable clause.
In Seethiah v.
Venkatasubbish, mere incompatability of good relations between two rival factions
in the directorate, in the absence of some other strong ground such as
sufficient for ordering winding up of the company under clause (6) of section
162. There was nothing particularly wrong with the management of the company,
except that the petitioners were holding views different from those held by the
majority in relation to the details of management. GOVINDA MENON J. in the
concluding portion of his judgment observes :
“When there is
such uanimity amongst the majority belongings to different communities, that by
itself is a reason, in the absence of any evidence of misappropriation or
malversation of funds by the management, to conclude that on account of
difference of views alone the company should not be wound up.”
There is yet
another difficulty in applying the rules of dissolution of partnership to this
case. It cannot be positively said that the petitioner is in nor way
responsible for creating the present situation. For the dissolution of a
partnership on the ground of justifiable lack of confidence it has to be shown
a partner, other than the partner suing, wilfully or persistently commits
breaches of agreements relating to the management of the affairs of the firm or
the conduct of its business, or otherwise so conducts himself in matters
relating to the business that it is not reasonably practicable for the other
partners to carry on the business in partnership with him. The petitioner
admits that he started a private business of his own at Patiala in the name of
Bir Trading Corporation on 18th January, 1955. It was then that he submitted
his resignation to the company on 27th January. His firm deals in tractors,
which is the principal business of the company as well. I do not agree with Mr.
Tulli that the business is not a competitive one because the two deal in
tractors of different make or imported from different manufacturers. The facts
disclose that the petitioner began to evidence dissatisfaction of the company’s
management only after he started his own similar business. Shri Anand Kumar, in
his affidavit, states that when tractors were required to be purchased by the
Municipal Committees of Patiala and Nabha the petitioner, as proprietor of Bir
Trading Corporation, submitted his tenders in direct competition with those
sent by the company.
Each of the
directors has further testified that four of the employees of the respondent
company were induced to leave their service and were employed by the petition
in his private concern. There are affidavits of three other employees to the
effect that they too were approached by the petitioner to give up their service
with the company and also to disclose certain secrets concerning the company’s
business.
Generally
speaking a director stands in fiduciary position to the company. Being a director
and therefore in a fiduciary relation to the company, he is always expected to
guard the company’s interest and surely not to utilise the position and
knowledge possessed by him in virtue of his office to the detriment of the
company’s interest and or his personal course the duty of its agents so to act
as best to promote the interests of the corporation whose affairs they are
conducting. Such agents have duties to discharge of a fiduciary nature towards
their principal. And it is a rule of universal application, that no one, having
such duties to discharge, shall be allowed to enter into engagements in which
he has, or can have, a personal interest conflicting, or which may conflict,
with the interests of those whom he is bound to protect.
It seems, the
petitioner realised the situation and submitted his resignation shortly after
he started his own business, but sometime later he changed his mind and
preferred to stick to his guns.
The main point
repeatedly stressed by Mr. Tulli is that the petitioner resignation was
intentionally misinterpreted so as to exclude him from the company’s
management. The contention is that the petitioner in fact meant to resign
merely from the office of a “working director’ and intended to continue as an
ordinary director. Article 26 authorises the board to appoint all or any of the
permanent directors to work whole-time or part-time for the business of the
company on such remuneration and conditions as the directors may decide.
Under this
articles, the four promoters and permanent directors of the company were
appointed as its working directors on a remuneration of Rs. 500 per mensem
each. On 31st March, 1954, Swarn J. Singh was also appointed a working
director. The petitioner sent in his resignation on 27th January, 1955. Let me
repeat, it says “Kindly consider me from today as a sleeping partner and
oblige.” On receipt of this resignation, the power of the petitioner to operate
upon the company’s bank account was withdrawn in the minutes of 1st February,
1955. The resignation itself was considered by the board in its next meeting on
13th February. The resignation was unanimously accepted and Shri Prem Pal was
authorised to communicate the decision to the “outgoing director”. The
resignation was regarded as one from the office of a director and not merely
from that of a working director, and it was accepted as such.
The words
“sleeping partner” could not be reasonably construed as “ordinary director.” A
director, even when he is not a working and paid director, is still a governing
partner and not a “sleeping partner”. On the other hand, “partner” may be taken
as synonymous to a shareholder who has not direct concern with the governance
of the company’s word “partner” could, therefore, be reasonably understood to
mean a shareholder. If the petitioner really meant something else, he could
have conveyed it in explicit terms. He could have plainly said that while
ceasing to be a working director he would continue to be a director.
In any case,
the language used in the letter was possible of the interpretation placed on it
by the board. The most that can be said is that that board committed an honest
mistake in interpreting the letter ; the action was not mala fide or based upon
fraudulent intention to oust the petitioner. The petitioner himself, in his
letter dated 29th April 1955, described it as an “error which obviously has
been due to some misunderstanding.”
The
resignation with the above interpretation, was accepted on 13th February, 1955.
Statutory information of the petitioner having ceased to be a director was
filed with the Registrar on 24th February. Entry No. 511 dated 15th February,
in the company’s despatch register, relates to the intimation of the decision
sent to the petitioner.
The petitioner
says he did not receive the intimation and that the came to know of the
resolution only on inspection of the records with the Registrar. He put forth
his interpretation of the resignation for the first time in his letter of 29th
April 1955. It is difficult to believe that the company’s letter was not
actually despatched and it did not reach the petitioner, or that the petitioner
did not come to know of the resolution much earlier. What I am inclined to
think is that the petitioner, for some reasons, changed his mind subsequently
and chose to take advantage of the inadvertent omission of sufficient clarity
in his letter. I cannot, therefore, arrive at the conclusion that it is
established that the petitioner was fraudulently or unreasonably excluded from
the directorate.
It is then
contended that no notice of the meetings held on 1st February and 13th
February, 1955, was given to the petitioner. I do not think that was at all
necessary after the petitioner’s resignation of 27th January. According to
article 18, a permanent director is to remain in office so long as he continues
to hold the necessary qualification or he does not himself voluntarily resign.
This clearly means that a director is entitled to relinquish his office at any
time he pleases and his resignation is not dependant upon its acceptance by the
company. The petitioner, therefore, his office as sons as he tendered his
resignation to the company.
Mr. Kapur has
referred to certain purchases, worth several thousands, made by the petitioner
on behalf of his private firm from the company between 34d February and 4th
April, 1955. A sum of Rs. 1,018-12-6 is shown to be due from the petitioner in
this account at the last date. The purchases and correctness of the statement
of account are not denied by the petitioner. The contention is that,
notwithstanding the resignation, the petitioner would have ceased to be a
director because of this having explicit consent of the directors, a director
of the company or the firm of which he is a partner or any partner of such
firm, or the private company of which he is member or director, shall not enter
into any contract for the sale, purchase or supply of goods and materials with
the company. Section 86 1 (h) further lays down that the office of a director
shall be vacated if he acts in contravention of section 86F. Undoubtedly, the
provision is mandatory and was introduced by the Amendment Act of 1936 to
safeguard the interest of the company against any possible misuse of his
position by a director. The consent of the directors cannot be a general one,
it must be with respect to the particular transaction which the director
intends to enter into.
There is not
even a suggestion that the purchases were made with the consent, express or
implied, of all the directors. I cannot agree with Mr. Tulli that section 86F
is confined in its application to contracts which are to be performed at some
future time, and that it does not apply to an individual sale or purchase, or
to a contract which is performed and completed the moment it is entered into.
Emphasis in
this connection is laid on the use of the plural “contracts” and the word “for”
in the phrase “shall not enter into any contracts for the sale, purchase for
the sale, purchase or supply of goods and materials with the company.” An
agreement enforceable by law is a contract. The agreement may be given effect
to the moment it is entered into or it may be executable at some future time.
In either case it will be a contract, if it is permissible by law. The plural
includes the singular as well, and its use does not in any way lead to the
interpretation placed on the section by Mr. Tulli.
Similarly, no
particular significance can be attached to the use of the word “for”.
Grammatically, this is the only preposition that could be appropriately used
for connecting the term “contract” with the three nouns that follow. In no way
does it signify that the section covers only those contracts which are
executory in nature, and not those which are executable at the time they are
entered into. I do not see any force in the argument that the word “of” would
have been used if the section was intended to include the latter type of
contracts as well. Even the use of the word “of” instead of “for”, in my view,
would not have made any difference or conveyed a different sense.
The continued
transactions between the petitioner and the company, even after the former’s
resignation, rather go to show that there was no serious antagonism between him
and the company’s working directors. The latter would not have agreed to supply
the goods for the petitioner’s competitive business, if they had formed into a
group to oust him.
The proposed
amendment in the articles, authorising the expropriation of competitive
shareholder or shareholders, is relied upon as an instance of oppressive
attitude of the majority towards the minority and is said to be directly
intended for application to the petitioner. At present, I need not go into the
bona fides of the directors in proposing the amendment or adjudicate upon the
justification or reasonableness of the amendment. The board of itself rescinded
the resolution and gave up the idea of holding the extraordinary general
meeting.
It is next
contended that the allotment of shares to Mr. Sat Pal, Rah Pal and Shrimati
Pritam Devi was illegal inasmuch as the provisions of section 105C of the
Companies Act were not complied with, Section 105C runs as follows :
“Where the
directors decide to increase the capital of the company by the issue of further
shares such shall be offered to the members in proportion to the existing
shares held by each member (irrespective of class) and such offer shall be made
by notice specifying the number of shares to which the member is entitled, and
limiting a time within which the offer, if not accepted, will be deemed to be
declined ; and after the expiration of such time, or on receipt of an
intimation from the member to whom such notice is given that he declines to
accept the shares offered, the directors may dispose of the same in such manner
as they think most beneficial to the company.”
The question
whether the word “capital” in the above section means the authorised capital or
the subscribed capital of a company came up before me in S. Pritam Singh v. Kotkapura
Bus Service Ltd. It was held that the term “capital” in section 105C means the
company’s subscribed capital and, therefore, when the directors decide to
increase the subscribed capital by issuing further shares, the section applied
and it is obligatory for the directors to offer the shares to the existing
shareholders before allotting them to any other person. It is further held that
if the shares were not so offered, their allotment to others would be irregular
and hence invalid.
In Nanalal v.
Bombay Life Assurance Co. Ltd., the question as to the precise scope of section
105C was not finally decided because in their Lordships’ opinion, on any
interpretation of it, the provisions of the section were substantially complied
with. Their Lordships, however, favoured the view that section 105C becomes
applicable only when the directors decide to increase capital within the
authorised limit by issue of further shares. It is consequently urged that
before shares could be allotted to Mr. Pal and others the shares ought to have
been offered to the existing shareholders, and since that was done the
allotment was illegal and inoperative.
Mr. Kanpur, on
behalf of the respondent, in the first instances, taken up his stand on the
minutes of the first meeting of the board of 1st January, 1954, whereby shares
of the value of Rs. 2,50,000 (out of the authorised capital of Rs. 5,00,000)
were issued for subscription by the promoters, their relations and friends. In
the next meeting held on 25th January, 1954, the four promoters offered to take
ten shares each and the same were allotted to them.
According to
the learned counsel, the word “capital” in section 105C does not mean anything
more than the issued capital and the same having been one offered to the
shareholders it need not have been again offered to them when shares were
allotted to Mr. Sat Pal and others. Counsel, however, 1954, and before that
there were no shareholders in existence ; there could, therefore, be no
question of an offer of further shares to the existing shareholders.
Moreover, Mr.
Kapur has not been able to convince me to change my view that the word
“capital” in section 105C means the subscribed capital and that every time
further shares are issued they ought to be offered to the existing shareholders.
Mr. Kapur then
maintains that the provisions of section 105C were substantially complied with
inasmuch as all the existing shareholders were present in the meeting when
shares were unanimously allotted to Mr. Sat pal and others, and also that the
petitioner having once agreed to accept the allotment cannot now be allowed to
question its validity. The section authorises the directors to dispose of the
shares in such manner as they think most beneficial to the company after
existing members have declined to accept the shares offered to them. But if all
the existing members have themselves joined to make the allotment they should
be deemed to have declined to accept the shares of themselves.
The petitioner
takes up two alternative positions in this connection. He says he did not
attend the meeting of 1st February, and was not present when the shares were
allotted ; but if he did attend and was present he was not apprised of the fact
that he was entitled to those shares, or some of them, for himself.
The mainstay
of the petitioner is that he did not sign the minutes or note down his presence
that day. He, therefore, affirms that his name as one of the directors who
participated in the meeting was subsequently added in the minutes. The
assertion, however, is not supported by actual facts. Except for a couple of
meetings, he did never sign the minute-book in token of his presence. Every
time a note with respect to his presence was made by someone else ; the
petitioner does not deny to have attended any of those meetings.
Statutory
presumption of correctness attaches to the entries in books regularly
maintained by a limited company. It is for the person alleging the contrary to
prove it. The facts in the present case are that in the petition it was nowhere
alleged that the petitioner did not attend the meeting on 1st February. Even in
his reply affidavit submitted on 18th February, 1955, the petitioner did not
swear to that effect. A casual reference to it was, however, made in the
replication submitted by him that date.
On the other
hand, the other four directors who attended the meeting, in their affidavits
submitted much earlier, vouchsafe to the petitioner’s participation in the said
meeting. Moreover, the minutes were read out and confirmed (without any
objection) in the next meeting on 9th February. The presence of the petitioner
is noted, in the usual mode, in the minutes of this meeting. Neither in his
reply affidavit nor in his replication the petitioner did anywhere allege that
he did not in fact attend the meeting on 9th February. The inference,
therefore, is that the petitioner did participate in the meeting on 1st
February and that the shares were allotted with his consent.
As regards the
effect of it, Mr. Tulli contends that acquiescence cannot be presumed unless
knowledge of the irregularity or invalidity of the transaction could be brought
home to every one of the members who attended the meeting. Relying upon the
observations of their Lordships in Premila Devi v. Peoples Bank of Northern India
Ltd., the learned counsel maintains that there can be no ratification without
an intention to ratify, and there can be no intention to ratify an illegal act
without knowledge of the illegality.
It is correct
that in order to establish a case of ratification it is essential that the
party ratifying should be conscious of the excess of authority exercised by his
agent, and also that, in spite of this knowledge, the party consciously by an
overt act agreed to be bound by it. But the present is not a case of
ratification of something done by its agent or someone else on behalf of the
petitioner. It is in fact a case where the petitioner himself was a party to
the transaction, and therefore estoppel or waiver of his right (which he failed
to exercise) may be forcefully pleaded. To hold that the petitioner did not
acquiesce in the irregular mode in which the allotment was made would be giving
him an opportunity to do that which, in fact, would be a fraud upon those who
were admitted into the company as subscribes of its additional capital.
In any case,
it is not necessary for me to dwell on the point any further or to decide it
finally. The petitioner, if he feels aggrieved, has a more appropriate remedy
(application for rectification of the register of members) open to him. All
other members are agreed to an accept the allotment. It is not even alleged
that the allotment was made fraudulently or with a view to gain majority
against the petitioner. No present right of the petitioner seems to be
affected. He never was, nor is he now, anxious to get any more shares for
himself.
As a matter of
fact he is anxious to get rid of those he already has. The only question with
which I am here concerned is whether it is just and equitable to wind up the
company, and I have absolutely no doubt that it is not a ground which does lead
to that conclusion.
It is next
urged that the board is not properly constituted and that the number of its
members is reduced to less than the minimum. The contention that Shri Sat Pal
had ceased to be a director on 9th March, 1955, is unassailable. According to
article 19, a director must hold in his own name shares of the face value of
Rs. 20,000. Shri Sat Pal cannot be said to have ever attained that
qualification. He could not in that matter, take advantage of the shares
standing in the name of his brother or mother. He was appointed a director on
9th January, 1955. He ought to have obtained the specified share qualification
within two months of his appointment, as required by section 85(1) of the
Companies Act.
Section
86-1(a) lays down that the office of a director shall be vacated if he fails to
obtain the share qualification necessary for his appointment within the time
specified in section 85(1). Shri Sat Pal, provides that a director shall vacate
office on the happening of some event the director automatically vacates office
on the happening of that event ; the board has no power to waive the event.
Consequently, Shri Sat Pal could not legally act as a directorate after that
date.
Section 85(2)
lays down the penalty that may be imposed upon the unqualified person who acts
as a penalty after the expiration of the specified period of two months. But
with that we are not at present concerned. Here, what we have to see is the
effect of his having so acted. Does it vitiate the proceedings of the board in
which he took part after 9th March, 1955 ? Section 86 of the Act says :
“The acts of a
director shall be valid notwithstanding any defect that may afterwards be
discovered in his appointment or qualification :
Provided that
nothing in this section shall be deemed to give validity to acts done by a
director after the appointment of such director has been shown to be invalid.”
It cannot be
seriously disputed that Shri Sat Pal was appointed, and he accepted that
appointment, under the mistaken belief that he was holding shares worth Rs.
20,000 jointly with his brother and mother. It is not even alleged that the
mistake was pointed out, or that the appointment was shown to be valid, at any
time before the present petition was presented on 4th July, 1955. Notice of the
petition was left at the company’s office on 6th July, 1955, and it was
published in the State Gazette on 16th July, 1955.
The minutes
show that the meeting that Shri Sat Pal attended was held on 7th July, 1955.
The only business transacted that day was to confirm the proceedings of the
previous meeting and to cancel the decision to hold the extraordinary general
meeting on 9th July. Acts bona fide done by a de facto director ought to be
regarded as valid, and that is only between the company and the outsiders but
also between the company and its members.
As regards
Swarn J. Singh, it is stated that he ceased to be a director when, after his
appointment on 1st February, 1954, he was not elected in the next following
ordinary general meeting on 25th June, 1955. Reliance in this connection is
placed on regulation 85 of Table A of the Companies Act. The regulation says :
“The director
shall have power at any time, and from time to time, to appoint a person as an
additional director who shall retire from office at the next following ordinary
general meeting, but shall be eligible for election by the company at that
meeting as an additional director.”
Minutes of 1st
February, 1954, while co-opting Swarn J.Singh as a director, make it clear that
“he shall hold office until removed by the directors or by the shareholders.”
This appointment of his was confirmed in a general meeting of the shareholders
held on 4th April, 1954.
Mr. Tulli,
however, stresses that this could have no effect, for, as provided by
regulation 85, Swarn J. Singh should be deemed to have retired on 25th June,
1955 when the first ordinary general meeting of the company was held. Since he
was not elected in that meeting he ceased to be a director that day and could
not act as such thereafter. The petitioner had resigned. Swarn J.Singh ceased
to be director on 25th June, 1955, and Sat Pal had ceased to be a director much
earlier. This reduced the number of directors to three. Article 17 requires
“that until otherwise determined by the company in general meeting”, the number
of directors shall not be less than four. It is, therefore, urged that there
was no legally constituted board after 25th June, 1955, and that the same state
of affairs still continues.
Now,
regulation 85 of Table ‘A’ in the First Schedule is not a compulsory regulation
; it is within the competency of a company to adopt it with any modification.
The respondent company by its article I adopts the regulation contained in
Table A, so far as they are applicable to a private company, but expressly
,makes them subject to the provisions contained in the articles. That leads one
to find out if the articles contain anything contrary to, or in modification
of, regulation 85. Article 28 contains an analogous provision and it reads :
“The directors
shall have power from time to time, and at any time, to appoint any other
persons to be directors and no other than the person recommended by the
directors shall be elected as a director of the company.”
Obviously, the
article authorises the directors to make the appointment of a director without
any restriction or limitation as to the period of his appointment. To be more precise,
the article does not adopt the proviso that the director so appointed “shall
retire from office at the next following ordinary general meeting.”
That is the
modification with which the regulation is adopted. It authorised the board to
decide that the appointment of Swarn J.Singh as a director shall continue till
he is “removed by the directors or by the shareholders.” He would not,
therefore, be deemed to have retired from office at the next following ordinary
general meeting and did not stand in need of election by the company at that
meeting.
Let us assume
that Swarn J.Singh did cease to be a director on 25th June, 1955. The question
still remains, what is its effect. Does it vitiate or invalidate the
proceedings in which he took part thereafter ? Does it unavoidably lead to the
conclusion that there no longer exists a legally constituted board to manage
the company’s affairs ? As already observed, the answer to the first question
in the negative is afforded by section 86 of the Companies Act. It is not even
suggested that the legal complications were known to the directors or that
Swarn J. Singh’s appointment was, at any time earlier, shown to be invalid.
Regulation 89
provides for the contingency giving rise to the second question. The regulation
says :
“The
continuing directors may act notwithstanding any vacancy in their body, but if
so long as their number is reduced below the number fixed by or pursuant to the
regulations of the company as the necessary quorum of directors, the continuing
directors may act for the purpose of increasing the number of directors to that
number, or of summoning a general meeting of the company, but for no other
purpose.”
According to
article 32 of the company, until otherwise determined by the directors, two of
them form the quorum. Their number being still more than the necessary quorum,
the continuing directors, notwithstanding the vacancy, are legally entitled to
carry on the management. It is only where the number is reduced below the
necessary quorum that the directors are not competent to function for any
purpose other than those specified in the regulation.
I do not see
force in Mr. Tulli’s argument that since the number of the continuing directors
has gone blow the minimum number of four there is no legally constituted board
and therefore the regulation can have no application. What he precisely
contends is that you must have a board of four before there can be a quorum.
The learned
counsel, in this connection, forgets the significant distinction between the
cases where directors too few in number can and cannot act as continuing
directors. If there never existed a board sufficient in number, the continuing
clause (in Regulation 89) would be of no help in authorising the board to carry
on business. But where the board, which was originally competent to transact
business, is for any reason diminished to a number less than that provided for
by the articles, the continuing clause would apply and the remaining directors
would be competent to transact the company’s business.
The phrase
“notwithstanding any vacancy in their body” applies equally to a case where the
number of directors is reduced blow the minimum number. It is true that there
cannot be a quorum competent to act where the number of directors is not filled
up to the minimum number. But this is always subject to any contrary provision
in the articles of a company. That provision is made in this case by regulation
89, adopted by article I of the company’s articles of association.
Lastly, it is
urged that the company’s funds are being recklessly wasted. The instances
relied upon are :
“(i) Payment
of Rs. 500 per mensem are remuneration to each of the working directors ;
(ii) Rs. 200
per mensem paid to Sri Sat Pal, legal adviser of the company ; and
(iii) Rs.
1,000 paid for the year 1955, towards premium for insurance against accident of
the directors.”
The
remunerations were allowed and the expenses incurred when the petitioner was
one of the working directors, and with his approval and consent. He himself
enjoyed their benefit so long as he continued as a working director. He did
never come forward with an objection that the expenses were excessive or
unnecessary. The remuneration is now stated to be exorbitant and highly
incommensurate with the amount of business the company is handling and the
profits that are being made out of it.
The amount of
remuneration was unanimously settled by all the directors (of whom the
petitioner was one) and it was subsequently confirmed in a general meeting. The
directors and the shareholders were in full knowledge of the true state of
affairs and they were, therefore, in a position to judge and decide the
reasonableness of the remuneration. On the basis of the material on record, it
is not possible for me to hold that they had singularly erred or that their
action was not bona fide.
The grounds
urged, individually or collectively, in my opinion, are in no way sufficient to
lead to the irresistible conclusion that it is just and equitable to wind up
the company. The petition is being opposed by the shareholders, except the
petitioner. They all show confidence in the management of the company, desire
that they should be allowed to carry on the business on which they have jointly
and willingly embarked. Interest of the general body of shareholders is a
matter of primary consideration in such cases.
It may suit
the petitioner’s purpose, but I am not at all satisfies that the winding up
order will be to the advantage of the entire body of shareholders or the
company’s creditors, or that it is necessary to safeguard their interest. Some
of the shareholders have subscribed large sums to the capital of the company.
Their stake is much more than that of the petitioner, whose subscription in
cash towards the capital amounts only to Rs. 1,000.
I have no
hesitation to agree with Mr. Tulli that the ‘just and equitable clause” ought
not to be confined to circumstances ejusdem generis with those set out in the
foregoing clauses of section 162. But, wide as the powers are, they ought to be
exercised with great care and circumspection. There must be very strong grounds
for exercising the discretion, particularly at the instance of a shareholder
and against the unanimous view of all the rest of them. No such case, I am
sure, is made out by the petitioner.
I also do not
see any justification for making an order, under section 153C(5) (b), directing
the company or its members to purchase the petitioner’s shares. As already
observed, the facts do not justify the making of a winding up order under the
just and equitable clause. Nor has it been shown that the affairs of the
company are being conducted in a manner oppressive to some of its members.
Consequently, the alternative prayer has also to be rejected.
In the result
the application is dismissed with costs. Counsel’s fee shall be Rs. 200.
[1949] 19 COMP CAS 311 (MAD.)
HIGH
COURT OF
v.
V.S. Thiruvengadaswami Mudaliar
HORWILL AND
BALAKRISHNA AYYAR, JJ.
AUGUST 23,
1949
R.
D. Narasaraju and T.T. Srinivasan,
for the Respondent.
Horwill, J.—In misfeasance proceedings taken by the
liquidator during the course of a winding up of a company of which the
appellant was a director for a
year or so, this Court on the Original Side directed that the appellant do pay
the Official Liquidator the sum of Rs. 2,991-14-0 and Rs. 4,866-6-0 "being
the amounts of loss occasioned in respect of the share brokerage, preliminary
expenses and investments in unauthorised banks respectively...."
The respondent having taken an
assignment of the decree proceeded against the appellant in execution and
applied to the Court for his arrest. The question arose whether under Section
51 of the Civil Procedure Code the respondent was liable for arrest. He pleaded
that he was a pauper and was quite unable to raise the money to discharge the
decree. The Court however found that since he was a director and it was on
account of his breach of duty that the loss had been sustained by the company,
clause (c) of the proviso to Section 51 applied, and "that the decree is
for a sum for which the judgment-debtor was bound in fiduciary capacity to
account."
It is not contended by the
respondent that a director is an express trustee of the property of the
company; but it has always been held that the relationship between a director
and a member of a company is that of trustee and cestui que trust, and
directors have been described as commercial trustees, quasi trustees, and the
like. In Cavendish Bentinc v. Fenn, Lord
Macnaghten said that the expression "misfeasance" in Section 165 of
the Indian Companies Act was not misfeasance in the general sense of the word
but as being in the nature of a breach of trust. The learned advocate for the
appellant has attempted to draw a distinction between misfeasance, or active
wrongdoing, and non-feasance or mere negligence. One does not find in Section 235
of the Indian Companies Act the word "non-feasance." A director is
under an obligation to assist in the management and supervision of the affairs
of the company; and if a breach of his duty to the company results in a loss to
the company, he is bound to make compensation to the company in respect of the
"misapplication, retainer or, misfeasance, or breach of trust". A
failure on the part of a person to do his duty with regard to the property of a
company over which he has control by virtue of his being a director amounts to
misfeasance within the meaning of Section 235 of the Indian Companies Act.
Mr. Gopalaswami Iyengar for the
appellant has sought to take us through the facts of the case in an attempt to
prove to us that the appellant was in no way responsible for the loss that
occurred; but we cannot, as the learned District Judge pertinently pointed out,
go behind the decree itself. The judgment of this Court also shows that the
appellant failed to do his duty.
One of the earliest Indian cases
that dealt with the duties of a Director towards the members of the company is
New Fleming Spinning and Weaving Co., Ltd. v. Kessowji Naik. The learned
Judge said :—
"My
conclusion is that, (a) although the directors are not trustees in every sense
of the term, they stand in a fiduciary relation towards their shareholders with
respect to the funds and the business placed in their charge; (b) It follows
that they are liable to be sued for a breach of trust, in case they have not
dealt with the property and watched over the business as carefully as a man of
ordinary prudence would deal with such property and watch over such business if
they were his own."
Again at page 396 :—
"if
instead of performing their duty and showing reasonable diligence, the
defendants delegated all the control to the agent, and so enabled him to
misapply the company's money, they must, on the authority of the rule laid down
by Lord Langdale be held liable for that misapplication".
Ramasami v. Sreeramulu Chetti also
considered the relationship between a Director and the members of a company. Reference
is made therein to certain English cases in which it had been held that the
relationship of trustee and cestui que trust subsists between the Directors of
Joint Stock Companies and the shareholders, it being held in such cases that
misfeasance by a Director was a breach of trust. Even in In re Forest of Dean
Coal Mining Co.,
relied on by the learned advocate for the appellant, we find at page 453 this
passage:—
"Again,
directors are called trustees. They are no doubt trustees of assets which have
come into their hands, or which are under their control......."
We have not been referred by the
learned advocate for the appellant to any case in which it was held that the
relationship between a Director and the members of a company is not that of
trustee and cestui que trust. Although, as already stated, he is not an express
trustee, yet he certainly occupies a fiduciary position with regard to the
members of the company.
It is next argued that even though
a Director occupies a fiduciary position in relation to the members of a
company, he is not liable to account to them. It seems to us that his liability
to account flows from his fiduciary position, which requires him to hold the property
of the company over which he has control for the benefit of the members of the
company. If he holds the position of a trustee with regard to the members of the company, it means that
the members of the company can call upon him to account for the property over
which he has control on their behalf. This is expressed in the opening sentence
of paragraph 533 of Halsbury's Laws of England, Vol. V:—
"Directors
are trustees of the property of the company in their hands or under their
control and must account to the company for all such property."
We are therefore satisfied that
the learned District Judge was right in holding that an order for arrest could
issue against the appellant even if his allegation that he had no money were
true.
The appeal is dismissed
with costs.
Supreme Court
companies act
[2004]
54 scl 601 (sc)
SUPREME
COURT OF
Dale & Carrington Investment
(P.) Ltd.
v.
P. K.
Prathapan
mrs.
Ruma Pal and Arun Kumar, JJ.
september
13, 2004
When
powers to issue additional shares are used by
directors of company merely for an extraneous purpose
like maintenance or acquisition of control over affairs of
company, same cannot be upheld
Section 291, read with section 81, of the
Companies Act, 1956 - Directors - Power of - Whether fiduciary capacity, within
which directors have to act, enjoins upon them a duty to act on behalf of a
company with utmost good faith, utmost care and skill and due diligence and in
interest of company they represent - Held, yes - Whether in matter of issue of
additional shares, if powers are used by directors merely for an extraneous
purpose like maintenance or acquisition of control over affairs of company,
same cannot be upheld - Held, yes - Whether even though section 81, which
contains certain requirements in matter of issue of further share capital by a
company, does not apply to private limited companies, directors in a private
limited company are expected to make a disclosure to shareholders of such a
company when further shares are being issued - Held, yes
Section 397, read with section 398, of the
Companies Act, 1956 - Oppression and mismanagement - Appellant was private
limited company - P, who was majority shareholder in company, filed petition
under section 397/398 alleging that 'R', who was managing director of company,
had allotted to himself certain equity shares of company without making offer
to ‘P’ regarding further issue of shares and as a result of such allotment 'P'
had been reduced to minority shareholder in company - 'R' had neither placed on
record anything to justify issue of further share capital nor it had been shown
that proper procedure was followed in allotting additional share capital;
rather only motive for allotment appeared to be mala fide to gain control of
company - CLB held that allotment of additional shares by 'R' to himself was an
act of oppression on his part and as a relief gave option to 'P' to sell his
shares to 'R' - On appeal by 'P', High Court maintained CLB's finding regarding
oppression but as a relief set aside allotment of additional shares in favour
of 'R' - Whether on facts of case, only relief that had to be granted was to
undo advantage gained by ‘R’ through his manipulations and fraud and,
therefore, allotment of all additional shares in favour of ‘R’ had rightly been
set aside by High Court - Held, yes
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against order of - Whether if a finding of fact is
perverse and is based on no evidence, it can be set aside in appeal even though
appeal is permissible only on question of law - Held, yes - Whether where
judgment of CLB was given in a very cursory and cavalier manner and CLB had not
gone into real issues which were germane to decision of controversy involved in
case, High Court had rightly gone into depth of matter while exercising
jurisdiction under section 10F - Held, yes
FACTS
R and P were natives of Kerala. P had been working in
The CLB decided
the issue of locus standi against R. It took the view that R had committed an
act of oppression by not only not informing P about issue of further share
capital of the company but also not offering him the further share capital
which was being issued by the company. However, it, while considering relief,
gave an option to P to sell his shares to R. The CLB dismissed R’s petition for
rectification of register of members.
The High Court
on being approached by both parties maintained the judgment of the CLB so far
as the rejection of petition for rectification of register of members was
concerned. However, it allowed the appeal filed by P which was directed mainly
to the question of relief granted by the CLB. It further took a serious view of
the manner in which R was managing the affairs of the company and held it to be
an act of fraud on the part of R in allotting additional equity shares of the
company in his favour. It, accordingly, ordered setting aside of allotment of
shares made in the board meetings held on 24-10-1994 and 26-3-1997, to R.
On appeal to the Supreme Court :
held
Validity
of allotment of equity shares
A doubt had
been cast about whether the alleged meetings in which additional equity shares
were allotted to R were held at all. The appellants had filed a photocopy of
the minutes of the alleged meeting of the board of directors said to have taken
place on 24-10-1994. However neither a copy of a notice convening the board
meeting nor the log book meant to record signatures of directors attending the
meeting of the board of directors were produced. In the absence of these
documents and any other proof to show that a meeting was held as alleged it
could not be accepted that a meeting of the board of directors was held on
24-10-1994. If no meeting of the board of directors took place on the date, the
question of allotment of shares to R did not arise. The photocopy of the
minutes of the alleged meeting produced by the appellants was sham and
fabricated. The alleged allotment of additional equity shares of the company in
favour of R was, therefore, wholly unauthorized and invalid and deserved to be
set aside. Even assuming that a meeting of the board of directors of the
company did take place as alleged by R, the first question that arose whether
the company required additional funds for which the shares were issued. Nothing
had been placed on record to show that during the financial year 1993-94, i.e.,
1-4-1993 to 31-3-1994, suddenly a need had arisen for a substantial investment.
No particular reason for making a major investment had been shown. Nothing had
been shown as to how such amount was utilized.
Hence, it
appeared that the only purpose of R was to allot additional shares in the
company to himself to gain control of the company and to achieve that
objective, the books of the company had been manipulated. The High Court was
right in holding that the entire manipulation of records of the company by R
was an act of fraud on his part. [para 11]
Legal position of
directors of companies
A company is a
juristic person and it acts through its directors who are collectively referred
to as the board of directors. An individual director has no power to act on
behalf of a company of which he is a director unless by some resolution of the
board of directors of the company specific power is given to him/her. Whatever
decisions are taken regarding running the affairs of the company, they are
taken by the board of directors. The directors of companies have been variously
described as agents, trustees or representatives, but one thing is certain that
the directors act on behalf of a company in a fiduciary capacity and their acts
and deeds have to be exercised for the benefit of the company. They are agents
of the company to the extent they have been authorized to perform certain acts
on behalf of the company. In a limited sense, they are also trustees for the
shareholders of the company. To the extent the power of the directors are
delineated in the memorandum and articles of association of the company, the
directors are bound to act accordingly. As agents of the company, they must act
within the scope of their authority and must disclose that they are acting on behalf
of the company. The fiduciary capacity, within which the directors have to act,
enjoins upon them a duty to act on behalf of a company with utmost good faith,
utmost care and skill and due diligence and in the interest of the company,
they represent. They have a duty to make full and honest disclosure to the
shareholders regarding all important matters relating to the company. It
follows that in the matter of issue of additional shares, the directors owe a
fiduciary duty to issue shares for a proper purpose. That duty is owed by them
to the shareholders of the company. Therefore, even though section 81, which
contains certain requirements in the matter of issue of further share capital
by a company, does not apply to private limited companies, the directors in a
private limited company are expected to make a disclosure to the shareholders
of such a company when further shares are being issued. That requirement flows
from their duty to act in good faith and make full disclosure to the
shareholders regarding the affairs of a company. The acts of directors in a
private limited company are required to be tested on a much finer scale in
order to rule out any misuse of power for personal gains or ulterior motives.
Non-applicability of section 81 in case of private limited companies casts a
heavier burden on its directors. Private limited companies are normally closely
held, i.e., the share capital is held within members of a family or within a
close knit group of friends. That brings in considerations akin to those
applied in cases of partnership where the partners owe a duty to act with
utmost good faith towards each other. Non-applicability of section 81 to
private companies does not mean that the directors have absolute freedom in the
matter of the management of affairs of the company. [
In the instant
case, articles of association of the company prohibited any invitation to the
public for subscription of shares or debentures of the company. The intention
appeared to be that the share capital of the company would remain within a
close knit group. Therefore, if the directors failed to act in the manner
prescribed above, they could be held liable for breach of trust for misapplying
funds of the company and for misappropriating its assets. [
When powers are
used merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company, the same cannot be upheld. [
In the instant
case, the managing director had neither placed on record anything to justify
issue of further share capital nor it had been shown that proper procedure was
followed in allotting the additional share capital. Conclusion was inevitable
that neither the allotment of additional shares in favour of R was bona fide
nor it was in the interest of the company nor a proper and legal procedure was
followed to make the allotment. The motive for the allotment was mala fide, the
only motive being to gain control of the company. Therefore, the entire
allotment of shares to R had to be set aside. [
Even the CLB
found that the allotment of additional shares by R to himself was an act of
oppression on his part. The CLB drew that conclusion solely for the reason that
no offer had been made to the majority shareholders regarding issue of further
share capital. The High Court accepted the finding of oppression. However, it
placed it on a much broader base by taking into consideration various other
factors. The High Court’s finding was based on a much stronger footing. In
fact, the High Court had gone on to conclude that R had played a fraud on the
majority shareholders by manipulating the allotment of shares in his favour.
There was no reason to differ with the finding of the High Court [
Locus
standi to file petition
So far as the
question of permission of the Reserve Bank of
The entire
scheme regarding purchase of shares in the name of mother of P was suggested by
R himself. He saw to it that the shares were transferred by the company in the
name of P and his wife. The company had recorded the transfer and corrected its
register of members in that behalf which, in fact, led R to file a petition for
rectification of the register of members as a counterblast to the petition
filed by P under section 397/398. It was not open to R later to raise the
question of the FERA violation, more particularly in view of his having
recorded the transfer of shares in the name of P and his wife in the records of
the company. That also answered the objection regarding locus standi of P and
his wife to file section 397/398 petition before the CLB. Since they were
registered as shareholders of the company on the date of filing of the petition
and they held the requisite number of shares in the company, they could
maintain the petition. [
Scope
of powers of High Court in appeal under section 10F
Section 10F
refers to an appeal being filed on the question of law. The appellant argued
that the High Court could not disturb the findings of fact arrived at by the
CLB. It was further argued that the High Court had recorded its own finding on
certain issues which the High Court could not go into and, therefore, the
judgment of the High Court was liable to be set aside. One could not agree with
the submission made by the appellants. It is settled law that if a finding of
fact is perverse and is based on no evidence, it can be set aside in appeal
even though the appeal is permissible only on the question of law. The
perversity of the finding itself becomes a question of law. In the instant
case, the judgment of the CLB was given in a very cursory and cavalier manner.
The Board had not gone into the real issues which were germane to the decision
of the controversy involved in the case. The High Court had rightly gone into
the depth of the matter. The controversy in the case revolved around alleged
allotment of additional shares in favour of R and whether the allotment of
additional shares was an act of oppression on his part. On the issue of
oppression the finding of the CLB was in favour of P, i.e., his impugned act
was held to be an act of oppression. The said finding had been maintained by
the High Court although it had given stronger reasons for the same. Hence,
there was no merit in the argument that the High Court exceeded its
jurisdiction under section 10F while deciding the appeal. [Paras 13.1 and 13.2]
Relief
The facts of
the instant case were so manifestly against R that two opinions were not
possible on the aspect of relief. The only relief that had to be granted in the
instant case was to undo the advantage gained by R through his manipulations
and fraud. The allotment of all the additional shares in favour of R had to be
set aside. The High Court was fully justified in granting the relief of setting
aside the impugned allotment of additional shares in favour of R. The approach
of the CLB was totally erroneous inasmuch as after having found that there was
oppression on the part of R, he was still allowed to take advantage of his own
wrong inasmuch as he was given the option to buy P’s shares and that too not
for a proper price. The CLB was wrong in allowing purchase of shares of P and
his wife by R. Such an order amounted to rewarding the wrong-doer and
penalizing the oppressed party. Therefore, the relief granted by the High Court
was a proper relief in the facts of the case. [
The appeals
were, therefore, to be dismissed. [
Cases referred to
Regal (Hastings) Ltd. v. Gulliver 1942(1) All ER 379
(para 11.4), Alexander v. Automatic Telephone Co. [1900] 2 Ch. 56 (para 11.4),
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.
[1981] 3 SCC 333 (para 11.4), Punt v. Symons [1903] 2 Ch. 506 (para 11.4),
Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 (para 11.4), Hogg v.
Cramphorn Ltd. [1967] 1 Ch. 254 (para 11.4), Howard Smith Ltd. v. Ampol
Petroleum Ltd. 1974 AC 821 (PC) (para 11.4), Rolled Steel Products (Holdings)
Ltd. v. British Steel Corpns. 1986 Ch. 246 (CA) (para 11.6), Bishopsgate
Investment Management Ltd. (In Liquidation) v. Maxwell (No. 2) [1994] 1 All ER
261 (CA) (para 11.6), Whitehouse v. Carlto Hotel (P.) Ltd. [1987] 162 CLR 285
(para 11.6), Tea Brokers (P.) Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp.
LJ. 463 (para 11.7), LIC of India v. Escorts Ltd. [1986] 1 SCC 264 (para 12),
Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213
(para 12.1), S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994]
80 Comp. Cas. 693 (
Dushyant A.
Dave, Krishnan Venugopal, K.S. Venugopal, E.B. Shaji, Nikhil Goel, Prasad Vijay
Kumar, A. Venugopal and A.D. Sikri for the Appellant. S. Ganesh,
Joseph Kodianthapa, Ajay K. Jain, Saji Kurup, Deepak Prakash and M.P.
Vinod for the Respondent.
Judgment
Arun Kumar, J. - P.K. Ramanujam, appellant 2 and
P.K. Prathapan and his wife Pushpa Prathapan, respondents 1 and 2 are the
contesting parties in this litigation. Appellant 1 is the company in which they
are all shareholders and the litigation is about its control and management.
Both parties are making claims to the right to control and manage the company.
Briefly the facts are : Ramanujam had returned to Kerala, his native place,
after resigning his job as an accountant in England in the year 1983. He was
looking for an opportunity to work. Prathapan, also a native of Kerala, had
been working in Muscat since long and was staying there alongwith his family.
The mother of Prathapan, named Kalyani Kochuraman, was living in Kerala.
Prathapan had two sons. According to Prathapan his sons were desirous of returning
to India and settling down in their native place. Therefore, Prathapan wanted
to set up some business in India in order to settle his sons. Since the parties
are relations they were in touch with each other. Towards the middle of 1987
Ramanujam informed Prathapan that a hotel called ‘Hotel Siddharth’ in a town
called Chalakudy, was available for sale. The hotel building had ten rooms,
besides a restaurant with a bar attached to it. The partners who were running
the hotel were interested in selling it immediately. Ramanujam further informed
Prathapan that the hotel was available for down payment of Rs. 6 lakhs (Rupees
Six Lakhs). The purchaser, in addition, had to take upon a liability of about
Rs. 18 lakhs (Rupees eighteen lakhs) which was standing on the hotel. Ramanujam
offered a look after the business of the hotel till Prathapan decided to return
to India. The parties decided to go ahead with the purchase of the hotel for
which Prathapan agreed to send Rs. Five Lakhs. Ramanujam was to get a salary for
the services to be rendered by him in looking after the business of the hotel.
A company by the name of Dale and Carrington Investments Private Limited was
incorporated on 4th November, 1986 for the hotel business. Ramanujam and his
wife Draupathy were shown as the promoters of the company. On the request of
Ramanujam, Prathapan sent a Bank Draft in the sum of Rs. 5 lakhs (Rupees Five
Lakhs) favouring his mother Kalyani Kochuraman on 3rd March, 1987. The draft
was sent in the name of the mother because Prathapan was an NRI and the company
could not receive money directly from him. The device of money being first sent
in the name of Prathapan’s mother and thereafter the mother transferring it to
the company, was suggested by Ramanujam in his letter dated 25th February, 1987
to Prathapan. The Hotel was accordingly acquired by the company in March, 1987.
A sum of Rs. 6 lakhs (Rupees Six Lakhs) was required to be paid in cash to the
vendors out of which Rs. 5 lakhs (Rupees five lakhs) were received from Prathapan
and a sum of Rs. 50,000 (Rupees Fifty Thousand) was invested by Muralidharan,
brother of Prathapan. The rest of the amount came from other respondents. There
was no financial contribution by Ramanujam. Initially Ramanujam and his wife
Draupathy were the Directors of the company. However, in December, 1988
Draupathy was dropped as director and in her place Muralidharan, brother of
Prathapan and Suresh Babu, brother of Prathapan’s wife, were taken as Directors
of the Company. 5000 (five thousand) equity shares worth Rupees five lakhs were
allotted in the name of Smt. Kalyani Kochuraman, mother of Prathapan against
the investment of Rupees Five Lakhs. These 5000 equity shares were subsequently
transferred in the name of Prathapan and his wife, 2500 (two thousand five
hundred) each, subject to the transferees obtaining requisite permission of the
Reserve Bank of India under the Foreign Exchange Regulation Act (FERA). The
transfer of shares in the name of Prathapan and his wife Pushpa was duly
recorded in the Register of Members maintained by the company. Thus Prathapan
and his wife Pushpa became shareholders of the company to the extent of 2500
equity shares each.
2. Initially the
company was making losses. However, by about the year 1991-92, the company
turned the corner. Copies of balance sheets of the company for a few years of
its working have been placed on record by the appellant which show that till
31st March, 1992 there were no profits in the company. For the first time some
profit was shown as on 31st March, 1993. Till 31st March, 1993, under the head
‘Advance towards share capital pending allotment’ only a sum of Rs. 3000
(Rupees Three Thousand) was shown whereas as on 31st March, 1994 under the said
head, a balance of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five
hundred only) was shown. We have mentioned this figure here because it will be
relevant for the main controversy in this case.
3. It is the case of
Prathapan that he continued to provide finance to the company by sending money
to Ramanujam from time to time. The details of some of such disbursements are
as under :
(a) A sum of Rs. 1,00,000 in March, 1989;
(b) US $ 6300 in favour of
Maruthi Udyog Ltd. for allotment of a vehicle for the use of second appellant
in November, 1991;
(c) A sum of Rs. one lakh in February, 1994;
(d) A deposit of Rs. one lakh
with State Bank of India in the year 1996 to provide bank guarantee in favour
of the sales tax authorities at Kerala;
(e) A sum of Rs. Nine lakhs in January, 1996
for making remittance in favour of the Sales Tax Authorities.
4. According to
Prathapan he was to be issued shares of the company against these remittances
while according to Ramanujam the remittances were on personal account in view
of the close relationship between the parties. The fact remains that the
remittances were to Ramanujam and not to the company.
5. In the beginning,
the business of the company was carried on by Ramanujam with the assistance of Muralidharan,
brother of Prathapan who was acting as Manager of the Company, while Ramanujam
was the Chairman and Managing Director of the company. It is not denied that
Ramanujam was regularly getting salary for working as Managing Director of the
company. According to Prathapan he was kept completely in the dark about the
affairs of the company throughout. He never received a penny towards dividend
on the shares held by him in the company.
6. Sometime in the
year 1998 Prathapan is said to have come to India to consider acquiring another
Hotel for expanding the business of the company. At that time he is said to
have discovered certain startling facts about the company. The most important
fact which is at the centre of the controversy in this case is that the
company’s authorised capital was increased from Rs. 15 lakhs to Rs. 25 lakhs
and thereafter to Rs. 35 lakhs without the knowledge of Prathapan, a principal
shareholder of the company. Further in an alleged meeting of the Board of
Directors of the company said to have been held on 24th October, 1994, chaired
by Ramanujam, the Board of Directors of the company is said to have been
informed about a sum of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five
hundred only) standing to the credit of Ramanujam in the books of the company.
He made a proposal for allotment of shares in lieu of that amount in his
favour. As per the case of Ramanujam the Board allotted 6,865 equity shares of
Rs. 100 each in the said meeting in his favour. According to Prathapan he was
never made aware of the increase in authorised share capital of the Company and
the alleged allotment of additional equity shares of the company in favour of
Ramanujam. The alleged allotment reduces Prathapan, who was a majority
shareholder in the company, to a minority shareholder in the company. Prathapan
challenged this alleged allotment of shares in favour of Ramanujam by filing a
Company Petition under sections 397 and 398 of the Companies Act before the
Company Law Board in July, 1999. The main challenge in the Company Petition
filed by Prathapan alongwith his wife as co-petitioner, was to the said alleged
allotment of 6865 equity shares of Rs. 100 each of the company. This was
alleged to be an act of oppression on the part of Ramanujam who was managing
the company. Prayer was made that the allotment of shares be set aside, and
necessary correction be made in the Register of Members of the company.
According to Prathapan Ramanujam did not contribute any money from his own
resources for purposes of the company while all along he drew a handsome salary
for working as the Managing Director. His maximum investment in the company
could not be more than Rs. 20,000. He committed fraud and breach of trust as a
result of which Prathapan and his wife had been totally marginalised in the
company. In fact, Muralidharan, brother of Prathapan was removed from the Board
of Directors of the company on 1st October, 1994 while Suresh Babu,
brother-in-law of Prathapan and brother of Pushpa, (Prathapan’s wife) was removed
as Director on 30th September, 1996. Prathapan also alleged that Ramanujam
siphoned off funds of the company for personal gains.
7. The Company Law
Board took the view that Ramanujam had committed an act of oppression by not
only not informing him about issue of further share capital of the Company but
also not offering him the further share capital which was being issued by the
company. Having given a finding of ‘oppression’ in favour of Prathapan the
Company Law Board while considering relief, gave an option to Prathapan to sell
his shares to Ramanujam. It was observed that a return of 12% per annum on the
investment made by Prathapan would be fair in the facts of the case. Prathapan
and his wife, who were petitioners in the company petition, were given liberty
to sell their shares to Ramanujam at par value with 12% simple interest per
year from the date of their investment.
8. During the
pendency of the company petition filed by Prathapan, a petition was filed
before the Company Law Board for rectification of the Register of Members so as
to delete the entries recording of transfer of shares in favour of Prathapan
and his wife. This was on the ground that they had failed to obtain permission
of the Reserve Bank of India under the Foreign Exchange Regulation Act
regarding transfer of shares in their favour.
9. In the proceedings
in the petition under sections 397 and 398 of the Companies Act, locus standi
of Prathapan and his wife to file the petition was challenged. This issue was
decided by the Company Law Board against Ramanujam. The petition for
rectification of Register of members was dismissed. However, Prathapan was
aggrieved about the relief granted by the Company Law Board. Inspite of the
finding on oppression being in his favour, he was asked to sell his shares and
leave the company. Ramanujam was aggrieved of the finding of oppression against
him and of the dismissal of the application for rectification of Register of
Members. Both parties approached the High Court of Kerala against the judgment
of the Company Law Board. The High Court maintained the judgment of the Company
Law Board so far as the rejection of petition for ratification of Register of
members was concerned. However, the High Court allowed the appeal filed by
Prathapan which was directed mainly on the question of relief granted by the
Company Law Board. The High Court took a serious view of the manner in which
Ramanujam was managing the affairs of the company. The High Court held it to be
an act of fraud on the part of Ramanujam in allotting 6865 equity shares of the
company in his favour. The High Court further held that a perpetrator of fraud
could not be allowed to take benefit of his own wrong. The High Court found
that the observation of the Company Law Board that the appellants can sell
their shares at par value to the Managing Director, getting 12 per cent
interest on their investment, will not be justified but will only help the
manipulator. The High Court ordered setting aside of allotment of shares made
in the Board Meetings held on 24th October, 1994 and 26th March, 1997, to
Ramanujam, the Managing Director of the company. The Share Register was ordered
to be rectified accordingly. The present appeal by Ramanujam is directed
against the judgment of the High Court.
10. On the basis of the
submissions made by the learned counsel for the parties, following issues arise
for consideration :
Issue 1.
Validity of allotment of equity shares of the Company in favour of Ramanujam
whereby he becomes a majority shareholder and Prathapan and his wife are
reduced to minority shareholders.
This issue gives rise to following questions :
(a) Was a meeting of the
Board of Directors of the Company held on 24h October, 1994 when the first
allotment of additional shares in favour of Ramanujam is said to have been made
?
(b) Was it a valid meeting of the Board of
Directors of the company ?
(c) Did the Company require
funds so as to necessitate raising of share capital of the company by issuing
further equity shares ?
(d) Was the alleged allotment
of equity shares in favour of Ramanujam a bona fide act on the part of Board of
Directors in the interest of the company ? In other words does the act of
raising share capital by allotment of additional equity shares in favour of
Ramanujam, the Managing Director, amount to an act of oppression on his part
towards the then majority shareholders ?
Issue 2. What
is the effect of not obtaining permission of the Reserve Bank of India under
the Foreign Exchange Regulation Act (FERA) by Prathapan regarding transfer of
shares in his and his wife’s favour ? Did Prathapan and his wife Pushpa have no
locus standi to file the petition under sections 397 and 398 of the Companies
Act before the Company Law Board ?
Issue 3. Scope of power of the High Court in an appeal under section 10F
of the Companies Act;
Issue 4.
Relief to be granted to a majority shareholder who by an act of oppression on
the part of management of the company is converted into a minority shareholder.
Issue 1. Validity of allotment of equity shares
11. This is the main
issue which arises for consideration in this case. As already noted Ramanujam
who was the Managing Director of the company got allotted 6865 equity shares to
himself in a meeting of the Board of Directors of the company alleged to have
been held on 24th October, 1994. Again on 26th March, 1997 he managed to get
allotted further 9800 equity shares to himself. Prathapan has challenged these
allotments of shares in favour of Ramanujam as acts of oppression on the part
of Ramanujam, the Chairman and Managing Director of the company for which he
filed a petition under sections 397 and 398 of the Companies Act before the
Company Law Board. A doubt has been cast about whether the alleged meetings in
which additional equity shares were allotted to Ramanujam were held at all. In
this behalf the following facts are noticeable :—
(a) The appellants have filed
a photocopy of the minutes of the alleged meeting of the Board of Directors
said to have taken place on 24th October, 1994. As per the photocopy the
minutes appear to be signed by Ramanujam as Chairman. The presence of Suresh
Babu as a Director of the Company has been shown in the minutes. However, there
is no evidence of presence of Suresh Babu in the said meeting. Article 36 of
the Articles of Association of the company requires that a notice convening the
meetings of the Board of Directors shall be issued by the Chairman or by one of
the Directors duly authorized by the Board in this behalf. Suresh Babu filed an
affidavit in the proceedings before the Company Law Board wherein he has
categorically stated that at no point of time he was involved in the affairs of
the company and in running the business of the company. Further he has stated
in the said affidavit that at no point of time he was informed that he had been
appointed as Director of the company. He had never received any notice of any
Board meetings nor had he ever attended any Board meeting. In view of this
categorical denial by Suresh Babu about attending any meetings of the Board of
Directors of the company, it was incumbent on the part of Ramanujam who was the
Chairman and Managing Director of the company and was in possession of all the
records of the company, to place on record a copy of a notice calling a meeting
of the Board of Directors in terms of article 36. No copy of the notice
intimating Suresh Babu about the meeting of the Board of Directors and asking
him to attend the same, has been placed on record to show that Suresh Babu was
informed about holding of the meeting in question.
Here reference
is required to be made to certain other articles of the company which are
relevant for the controversy. Article 8 provides that shares of the company
shall be under the control of the Directors who may allot the same to such
applicants as they think desirable of being admitted to membership of the
company. Article 10 provides that allotment of shares “shall exclusively be
vested in the Board of Directors, who may in their absolute discretion allot
such number of shares as they think proper...” Article 38 requires that the
Directors present at the Board Meeting shall write their names and sign in a
book specially kept for the purpose. Article 4(iii) prohibits any invitation to
the public to subscribe for any shares or debentures of the company. The above
provisions of the Articles of Association show that the Board of Directors have
an absolute discretion in the matter of allotment of shares. But this
pre-supposes that such a decision has to be taken by the Board of Directors.
The decision is taken by the Board of Directors only in meetings of the Board
and not elsewhere. Ramanujam, the Managing Director cannot take a decision on
his own to allot shares to himself. If Suresh Babu was present in the meeting,
as is the case of Ramanujam, he must have signed a book specially kept for
recording presence of the Directors at the Board Meeting in terms of article
38. Ramanujam should have been the first person to produce such a book to show
the presence of Suresh Babu at the alleged Board meeting said to have been held
on 24th October, 1994, specially when Suresh Babu was denying his presence at
the meeting. Nothing has been produced. Thus neither a copy of a notice
convening the Board meeting nor the log book meant to record signatures of
Directors attending the meeting of the Board of Directors were produced. In the
absence of these documents and any other proof to show that a meeting was held
as alleged we are unable to accept that a meeting of the Board of Directors was
held on 24th October, 1994. If no meeting of the Board of Directors took place
on that date, the question of allotment of shares to Ramanujam does not arise.
We are inclined to believe that photocopy of the minutes of the alleged meeting
dated 24th October, 1994 produced by appellants, is sham and fabricated. The
alleged allotment of additional equity shares of the company in favour of
Ramanujam is, therefore, wholly unauthorized and invalid and has to be set
aside.
Normally this Court
would not have gone into these questions of fact. However, the learned counsel
for the appellant in the course of his arguments drew our attention to the
various Articles of Association of the company, which unfortunately neither the
Company Law Board nor the High Court considered. We cannot help referring to
them, particularly in view of the fact that the Articles of a company are its
constituent document and are binding on the company and its Directors.
The facts on
record show that the company was being run as one man show and Ramanujam was
maintaining the Minutes Book of meetings of Board of Directors only to comply
with the statutory requirement in this behalf. The minutes were being recorded
by him according to his choice and at his instance. The minutes do not reflect
the actual position. Article 38 mandated that a book should be maintained to
record presence of Directors at meetings of the Board of Directors. If a book
for recording signatures of Directors attending meetings of the Board of Directors
was not maintained, it was in clear violation of article 38 of the Articles of
Association of the company. The Company Law Board without going into these
relevant aspects, proceeded on an assumption that a meeting of the Board of
Directors did take place on 24th October, 1994. This assumption of the Company
Law Board is clearly without any basis.
(b) When no meeting of the
Board of Directors of the company was held on 24th October, 1994, the question
of validity of the meeting does not arise. On the relevant date Suresh Babu was
the only other Director of the Company. He denies having attended any meeting
of the Board of Directors of the company. There is nothing to rebut this stand
of Suresh Babu. In his absence no valid meeting of the Board of Directors could
be held.
(c) For considering this
point let us assume that a meeting of the Board of Directors of the company did
take place as alleged by Ramanujam. First question that arises is whether the
company required additional funds for which the shares were issued. We have
already referred to Balance Sheets of the company, copies whereof have been
placed on record. Till 31st March, 1993 the Balance Sheets did not show any
investment of substantial amounts of money in the company. It is the Balance
Sheet for the year ending 31st March, 1994 which for the first time shows an
advance of Rs. 6,86,500 towards share capital pending allotment. Nothing has
been placed on record to show that during the financial year 1993-94, i.e., 1st
April, 1993 to 31st March, 1994 suddenly need had arisen for a substantial
investment. The company was running a hotel, the property whereof was owned by
the company. No particular reason for making a major investment has been shown.
Nothing has been shown as to how the amount of Rs. 6,86,500 was utilised. It
appears that Ramanujam who was managing the affairs of the company single
handedly, realized that the company had turned around and the Hotel property
had appreciated in terms of its market value. He started working on a strategy
to get controlling shares in the company. It was in furtherance of this
objective that Ramanujam managed to show the entry regarding advance against
shares in the Balance Sheet as on 31st March, 1994. For this amount, he
allotted equity shares to himself to gain control of the company. In these
facts it is difficult for us to appreciate that the additional funds were
required by the company. In our view the finding of the High Court that no
funds were needed by the company is fully justified. The only purpose was to
allot additional shares in the company to himself to gain control of the
company and to achieve this objective, the books of the company appear to have
been manipulated. The High Court was right in holding that the entire
manipulation of records of the company by Ramanujam was an act of fraud on his
part.
(d) We may also test the
alleged act of allotment of equity shares in favour of Ramanujam from a legal
angle. Could it be said to be a bona fide act in the interest of the Company on
the part of Directors of the Company?
11.1 At this stage it may
be appropriate to consider the legal position of Directors of companies
registered under the Companies Act. A company is a juristic person and it acts
through its Directors who are collectively referred to as the Board of
Directors. An individual Director has no power to act on behalf of a company of
which he is a Director unless by some resolution of the Board of Directors of
the Company specific power is given to him/her. Whatever decisions are taken regarding
running the affairs of the company, they are taken by the Board of Directors.
The Directors of companies have been variously described as agents, trustees or
representatives, but one thing is certain that the Directors act on behalf of a
company in a fiduciary capacity and their acts and deeds have to be exercised
for the benefit of the company. They are agents of the company to the extent
they have been authorized to perform certain acts on behalf of the company. In
a limited sense they are also trustees for the shareholders of the company. To
the extent the power of the Directors are delineated in the Memorandum and
Articles of Association of the company, the Directors are bound to act
accordingly. As agents of the company they must act within the scope of their
authority and must disclose that they are acting on behalf of the company. The
fiduciary capacity within which the Directors have to act enjoins upon them a
duty to act on behalf of a company with utmost good faith, utmost care and
skill and due diligence and in the interest of the company they represent. They
have a duty to make full and honest disclosure to the shareholders regarding
all important matters relating to the company. It follows that in the matter of
issue of additional shares, the directors owe a fiduciary duty to issue shares
for a proper purpose. This duty is owed by them to the shareholders of the
company. Therefore, even though section 81 of the Companies Act which contains
certain requirements in the matter of issue of further share capital by a
company does not apply to private limited companies, the directors in a private
limited company are expected to make a disclosure to the shareholders of such a
company when further shares are being issued. This requirement flows from their
duty to act in good faith and make full disclosure to the shareholders
regarding affairs of a company. The acts of directors in a private limited
company are required to be tested on a much finer scale in order to rule out
any misuse of power for personal gains or ulterior motives. Non-applicability
of section 81 of the Companies Act in case of private limited companies casts a
heavier burden on its directors. Private limited companies are normally closely
held, i.e., the share capital is held within members of a family or within a
close knit group of friends. This brings in considerations akin to those
applied in cases of partnership where the partners owe a duty to act with
utmost good faith towards each other. Non-applicability of section 81 of the
Act to private companies does not mean that the directors have absolute freedom
in the matter of management of affairs of the company.
11.2 In the present case
Article 4(iii) of the Articles of Association prohibits any invitation to the
public for subscription of shares or debentures of the company. The intention
from this appears to be that the share capital of the company remains within a
close knit group. Therefore, if the directors fail to act in the manner
prescribed above they can in the sense indicated by us earlier be held liable
for breach of trust for misapplying funds of the company and for
misappropriating its assets.
11.3 The learned counsel
for the appellant argued that Articles of Association of the company give
absolute power to the Board of Directors regarding issue of further share
capital. The Board of Directors exercised the power while issuing further
shares in favour of Ramanujam and the same cannot be challenged. In our view,
this argument has no merit because the facts of the case do not support the
argument. Firstly, the Articles of Association require such decisions regarding
issue of further share capital to be taken in a meeting of the Board of
Directors and we have found that the alleged meeting of the Board of Directors
in which the additional shares are purported to have been issued in favour of
Ramanujam was sham. Secondly, assuming for the sake of argument that meetings
of Board of Directors did take place the manner in which the shares were issued
in favour of Ramanujam without informing other shareholders about it and
without offering them to any other shareholder, the action was totally mala
fide and the sole object of Ramanujam in this was to gain control of the
company by becoming a majority shareholder. This was clearly an act of
oppression on the part of Ramanujam towards the other shareholder who has been
reduced to a minority shareholder as a result of this act. Such allotments of
shares have to be set aside.
11.4 On the role of
Directors, the law is well settled. The position has been the subject-matter of
various decisions. Some of them are:
In Regal (Hastings) Ltd. v. Gulliver 1942 (1) All. ER 379 Lord Russell of
Killowen observed as under:
“Directors of a limited company are the creatures
of a statute and occupy a position peculiar to themselves. In some respects
they resemble trustees, in others they do not. In some respects they resemble
agents, in others they do not. In some respects they resemble managing partners
in others they do not. The said judgment quotes from Principles of Equity by
Lord Kames. In one sentence the entire concept is conveyed. The sentence runs
‘Equity prohibits a trustee from making any profit by his management, directly
or indirectly. Ultimately the issue in each case will depend upon facts of that
case’.”
Lindley MR observed in Alexander v. Automatic Telephone Co. (1900) 2 Ch.
56 at pages 66-67:
“The Court of Chancery has always exacted from
directors the observance of good faith towards their shareholders and towards
those who take shares from the company and become co-adventurers with
themselves and others who may join them. The maxim ‘Caveat emptor’ has no
application to such cases, and directors who so use their powers as to obtain
benefits for themselves at the expense of the shareholders, without informing
them of the fact, cannot retain those benefits and must account for them to the
company, so that all the shareholders may participate in them.”
Needle
Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981]
3 SCC 333 is a judgment of this Court in which amongst various other aspects
the power of directors regarding issue of additional share capital was also
considered. This Court observed:
“The power to issue shares is given primarily
to enable capital to be raised when it is required for the purposes of the
company but it can be used for other purposes also as, for example, to create a
sufficient number of shareholders to enable the company to exercise statutory
powers, or to enable it to comply with legal requirements as in the instant
case. Hence if the shares are issued in the larger interest of the company, the
decision cannot be struck down on the ground that it has incidentally benefited
the Directors in their capacity as shareholders. So if the Directors succeed,
also or incidentally, in maintaining their control over the company or in newly
acquiring it, it does not amount to an abuse of their fiduciary power. What is
objectionable is the use of such power simply or solely for the benefit of
Directors or merely for an extraneous purpose like maintenance or acquisition
of control over the affairs of the company. Where the Directors seek, by
entering into an agreement to issue new shares, to prevent a majority
shareholder from exercising control of the company, they will not be held to
have failed in their fiduciary duty to the company if they act in good faith in
what they believe, on reasonable grounds, to be the interests of the company.
But if the power to issue shares is exercised from an improper motive, the
issue is liable to be set aside and it is immaterial that the issue is made in
a bona fide belief that it is in the interest of the company....” (p. 339)
In Needle
Industries (India) Ltd.’ s case (supra) the Board of Directors had resolved to
issue 16000 equity shares of Rs. 100 each to be offered as rights shares to the
existing shareholders in proportion to the shares held by them. The offer was
to be made by a notice specifying the number of shares to which each shareholder
was entitled to. The notice further said, in case the offer was not accepted
within 16 days from the date on which it was made, it was to be deemed to have
been declined by the concerned shareholder. The Holding Company held 18990
shares and it was entitled to 9495 rights shares. The Holding Company could not
avail its right to exercise the option for purchase of rights shares offered to
it. As a result the whole of the Rights Issue consisting of 16000 shares was
allotted to the Indian shareholders. The Holding Company filed a petition under
sections 397 and 398 of the Companies Act, 1956 in the High Court. The Single
Judge held in favour of the Holding Company that it had suffered a loss in view
of the fact that the market value of the rights share was Rs. 190 whereas the
shares were allotted at par, i.e., at Rs. 100. The grievance of the Holding
Company was that on account of postal delays it failed to receive the notice
containing the offer of rights shares in time, and therefore, it could not exercise
its option to buy the share. On appeal the Division Bench held that the affairs
of Needle Industries (India) Ltd.’s case (supra) were being conducted in a
manner oppressive to the Holding Company. The Division Bench ordered winding up
of the company. A further appeal to the Court was allowed mainly on the ground
that there was no oppression. However, a direction was issued that the Indian
shareholders pay an amount equivalent to that by which they unjustifiably
enriched, namely Rs. 90 × 9495 which comes to Rs. 8,54,550 to the Holding
Company.
In Needle
Industries (India) Ltd.’s case (supra) this Court referred to some old English
decisions with approval. Punt v. Symons [1903] 2 Ch. 506 was quoted in which it
was held “where the shares had been issued by the Directors, not for the
general benefit of the company, but for the purpose of controlling the holder
of the greater number of shares by obtaining a majority of voting power, they
ought to be restrained from holding the meeting at which the votes of the new
shareholders were to have been used.”
Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 applied the same
principle while holding:
“....the basis of both cases is, as I
understand, that directors are not entitled to use their powers of issuing
shares merely for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company, or merely for the
purpose of defeating the wishes of the existing majority of shareholders.” (p.
84)
In Hogg v.
Cramphorn Ltd. [1967] 1 Ch. 254, Buckley, J. reiterated the principle in Punt’s
case (supra) and in Piercy’s case (supra). It was held that if the power to
issue shares was exercised for an improper motive the issue was liable to be
set aside and it was immaterial that the issue was made in a bona fide belief
that it was in the interests of the company.
11.5 The principle
deduced from these cases is that when powers are used merely for an extraneous
purpose like maintenance or acquisition of control over the affairs of the
company, the same cannot be upheld.
11.6 Courts in the
Commonwealth countries including England and Australia have emphasized that the
duty of the Directors does not stop at ‘to act bona fide’ requirement. They
have evolved a doctrine called the ‘proper purpose doctrine’ regarding the
duties of company directors. In Hogg’s case (supra), explicit recognition was
given to the proper purpose test over and above the traditional bona fide test.
In this case the director had allotted shares with special voting rights to the
trustees of a scheme set up or the benefit of company employees with the
primary purpose of avoiding a takeover bid. Buckley, J. found as a fact that
the directors had acted in subjective good faith. They had indeed honestly
believed that their actions were in best interests of the company. Despite this
it was observed:
“...an essential element of the scheme, and
indeed its primary purpose, was to ensure control of the company by the
directors and those whom they could confidently regard as their supporters.”
As such, he
concluded that the allotment was liable to be set aside as a consequence of the
exercise of the power for an improper motive. He also held that the power to
issue shares was fiduciary in nature. In Howard Smith Ltd. v. Ampol Petroleum
Ltd. 1974 AC 821, the Privy Council confirmed the above view expressed by
Buckley, J. which shows a preference for the proper purpose doctrine. The Privy
Council felt that the bona fide test was not sufficient to meet the challenge
because it failed to encompass the obligation of directors to be fair. The
directors’ acts should not only satisfy the test of bona fides they should also
be done with a proper motive. Any lingering doubts over the status of the purpose
doctrine as a separate and independent head of directors duty within the common
law jurisdiction have been laid to rest by two decisions of the Court of Appeal
in England in Rolled Steel Products (Holdings) Ltd. v. British Steel Corpns.
1986 Ch. 246 and Bishopsgate Investment Management Ltd. (In Liquidation) v.
Maxwell (No. 2) [1994] 1 All ER 261. It was held by the Court of Appeal in
Bishopsgate that the bona fides of the directors alone would not be
determinative of the propriety of their actions. In a parallel development in
Australia the proper purpose doctrine has been approved in a decision of the
High Court in Whitehouse v. Carlto Hotel (P.) Ltd. [1987] 162 CLR 285.
11.7 The Tea Brokers (P.)
Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp. LJ. 463 was also a case of a
minority shareholder who on becoming managing director of the company, issued
further share capital in his favour in order to gain control of management of
the company. Barooah and his friends and relations were majority shareholders of
the respondent company having 67 per cent of the total issued capital of the
company. Barooah personally held 300 equity shares out of 1155 shares issued by
the company. He was at all material times a director of the company. His case
was that he was wrongfully and illegally ousted from the management of the
company. One Khaund, who initially started as an employee of the company had
110 shares in the company and belonged to the minority group. Khaund was
appointed as the managing director of the company. Barooah’s grievance was that
Khaund took advantage of his position as managing director and acted in a
manner detrimental and prejudicial to the interests of the company and in a
manner conducive to his own interest. Khaund had hatched a plan with other directors
to convert petitioner Barooah into a minority and to obtain full and exclusive
control and management of the affairs of the company. In a petition filed under
sections 397 and 398 of the Companies Act, 1956, acts of Khaund were found to
be by way of ‘oppression and mismanagement’ within the meaning of sections 397
and 398 of the Companies Act. Allotment of 100 equity shares by the company to
Khaund at a meeting of the Board of Directors said to have been held on 14th
January, 1971 was held to be illegal. The Board of Directors of the company was
superseded and a special officer was appointed to carry on management of the
company with the advice of Barooah, Khaund and a representative of labour
union. There were several other directions issued by the court which are not
necessary to be mentioned here. The Division Bench considered in detail the
relevant legal position. Without using the phrase ‘proper purpose doctrine’ the
principle enunciated therein, was applied. The following observations of Justice
A.N. Sen are reproduced:
“It is well settled that the directors may
exercise their powers bona fide and in the interest of the company. If the
directors exercise their powers of allotment of shares bona fide and in the
interest of the company, the said exercise of powers must be held to be proper
and valid and the said exercise of powers may not be questioned and will not be
invalidated merely because they have any subsidiary additional motive, even
though this be to promote their advantage. An exercise of power by the
directors in the matter of allotment of shares, if made mala fide and in their
own interest and not in the interest of the company will be invalid even though
the allotment may result incidentally in some benefit to the company.”
Further it was
held that if a member who holds the majority of shares in a company is reduced
to the position of minority shareholder in the company by an act of the company
or by its Board of Directors mala fide, the said act must ordinarily be
considered to be an act of oppression to the said member. The member who holds
the majority of shares in the company is entitled by virtue of his majority to
control, manage and run the affairs of the company. This is a benefit or
advantage which the member enjoys and is entitled to enjoy in accordance with
the provisions of company law in the matter of administration of the affairs of
the company by electing his own men to the Board of Directors of the company.
On the question of relief, the court observed:
“A majority shareholder should not ordinarily
be directed to sell his shares to the minority group of shareholders, if per
chance through fortuitous circumstances or otherwise, the minority group of
shareholders come into power and management of the company. The majority shareholders
by virtue of their majority will usually be in a position to redress all wrongs
done and to undo the mischief done by the minority group of shareholders, as it
will always be possible for the majority group of shareholders to regain
control of the company so long as they remain in majority in the company by
virtue of the majority. Except in unusual circumstances, the majority group of
shareholders, in my opinion, should never be ordered or directed to sell their
shares to the minority group of shareholders. An order directing the majority
group of shareholders to sell his shares to the minority group of shareholders
will not redress the wrong done to the majority group of shareholders and will
not give him sufficient compensation or relief against the act of oppression
complained of by him, and, on the other hand, may add to his suffering and
grievance and cause him greater hardship. Such an order will not further the
ends of justice and indeed the cause of justice may be defeated.”
On the
question of issue of fresh share capital, it was held to be illegal to issue
shares to only one shareholder. This was held to be a violation of common law
right of every shareholder. Common Law recognized a pre-emptive right of a
shareholder to participate in further issue of shares however. In India in view
of section 81 of the Companies Act, such a right cannot be found for sure.
However, the test to be applied in such cases which requires the court to
examine as to whether the shares were issued bona fide and for the benefit of
the company, would import such considerations in case of private limited
companies under the Indian Law. Existence of right to issue shares to one
director may technically be there, but the question whether the right has been
exercised bona fide and in the interests of the company has to be considered in
facts of each case and if it is found that it is not so, such allotment is
liable to be set aside.
11.8 Reference has been
made to the case of Piercy (supra) “where directors, who controlled merely a
minority of the voting power in the company allotted shares to themselves and
their friends not for the general benefit of the company, but merely with the
intention of thereby acquiring a majority of the voting power and of thus being
able to defeat the wishes of the existing minority of shareholders, it was held
that, even assuming that the directors were right in considering that the
majority’s wishes were not in the best interests of the company, the allotments
were invalid and ought to be declared void. It follows from this case that the
exercise by directors of fiduciary powers for purposes other than those for
which they were conferred is invalid. It may be said that although the power of
issuing shares is given to directors primarily for the purpose of enabling them
to raise capital when required for the purpose of the company, this was not the
object of the directors in this case...”
11.9 It will be seen from
the judgments in Needle Industries (India) Ltd.’s case (supra) and Tea Brokers
(P.) Ltd.’s case (supra) that the courts in India have applied the same tests
while testing exercise of powers by directors of companies as in other
Commonwealth countries.
11.10 In the present case
we are concerned with the propriety of issue of additional share capital by the
Managing Director in his own favour. The facts of the case do not pose any
difficulty particularly for the reason that the Managing Director has neither
placed on record anything to justify issue of further share capital nor it has been
shown that proper procedure was followed in allotting the additional share
capital. Conclusion is inevitable that neither the allotment of additional
shares in favour of Ramanujam was bona fide nor it was in the interest of the
company nor a proper and legal procedure was followed to make the allotment.
The motive for the allotment was mala fide, the only motive being to gain
control of the company. Therefore, in our view, the entire allotment of shares
to Ramanujam has to be set aside.
11.11 Even the Company Law
Board found that the allotment of additional shares by Ramanujam to himself was
an act of oppression on his part. The Company Law Board drew this conclusion
solely for the reason that no offer had been made to the majority shareholders
regarding issue of further share capital. The High Court accepted the finding
of oppression. However, it placed it on a much broader base by taking into
consideration various other factors. The High Court’s finding is based on a
much stronger footing. In fact, the High Court has gone on to conclude that
Ramanujam has played a fraud on the minority shareholders by manipulating the
allotment of shares in his favour. We find no reason to differ with the finding
of the High Court.
Issue 2
12. This
brings us to the issue regarding locus standi of Prathapan and Prathapan’s
family to maintain the petition under sections 397 and 398 of the Companies Act
and their failure to obtain permission of the Reserve Bank of India as per
section 29 of the Foreign Exchange Regulation Act. So far as the question of
permission of the Reserve Bank of India under FERA is concerned the same can be
obtained ex post facto. This stands concluded by judgment of this Court in LIC
of India v. Escorts Ltd. [1986] 1 SCC 264. The statute does not provide any
time limit for obtaining the permission. We cannot lose sight of the subsequent
development in this connection. FERA stands repealed and the statute brought in
force by way of replacement of FERA, i.e., the Foreign Exchange Management Act
(FEMA), does not contain any such requirement.
12.1 On
the question of locus standi the learned counsel for the respondent cited
Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213,
wherein it was held that the validity of a petition must be judged from the
facts as they were at the time of its presentation, and a petition which was
valid when presented cannot cease to be maintainable by reason of events
subsequent to its presentation. In S. Varadarajan v. Venkateswara Solvent
Extraction (P.) Ltd. [1994] 80 Comp. Cas. 693 (Mad.), a petition was filed by
the applicant and four others under sections 397 and 398 of the Companies Act.
During the pendency of the petition, the four other persons who had joined the
applicant in filing the petition sold their shares thereby ceasing to be
shareholders of the company. It was held that the application could not be
rejected as not maintainable on the ground that the four shareholders ceased to
be shareholders of the company. The requirement about qualification shares is
relevant only at the time of institution of proceeding. In Jawahar Singh Bikram
Singh (P.) Ltd. v. Smt. Sharda Talwar [1974] 44 Comp. Cas. 552, a Division
Bench of the Delhi High Court held that for the purposes of petition under
section 397/398 it was only necessary that members who were already
constructively before the court should continue the proceedings. It is a case
in which the petitioner who had filed a petition died during the pendency of
the petition. While filing the petition he had obtained consent of requisite
number of shareholders of the company, among them his wife was also there. The
Court further observed that since wife of the petitioner was already
constructively a petitioner in the original proceedings, by virtue of her
having given a consent in writing, she was entitled to be transposed as
petitioner in place of her husband.
12.2 It
is to be further noted that the entire scheme regarding purchase of shares in
the name of mother of Prathapan was suggested by Ramanujam himself. He saw to
it that the shares were transferred by the company in the name of Prathapan and
his wife. The company has recorded the transfer and corrected its Register of
Members in this behalf which, in fact, led Ramanujam to file a petition for rectification
of the Register of Members as a counter blast to the petition filed by
Prathapan under section 397/398 of the Companies Act. It is not open to
Ramanujam now to raise the question of FERA violation, more particularly in
view of his having recorded the transfer of shares in the name of Prathapan and
his wife Pushpa in the records of the Company. This also answers the objection
regarding locus standi of Prathapan and his wife to file the section 397/398
petition before the company Law Board. Since they were registered as
shareholders of the company on the date of filing of the petition and they held
the requisite number of shares in the company, they could maintain the
petition.
12.3 We,
therefore, find no merit in the contention that the petition under sections
397/398 of the Companies Act, filed by the Prathapan and his wife before the
Company Law Board was not maintainable.
Issue 3 : Scope of power of High Court in appeal
under section 10F of the Companies Act
13. We
have now to deal with the question of scope of appeal filed under section 10F
of the Companies Act by Prathapan in the High Court.
13.1 Section
10F refers to an appeal being filed on the question of law. The learned counsel
for the appellant argued that the High Court could not disturb the findings of
fact arrived at by the Company Law Board. It was further argued that the High
Court has recorded its own finding on certain issues which the High Court could
not go into and therefore the judgment of the High Court is liable to be set
aside. We do not agree with the submission made by the learned counsel for
appellants. It is settled law that if a finding of fact is perverse and is
based on no evidence, it can be set aside in appeal even though the appeal is
permissible only on the question of law. The perversity of the finding itself
becomes a question of law. In the present case we have demonstrated that the
judgment of the Company Law Board was given in a very cursory and cavalier
manner. The Board has not gone into real issues which were germane for the
decision of the controversy involved in the case. The High Court has rightly
gone into the depth of the matter. As already stated the controversy in the
case revolved around alleged allotment of additional shares in favour of
Ramanujam and whether the allotment of additional shares was an act of
oppression on his part. On the issue of oppression the finding of the Company
Law Board was in favour of Prathapan, i.e., his impugned act was held to be an
act of oppression. The said finding has been maintained by the High Court
although it has given stronger reasons for the same.
13.2 We
find no merit in the argument that the High Court exceeded its jurisdiction
under section 10F of the Companies Act while deciding the appeal.
Issue 4 : Relief
14. On
the question of relief, the learned counsel for the parties referred to
decisions in support of their respective stands. We do not consider it
necessary to refer to these decisions because relief depends on facts of a
particular case. We have seen the facts of the present case which to our mind
are so manifestly against Ramanujam that two opinions are not possible on the
aspect of relief. The only relief that has to be granted in the present case is
to undo the advantage gained by Ramanujam through his manipulations and fraud.
The allotment of all the additional shares in favour of Ramanujam has to be set
aside. In our view, the High Court was fully justified in granting the relief
of setting aside the impugned allotments of additional shares in favour of
Ramanujam. The approach of the Company Law Board was totally erroneous in as
much as after having found that there was oppression on the part of Ramanujam,
he was still allowed to take advantage of his own wrong in as much as he was
given the option to buy Prathapan’s shares and that too not for a proper price.
In our view the Company Law Board was wrong in allowing purchase of shares of
Prathapan and his wife by Ramanujam. Such an order amounts to rewarding the
wrong doer and penalizing the oppressed party. In the circumstances of this
case asking the oppressed to sell his shares to the oppressor not only fails to
redress the wrong done to the oppressed, it also results in heavy monetary loss
to him. The relief granted by the High Court was a proper relief in the facts
of the case.
15. All the appeals are
accordingly dismissed with costs. Counsel fee Rs. 50,000.
Supreme
Court
companies act
[2004]
54 scl 601 (sc)
SUPREME
COURT OF
Dale & Carrington Investment
(P.) Ltd.
v.
P. K.
Prathapan
mrs. Ruma Pal and Arun Kumar, JJ.
Civil
Appeal Nos. 5915 to 5918 of 2002
september
13, 2004
When powers to issue
additional shares are used by
directors of company merely for an extraneous purpose
like maintenance or acquisition of control over affairs of
company, same cannot be upheld
Section 291, read with section 81, of the
Companies Act, 1956 - Directors - Power of - Whether fiduciary capacity, within
which directors have to act, enjoins upon them a duty to act on behalf of a
company with utmost good faith, utmost care and skill and due diligence and in
interest of company they represent - Held, yes - Whether in matter of issue of
additional shares, if powers are used by directors merely for an extraneous
purpose like maintenance or acquisition of control over affairs of company,
same cannot be upheld - Held, yes - Whether even though section 81, which
contains certain requirements in matter of issue of further share capital by a
company, does not apply to private limited companies, directors in a private
limited company are expected to make a disclosure to shareholders of such a
company when further shares are being issued - Held, yes
Section 397, read with section 398, of the
Companies Act, 1956 - Oppression and mismanagement - Appellant was private
limited company - P, who was majority shareholder in company, filed petition
under section 397/398 alleging that 'R', who was managing director of company,
had allotted to himself certain equity shares of company without making offer
to ‘P’ regarding further issue of shares and as a result of such allotment 'P'
had been reduced to minority shareholder in company - 'R' had neither placed on
record anything to justify issue of further share capital nor it had been shown
that proper procedure was followed in allotting additional share capital;
rather only motive for allotment appeared to be mala fide to gain control of
company - CLB held that allotment of additional shares by 'R' to himself was an
act of oppression on his part and as a relief gave option to 'P' to sell his
shares to 'R' - On appeal by 'P', High Court maintained CLB's finding regarding
oppression but as a relief set aside allotment of additional shares in favour
of 'R' - Whether on facts of case, only relief that had to be granted was to
undo advantage gained by ‘R’ through his manipulations and fraud and,
therefore, allotment of all additional shares in favour of ‘R’ had rightly been
set aside by High Court - Held, yes
Section 10F of the Companies Act, 1956 -
Company Law Board - Appeal against order of - Whether if a finding of fact is
perverse and is based on no evidence, it can be set aside in appeal even though
appeal is permissible only on question of law - Held, yes - Whether where judgment
of CLB was given in a very cursory and cavalier manner and CLB had not gone
into real issues which were germane to decision of controversy involved in
case, High Court had rightly gone into depth of matter while exercising
jurisdiction under section 10F - Held, yes
FACTS
R and P were natives of Kerala. P had been working in
The CLB decided
the issue of locus standi against R. It took the view that R had committed an
act of oppression by not only not informing P about issue of further share
capital of the company but also not offering him the further share capital
which was being issued by the company. However, it, while considering relief,
gave an option to P to sell his shares to R. The CLB dismissed R’s petition for
rectification of register of members.
The High Court
on being approached by both parties maintained the judgment of the CLB so far as
the rejection of petition for rectification of register of members was
concerned. However, it allowed the appeal filed by P which was directed mainly
to the question of relief granted by the CLB. It further took a serious view of
the manner in which R was managing the affairs of the company and held it to be
an act of fraud on the part of R in allotting additional equity shares of the
company in his favour. It, accordingly, ordered setting aside of allotment of
shares made in the board meetings held on 24-10-1994 and 26-3-1997, to R.
On appeal to
the Supreme Court :
held
Validity
of allotment of equity shares
A doubt had
been cast about whether the alleged meetings in which additional equity shares
were allotted to R were held at all. The appellants had filed a photocopy of
the minutes of the alleged meeting of the board of directors said to have taken
place on 24-10-1994. However neither a copy of a notice convening the board
meeting nor the log book meant to record signatures of directors attending the meeting
of the board of directors were produced. In the absence of these documents and
any other proof to show that a meeting was held as alleged it could not be
accepted that a meeting of the board of directors was held on 24-10-1994. If no
meeting of the board of directors took place on the date, the question of
allotment of shares to R did not arise. The photocopy of the minutes of the
alleged meeting produced by the appellants was sham and fabricated. The alleged
allotment of additional equity shares of the company in favour of R was,
therefore, wholly unauthorized and invalid and deserved to be set aside. Even
assuming that a meeting of the board of directors of the company did take place
as alleged by R, the first question that arose whether the company required
additional funds for which the shares were issued. Nothing had been placed on
record to show that during the financial year 1993-94, i.e., 1-4-1993 to
31-3-1994, suddenly a need had arisen for a substantial investment. No
particular reason for making a major investment had been shown. Nothing had
been shown as to how such amount was utilized.
Hence, it
appeared that the only purpose of R was to allot additional shares in the
company to himself to gain control of the company and to achieve that objective,
the books of the company had been manipulated. The High Court was right in
holding that the entire manipulation of records of the company by R was an act
of fraud on his part. [para 11]
Legal position of
directors of companies
A company is a juristic
person and it acts through its directors who are collectively referred to as
the board of directors. An individual director has no power to act on behalf of
a company of which he is a director unless by some resolution of the board of
directors of the company specific power is given to him/her. Whatever decisions
are taken regarding running the affairs of the company, they are taken by the
board of directors. The directors of companies have been variously described as
agents, trustees or representatives, but one thing is certain that the
directors act on behalf of a company in a fiduciary capacity and their acts and
deeds have to be exercised for the benefit of the company. They are agents of
the company to the extent they have been authorized to perform certain acts on
behalf of the company. In a limited sense, they are also trustees for the
shareholders of the company. To the extent the power of the directors are
delineated in the memorandum and articles of association of the company, the
directors are bound to act accordingly. As agents of the company, they must act
within the scope of their authority and must disclose that they are acting on
behalf of the company. The fiduciary capacity, within which the directors have
to act, enjoins upon them a duty to act on behalf of a company with utmost good
faith, utmost care and skill and due diligence and in the interest of the
company, they represent. They have a duty to make full and honest disclosure to
the shareholders regarding all important matters relating to the company. It
follows that in the matter of issue of additional shares, the directors owe a
fiduciary duty to issue shares for a proper purpose. That duty is owed by them
to the shareholders of the company. Therefore, even though section 81, which
contains certain requirements in the matter of issue of further share capital
by a company, does not apply to private limited companies, the directors in a
private limited company are expected to make a disclosure to the shareholders
of such a company when further shares are being issued. That requirement flows
from their duty to act in good faith and make full disclosure to the
shareholders regarding the affairs of a company. The acts of directors in a
private limited company are required to be tested on a much finer scale in
order to rule out any misuse of power for personal gains or ulterior motives.
Non-applicability of section 81 in case of private limited companies casts a
heavier burden on its directors. Private limited companies are normally closely
held, i.e., the share capital is held within members of a family or within a
close knit group of friends. That brings in considerations akin to those
applied in cases of partnership where the partners owe a duty to act with
utmost good faith towards each other. Non-applicability of section 81 to
private companies does not mean that the directors have absolute freedom in the
matter of the management of affairs of the company. [Para 11.1]
In the instant
case, articles of association of the company prohibited any invitation to the
public for subscription of shares or debentures of the company. The intention
appeared to be that the share capital of the company would remain within a
close knit group. Therefore, if the directors failed to act in the manner prescribed
above, they could be held liable for breach of trust for misapplying funds of
the company and for misappropriating its assets. [Para 11.2]
When powers are
used merely for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company, the same cannot be upheld. [Para 11.5]
In the instant
case, the managing director had neither placed on record anything to justify
issue of further share capital nor it had been shown that proper procedure was
followed in allotting the additional share capital. Conclusion was inevitable
that neither the allotment of additional shares in favour of R was bona fide
nor it was in the interest of the company nor a proper and legal procedure was
followed to make the allotment. The motive for the allotment was mala fide, the
only motive being to gain control of the company. Therefore, the entire
allotment of shares to R had to be set aside. [Para 11.10]
Even the CLB
found that the allotment of additional shares by R to himself was an act of oppression
on his part. The CLB drew that conclusion solely for the reason that no offer
had been made to the majority shareholders regarding issue of further share
capital. The High Court accepted the finding of oppression. However, it placed
it on a much broader base by taking into consideration various other factors.
The High Court’s finding was based on a much stronger footing. In fact, the
High Court had gone on to conclude that R had played a fraud on the majority
shareholders by manipulating the allotment of shares in his favour. There was
no reason to differ with the finding of the High Court [Para 11.11]
Locus
standi to file petition
So far as the
question of permission of the Reserve Bank of India under the FERA was
concerned, the same could be obtained ex-post facto. The statute did not
provide any time limit for obtaining the permission. Further, the FERA stood
repealed and the statute brought in force by way of replacement of the FERA,
i.e., the Foreign Exchange Management Act (FEMA), does not contain any such
requirement. [Para 12]
The entire
scheme regarding purchase of shares in the name of mother of P was suggested by
R himself. He saw to it that the shares were transferred by the company in the
name of P and his wife. The company had recorded the transfer and corrected its
register of members in that behalf which, in fact, led R to file a petition for
rectification of the register of members as a counterblast to the petition
filed by P under section 397/398. It was not open to R later to raise the
question of the FERA violation, more particularly in view of his having
recorded the transfer of shares in the name of P and his wife in the records of
the company. That also answered the objection regarding locus standi of P and
his wife to file section 397/398 petition before the CLB. Since they were
registered as shareholders of the company on the date of filing of the petition
and they held the requisite number of shares in the company, they could
maintain the petition. [Para 12.2]
Scope
of powers of High Court in appeal under section 10F
Section 10F
refers to an appeal being filed on the question of law. The appellant argued
that the High Court could not disturb the findings of fact arrived at by the CLB.
It was further argued that the High Court had recorded its own finding on
certain issues which the High Court could not go into and, therefore, the
judgment of the High Court was liable to be set aside. One could not agree with
the submission made by the appellants. It is settled law that if a finding of
fact is perverse and is based on no evidence, it can be set aside in appeal
even though the appeal is permissible only on the question of law. The
perversity of the finding itself becomes a question of law. In the instant
case, the judgment of the CLB was given in a very cursory and cavalier manner.
The Board had not gone into the real issues which were germane to the decision
of the controversy involved in the case. The High Court had rightly gone into
the depth of the matter. The controversy in the case revolved around alleged
allotment of additional shares in favour of R and whether the allotment of
additional shares was an act of oppression on his part. On the issue of
oppression the finding of the CLB was in favour of P, i.e., his impugned act
was held to be an act of oppression. The said finding had been maintained by
the High Court although it had given stronger reasons for the same. Hence,
there was no merit in the argument that the High Court exceeded its
jurisdiction under section 10F while deciding the appeal. [Paras 13.1 and 13.2]
Relief
The facts of
the instant case were so manifestly against R that two opinions were not
possible on the aspect of relief. The only relief that had to be granted in the
instant case was to undo the advantage gained by R through his manipulations
and fraud. The allotment of all the additional shares in favour of R had to be
set aside. The High Court was fully justified in granting the relief of setting
aside the impugned allotment of additional shares in favour of R. The approach
of the CLB was totally erroneous inasmuch as after having found that there was
oppression on the part of R, he was still allowed to take advantage of his own
wrong inasmuch as he was given the option to buy P’s shares and that too not
for a proper price. The CLB was wrong in allowing purchase of shares of P and
his wife by R. Such an order amounted to rewarding the wrong-doer and
penalizing the oppressed party. Therefore, the relief granted by the High Court
was a proper relief in the facts of the case. [Para 14]
The appeals
were, therefore, to be dismissed. [Para 15]
Cases referred to
Regal (Hastings) Ltd. v. Gulliver 1942(1) All ER 379
(para 11.4), Alexander v. Automatic Telephone Co. [1900] 2 Ch. 56 (para 11.4),
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.
[1981] 3 SCC 333 (para 11.4), Punt v. Symons [1903] 2 Ch. 506 (para 11.4),
Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 (para 11.4), Hogg v. Cramphorn
Ltd. [1967] 1 Ch. 254 (para 11.4), Howard Smith Ltd. v. Ampol Petroleum Ltd.
1974 AC 821 (PC) (para 11.4), Rolled Steel Products (Holdings) Ltd. v. British
Steel Corpns. 1986 Ch. 246 (CA) (para 11.6), Bishopsgate Investment Management
Ltd. (In Liquidation) v. Maxwell (No. 2) [1994] 1 All ER 261 (CA) (para 11.6),
Whitehouse v. Carlto Hotel (P.) Ltd. [1987] 162 CLR 285 (para 11.6), Tea
Brokers (P.) Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp. LJ. 463 (para
11.7), LIC of India v. Escorts Ltd. [1986] 1 SCC 264 (para 12), Rajahmundry
Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213 (para 12.1),
S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp.
Cas. 693 (Mad.) (para 12.1) and Jawahar Singh Bikram Singh (P.) Ltd. v. Smt. Sharda
Talwar [1974] 44 Comp. Cas. 552 (Delhi) (para 12.1)
Dushyant A.
Dave, Krishnan Venugopal, K.S. Venugopal, E.B. Shaji, Nikhil Goel, Prasad Vijay
Kumar, A. Venugopal and A.D. Sikri for the Appellant. S. Ganesh,
Joseph Kodianthapa, Ajay K. Jain, Saji Kurup, Deepak Prakash and M.P.
Vinod for the Respondent.
Judgment
Arun Kumar, J. - P.K. Ramanujam, appellant 2 and
P.K. Prathapan and his wife Pushpa Prathapan, respondents 1 and 2 are the
contesting parties in this litigation. Appellant 1 is the company in which they
are all shareholders and the litigation is about its control and management.
Both parties are making claims to the right to control and manage the company.
Briefly the facts are : Ramanujam had returned to Kerala, his native place,
after resigning his job as an accountant in England in the year 1983. He was
looking for an opportunity to work. Prathapan, also a native of Kerala, had
been working in Muscat since long and was staying there alongwith his family.
The mother of Prathapan, named Kalyani Kochuraman, was living in Kerala.
Prathapan had two sons. According to Prathapan his sons were desirous of
returning to India and settling down in their native place. Therefore,
Prathapan wanted to set up some business in India in order to settle his sons.
Since the parties are relations they were in touch with each other. Towards the
middle of 1987 Ramanujam informed Prathapan that a hotel called ‘Hotel
Siddharth’ in a town called Chalakudy, was available for sale. The hotel
building had ten rooms, besides a restaurant with a bar attached to it. The
partners who were running the hotel were interested in selling it immediately.
Ramanujam further informed Prathapan that the hotel was available for down
payment of Rs. 6 lakhs (Rupees Six Lakhs). The purchaser, in addition, had to
take upon a liability of about Rs. 18 lakhs (Rupees eighteen lakhs) which was
standing on the hotel. Ramanujam offered a look after the business of the hotel
till Prathapan decided to return to India. The parties decided to go ahead with
the purchase of the hotel for which Prathapan agreed to send Rs. Five Lakhs.
Ramanujam was to get a salary for the services to be rendered by him in looking
after the business of the hotel. A company by the name of Dale and Carrington
Investments Private Limited was incorporated on 4th November, 1986 for the
hotel business. Ramanujam and his wife Draupathy were shown as the promoters of
the company. On the request of Ramanujam, Prathapan sent a Bank Draft in the
sum of Rs. 5 lakhs (Rupees Five Lakhs) favouring his mother Kalyani Kochuraman
on 3rd March, 1987. The draft was sent in the name of the mother because
Prathapan was an NRI and the company could not receive money directly from him.
The device of money being first sent in the name of Prathapan’s mother and
thereafter the mother transferring it to the company, was suggested by
Ramanujam in his letter dated 25th February, 1987 to Prathapan. The Hotel was
accordingly acquired by the company in March, 1987. A sum of Rs. 6 lakhs
(Rupees Six Lakhs) was required to be paid in cash to the vendors out of which
Rs. 5 lakhs (Rupees five lakhs) were received from Prathapan and a sum of Rs.
50,000 (Rupees Fifty Thousand) was invested by Muralidharan, brother of
Prathapan. The rest of the amount came from other respondents. There was no
financial contribution by Ramanujam. Initially Ramanujam and his wife Draupathy
were the Directors of the company. However, in December, 1988 Draupathy was
dropped as director and in her place Muralidharan, brother of Prathapan and
Suresh Babu, brother of Prathapan’s wife, were taken as Directors of the
Company. 5000 (five thousand) equity shares worth Rupees five lakhs were
allotted in the name of Smt. Kalyani Kochuraman, mother of Prathapan against
the investment of Rupees Five Lakhs. These 5000 equity shares were subsequently
transferred in the name of Prathapan and his wife, 2500 (two thousand five
hundred) each, subject to the transferees obtaining requisite permission of the
Reserve Bank of India under the Foreign Exchange Regulation Act (FERA). The
transfer of shares in the name of Prathapan and his wife Pushpa was duly
recorded in the Register of Members maintained by the company. Thus Prathapan
and his wife Pushpa became shareholders of the company to the extent of 2500
equity shares each.
2. Initially the
company was making losses. However, by about the year 1991-92, the company
turned the corner. Copies of balance sheets of the company for a few years of
its working have been placed on record by the appellant which show that till
31st March, 1992 there were no profits in the company. For the first time some
profit was shown as on 31st March, 1993. Till 31st March, 1993, under the head
‘Advance towards share capital pending allotment’ only a sum of Rs. 3000
(Rupees Three Thousand) was shown whereas as on 31st March, 1994 under the said
head, a balance of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five
hundred only) was shown. We have mentioned this figure here because it will be
relevant for the main controversy in this case.
3. It is the case of
Prathapan that he continued to provide finance to the company by sending money
to Ramanujam from time to time. The details of some of such disbursements are
as under :
(a) A sum of Rs. 1,00,000 in March, 1989;
(b) US $ 6300 in favour of
Maruthi Udyog Ltd. for allotment of a vehicle for the use of second appellant
in November, 1991;
(c) A sum of Rs. one lakh in February, 1994;
(d) A deposit of Rs. one lakh
with State Bank of India in the year 1996 to provide bank guarantee in favour
of the sales tax authorities at Kerala;
(e) A sum of Rs. Nine lakhs in January, 1996
for making remittance in favour of the Sales Tax Authorities.
4. According to
Prathapan he was to be issued shares of the company against these remittances
while according to Ramanujam the remittances were on personal account in view
of the close relationship between the parties. The fact remains that the
remittances were to Ramanujam and not to the company.
5. In the beginning,
the business of the company was carried on by Ramanujam with the assistance of
Muralidharan, brother of Prathapan who was acting as Manager of the Company,
while Ramanujam was the Chairman and Managing Director of the company. It is
not denied that Ramanujam was regularly getting salary for working as Managing
Director of the company. According to Prathapan he was kept completely in the
dark about the affairs of the company throughout. He never received a penny
towards dividend on the shares held by him in the company.
6. Sometime in the
year 1998 Prathapan is said to have come to India to consider acquiring another
Hotel for expanding the business of the company. At that time he is said to
have discovered certain startling facts about the company. The most important
fact which is at the centre of the controversy in this case is that the
company’s authorised capital was increased from Rs. 15 lakhs to Rs. 25 lakhs
and thereafter to Rs. 35 lakhs without the knowledge of Prathapan, a principal
shareholder of the company. Further in an alleged meeting of the Board of
Directors of the company said to have been held on 24th October, 1994, chaired
by Ramanujam, the Board of Directors of the company is said to have been
informed about a sum of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five
hundred only) standing to the credit of Ramanujam in the books of the company.
He made a proposal for allotment of shares in lieu of that amount in his
favour. As per the case of Ramanujam the Board allotted 6,865 equity shares of
Rs. 100 each in the said meeting in his favour. According to Prathapan he was
never made aware of the increase in authorised share capital of the Company and
the alleged allotment of additional equity shares of the company in favour of
Ramanujam. The alleged allotment reduces Prathapan, who was a majority
shareholder in the company, to a minority shareholder in the company. Prathapan
challenged this alleged allotment of shares in favour of Ramanujam by filing a
Company Petition under sections 397 and 398 of the Companies Act before the
Company Law Board in July, 1999. The main challenge in the Company Petition
filed by Prathapan alongwith his wife as co-petitioner, was to the said alleged
allotment of 6865 equity shares of Rs. 100 each of the company. This was
alleged to be an act of oppression on the part of Ramanujam who was managing
the company. Prayer was made that the allotment of shares be set aside, and
necessary correction be made in the Register of Members of the company.
According to Prathapan Ramanujam did not contribute any money from his own
resources for purposes of the company while all along he drew a handsome salary
for working as the Managing Director. His maximum investment in the company
could not be more than Rs. 20,000. He committed fraud and breach of trust as a
result of which Prathapan and his wife had been totally marginalised in the
company. In fact, Muralidharan, brother of Prathapan was removed from the Board
of Directors of the company on 1st October, 1994 while Suresh Babu,
brother-in-law of Prathapan and brother of Pushpa, (Prathapan’s wife) was
removed as Director on 30th September, 1996. Prathapan also alleged that
Ramanujam siphoned off funds of the company for personal gains.
7. The Company Law Board
took the view that Ramanujam had committed an act of oppression by not only not
informing him about issue of further share capital of the Company but also not
offering him the further share capital which was being issued by the company.
Having given a finding of ‘oppression’ in favour of Prathapan the Company Law
Board while considering relief, gave an option to Prathapan to sell his shares
to Ramanujam. It was observed that a return of 12% per annum on the investment
made by Prathapan would be fair in the facts of the case. Prathapan and his
wife, who were petitioners in the company petition, were given liberty to sell
their shares to Ramanujam at par value with 12% simple interest per year from
the date of their investment.
8. During the pendency
of the company petition filed by Prathapan, a petition was filed before the
Company Law Board for rectification of the Register of Members so as to delete
the entries recording of transfer of shares in favour of Prathapan and his
wife. This was on the ground that they had failed to obtain permission of the
Reserve Bank of India under the Foreign Exchange Regulation Act regarding
transfer of shares in their favour.
9. In the proceedings
in the petition under sections 397 and 398 of the Companies Act, locus standi
of Prathapan and his wife to file the petition was challenged. This issue was
decided by the Company Law Board against Ramanujam. The petition for
rectification of Register of members was dismissed. However, Prathapan was
aggrieved about the relief granted by the Company Law Board. Inspite of the
finding on oppression being in his favour, he was asked to sell his shares and
leave the company. Ramanujam was aggrieved of the finding of oppression against
him and of the dismissal of the application for rectification of Register of
Members. Both parties approached the High Court of Kerala against the judgment
of the Company Law Board. The High Court maintained the judgment of the Company
Law Board so far as the rejection of petition for ratification of Register of
members was concerned. However, the High Court allowed the appeal filed by
Prathapan which was directed mainly on the question of relief granted by the
Company Law Board. The High Court took a serious view of the manner in which
Ramanujam was managing the affairs of the company. The High Court held it to be
an act of fraud on the part of Ramanujam in allotting 6865 equity shares of the
company in his favour. The High Court further held that a perpetrator of fraud
could not be allowed to take benefit of his own wrong. The High Court found
that the observation of the Company Law Board that the appellants can sell
their shares at par value to the Managing Director, getting 12 per cent
interest on their investment, will not be justified but will only help the
manipulator. The High Court ordered setting aside of allotment of shares made
in the Board Meetings held on 24th October, 1994 and 26th March, 1997, to
Ramanujam, the Managing Director of the company. The Share Register was ordered
to be rectified accordingly. The present appeal by Ramanujam is directed
against the judgment of the High Court.
10. On the basis of the
submissions made by the learned counsel for the parties, following issues arise
for consideration :
Issue 1.
Validity of allotment of equity shares of the Company in favour of Ramanujam
whereby he becomes a majority shareholder and Prathapan and his wife are
reduced to minority shareholders.
This issue gives rise to following questions :
(a) Was a meeting of the
Board of Directors of the Company held on 24h October, 1994 when the first
allotment of additional shares in favour of Ramanujam is said to have been made
?
(b) Was it a valid meeting of the Board of
Directors of the company ?
(c) Did the Company require
funds so as to necessitate raising of share capital of the company by issuing
further equity shares ?
(d) Was the alleged allotment
of equity shares in favour of Ramanujam a bona fide act on the part of Board of
Directors in the interest of the company ? In other words does the act of
raising share capital by allotment of additional equity shares in favour of
Ramanujam, the Managing Director, amount to an act of oppression on his part
towards the then majority shareholders ?
Issue 2. What
is the effect of not obtaining permission of the Reserve Bank of India under
the Foreign Exchange Regulation Act (FERA) by Prathapan regarding transfer of
shares in his and his wife’s favour ? Did Prathapan and his wife Pushpa have no
locus standi to file the petition under sections 397 and 398 of the Companies
Act before the Company Law Board ?
Issue 3. Scope of power of the High Court in an appeal under section 10F
of the Companies Act;
Issue 4.
Relief to be granted to a majority shareholder who by an act of oppression on
the part of management of the company is converted into a minority shareholder.
Issue 1. Validity of allotment of equity shares
11. This is the main
issue which arises for consideration in this case. As already noted Ramanujam
who was the Managing Director of the company got allotted 6865 equity shares to
himself in a meeting of the Board of Directors of the company alleged to have
been held on 24th October, 1994. Again on 26th March, 1997 he managed to get
allotted further 9800 equity shares to himself. Prathapan has challenged these
allotments of shares in favour of Ramanujam as acts of oppression on the part
of Ramanujam, the Chairman and Managing Director of the company for which he
filed a petition under sections 397 and 398 of the Companies Act before the
Company Law Board. A doubt has been cast about whether the alleged meetings in
which additional equity shares were allotted to Ramanujam were held at all. In
this behalf the following facts are noticeable :—
(a) The appellants have filed
a photocopy of the minutes of the alleged meeting of the Board of Directors
said to have taken place on 24th October, 1994. As per the photocopy the
minutes appear to be signed by Ramanujam as Chairman. The presence of Suresh
Babu as a Director of the Company has been shown in the minutes. However, there
is no evidence of presence of Suresh Babu in the said meeting. Article 36 of
the Articles of Association of the company requires that a notice convening the
meetings of the Board of Directors shall be issued by the Chairman or by one of
the Directors duly authorized by the Board in this behalf. Suresh Babu filed an
affidavit in the proceedings before the Company Law Board wherein he has
categorically stated that at no point of time he was involved in the affairs of
the company and in running the business of the company. Further he has stated
in the said affidavit that at no point of time he was informed that he had been
appointed as Director of the company. He had never received any notice of any
Board meetings nor had he ever attended any Board meeting. In view of this
categorical denial by Suresh Babu about attending any meetings of the Board of
Directors of the company, it was incumbent on the part of Ramanujam who was the
Chairman and Managing Director of the company and was in possession of all the
records of the company, to place on record a copy of a notice calling a meeting
of the Board of Directors in terms of article 36. No copy of the notice
intimating Suresh Babu about the meeting of the Board of Directors and asking
him to attend the same, has been placed on record to show that Suresh Babu was
informed about holding of the meeting in question.
Here reference
is required to be made to certain other articles of the company which are
relevant for the controversy. Article 8 provides that shares of the company
shall be under the control of the Directors who may allot the same to such
applicants as they think desirable of being admitted to membership of the
company. Article 10 provides that allotment of shares “shall exclusively be vested
in the Board of Directors, who may in their absolute discretion allot such
number of shares as they think proper...” Article 38 requires that the
Directors present at the Board Meeting shall write their names and sign in a
book specially kept for the purpose. Article 4(iii) prohibits any invitation to
the public to subscribe for any shares or debentures of the company. The above
provisions of the Articles of Association show that the Board of Directors have
an absolute discretion in the matter of allotment of shares. But this
pre-supposes that such a decision has to be taken by the Board of Directors.
The decision is taken by the Board of Directors only in meetings of the Board
and not elsewhere. Ramanujam, the Managing Director cannot take a decision on
his own to allot shares to himself. If Suresh Babu was present in the meeting,
as is the case of Ramanujam, he must have signed a book specially kept for
recording presence of the Directors at the Board Meeting in terms of article
38. Ramanujam should have been the first person to produce such a book to show
the presence of Suresh Babu at the alleged Board meeting said to have been held
on 24th October, 1994, specially when Suresh Babu was denying his presence at
the meeting. Nothing has been produced. Thus neither a copy of a notice
convening the Board meeting nor the log book meant to record signatures of
Directors attending the meeting of the Board of Directors were produced. In the
absence of these documents and any other proof to show that a meeting was held
as alleged we are unable to accept that a meeting of the Board of Directors was
held on 24th October, 1994. If no meeting of the Board of Directors took place
on that date, the question of allotment of shares to Ramanujam does not arise.
We are inclined to believe that photocopy of the minutes of the alleged meeting
dated 24th October, 1994 produced by appellants, is sham and fabricated. The
alleged allotment of additional equity shares of the company in favour of
Ramanujam is, therefore, wholly unauthorized and invalid and has to be set
aside.
Normally this
Court would not have gone into these questions of fact. However, the learned
counsel for the appellant in the course of his arguments drew our attention to
the various Articles of Association of the company, which unfortunately neither
the Company Law Board nor the High Court considered. We cannot help referring
to them, particularly in view of the fact that the Articles of a company are
its constituent document and are binding on the company and its Directors.
The facts on
record show that the company was being run as one man show and Ramanujam was
maintaining the Minutes Book of meetings of Board of Directors only to comply
with the statutory requirement in this behalf. The minutes were being recorded
by him according to his choice and at his instance. The minutes do not reflect
the actual position. Article 38 mandated that a book should be maintained to
record presence of Directors at meetings of the Board of Directors. If a book
for recording signatures of Directors attending meetings of the Board of
Directors was not maintained, it was in clear violation of article 38 of the
Articles of Association of the company. The Company Law Board without going
into these relevant aspects, proceeded on an assumption that a meeting of the
Board of Directors did take place on 24th October, 1994. This assumption of the
Company Law Board is clearly without any basis.
(b) When no meeting of the
Board of Directors of the company was held on 24th October, 1994, the question
of validity of the meeting does not arise. On the relevant date Suresh Babu was
the only other Director of the Company. He denies having attended any meeting
of the Board of Directors of the company. There is nothing to rebut this stand
of Suresh Babu. In his absence no valid meeting of the Board of Directors could
be held.
(c) For considering this
point let us assume that a meeting of the Board of Directors of the company did
take place as alleged by Ramanujam. First question that arises is whether the
company required additional funds for which the shares were issued. We have
already referred to Balance Sheets of the company, copies whereof have been
placed on record. Till 31st March, 1993 the Balance Sheets did not show any
investment of substantial amounts of money in the company. It is the Balance
Sheet for the year ending 31st March, 1994 which for the first time shows an
advance of Rs. 6,86,500 towards share capital pending allotment. Nothing has
been placed on record to show that during the financial year 1993-94, i.e., 1st
April, 1993 to 31st March, 1994 suddenly need had arisen for a substantial
investment. The company was running a hotel, the property whereof was owned by
the company. No particular reason for making a major investment has been shown.
Nothing has been shown as to how the amount of Rs. 6,86,500 was utilised. It
appears that Ramanujam who was managing the affairs of the company single
handedly, realized that the company had turned around and the Hotel property
had appreciated in terms of its market value. He started working on a strategy
to get controlling shares in the company. It was in furtherance of this
objective that Ramanujam managed to show the entry regarding advance against
shares in the Balance Sheet as on 31st March, 1994. For this amount, he
allotted equity shares to himself to gain control of the company. In these
facts it is difficult for us to appreciate that the additional funds were
required by the company. In our view the finding of the High Court that no
funds were needed by the company is fully justified. The only purpose was to
allot additional shares in the company to himself to gain control of the
company and to achieve this objective, the books of the company appear to have
been manipulated. The High Court was right in holding that the entire
manipulation of records of the company by Ramanujam was an act of fraud on his
part.
(d) We may also test the
alleged act of allotment of equity shares in favour of Ramanujam from a legal
angle. Could it be said to be a bona fide act in the interest of the Company on
the part of Directors of the Company?
11.1 At this stage it may
be appropriate to consider the legal position of Directors of companies
registered under the Companies Act. A company is a juristic person and it acts
through its Directors who are collectively referred to as the Board of
Directors. An individual Director has no power to act on behalf of a company of
which he is a Director unless by some resolution of the Board of Directors of
the Company specific power is given to him/her. Whatever decisions are taken
regarding running the affairs of the company, they are taken by the Board of
Directors. The Directors of companies have been variously described as agents,
trustees or representatives, but one thing is certain that the Directors act on
behalf of a company in a fiduciary capacity and their acts and deeds have to be
exercised for the benefit of the company. They are agents of the company to the
extent they have been authorized to perform certain acts on behalf of the
company. In a limited sense they are also trustees for the shareholders of the
company. To the extent the power of the Directors are delineated in the
Memorandum and Articles of Association of the company, the Directors are bound
to act accordingly. As agents of the company they must act within the scope of
their authority and must disclose that they are acting on behalf of the
company. The fiduciary capacity within which the Directors have to act enjoins
upon them a duty to act on behalf of a company with utmost good faith, utmost
care and skill and due diligence and in the interest of the company they
represent. They have a duty to make full and honest disclosure to the
shareholders regarding all important matters relating to the company. It
follows that in the matter of issue of additional shares, the directors owe a
fiduciary duty to issue shares for a proper purpose. This duty is owed by them
to the shareholders of the company. Therefore, even though section 81 of the
Companies Act which contains certain requirements in the matter of issue of
further share capital by a company does not apply to private limited companies,
the directors in a private limited company are expected to make a disclosure to
the shareholders of such a company when further shares are being issued. This
requirement flows from their duty to act in good faith and make full disclosure
to the shareholders regarding affairs of a company. The acts of directors in a
private limited company are required to be tested on a much finer scale in
order to rule out any misuse of power for personal gains or ulterior motives.
Non-applicability of section 81 of the Companies Act in case of private limited
companies casts a heavier burden on its directors. Private limited companies
are normally closely held, i.e., the share capital is held within members of a
family or within a close knit group of friends. This brings in considerations
akin to those applied in cases of partnership where the partners owe a duty to
act with utmost good faith towards each other. Non-applicability of section 81
of the Act to private companies does not mean that the directors have absolute
freedom in the matter of management of affairs of the company.
11.2 In the present case
Article 4(iii) of the Articles of Association prohibits any invitation to the
public for subscription of shares or debentures of the company. The intention
from this appears to be that the share capital of the company remains within a
close knit group. Therefore, if the directors fail to act in the manner
prescribed above they can in the sense indicated by us earlier be held liable
for breach of trust for misapplying funds of the company and for
misappropriating its assets.
11.3 The learned counsel
for the appellant argued that Articles of Association of the company give
absolute power to the Board of Directors regarding issue of further share
capital. The Board of Directors exercised the power while issuing further shares
in favour of Ramanujam and the same cannot be challenged. In our view, this
argument has no merit because the facts of the case do not support the
argument. Firstly, the Articles of Association require such decisions regarding
issue of further share capital to be taken in a meeting of the Board of
Directors and we have found that the alleged meeting of the Board of Directors
in which the additional shares are purported to have been issued in favour of
Ramanujam was sham. Secondly, assuming for the sake of argument that meetings
of Board of Directors did take place the manner in which the shares were issued
in favour of Ramanujam without informing other shareholders about it and
without offering them to any other shareholder, the action was totally mala fide
and the sole object of Ramanujam in this was to gain control of the company by
becoming a majority shareholder. This was clearly an act of oppression on the
part of Ramanujam towards the other shareholder who has been reduced to a
minority shareholder as a result of this act. Such allotments of shares have to
be set aside.
11.4 On the role of
Directors, the law is well settled. The position has been the subject-matter of
various decisions. Some of them are:
In Regal (Hastings) Ltd. v. Gulliver 1942 (1) All. ER 379 Lord Russell of
Killowen observed as under:
“Directors of a limited company are the
creatures of a statute and occupy a position peculiar to themselves. In some
respects they resemble trustees, in others they do not. In some respects they
resemble agents, in others they do not. In some respects they resemble managing
partners in others they do not. The said judgment quotes from Principles of
Equity by Lord Kames. In one sentence the entire concept is conveyed. The
sentence runs ‘Equity prohibits a trustee from making any profit by his
management, directly or indirectly. Ultimately the issue in each case will
depend upon facts of that case’.”
Lindley MR observed in Alexander v. Automatic Telephone Co. (1900) 2 Ch.
56 at pages 66-67:
“The Court of Chancery has always exacted from
directors the observance of good faith towards their shareholders and towards
those who take shares from the company and become co-adventurers with
themselves and others who may join them. The maxim ‘Caveat emptor’ has no
application to such cases, and directors who so use their powers as to obtain
benefits for themselves at the expense of the shareholders, without informing
them of the fact, cannot retain those benefits and must account for them to the
company, so that all the shareholders may participate in them.”
Needle
Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981]
3 SCC 333 is a judgment of this Court in which amongst various other aspects
the power of directors regarding issue of additional share capital was also
considered. This Court observed:
“The power to issue shares is given primarily
to enable capital to be raised when it is required for the purposes of the
company but it can be used for other purposes also as, for example, to create a
sufficient number of shareholders to enable the company to exercise statutory
powers, or to enable it to comply with legal requirements as in the instant
case. Hence if the shares are issued in the larger interest of the company, the
decision cannot be struck down on the ground that it has incidentally benefited
the Directors in their capacity as shareholders. So if the Directors succeed,
also or incidentally, in maintaining their control over the company or in newly
acquiring it, it does not amount to an abuse of their fiduciary power. What is
objectionable is the use of such power simply or solely for the benefit of
Directors or merely for an extraneous purpose like maintenance or acquisition
of control over the affairs of the company. Where the Directors seek, by
entering into an agreement to issue new shares, to prevent a majority
shareholder from exercising control of the company, they will not be held to
have failed in their fiduciary duty to the company if they act in good faith in
what they believe, on reasonable grounds, to be the interests of the company.
But if the power to issue shares is exercised from an improper motive, the
issue is liable to be set aside and it is immaterial that the issue is made in
a bona fide belief that it is in the interest of the company....” (p. 339)
In Needle
Industries (India) Ltd.’ s case (supra) the Board of Directors had resolved to
issue 16000 equity shares of Rs. 100 each to be offered as rights shares to the
existing shareholders in proportion to the shares held by them. The offer was
to be made by a notice specifying the number of shares to which each
shareholder was entitled to. The notice further said, in case the offer was not
accepted within 16 days from the date on which it was made, it was to be deemed
to have been declined by the concerned shareholder. The Holding Company held
18990 shares and it was entitled to 9495 rights shares. The Holding Company
could not avail its right to exercise the option for purchase of rights shares
offered to it. As a result the whole of the Rights Issue consisting of 16000
shares was allotted to the Indian shareholders. The Holding Company filed a
petition under sections 397 and 398 of the Companies Act, 1956 in the High
Court. The Single Judge held in favour of the Holding Company that it had
suffered a loss in view of the fact that the market value of the rights share
was Rs. 190 whereas the shares were allotted at par, i.e., at Rs. 100. The
grievance of the Holding Company was that on account of postal delays it failed
to receive the notice containing the offer of rights shares in time, and
therefore, it could not exercise its option to buy the share. On appeal the
Division Bench held that the affairs of Needle Industries (India) Ltd.’s case
(supra) were being conducted in a manner oppressive to the Holding Company. The
Division Bench ordered winding up of the company. A further appeal to the Court
was allowed mainly on the ground that there was no oppression. However, a
direction was issued that the Indian shareholders pay an amount equivalent to
that by which they unjustifiably enriched, namely Rs. 90 × 9495 which comes to
Rs. 8,54,550 to the Holding Company.
In Needle
Industries (India) Ltd.’s case (supra) this Court referred to some old English
decisions with approval. Punt v. Symons [1903] 2 Ch. 506 was quoted in which it
was held “where the shares had been issued by the Directors, not for the
general benefit of the company, but for the purpose of controlling the holder
of the greater number of shares by obtaining a majority of voting power, they
ought to be restrained from holding the meeting at which the votes of the new
shareholders were to have been used.”
Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 applied the same
principle while holding:
“....the basis of both cases is, as I
understand, that directors are not entitled to use their powers of issuing
shares merely for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company, or merely for the
purpose of defeating the wishes of the existing majority of shareholders.” (p.
84)
In Hogg v.
Cramphorn Ltd. [1967] 1 Ch. 254, Buckley, J. reiterated the principle in Punt’s
case (supra) and in Piercy’s case (supra). It was held that if the power to
issue shares was exercised for an improper motive the issue was liable to be
set aside and it was immaterial that the issue was made in a bona fide belief
that it was in the interests of the company.
11.5 The principle
deduced from these cases is that when powers are used merely for an extraneous
purpose like maintenance or acquisition of control over the affairs of the
company, the same cannot be upheld.
11.6 Courts in the
Commonwealth countries including England and Australia have emphasized that the
duty of the Directors does not stop at ‘to act bona fide’ requirement. They
have evolved a doctrine called the ‘proper purpose doctrine’ regarding the
duties of company directors. In Hogg’s case (supra), explicit recognition was
given to the proper purpose test over and above the traditional bona fide test.
In this case the director had allotted shares with special voting rights to the
trustees of a scheme set up or the benefit of company employees with the
primary purpose of avoiding a takeover bid. Buckley, J. found as a fact that
the directors had acted in subjective good faith. They had indeed honestly
believed that their actions were in best interests of the company. Despite this
it was observed:
“...an essential element of the scheme, and
indeed its primary purpose, was to ensure control of the company by the
directors and those whom they could confidently regard as their supporters.”
As such, he
concluded that the allotment was liable to be set aside as a consequence of the
exercise of the power for an improper motive. He also held that the power to
issue shares was fiduciary in nature. In Howard Smith Ltd. v. Ampol Petroleum
Ltd. 1974 AC 821, the Privy Council confirmed the above view expressed by
Buckley, J. which shows a preference for the proper purpose doctrine. The Privy
Council felt that the bona fide test was not sufficient to meet the challenge
because it failed to encompass the obligation of directors to be fair. The
directors’ acts should not only satisfy the test of bona fides they should also
be done with a proper motive. Any lingering doubts over the status of the
purpose doctrine as a separate and independent head of directors duty within
the common law jurisdiction have been laid to rest by two decisions of the
Court of Appeal in England in Rolled Steel Products (Holdings) Ltd. v. British
Steel Corpns. 1986 Ch. 246 and Bishopsgate Investment Management Ltd. (In
Liquidation) v. Maxwell (No. 2) [1994] 1 All ER 261. It was held by the Court
of Appeal in Bishopsgate that the bona fides of the directors alone would not
be determinative of the propriety of their actions. In a parallel development
in Australia the proper purpose doctrine has been approved in a decision of the
High Court in Whitehouse v. Carlto Hotel (P.) Ltd. [1987] 162 CLR 285.
11.7 The Tea Brokers (P.)
Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp. LJ. 463 was also a case of a
minority shareholder who on becoming managing director of the company, issued
further share capital in his favour in order to gain control of management of
the company. Barooah and his friends and relations were majority shareholders
of the respondent company having 67 per cent of the total issued capital of the
company. Barooah personally held 300 equity shares out of 1155 shares issued by
the company. He was at all material times a director of the company. His case
was that he was wrongfully and illegally ousted from the management of the
company. One Khaund, who initially started as an employee of the company had
110 shares in the company and belonged to the minority group. Khaund was
appointed as the managing director of the company. Barooah’s grievance was that
Khaund took advantage of his position as managing director and acted in a
manner detrimental and prejudicial to the interests of the company and in a
manner conducive to his own interest. Khaund had hatched a plan with other
directors to convert petitioner Barooah into a minority and to obtain full and
exclusive control and management of the affairs of the company. In a petition
filed under sections 397 and 398 of the Companies Act, 1956, acts of Khaund
were found to be by way of ‘oppression and mismanagement’ within the meaning of
sections 397 and 398 of the Companies Act. Allotment of 100 equity shares by
the company to Khaund at a meeting of the Board of Directors said to have been
held on 14th January, 1971 was held to be illegal. The Board of Directors of
the company was superseded and a special officer was appointed to carry on
management of the company with the advice of Barooah, Khaund and a
representative of labour union. There were several other directions issued by
the court which are not necessary to be mentioned here. The Division Bench
considered in detail the relevant legal position. Without using the phrase
‘proper purpose doctrine’ the principle enunciated therein, was applied. The
following observations of Justice A.N. Sen are reproduced:
“It is well settled that the directors may
exercise their powers bona fide and in the interest of the company. If the directors
exercise their powers of allotment of shares bona fide and in the interest of
the company, the said exercise of powers must be held to be proper and valid
and the said exercise of powers may not be questioned and will not be
invalidated merely because they have any subsidiary additional motive, even
though this be to promote their advantage. An exercise of power by the
directors in the matter of allotment of shares, if made mala fide and in their
own interest and not in the interest of the company will be invalid even though
the allotment may result incidentally in some benefit to the company.”
Further it was
held that if a member who holds the majority of shares in a company is reduced
to the position of minority shareholder in the company by an act of the company
or by its Board of Directors mala fide, the said act must ordinarily be
considered to be an act of oppression to the said member. The member who holds
the majority of shares in the company is entitled by virtue of his majority to
control, manage and run the affairs of the company. This is a benefit or
advantage which the member enjoys and is entitled to enjoy in accordance with
the provisions of company law in the matter of administration of the affairs of
the company by electing his own men to the Board of Directors of the company.
On the question of relief, the court observed:
“A majority shareholder should not ordinarily
be directed to sell his shares to the minority group of shareholders, if per
chance through fortuitous circumstances or otherwise, the minority group of
shareholders come into power and management of the company. The majority
shareholders by virtue of their majority will usually be in a position to
redress all wrongs done and to undo the mischief done by the minority group of
shareholders, as it will always be possible for the majority group of
shareholders to regain control of the company so long as they remain in
majority in the company by virtue of the majority. Except in unusual
circumstances, the majority group of shareholders, in my opinion, should never
be ordered or directed to sell their shares to the minority group of
shareholders. An order directing the majority group of shareholders to sell his
shares to the minority group of shareholders will not redress the wrong done to
the majority group of shareholders and will not give him sufficient
compensation or relief against the act of oppression complained of by him, and,
on the other hand, may add to his suffering and grievance and cause him greater
hardship. Such an order will not further the ends of justice and indeed the
cause of justice may be defeated.”
On the
question of issue of fresh share capital, it was held to be illegal to issue
shares to only one shareholder. This was held to be a violation of common law
right of every shareholder. Common Law recognized a pre-emptive right of a
shareholder to participate in further issue of shares however. In India in view
of section 81 of the Companies Act, such a right cannot be found for sure.
However, the test to be applied in such cases which requires the court to
examine as to whether the shares were issued bona fide and for the benefit of
the company, would import such considerations in case of private limited
companies under the Indian Law. Existence of right to issue shares to one
director may technically be there, but the question whether the right has been
exercised bona fide and in the interests of the company has to be considered in
facts of each case and if it is found that it is not so, such allotment is liable
to be set aside.
11.8 Reference has been
made to the case of Piercy (supra) “where directors, who controlled merely a
minority of the voting power in the company allotted shares to themselves and
their friends not for the general benefit of the company, but merely with the
intention of thereby acquiring a majority of the voting power and of thus being
able to defeat the wishes of the existing minority of shareholders, it was held
that, even assuming that the directors were right in considering that the majority’s
wishes were not in the best interests of the company, the allotments were
invalid and ought to be declared void. It follows from this case that the
exercise by directors of fiduciary powers for purposes other than those for
which they were conferred is invalid. It may be said that although the power of
issuing shares is given to directors primarily for the purpose of enabling them
to raise capital when required for the purpose of the company, this was not the
object of the directors in this case...”
11.9 It will be seen from
the judgments in Needle Industries (India) Ltd.’s case (supra) and Tea Brokers
(P.) Ltd.’s case (supra) that the courts in India have applied the same tests
while testing exercise of powers by directors of companies as in other
Commonwealth countries.
11.10 In the present case
we are concerned with the propriety of issue of additional share capital by the
Managing Director in his own favour. The facts of the case do not pose any
difficulty particularly for the reason that the Managing Director has neither
placed on record anything to justify issue of further share capital nor it has
been shown that proper procedure was followed in allotting the additional share
capital. Conclusion is inevitable that neither the allotment of additional
shares in favour of Ramanujam was bona fide nor it was in the interest of the
company nor a proper and legal procedure was followed to make the allotment.
The motive for the allotment was mala fide, the only motive being to gain
control of the company. Therefore, in our view, the entire allotment of shares
to Ramanujam has to be set aside.
11.11 Even the Company Law
Board found that the allotment of additional shares by Ramanujam to himself was
an act of oppression on his part. The Company Law Board drew this conclusion
solely for the reason that no offer had been made to the majority shareholders
regarding issue of further share capital. The High Court accepted the finding
of oppression. However, it placed it on a much broader base by taking into consideration
various other factors. The High Court’s finding is based on a much stronger
footing. In fact, the High Court has gone on to conclude that Ramanujam has
played a fraud on the minority shareholders by manipulating the allotment of
shares in his favour. We find no reason to differ with the finding of the High
Court.
Issue 2
12. This
brings us to the issue regarding locus standi of Prathapan and Prathapan’s
family to maintain the petition under sections 397 and 398 of the Companies Act
and their failure to obtain permission of the Reserve Bank of India as per
section 29 of the Foreign Exchange Regulation Act. So far as the question of
permission of the Reserve Bank of India under FERA is concerned the same can be
obtained ex post facto. This stands concluded by judgment of this Court in LIC
of India v. Escorts Ltd. [1986] 1 SCC 264. The statute does not provide any
time limit for obtaining the permission. We cannot lose sight of the subsequent
development in this connection. FERA stands repealed and the statute brought in
force by way of replacement of FERA, i.e., the Foreign Exchange Management Act
(FEMA), does not contain any such requirement.
12.1 On
the question of locus standi the learned counsel for the respondent cited
Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageshwara Rao AIR 1956 SC 213,
wherein it was held that the validity of a petition must be judged from the
facts as they were at the time of its presentation, and a petition which was
valid when presented cannot cease to be maintainable by reason of events
subsequent to its presentation. In S. Varadarajan v. Venkateswara Solvent
Extraction (P.) Ltd. [1994] 80 Comp. Cas. 693 (Mad.), a petition was filed by
the applicant and four others under sections 397 and 398 of the Companies Act.
During the pendency of the petition, the four other persons who had joined the
applicant in filing the petition sold their shares thereby ceasing to be
shareholders of the company. It was held that the application could not be
rejected as not maintainable on the ground that the four shareholders ceased to
be shareholders of the company. The requirement about qualification shares is
relevant only at the time of institution of proceeding. In Jawahar Singh Bikram
Singh (P.) Ltd. v. Smt. Sharda Talwar [1974] 44 Comp. Cas. 552, a Division
Bench of the Delhi High Court held that for the purposes of petition under
section 397/398 it was only necessary that members who were already
constructively before the court should continue the proceedings. It is a case
in which the petitioner who had filed a petition died during the pendency of
the petition. While filing the petition he had obtained consent of requisite
number of shareholders of the company, among them his wife was also there. The
Court further observed that since wife of the petitioner was already
constructively a petitioner in the original proceedings, by virtue of her
having given a consent in writing, she was entitled to be transposed as
petitioner in place of her husband.
12.2 It
is to be further noted that the entire scheme regarding purchase of shares in
the name of mother of Prathapan was suggested by Ramanujam himself. He saw to
it that the shares were transferred by the company in the name of Prathapan and
his wife. The company has recorded the transfer and corrected its Register of
Members in this behalf which, in fact, led Ramanujam to file a petition for
rectification of the Register of Members as a counter blast to the petition
filed by Prathapan under section 397/398 of the Companies Act. It is not open
to Ramanujam now to raise the question of FERA violation, more particularly in
view of his having recorded the transfer of shares in the name of Prathapan and
his wife Pushpa in the records of the Company. This also answers the objection
regarding locus standi of Prathapan and his wife to file the section 397/398
petition before the company Law Board. Since they were registered as
shareholders of the company on the date of filing of the petition and they held
the requisite number of shares in the company, they could maintain the
petition.
12.3 We,
therefore, find no merit in the contention that the petition under sections
397/398 of the Companies Act, filed by the Prathapan and his wife before the
Company Law Board was not maintainable.
Issue 3 : Scope of power of High Court in appeal
under section 10F of the Companies Act
13. We
have now to deal with the question of scope of appeal filed under section 10F
of the Companies Act by Prathapan in the High Court.
13.1 Section
10F refers to an appeal being filed on the question of law. The learned counsel
for the appellant argued that the High Court could not disturb the findings of
fact arrived at by the Company Law Board. It was further argued that the High
Court has recorded its own finding on certain issues which the High Court could
not go into and therefore the judgment of the High Court is liable to be set
aside. We do not agree with the submission made by the learned counsel for
appellants. It is settled law that if a finding of fact is perverse and is
based on no evidence, it can be set aside in appeal even though the appeal is
permissible only on the question of law. The perversity of the finding itself
becomes a question of law. In the present case we have demonstrated that the
judgment of the Company Law Board was given in a very cursory and cavalier
manner. The Board has not gone into real issues which were germane for the
decision of the controversy involved in the case. The High Court has rightly
gone into the depth of the matter. As already stated the controversy in the
case revolved around alleged allotment of additional shares in favour of
Ramanujam and whether the allotment of additional shares was an act of
oppression on his part. On the issue of oppression the finding of the Company
Law Board was in favour of Prathapan, i.e., his impugned act was held to be an
act of oppression. The said finding has been maintained by the High Court
although it has given stronger reasons for the same.
13.2 We
find no merit in the argument that the High Court exceeded its jurisdiction
under section 10F of the Companies Act while deciding the appeal.
Issue 4 : Relief
14. On
the question of relief, the learned counsel for the parties referred to
decisions in support of their respective stands. We do not consider it
necessary to refer to these decisions because relief depends on facts of a
particular case. We have seen the facts of the present case which to our mind
are so manifestly against Ramanujam that two opinions are not possible on the
aspect of relief. The only relief that has to be granted in the present case is
to undo the advantage gained by Ramanujam through his manipulations and fraud.
The allotment of all the additional shares in favour of Ramanujam has to be set
aside. In our view, the High Court was fully justified in granting the relief
of setting aside the impugned allotments of additional shares in favour of
Ramanujam. The approach of the Company Law Board was totally erroneous in as
much as after having found that there was oppression on the part of Ramanujam,
he was still allowed to take advantage of his own wrong in as much as he was
given the option to buy Prathapan’s shares and that too not for a proper price.
In our view the Company Law Board was wrong in allowing purchase of shares of Prathapan
and his wife by Ramanujam. Such an order amounts to rewarding the wrong doer
and penalizing the oppressed party. In the circumstances of this case asking
the oppressed to sell his shares to the oppressor not only fails to redress the
wrong done to the oppressed, it also results in heavy monetary loss to him. The
relief granted by the High Court was a proper relief in the facts of the case.
15. All the appeals are
accordingly dismissed with costs. Counsel fee Rs. 50,000.
[1950] 20 COMP. CAS. 179 (SC)
SUPREME
COURT OF
v.
Bombay Life Assurance Company Ltd.
KANIA, C.J.
And MAHAJAN, MUKHERJEA
AND DAS, JJ.
MAY 4, 1950
M.M. Desai and H.J.
Umrigar, S.P. Varma, Agent, for the Appellants.
M.C. Setalvad, (G.N. Joshi, Rajinder Narain, Agent, for the
Respondents Nos. 1 to 6, 8 & 9.
Kania, C.J.—This is an
appeal from the decision of the High Court of Judicature at
The appellants are two shareholders of the company. They
filed the suit, out of which this present appeal has arisen, "for themselves
and all other aggrieved shareholders of the company". The defendants are
the company and eight directors. It is contended in the plaint that the whole
issue of these further shares and the idea of increasing the capital of the
company was mala fide and with the object of retaining the control and
management of the company in the hands of defendants 2 to 9. It is further
contended that the resolution of the directors and the offer of shares
contained in the circular letter were in contravention of Section 105-C of the
Indian Companies Act. There were further prayers restraining the company and
directors from proceeding with the allotment of shares. It was contended that
the company was not in need of capital and the issue of further shares was not
made bona fide for the benefit or in the interest of the company but had been
made "merely with the object of retaining or securing to the 2nd defendant
and his friends the control of the first defendant company."
Considerable evidence was led in the trial court on the
question of bona fides. The trial court held that the issue of new shares was
bona fide and the appellate court has also come to the conclusion that the
object of the directors in issuing the new shares was not merely with the
object of retaining or securing to the second defendant and his friends the
control of the first defendant company. They held that the company was in need
of capital. The suit was consequently dismissed and that decision was affirmed
by the High Court on appeal.
The decision of the appellate court has been challenged
before us on both grounds. The learned counsel appearing for the appellants did
not contest the concurrent finding of fact of both the lower courts to the
effect that the company was in need of capital. It was however urged on their
behalf that as the issue of these shares, although not admitted in the written
statement but admitted in the course of evidence, was for the purpose of
preventing the control of the company going in the hands of Mr. Singhania, the
directors had not acted bona fide and solely in the interest of the company. I
have read the judgment prepared by Das, J., and I agree with his conclusion and
line of reasoning on this part of the case. In my opinion, the contention of
the appellants on this point was rightly rejected by both the lower courts and
that contention must fail.
That leaves the question whether the issue of these shares
was in contravention of Section 105-C of the Indian Companies Act. That section
runs as follows:—
"Where the directors decide to increase the capital of
the company by the issue of further shares such shares shall be offered to the
members in proportion to the existing shares held by each member (irrespective
of class) and such offer shall be made by notice specifying the number of
shares to which the member is entitled and limiting a time within which the
offer, if not accepted, will be deemed to be declined; and after the expiration
of such time, or on receipt of an intimation from the member to whom such
notice is given that he declines to accept the shares offered, the directors
may dispose of the same in such manner as they think most beneficial to the
company."
On behalf of the respondents three answers were submitted.
The first was that the section deals with the case of increase of capital by
the directors beyond the authorized limit and as in the present case the new
shares were issued within the authorized limit of capital, the section has no
application. The second was that the terms of the section should be construed
in a practical way and there was no difference between Regulation 42 in Table A
of the Companies Act and Section 105-C in respect of the scheme to offer the
proportion of shares to the existing shareholders. It was argued that so long
as they were offered "as nearly as circumstances admit" the directors
had complied with the requirements of the section and therefore their action
was not illegal. The third answer was that in fact the directors had not
committed any breach of the terms of Section 105-C up to now and therefore
their action cannot be held to be illegal. In view of my conclusion on the
third point it is not necessary to express any opinion on the first two answers
submitted on behalf of the respondents. It seems to me that Section 105-C, interpreted
strictly as contended by the appellants, casts on the directors two
obligations. They have to offer the shares issued to the shareholders on the
register of the company and not to any one else, and secondly, the offer must
be in the same proportion to all the shareholders and there should be no
discrimination amongst them. It is not contended that by the offer made by the
directors to the shareholders there has been any discrimination amongst the
shareholders on the register of the company. It was contended on behalf of the
appellant that the directors had failed to offer all the shares resolved to be
issued by them to the existing shareholders and therefore the requirements of
the section had not been complied with. It was argued that the directors having
resolved to issue 4,596 shares, they had to offer that whole lot at once to the
shareholders on the register and the result of the offer made by them was to
retain in their hands 272-4/5 shares. In my opinion, this contention is
unsound. By their resolution of the 21st of February, 1945, the directors
resolved to issue 4,596 shares out of the authorized capital of the company.
They have offered shares to the existing shareholders in the proportion of four
new shares to five shares held by them. Inasmuch as the offer does not absorb
the whole lot of 4,596 shares I am unable to construe the offer as an offer of
the whole lot at once to the existing shareholders. Unless the whole lot of
shares in pursuance of the offer could be accepted and taken up I am unable to
consider the offer contained in the circular as an offer of the 4,596 shares.
That however does not establish the contention of the appellants. I find
nothing in the section to justify the conclusion that the directors must offer
all the shares resolved to be issued in one lot to the shareholders. I can
conceive of numerous cases where a limited company with a growing business does
not require its capital to be called up at once. For instance, soon after a
company is formed it may issue shares of, say a lakh of rupees required for the
construction of the buildings, and after a year when it requires further
capital for payment of machinery etc. it can issue further shares. I do not
think the section as worded prevents the directors from issuing shares to
existing shareholders from time to time in that way. As noticed before, the
object of the section is to prevent discrimination amongst shareholders and
prevent the directors from offering shares to outsiders before they are offered
to the shareholders. So long as these two requirements are complied with, the
action of the directors in selecting the time when they will issue the shares
as also the proportion in which they should be issue a is a matter left to
their discretion and it is not the province of the Court to interfere with the
exercise of that discretion. This is or course subject to the general exception
that the directors are not to act against the interest of the company or mala
fide. No such question arises in this case and therefore it is unnecessary to
discuss that aspect of the situation. In my opinion therefore on this third
ground this contention of the appellants should be rejected.
The appeal therefore fails and is dismissed with costs.
Mahajan, J.—This is an
appeal by special leave from the judgment and decree of the High Court of
Judicature at Bombay (Chagla, C.J., and Tendolkar, J.) dated nth March, 1948,
confirming the judgment of the said High Court in its Original Jurisdiction
(Bhagwati, J.) dated 10th November, 1947.
The two questions canvassed in this appeal are: (1) whether
the issue of further shares by the directors was in contravention of the
provisions of Section 105-C of the Indian Companies Act, and (2) whether this
issue was not made bona fide. Both these questions were answered in favour of
the respondents by the High Court.
The Bombay Life Assurance Co. Ltd., the first defendant in
the, case, was incorporated in the year 1908 as a limited company with an
authorized capital of ten lakhs. 5,404 shares had been issued till the year
1945 and they were paid up to Rs. 25 each. The second defendant is the Chairman
of the Board of Directors which is comprised of defendants 2 to 9. The company
has a life fund of 230 lakhs.
In the year 1944 Sir Padampat Singhania, an industrialist
of Kanpur, attracted by the soundness of this concern, began purchasing the
shares of the company with a view to acquiring a controlling interest in its
management. Soon after competition started for the purchase of the shares of
the company between the Singhania group and the Maneklal Premchand group who
were in management of this company. The result of this competition was that
shares which were ordinarily quoted at 250 went up as much as to 2,000 in
March, 1945. A circular was issued by the directors to the shareholders
apprising them of the activities of the Singhania party and suggesting that
those who wanted to sell their shares should sell them in the first instance to
the Chairman. This circular does not seem to have had much effect as the shareholders
wanted to reap the maximum benefit which would come to them as a result of this
competition between two rich parties. By the end of December 1944 the Singhania
group had purchased 2,517 shares as against 2,397 held by Maneklal Premchand's
party. The Singhania group had thus acquired a majority of the shares in the
company though these had not yet been transferred in their name. On 8th
January, 1945, the. Chairman at his own instance and after consulting some of
the directors made an application to the Examiner of Capital Issues for
permission for a fresh issue of capital. This was allowed on 20th February,
1945. As soon as sanction of the Examiner of Capital Issues was obtained for
increasing the captial of the company, a meeting of the directors was held on
21st February, 1945, and it adopted the following resolution:—
(1) That
the capital of the company increased from Rs. 5,40,400 to Rs. 10,00,000 by the
issue of the remaining 4,596 ordinary shares of Rs. 100 each at a premium of
Rs. 75 per share.
(2) That as on the existing shares of Rs. 100 each Rs. 25 is
paid up, to call Rs. 22 per share on these new shares also.
(3) That these new shares shall rank pari passu in all
respects with the existing shares of the company, but they shall be entitled to
rank for dividend as from 1st April, 1945.
(4) That these new shares shall be offered in the first
instance by a circluar to the shareholders of the company as shown on the
register of members on 20th February, 1945, in the proportion of 4 new shares
to every 5 shares held by them in the capital of the company on that date.
(5) That in the case of any shareholder holding less than
five shares or whose holding of shares shall not be complete multiples of five
shares, then fractional certificates shall be issued to such shareholders in
respect of their rights for fraction of a share, each fractional certificate
representing one-fifth of a share.
(6) That a sum of Rs. 100 per share (Rs. 25 towards capital
and 75 for premium) shall be payable along with application for these new
shares.
(7) That all applications for shares in accordance with this
offer (including applications for shares made in respect of and accompanied by
fractional certificates and applications for shares accompanied by a
renunciation) must be presented to and payment made at the registered office of
the company in Bombay on or before the 10th March, 1945. Any shareholder or
person in whose favour a renunciation has been signed not applying on or before
the 10th March, 1945, in terms of the offer shall be deemd to have declined to
participate in this new issue and all fractional certificates not presented as
required on or before 10th March, 1945, will cease to have any validity and
will not entitle the holder to any rights.
(8) That any balance of the shares remaining out of this
issue not applied for by the 10th March, 1945, shall be disposed of by the
directors as they may conisder best in the interests of the company.
(9) That the draft circular to the shareholders with the
enclosures (Form A being the form of application, Form B form of renunciation,
Form of fractional certificates with application form) placed on the table by
the manager and actuary be approved and initialled by the chairman.
(10) That the manager and actuary be and is hereby directed to
issue forthwith the necessary circulars to the shareholders.
(11) That a committee consisting of the chairman and any one of
the directors or the chairman and any two of the directors be and are hereby appointed
to scrutinise the application for the new shares which may be received and to make allotment of these new shares.
* * *.
It is the validity of this resolution that is the subject
matter of the present dispute. The plaintiffs, who are two shareholders of the
company owing allegiance to the Singhania group, filed the suit out of which
this appeal arises chellenging this issue of further shares, principally on two
grounds, viz., (1) that the new issue contravenes the provisions of Section
105-C of the Indian Companies Act, and (2) that the issue of shares was not
bona fide made in the interests or for the benefit of the first defendant
company, but was resolved upon merely with the object of retaining or securing
to the second defendant and his friends control of the first defendant company.
As already stated, both these contentions were negatived by the trial Judge and
the suit was dismissed and this decision was affirmed on appeal.
The answer to the first question depends on the meaning to
be given to the words used in Section 105-C of the Indian Companies Act as to
its scope. The section was introduced in the Indian Companies Act in the year
1936. Antecedent to this period the qeustion of issue of new shares by the
directors was dealt with by Article 42 of the articles of association given in
the Schedule to the Indian Companies Act, 1913. The article was in these
terms:—
"Subject to any directions to the contrary, that may
be given by the resolution sanctioning the increase of share capital, all new shares
shall, before issue, be offered to such persons as at the date of the offer are
entitled to receive notices from the company of general meetings in proportion,
as nearly as the circumstances admit, to the amount of the existing shares to
which they are entitled."
As its language indicates, the article only applied to
cases where the capital of the company was increased by a resolution of the
company. It had no application to cases where the directors issued further
shares within the authorised limits. The new section introduced in 1936 is in
these terms:—
"Where the directors decide to increase the capital of
the company by the issue of further shares such shares shall be offered to the
members in proportion to the existing shares held be each member (irrespective
of class) and such offer shall be made by notice specifying the number of
shares to which the member is entitled, and limiting a time within which the
offer, if not accepted, will be deemed to be declined; and after the expiration
of such time or on receipt of an intimatiom from the member to whom such notice
is given that he declines to accept the shares offered, the directors may
dispose of the same in such manner as they think most beneficial to the
company."
It qualifies the discretion of the directors in the matter
of issue of capital by enjoining on them that if they decide to issue further
shares, the existing shareholders should be given the first option to buy them.
The language employed in the section admits of three possible interpretations:
(1) that its scope is limited to cases where there is an increase in the
capital of the company according to the provisions of Section 50; (2) that the
section covers within its ambit all issue of further capital whether made by
increasing the nominal capital or by issuing further shares within the
authorised capital; (3) that the section has application only to cases where
the directors issue further shares within the authorized limit.
The learned counsel for the respondents contended that the
whole intent and purpose of the section was to limit the discretion of
directors in regard to the issue of further shares in those cases alone where
there was an increase in the nominal capital of the company by recourse to the
provisions of Section 50 of the Indian Companies Act. It was argued that the
phrase "increase of capital" has been employed by the legislature in
Section 50 and some other sections preceding Section 105-C with reference only
to the nominal capital of a company and that this expression had not been used
with reference to the subscribed capital anywhere in the Act and therefore the
scope of Section 105-C should be limited to cases where the increase in the
capital is brought about under Section 50 of the Act and new shares are created
and issued by the directors. In Sircar and Sen's Indian Companies Act, 1937
Edition, at page 309, the learned authors observe as follows:—
"The words 'further shares' must be read in
conjunction with the words 'decide to increase the capital of the company'. They
must mean shares which are issued for the purpose of increasing the capital
beyond the authorized capital."
Mr. Ghosh on Indian Company Law, 8th Edn. at page 263, has
stated as follows:—
"The object of this new section appears to be to make
the salient provisions of Regulation 42 in Table A compulsory. The section as
drafted is liable to the construction that whenever the directors decide to
increase the capital of the company by the issue of further shares, even if it
be a part of the authorized capital, the new shares, must be first offered to
the existing shareholders. But this section should be read in conjunction with
clause (a) of Section 50 under subsection (2) of which the directors have no
power to increase the share capital of the company. Therefore it seems that the
words 'further shares' mean shares beyond the authorized capital of the
company."
Whatever might be the opinion
expressed by these commentators, the matter has to be decided on the language
of the Act itself. As already pointed out, the learned counsel for the
respondents contended that the above was the correct view as to the scope of
the section. The learned counsel for the appellants however urged that on a
proper interpretation of the section its scope could not be limited only to
cases of issue of further shares by creation of new shares by increasing the
nominal capital of the company, but that the language employed in the section
also included within its ambit cases where there was a further issue of shares
by the directors, within the authorized capital. The learned counsel laid
considerable emphasis on the expression 'further shares' used in the section
and suggested that these words have been used advisedly instead of the
expression 'new shares' in order to bring within the scope of the section
increases in the capital of a company whether within the authorized limit or
outside it.
The third interpretation of the
section finds support from the language employed by the legislature in the
opening part of the section, wherein it is said: "Where the directors
decide to increase the capital of the company by the issue of further
shares……" The directors can only decide to increase the capital at their
own initiative when they issue further shares out of the authorized capital. In
no other case can the directors themselves decide as to the increase in the
capital of a company. Under Section 50 the capital can only be increased by a
resolution of the company. Once the company has increased the nominal capital,
then the directors can issue shares within the new limit. Therefore the
authority of the directors, strictly speaking, in respect to the increase of
capital is limited to an increase within the authorized limit. They cannot by
their own decision increase the nominal capital of the company. In view of this
language the third interpretation of the section seems more plausible.
The expression "capital of a
company" is an ambiguous phrase and may mean either issued capital or
authorized capital according to the context. It has been used in different
senses in various parts of the Act. In what sense it has been used in this
section is by no means an easy matter to decide, particularly in view of the
fact that in spite of the introduction of this section in the Indian Companies
Act in the year 1936, Article 42 still remains as one of the articles to be
adopted by companies if they do not choose otherwise and this refers to cases
of increase in the nominal capital of a company. In my opinion, for the purpose
of deciding the present case it is not necessary to pronounce on the question
as to the precise scope of the section, because I consider that on any
interpretation of it the appellants'
contention has to be negatived. If the interpretation suggested by the learned
counsel for the respondents is accepted, then the plaintiffs' contention on the
first question fails, because here there has been no increase in the capital of
the company under Section 50. Conceding however for the sake of argument (but
not deciding) that the scope of the section is as it has been contended for by
Sir Noshirwan, the question still remains "To what extent has there been a
contravention of its provisions by the directors in the present case." So
far as I have been able to see, the resolution passed by the directors is in
accordance with the provisions of the section and does not injuriously affect
the shareholders or the company, and they cannot be said to have any cause of
grievance against it. In other words, in my opinion, the resolution
substantially complies with the provisions of Section 105-C of the Indian
Companies Act. The directors offered all the new shares to the shareholders in
the ratio of 4 to 5, as the shares of the company were held in multiples of
five to a larger extent than in any other multiple. The result of fixing this
ratio is that 272 shares remain outside the offer. In whatever other proportion
the shares were offered, still a few shares were bound to remain unoffered. If
a liberal interpretation is placed on the section, then it has to be held that
the directors' resolution substantially complies with its provisions. On the
other hand, if a technical and literal interpretation is placed on the section,
then the directors were bound to offer the shares in the ratio of 4596/5404 in
spite of the practical difficulties that might result in the actual working out
of such a proportion, and irrespective also of whatever absurdities or
anomalies might thus result. I am of the opinion that the section has to be
given a workable construction and a construction that is businesslike in
preference to a literal construction which might lead to a deadlock. In each
case it should be seen whether the directors have substantially complied with
the provisions of the section or not.
The basic idea underlying the section is that whatever is
given, is given to all the existing shareholders and is distributed equally and
equitably between them. It cannot be denied that all the shareholders were
offered the further shares and that they were offered equally and equitably.
Whatever is the balance remains with the company with the result that the
capital remains unincreased to this extent. In such a situation it is difficult
to hold that the resolution passed by the directors has contravened the
provisions of Section 105-C and has caused any detriment or injury either to
the company or to the shareholders. Even if the resolution passed by the
directors is held to be in technical breach of the section, as it has caused no
injury to anybody, the resolution cannot be held to be void. Under the law as
it existed prior to 1936, if a company incorporated in its articles of
association Article 42 mentioned in the Schedule to the Indian Companies Act,
then in the case of issue of new shares the directors' discretion was curtailed
inasmuch as they were bound to offer these shares in the first instance in
proportion as nearly as the circumstances admitted to the amount of the
existing shares to the existing shareholders, but in all other cases their
discretion remained unfettered. It was open to a company not to adopt Article
42 and thus fetter the discretion of the directors even in the case of the
issue of new capital. After 1936 it has been made obligatory on the directors
to give the first option to buy further shares to the existing shareholders and
without any favour to anyone. That being the intent and purpose of the section,
it has been fully carried out by the directors in the present instance and has
been carried out in a businesslike way because the ratio in which they offered
the shares is the ratio which works to the convenience of the largest number of
shareholders as the shares of the company are held mostly in multiples of five.
If the shares were issued in any other ratio, that would have created some
difficulty in the way of shareholders who held shares in multiples of five and
who owned 2,110 shares. They would have been obliged to collect fractions
before they could claim a whole share and thus make an application within the
time allowed to exercise the option. Where the language of a statute in its
ordinary meaning and grammatical construction leads to a manifest contradiction
of the apparent purpose of the enactment, or to some inconvenience or
absurdity, hardship, or injustice, presumably not intended, a construction may
be put upon it which modifies the meaning of the words, and even the structure
of the sentence. In my opinion, the section when it says, "such shares
shall be offered to the members" should be construed liberally and not
literally, as such an interpretation would make the section workable and would
not in any way affect its intent and purpose, the phrase "such
shares" meaning those shares which admit of being so offered in a
businesslike way.
It was argued that a liberal interpretation of the section
would result in the directors allotting the balance of shares remaining out of
the further shares unoffered to their own friends and relations and it would
operate to the detriment of the other shareholders. In this connection
reference was made to para. 8 of the resolution above mentioned. In my opinion
this paragraph does not bear out the contention of the appellants because it
has reference only to shares not applied for, obviously shares not offered and
which could not be taken up by the shareholders cannot fall under that
description. That paragraph applies only to cases where the shares could be
applied for and then no application was made in respect of them. It was not
disputed that the directors in the present case had not sold these shares to
anyone and that these have remained unissued. It was urged strongly by the
learned counsel for the appellants that the section being imperative and its
language being unambiguous, the court was bound to place a literal
interpretation on it and the argument of hardship or inconvenience should not
weigh with it. It was further suggested that the directors could always give
effect to the provisions of the section by increasing the capital in a manner
and to the extent that the further shares could be offered to the shareholders
in such a proportion that all the shares offered could be taken up by them. In
other words, it was contended that the section not only fetters the powers of
the directors in the matter of sale of shares but it also restricts their
discretion in the matter of increase of capital and as to the number of further
shares. This contention, if accepted, would mean that the legislature by
enacting Section 105-C indirectly enjoined on the directors that whenever they
decide to increase capital by issue of further shares they should make the
increase only to such an extent and in a manner as to enable the existing
shareholders to take the whole of it. If that was the intention of the section,
there was nothing easier for the legislature to say so. The section, on the
other hand, recognizes that the directors have a discretion in the matter of
the increase of capital when it says, "When the directors decide to
increase the capital of a company." It means that it is within their
absolute discretion to take the decision whether to increase the capital or
not. It is also within their discretion to say to what limit and to what extent
they will increase the capital. It is also for them to decide how many shares
and of what value they will issue. Once they have taken their decision, it is
then and then only that Section 105-C comes into operation. At that stage they
have to offer the new shares to the shareholders and at that stage they can
offer them in a businesslike manner to all of them equitably and equally and if
out of the shares offered some cannot be taken up by the shareholders as they
do not fit in the ratio in which the offer has been made, the only result is
that those shares remain unoffered and thus unissued. I am therefore of the
opinion that the learned Judges of the court of appeal were right when they
held that under Section 105-C the shares have to be offered to the existing
shareholders as nearly as the circumstances would admit and that the section
has to be given a businesslike construction and should be construed liberally
and that the charge of contravention of Section 105-C cannot be levelled
against the directors so long as they have not disposed of the unoffered
balance contrary to the provisions of the section. The result is that the first
contention of the learned counsel stands negatived.
The next question whether the action of the directors in
passing the resolution was not bona fide seems to be concluded by concurrent
findings of fact of the courts below to the effect that the resolution was
passed because the company needed additional funds at the moment when the new
issue was decided upon and that the issue of shares was not due solely to the
desire on the part of the directors to keep themselves in the saddle.
It is not the practice of this court ordinarily to
interfere with concurrent conclusions on questions of fact reached in the
courts below unless those conclusions have been reached on extraneous
considerations or by violating rules of procedure or by committing any breach
of some provision of
law: vide Srimati Bibhabati Devi v. Kumar Ramendra Narayan Rai. The learned
counsel for the appellants, while conceding that it was not open to him to
challenge concurrent findings of fact of the courts below, urged that the whole
case has been looked at by them from an erroneous angle. It was contended that
the courts below had misdirected themselves in their approach to the decision
of the issue of bona fides. In this connection emphasis was laid on the
following observations in the judgment of the learned Chief Justice and on
similar observations occurring elsewhere:—
"In this particular case it is urged and urged with
considerable force that the reason which actuated the directors on the 21st
February, 1945, in resolving to issue new shares was the fear that the
Singhania group would capture the company and oust the present directors from
their vantage point and take control of the company itself. It may be that one
of the factors that weighed with the directors was that consideration. It may
even be that it weighed with them a great deal. It may also be that the
directors selected this particular time, viz., the 21st February, 1945 for the
issue of these shares because of the impending danger of the majority of shares
going into the hands of the Singhania group with the necessary consequences.
If, with all that, it is established before the court that in fact on the 21st
February, 1945, the company was in need of funds, that the funds were required
for the working of the company, then the court will not interfere with the
discretion exercised by the directors, because the principle is obvious that if
the new shares have been issued because the company needs funds, then it cannot
be said that the discretion vested in the directors has been exercised not in
the interest of the company or for the purpose of the company. It is only when
that discretion is exercised solely for the personal ends of directors, for
their personal aggrandisement, for keeping themselves in power, then
undoubtedly that discretion cannot be said to have been exercised for the
purpose of or in the interests of the company."
Reference was also made to the concluding part of the same
judgment which runs thus:—
"Undoubtedly this is a case of high finance and we
have been given a glimpse of what high finance can be and there is great
justification in what Mr. Amin has said as to the manner in which some of the
things were done with regard to the affairs of this company. But ultimately we
must come down to the one short and simple question, was the company in need of
funds at the time when the directors decided upon the issue of new shares, and
in my opinion there can be no doubt on the evidence led in this case that the
answer to that question must be in the affirmative. If that be the position,
all other considerations can be of no avail or of very little avail as against
this central fact in this case and, as I am satisfied as to the central fact, I
would agree with the learned Judge who took the same view and come to the
conclusion that the plaintiffs have failed to discharge the burden which lay
upon them of establishing that the issue of new shares was not bona fide and
not in the interests of and for the benefit of the company."
It was argued that the learned Judges were not right in
thinking that all other considerations were of no avail and should be
practically kept out of consideration once it was established that the company
needed funds. It was said that it having been found that at the time of the
aforesaid resolution the directors were considerably influenced by the
consideration of keeping out the Singhania group from capturing the company,
and by the consideration of keeping themselves in the saddle, it should have
been held that they were acting with an ulterior motive, and that their
decision as to the need of the company for further funds was vitiated by reason
of the ulterior motive.
It is convenient here to state what the true approach should
be to a question of this nature when it arises in a case. It is well settled
that in exercising their powers, whether general or special, the directors must
always bear in mind that they hold a fiduciary position and must exercise their
powers for the benefit of the company and for that alone and that the court can
intervene to prevent the abuse of a power whenever such abuse is held proved,
but it is equally settled that where directors have a discretion and are bona
fide acting in the exercise of it, it is not the habit of the court to
interfere with them. When the company is in no need of further capital,
directors are not entitled to use their power of issuing shares merely for the
purpose of maintaining themselves and their friends in management over the
affairs of the company, or merely for the purpose of defeating the wishes of
the existing majority of shareholders.
It appears to me that the learned Judge in the court below
approached the decision of this question in the light of the principles stated
above and the contention of the learned counsel therefore does not seem right.
Where the directors are not chargeable for breach of trust so far as the
company is concerned and where their action is for the benefit of the company,
then merely because in promoting the interest of the company they also promote
their own interests, it cannot be held that they have not acted bona fide. As
it has been said in Hirche v. Sims, if the true
effect of the whole evidence is that the defendants truly and reasonably
believed at the time that what they did was for the interest of the company,
they are not chargeable with dolus malus or breach of trust merely because in
promoting the interest of the company they were also promoting their own, or
because they afterwards sold shares at prices which gave them large profits.
Both the courts below have found as a fact that to a
certain extent in resolving to issue new shares the directors were actuated by
a fear that the Singhania group would capture the company and oust the present
directors from their vantage point and take control of the company itself. It
was argued that this motive was an ulterior motive and the exercise of power by
the directors to achieve this objective by the issue of further shares was an
exercise of power for the purpose for which it was not conferred. This argument
would have had force if this was the main purpose of the directors in issuing
the further shares, but this is not the case here. As found by the High Court,
the central fact working in the mind of the directors was the necessity of
further funds for the company at the moment they passed the resolution. That
being so, it seems to me that the existence of the other motive does not make
the action of the directors in respect of the issue of further shares mala
fide.
Moreover, in the present case it seems to me that the
directors were on the defensive. They felt that the attempt of the Singhanias
to capture the controlling interest in the company by paying high prices for
its shares must have been with a purpose, i.e., to make use of the funds of the
company in their own concerns. Some evidence of this exists on the record. They
thought that it was their duty as directors to protect the company from such an
attack and they felt that it was beneficial to the company to protect it from
such an attack They did not keep the matter in secret but informed all the
shareholders about it. They first attempted to enter into the field of
competition with the Singhanias but it seems that they were not wholly
successful in their objective. They then decided to issue further capital by
taking into consideration the interest and the needs of the company and its
requirements in respect of capital at the moment. They also thought that by
this action they would also be able to keep out the Singhanias from capturing
the company. They were under no obligation to Singhanias who had not yet even
been entered as shareholders on the register of shareholders. There was no
dolus mains in their mind as directors of the company, as affecting the company
or its shareholders. On the other hand, they honestly considered it to be in
the best interest of the company to meet such an attack. The result therefore
is that it cannot be held that this is one of those unusual cases were this
court should not give weight to the concurrent findings of fact by the courts
below, or that it is a case where it can be held that the High Court in
arriving at its findings has committed a breach of any rule of procedure or law
and that there is no evidence to support the findings that have been arrived
at.
The result therefore is that this appeal fails and is
dismissed with costs.
Das, J.—I agree that
this appeal must be dismissed. As, how. ever, my decision rests on slightly
different reasons, I desire to state them in my judgment.
For the purpose of appreciating the questions involved in
this appeal which has been brought by the plaintiffs it will suffice to set out
the following facts.
The Bombay Life Assurance Company, Ltd., (hereinafter
referred to as "the company") was incorporated in 1908 with an
authorised capital of Rs. 10,00,000 divided into 10,000 shares of Rs. 100 each.
By 1945, 5,404 shares in all were subscribed, and Rs. 25 per share had been
paid on them. This left 4,596 shares out of the total authorized crpital yet to
be issued. The plaintiffs are two of the shareholders of the company.
Respondents 2 to 9 are the directors of the company of whom respondent 2 is the
chairman of the board of directors. It appears that from July, 1944, shares in
the company began to be purchased from the holders thereof by or in the
interest of Sri Padampat Singhania. This attempt to buy up the shares on a
large scale naturally resulted in a sudden rise in the price of the shares.
This abnormal rise in the price could not but attract the attention of the
board of directors. On 18th September, 1944, a board meeting was held at which
the chairman drew the attention of his co-directors to the serious implications
of the attempt of an outsider group to corner the shares of the company. It was
decided at that meeting that a circular should be issued to the shareholders
acquainting them of the true position and the chairman was authorised to sign
the circular. Accordingly, on 19th September, 1944, a circular was issued to
the shareholders drawing their attention to what was happening and exhorting
them, in case they wanted to dispose of their holdings, to offer them to the
chairman. The result of the chairman and other directors entering the arena was
a race for purchase of shares of the company which inevitably led to a
phenomenal rise in the price of the shares. The shares which in 1944 were
quoted at Rs. 250 per share went up to Rs. 2,000 per share in March, 1945. It
may be noted here that the shares purchased by the Singhania group were not
submitted for registration of the transfers with the result that their names
have not yet been entered on the register of members. In the meantime, on 8th
January, 1945, an application was submitted by the company to the Examiner of
Capital Issues for sanction for a fresh issue of capital, setting forth several
reasons for which such capital was required by the company. The required
sanction dated 16th February, 1945, was received by the company on 20th
February, 1945, and on the next day (21st February, 1945) a board meeting was
held at which the directors decided to issue the remaining 4,596 shares at a
premium of Rs. 75 per share and to call up Rs. 25 per share on them. The
minutes of the board meeting (Ex. O) are printed at pages 301-2 of the Paper
Book. Pursuant to this resolution of the board a circular (Ex. Q) was issued to
the shareholders on the same day with copies of the form of application and form
of renunciation referred to in the resolution and in the circular. These
further shares were offered to the shareholders shown on the register of
members in the proportion of 4 further shares to every 5 shares then held by
them. The last date for submission of the applications and necessary payments
for the shares so offered was fixed for 10th March, 1945. It is said that on
the very next day after the board meeting 1,648 shares were allotted and that
between 22nd February and 6th March, 1945, 2,204 shares were allotted to the
shareholders who had applied for the same. The suit out of which the present
appeal has arisen was filed on 5th March, 1945.
"The plaintiffs are two of the members of the company
suing "for themselves and all other aggrieved shareholders" of the
company. The defendants are the company and the eight directors.
The reliefs prayed for are as follows, inter alia:
(a) That it may be
declared that the resolution of the directors and the offer referred to in para
6 hereof contravenes the provisions of Section 105-C of the Indian Companies
Act and was and is ultra vires, and illegal;
(b) That it may be
declared that the said offer of shares referred to in para 6 hereof is not bona
fide or in the interest of the defendant company and is ultra vires and
illegal;
(c) That the
defendants 2 to 9 may be restrained by an injunction from allotting any shares
or doing any further act in pursuance of the said offer."
It will be noticed that none of the shareholders other than
the directors to whom further shares had been allotted before the filing of the
suit has been made a party to the suit. Further, even as against the defendants
2 to 9 the consequential relief by way of cancellation of the allotments of
further shares to them and the rectification of the register in respect thereof
has not been prayed for by the plaintiffs.
The contentions of the plaintiffs as set forth in the
plaint on which the above prayers were founded may be summarised shortly as
follows:
(i) the company was not in need of capital;
(ii) the
issue of further shares was not made bona fide for the benefit or in the
interest of the company but had been made "merely with the object of
retaining or securing to the second defendant and his friends the control of
the first defendant company"; and
(iii) the
issue and offer of further shares are illegal and void for contravention of the
provisions of Section 105C of the Indian Companies Act. It is necessary to
examine each of these contentions and to ascertain their effect.
Re (i): Both the Courts below have found it as a fact that
at the time the directors resolved upon the issue of further shares the company
was in need of capital for the purposes mentioned in the company's application
to the Examiner of Capital Issues referred to above. This concurrent finding of
fact has not been contested before us and the next contention of the appellants
will have to be examined in that light.
Re (ii): It is not disputed that the company's need for
funds standing by itself will afford a good motive to the directors to issue
further shares. The contention, however, is that if that motive was not the
sole motive but was mixed up with any other motive, it was an abuse of the
powers of the directors to issue further shares. This plea is clearly a departure
from the case made in the plaint. There the case was that there was no need for
funds at all and the sole motive of the directors was merely to retain their
own control over the affairs of the company. It will, however, be a
hypertechnicality to shut out this plea altogether. The plea of mixed motive
raises three questions, namely—
(a) whether
apart from the motive of finding further capital for the company, there was
any, and, if so, what other motive,
(b) was that other motive vitiated by bad
faith, and
(c) if it
was so vitiated, whether the presence of it nullified the good motive and
rendered the issue of further shares illegal and void.
The contention of the plaintiffs before Bhagwati, J., as
before us, was that the company was not in need of any further capital in
February, 1945, and that the directors of the company decided to issue the
further capital merely with a view to retain control of the management of the
company in their hands. On the evidence before him, Bhagwati, J., found that
the motive of the directors was rather to keep the Singhania group out of the
control of the company than to retain their own control. The race for the
purpose of purchasing the shares was not merely for the purpose of increasing
their holdings for holdings' sake but was really with a view to prevent the
Singhania group from obtaining a majority of shares which would give them the
control of the management of the company and enable them to utilise the life
funds of the company for the purposes of the various industrial concerns of the
Singhania group. The result of keeping out of the Singhania group might well be
to strengthen the position of the directors and to keep them in the saddle, but
the proximate motive was to exclude the Singhanias. The distinction is real and
quite understandable. The appeal Court does not appear to have dissented from
this view of the matter and I do not see any reason to take a different view.
It follows, therefore, that apart from the motive of raising fresh capital for
the purposes and benefit of the company, the directors also had another motive,
namely, to prevent the Singhania group, who are strangers to the company, from
intruding into its affairs so as to be able to assume a controlling hand in its
management for their own purposes rather than for the benefit of the company.
On the evidence on record the existence of this motive side by side with the
motive of raising further capital cannot be denied.
The question then arises whether in acting up to it the
directors were actuated by bad faith. In coming to a conclusion on this point
it has to be borne in mind that the Singhania group had only purchased some
shares from various existing shareholders but did not submit the transfers for
registration so as to get their names put upon the register of members. It is
clear that until the Singhania group get their names entered in the register of
members, they are not shareholders but are complete strangers to the company.
It has been held in Percival v. Wright that
ordinarily the directors are not trustees for individual shareholders. Even if
the directors owe some duty to the existing shareholders on the footing of
there being some fiduciary relationship between them as stated in some cases
(see for example In
re Gresham Life Assurance Society), I see no
cogent reason for extending this principle and
imputing any kind of fiduciary relationship between the directors and persons
who are complete strangers to the company. In my judgment, therefore, the
conduct of respondents 2 to 9 cannot be judged on the basis of any assumed
fiduciary relationship existing between them and the Singhania group. In my
opinion, respondents 2 to 9 owed no duty to the Singhania group and, therefore,
the motive to exclude them cannot be said to be mala fide per se. In North-West Transportation Company,
Ltd. v. Beatty the Judicial
Committee observed at p. 601:
"But the constitution of the company enabled the
defendant J.H. Beatty to acquire this voting power; there was no limit upon the
number of shares which a shareholder might hold, and for every share so hold he
was entiled to vote, the charter itself recognised the defendant as a holder of
200 shares, one-third of the aggregate number; he had a perfect right to
acquire further shares and to exercise his voting power in such a manner as to
secure the election of directors whose views upon policy agreed with his own,
and to support those views at any shareholders' meeting."
Beatty referred to in the above passage was a director. It
follows therefore, that the fact of the directors entering into a competition
with the Singhania group in purchasing the shares of the company was quite
legitimate and was not mala fide. It was urged, however, that the issuing of
further shares, although the company required further capital, was, in the
circumstances, evidence of bad faith. Bhagwati, J., dealt with the various acts
of the directors relied upon by the plaintiffs as indicating bad faith on the
part of the directors and on a consideration of all of them was "unable to
come to the conclusion that the issue of new shares was decided upon by the
directors not bona fide in the interests of the company and merely with a view
to keep the control of the affairs of the company in their hands." The
learned Judge, therefore, came to the conclusion that the issue of further
shares and the offer thereof made on the 21st February, 1945, was not ultra
vires and illegal. Some of these facts on which the charge of mala fides was
sought to be founded were urged before the appeal Court by learned counsel for
the appellants. The learned Chief Justice discussed the matters and concluded
by saying that he agreed with the trial Judge that the plaintiffs had failed to
discharge the burden which lay upon them of establishing that the issue of new
shares was not bona fide and not in the interests, and for the benefit, of the
company. I do not see any cogent reason for taking a different view on the
facts. The position, shortly put, was that the Singhania group, who were
outsiders and to whom the directors owed no duty, were out to corner the shares
of the company for their own ends. To thwart that object of the Singhania group
by making it more and more difficult for them to acquire more shares the
directors took advantage of the existing needs of the company for further
capital and decided upon to issue further shares. The issue of further shares
served two purposes, namely, the purpose of finding the necessary finance, and
to exclude the interlopers, both of which purposes, according to the directors,
were for the benefit of the company. Rightly or wrongly, the directors felt
that it was not in the interests of the company to allow the Singhania group a
controlling hand in the management of the affairs of the company. Their
apprehension evidently was that the Singhania group, if and when they became
shareholders, would use their voting power in their own interests and to the
detriment of the company by utilising the life fund of the company for the
purposes of their various other industrial concerns. I find nothing in evidence
on record to doubt the honesty of the directors in holding this view and, that
being so, I see nothing improper if the directors in the interests of the
company and the existing shareholders tried to prevent what, according to them,
would be a catastrophe. Indeed, if the directors honestly held that view— and
as already stated I have no reason to think that they did not— they would, in
my opinion, have been guilty of dereliction of duty to the company and to the
existing shareholders if they did not exert themselves to prevent such evil. In
my judgment the motive to prevent the Singhania group, who were outsiders, from
acquiring a control over the company cannot, as between the directors and the
company and the existing shareholders, be stigmatised as mala fide.
At two places in his judgment the learned Acting Chief
Justice expressed the view that if it were established before the Court that
the company needed further capital, all other considerations could be of no
avail or of very little avail as against that central fact Tendolkar, J., did
not consider it necessary to deal with the various acts of the directors relied
upon as evidence of their mala fides, because he was of the view that assuming
that the directors did all those acts with the object of keeping the Singhania
group out of control of the company, the moment it was established that the
company was in need of further capital for legitimate purposes, the fact that
the directors utilised such need for purpose the of establishing themselves
more firmly in the saddle did not render the issue of further capital either
ultra vires or invalid. Learned counsel for the plaintiffs contends that the
learned Judges in the Courts below entirely overlooked the point that the
presence of such bad motive would nullify the good motive of finding capital
necessary for the company and this mixture of motives would render the issue of
further shares illegal and void. This leads me to a consideration of the third
sub-head on the assumption that what I have called the additional motive was a
bad motive.
It is well established that directors of a company are in a
fiduciary position vis-a-vis the company and must exercise their power for the
benefit of the company. If the power to issue further shares is exercised by
the directors not for the benefit of the company but simply and solely for
their personal aggrandisement and to the detriment of the company, the Court
will interfere and prevent the directors from doing so. The very basis of the
Court's interference in such a case is the existence of the relationship of a
trustee and of cestui que trust as between the directors and the company.
The first case to be referred to is that of Fraser v.
Whalley. In
that case a new company was incorporated in 1859 by an Act of Parliament. By
that Act also certain existing railway companies were authorised "to
acquire, take and hold shares in the undertaking of the company, and for such
purpose to create new shares in their undertakings". The existing
companies in 1861 passed resolutions authorising their directors to exercise
this power. The resolutions were, however, not acted upon and the existing
companies did not issue new shares in their undertakings for the purpose of taking
up any share in the new company and all the shares of the new company were
issued to persons other than the existing companies. In short, the shares which
it was contemplated would be taken up by the existing companies were no longer
available. Subsequently, in 1862, another Act of Parliament was passed
authorising the new company to make a branch line and for that purpose to raise
fresh capital by the creation and issue of new shares. But this new Act gave no
fresh power to the existing companies to take up any of these new shares to be
issued by the new company. One Savin held the majority of shares in the
existing companies and there was dispute between him and the directors. The
general meeting of the company was shortly going to be held and the directors
knew that at the ensuing general meeting their policy would be repudiated by
the majority of shareholders and they would be turned out from their office. It
was in these circumstances that the directors purporting to act on the
resolutions of 1861, resolved to issue new shares. Suit was filed on behalf of
the shareholders to restrain the directors from issuing any new shares. On a
motion for injunction Wood, V. C, granted an interlocutory injunction. In
course of his judgment the learned Judge observed:
"The directors are informed that at the next general
meeting they are likely to be removed, and, therefore, on the very verge of a
general meeting, they, without giving notice to anyone, with this indecent
haste and scramble which is shewn by the times at which the meetings were held,
resolve that shares are, on the faith of this obsolete power entrusted to them
for a different purpose, to be issued for the very purpose of controlling the
ensuing general meeting.
I have no doubt that the Court will interfere to prevent so
gross a breach of trust. I say nothing on the question whether the policy
advocated by the directors, or that which I am told is to be pursued by Savin,
is the more for the interest of the company. That is a matter wolly for the
shareholders. I fully concur in the principle laid down in Foss v. Harbottle as to that,
but if the directors can clandestinely and at the last moment use a stale
resolution for the express purpose of preventing the free action of the
shareholders, this Court will take care that, when the company cannot
interfere, the Court will do so."
It will be noticed that this decision proceeds entirely on
the grounds that the resolutions of 1861 on which the directors purported to
act were obsolete, for they had not so long been acted upon and also because
the shares contemplated by that resolution were not available, and even if the
resolutions were still effective and gave authority to the directors to issue
new shares, the directors could only do so for the purpose of acquiring shares
in the new company and not for the purpose of controlling the ensuing general
meeting and preventing the free action of the shareholders. There was no
evidence whatever in that case that the issue of shares was at all for the
benefit of the company. The issue of shares in that case was not for the
purpose of taking up shares in the new company for which purpose alone the
power could be exercised, but that it was being exercised, wholly and solely
for quite a different purpose, namely, of maintaining themselves in office.
Punt v. Symons & Co., Limited was a motion
for an interim injunction to restrain the holding of a meeting of the defendant
company for confirming the resolution for issue of shares. On the evidence it
was quite clear "that these shares were not issued bona fide for the
general advantage of the company, but that they were issued with the immediate
object of controlling the holders of the greater number of shares in the
company, and of obtaining the necessary statutory majority for passing a
special resolution while, at the same time, not conferring upon the minority
the power to demand a poll." Byrne, J., granted an injunction restraining
the defendant from holding the confirmatory meeting and observed:
"I am quite satisfied that the meaning, object, and
intention of the issue of these shares was to enable the shareholders holding
the smaller amount of shares to control the holders of a very considerable
majority. A power of the kind exercised by the directors in this case, is one
which must be exercised for the benefit of the company; primarily it is given
them for the purpose of enabling them to raise capital when required for the
purposes of the company. There may be occasions when the directors may fairly
and properly issue shares in the case of a company constituted like the present
for other reasons. For instance, it would not be at all an unreasonable thing
to create a sufficient number of shareholders to enable statutory powers to be
exercised, but when I find a limited issue of shares to persons who are
obviously meant and intended to secure the necessary statutory majority in a
particular interest, I do not think that is a fair and bona fide exercise of
the power. "
The learned Judge concluded with the following
words:—"If I find as I do that shares have been issued under the general
and fiduciary power of the directors for the express purpose of acquiring an
unfair majority for the purpose of altering the rights of parties under the
articles, I think I ought to interfere."
Piercy v. S. Mills & Co., Ltd. was a witness
action before Peterson, J. It was indeed a gross case. On the evidence
Peterson, J., found that it was manifest "that the shares were allotted
simply and solely for the purpose of retaining control in the hands of the
existing directors." After stating the facts, the learned Judge said:
"The question is whether the directors were justified in acting as they
did, or whether their conduct was a breach of the fiduciary powers which they
possessed under the articles. What they did in fact was to override the wishes
of the holders of the majority of the shares of the company for the time being
by the issue of fresh shares issued solely for that purpose." Then after
referring to Fraser v. Whalley and Punt v.
Symons & Co. Ltd., the learned
Judge concluded: "The basis of both cases is, as I understand, that
directors are not entitled to use their powers of issuing shares merely for the
purpose of maintaining their control or the control of themselves and their
friends over the affairs of the company, or merely for the purpose of defeating
the wishes of the existing majority of shareholders. That is, however, exactly
what has happened in the present case. With the merits of the dispute as
between the directors and the plaintiff I have no concern whatever. The
plaintiff and his friends held a majority of the shares of the company, and
they were entitled, so long as that majority remained, to have their views
prevail in accordance with the regulations of the company, and it was not, in
my opinion, open to the directors, for the purpose of converting a minority
into a majority, and solely for the purpose of defeating the wishes of the
existing majority, to issue the shares which are in dispute in the present
action." In the result, the shares allotted to the defendants were
declared void.
It will be noticed that in each of the three cases the act
of the directors was not only not of advantage to the company but was in
essence to its detriment in that it was calculated to reduce the existing
majority into minority and to prevent the majority of the existing shareholders
to exercise their discretion with respect to what they conceived to be in the
best interests of the company. Those cases were not cases of mixed motives at
all. The only motive operating in those cases in the minds of the directors was
detrimental to the interests of existing shareholders and, therefore, to the
company itself. Our attention was drawn to Palmer's Company Law, 18th Edition,
p. 183, where it is stated that "in exercising their powers, whether
general or special, directors must always bear in mind that they are in a
fiduciary position, and must exercise their powers for the benefit of the
company, and for that alone." Relying on the words "and for that
alone" it is urged that the power to issue shares must be exercised wholly
and solely for the benefit of the company, that there must not be any other
motive whether or not that other motive is injurious to the company and that if
that power is exercised for that purpose and also for some other purpose then
irrespective of the nature of that other purpose the directors would be guilty
of an abuse of their power. I am not prepared to read the passage in the way
urged by learned counsel for the plaintiffs. None of the cases cited on that
point in Palmer's Company Law was concerned with mixed motive at all. In none
of them was there any motive beneficial to the company or to the existing
shareholders. In my view what that passage means is that the power must be
exercised for the benefit of the company and that as between the directors and
the company there must be no other motive which may operate to the detriment of
the company. If the directors exercise the power for the benefit of the company
and at the same time they have a subsidiary motive which in no way affects the
company or its interests or the existing shareholders then the very basis of
interference of the Court is absent, for, as I have pointed out, the Court of
equity only intervenes in order to prevent a breach of trust on the part of the
directors and to protect the cestui que trust, namely the company and possibly
the existing shareholders. If as between the directors and the company and
existing shareholders there is no breach of trust or bad faith there can be
occasion for the exercise of the equitable jurisdiction of the Court. I find
support for my views in the following observations of their Lordships of the
Judicial Committee in Hirsche v. Sims:
"If the true effect of the whole evidence is, that the
defendants truly and reasonably believed at the time that what they did was for
the interest of the company, they are not chargeable with dolus mains or breach
of trust merely because in promoting the interest of the company they were also
promoting their own, or because they afterwards sold shares at prices which
gave them large profits."
On the facts of this case the concurrent finding is that
the company was in need of funds and, therefore, the issue of further shares
was clearly necessary and is referable to such need. The further motive of
keeping out the Singhania group, who are not yet shareholders but are
strangers, does not prejudicially affect the company or the existing
shareholders and the presence of such further motive cannot vitiate the good
motive of finding the necessary funds for the company. In my judgment it is impossible
to hold that the issue of fresh shares was, in the circumstances, illegal or
void.
Re (iii): Learned counsel for the plaintiffs contends that
both the Courts below were in error in holding that there has been no
contravention of the provisions of Section 105-C of the Indian Companies Act.
That section is in the following terms:—"Where the directors decide to
increase the capital of the company by the issue of further shares such shares
shall be offered to the members in proportion to the existing shares held by
each member (irrespective of class) and such offer shall be made by notice
specifying the number of shares to which the member is entitled, and limiting a
time within which the offer, if not accepted, will be deemed to be declined;
and after the expiration of such time, or on receipt of an intimation from the
member to whom such notice is given that he declines to accept the shares
offered, the driectors may dispose of the same in such manner as they think
most beneficial to the company." This section was added to the Indian
Companies Act in 1936.
The first question is whether the section contemplates
increase of capital above the authorised limit, or only below the authorised
limit. Learned Attorney-General appearing for the company urges that the words
"further shares" must be read in conjunction with the words
"decide to increase the capital of the company" and, so read, must
mean shares which are issued for the purpose of increasing the capital beyond
the authorised capital. He contends that Section 105-C has no application to
this case. Section 50 deals with, among other things, alteration of the
conditions of the memorandum of association of the company by increasing its
share capital by the issue of new shares. The very idea of alteration of the
memorandum by the issue of new shares clearly indicates that it contemplates an
increase of the share capital above the authorised capital with which the
company got itself registered. This increase can only be done by the company in
a general meeting as provided in sub-section (2) of Section 50. This increase
above the authorised limit cannot possibly be done by the directors on their
own responsibility. Section 105-C, however, speaks of increase of capital by
the issue of further shares. The words used are capital and not share capital
and further shares and not new shares. It speaks of increase by the directors.
Therefore, the section only contemplates such increase of capital as is within
the competence of the directors to decide upon. It clearly follows from this
that the section is intended to cover a case where the directors decide to
increase the capital by issuing further shares within the authorised limit, for
it is only within that limit that the directors can decide to issue further shares,
unless they are precluded from doing even that by the regulations of the
company. It is said that Section 105C becomes applicable after the company in a
general meeting has decided upon altering its memorandum by increasing its
share capital by issuing new shares. If the company at a general meeting has
decided upon the increase of its share capital by the issue of new shares, then
it is wholly inappropriate to talk of the directors deciding to increase
capital, because the increase has already been decided upon by the company
itself. Further, after the company has at a general meeting decided to increase
its share capital by the issue of new shares the increased capital becomes its
authorised capital and then if the directors under Section 105C decide to
increase the capital by the issue of further shares, then this decision is
nothing more than a decision to raise capital within the newly authorised
limit. Finally, if Section 105C were to be held applicable to the case of an
increase of capital above the authorised limit then such construction will lead
to anomalous reults so far as the companies which have adopted Table A, for the
section is not consonant with Regulation 42 of Table A which, as will be shown
hereafter applies to increase of capital beyond the authorised limit. If the
Legislature intended that Section 105C should apply to all companies in the
matter of increase of capital above the authorised limit, then the simplest
thing would have been to make Regulation 42 a complusory regulation instead of
introducing a section which in its terms differs from Regulation 42 and which
therefore makes the position of companies which have adopted Table A anomalous.
It appears to me, therefore, for reasons stated above, that Section 105C
becomes applicable only when the directors decide to increase capital within
the authorised limit by the issue of further shares. In this view of the matter
that section is clearly applicable to the facts of this case.
The next question is whether the directors have, in the matter
of issuing and offering further shares in the present case, been guilty of any
contravention of the provisions of this section. Learned counsel for the
plaintiffs contends that they have, because they have not offered the whole lot
of shares to the shareholders in proportion to the existing shares held by
them. It is pointed out that although the directors decided to issue 4,596
further shares they have only offered 4 shares to every 5 shares held by the
shareholders which works out at 4,323 1/5 shares which leaves 272 4/5 shares in
the hands of the directors which they have reserved power unto themselves to
dispose of in such manner as they think fit. Learned Attorney-General appearing
for the company submits:
(a) That
Section 105C should be construed in the light of Regulation 42 in Table A of
the Indian Companies Act, 1913;
(b) That in
order to prevent absurdity and to give business efficacy to the section, the
words "as nearly as circumstances admit" should be read into the
section; and
(c) That in
any event the directors have not contravened the provisions of the section even
if the same be literally construed.
Each of these points requires serious consideration.
As to the first point it should be remembered that Section
105C was introduced in the Act only in 1936. There is no counterpart of it in
the English Act even now. Prior to 1936 there was no check on the powers of the
directors to issue blocks of shares, within the authorised limit, to themselves
or to their nominees, unless their powers were circumscribed by the articles of
association. One of the mischiefs of the managing agency system which prevails
in this country was that the managing agents, who usually dominated the board
of directors, could, to secure their own position, induce the board to issue
blocks of preference shares to the managing agents or their nominees. To check
this mischief Section 105C was introduced in the Indian Act in 1936. As regards
the increase of capital beyond the authorised limit it could only be done by
the company. The shareholders could, while sanctioning such increase, protect
themselves by giving special directions to the directors as to the mode of
disposal of the new shares. In the model regulations set forth in Table A of
the 1882 Act under the heading "Increase of Capital" are grouped 3
regulations, 26 to 28. Regulation 27 was in the following terms:
"(27) Subject to any directions to the contrary that
may be given by the meeting that sanctions the increase of capital, all new
shares shall be offered to the members in proportion to the existing shares
held by them, and such offer shall be made by notice specifying the number of
shares to which the member is entitled, and limiting a time within which the
offer, if not accepted, will be deemed to be declined, and after the expiration
of such time, or on the receipt of an intimation from the member to whom such
notice is given that he declines to accept the shares offered, the directors
may dispose of the same in such manner as they think most beneficial to the
company."
In Table A of our present Act under the heading
"Alteration of Capital" are to be found 3 corresponding regulations,
41 to 43. Regulation 42 is as follows:—
"42. Subject to any direction to the contrary that may
be given by the resolution sanctioning the increase of share capital, all new
shares shall, before issue, be offered to such persons as at the date of the
offer are entitled to receive notices from the company of general meetings in
proportion, as nearly as the circumstances admit, to the amount of the existing
shares to which they are entitled. The offer shall be made by notice specifying
the number of shares offered, and limiting a time within which the offer, if
not accepted, will be deemed to be declined, and after the expiration of that
time, or on the receipt of an intimation from the person to whom the offer is
made that he declines to accept the shares offered, the directors may dispose
of the same in such manner as they think most beneficial to the company. The directors may likewise so
dispose of any new shares which (by reason of the ratio which the new shares
bear to shares held by persons, entitled to an offer of new shares) cannot, in
the opinion of the directors, be conveniently offered under this article."
The words underlined are new and are not to be found in
Regulation 27 of Table A of the 1882 Act. The Scheme of the 1882 Act. as of our
present Act, and the language used in the two regulations quoted above clearly
indicate, to my mind, that they deal with that kind of increase of share
capital which involves an alteration of the conditions of the memorandum which
the company alone can do by issuing new shares. These regulations do not
purport to deal with increase of capital which is within the competency of the
directors to decide upon. In that kind of increase of capital beyond the
authorised limits these regulations give the directors certain latitude,
subject, of course, to any directions to the contrary that may be given by the
resolution of the shareholders in general meeting sanctioning such increase.
The only difference between Regulation 27 of 1882 and Regulation 43 of our
present Act is that under the last mentioned regulation, in the absence of any
direction to the contrary, the discretion of the directors has been widened by
the introduction of the words underlined above. This company was incorporated
in 1908 under the Act of 1882. It did not adopt the Regulations of Table A of
the 1882 Act but Article 45 of its Articles of Association proceeds more or
less on the lines of Regulation 27 of Table A of the 1882 Act. The discretion
given to the directors under Article 45 is, therefore, obviously narrower than
that left to the directors under Regulation 42 of Table A of the present Act.
Then came Section 105-C in 1936. As already pointed out, that section deals
with increase of capital within the authorised limit which the directors can
decide upon without reference to the shareholders in a general meeting of the
company. The Legislature had before it both regulation 27 of Table A of 1882
and Regulation 42 of Table A of the Act of 1913. It chose to adopt the language
of Regulation 27 in preference to that of Regulation 42. The absence in Section
105-C of the words I have underlined in Regulation 42 cannot but be regarded as
deliberate. And I can conceive of very good reasons for this departure. In the
case of increase beyond the authorised limit, that can be done only by the
company in general meeting and the shareholders can protect themselves by
giving directions to the contrary and, therefore, subject to such directions a
wider latitude may safely be given to the directors. But in the case of
increase of capital within the authorised limit which the directors may do
without reference to the shareholders the Legislature did not think it safe to
leave an uncontrolled discretion to the directors. The mischief sought, to be
remedied required this curtailing of the directors' discretion. In my judgment
it is impossible to construe Section 105-C in the light of Regulation 42 for
several reasons. Regulation 42 and Section 105-C do not cover the same field
and cannot be said to be in pari materia. The omission of the underlined words
was obviously deliberate. The difference in the language of the two provisions
in the same statute cannot be overlooked as merely accidental. And lastly the
reading of these words of Regulation 42 in Section 105-C will frustrate what I
conceive to be the underlying reason for the introduction of the section. In my
judgment the first point urged by the learned Attorney-General which found
favour with the Courts below cannot be accepted.
The second point urged by the learned Attorney-General is
founded on the supposed necessity of introducing the words "as nearly as
the circumstances admit" to avoid the absurdity which may flow from a
literal construction of Section 105-C. It must be remembered that the cardinal
rule of interpretation of statutes is to construe its provisions literally and
grammatically giving the words their ordinary and natural meaning. It is only
when such a construction leads to an obvious absurdity which the Legislature
cannot be supposed to have intended that the Court in interpreting the section
may introduce words to give effect to what it conceives to be the true
intention of the Legislature. It is not any and every inconvenience that
justifies adoption of this extreme rule of construction. The section literally
construed is quite intelligible and may easily be applied to many cases where
the further shares issued bear a uniform and round proportion. Merely because a
literal construction of the section leads to inconvenient result in a
particular case cannot, in my opinion, justify the application of such a
drastic rule of construction as is urged by the Attorney-General. Even in this
case there would have been no inconvenience if the directors decided for the
issue of 4,053 shares which could have been offered in the proportion of 3
shares to every 4 shares held by each shareholder. It is true that ordinarily
it is for the directors to judge as to the exact amount of capital needed by
the company but in arriving at their decision they cannot overlook the
limitations put upon their power by the section with respect to the proportion
in which the further shares are to be offered by them to the shareholders.
Further, the supposed inconvenience can be easily avoided by a reference to the
shareholders in a general meeting by asking them to increase the share capital
beyond the authorised limit to such an amount as would permit proportionate
disposal of the further and new shares. In my opinion there is not sufficient
force in the contention which should induce the Court to depart from the
ordinary and golden rule of interpretation I have mentioned above.
The last point urged by the learned Attorney-General
appears to me to be of substance. On a strictly literal construction of the
section the directors must perforce offer all the further shares to the
shareholders in proportion to their respective holdings. Section 105C comes
into operation after the directors have decided to issue further shares. The
section does not in terms provide that such offer must be made all at once or
at any particular point of time and I see no reason to import any such
requirement in the section. The underlying object of the section is to effect
equitable distribution of the further shares. Here the shares have been offered
in the proportion of 4 shares to every 5 shares. There can be no suggestion of
favouritism in this offer. Every shareholder will get his proportion if he so
desires. The majority will remain the majority if every one takes up the shares
offered to him. It is true that 272 4/5 shares remain in hand. At best although
issued they have not been offered to anyone. I do not agree that under clause 8
of the directors' resolution the directors can dispose of those 272 4/5 shares
in any manner they please before offering them proportionately to the existing
shareholders. That clause, on a true construction of the resolution as a whole,
covers only those shares which have been actually issued but have not been
applied for. In point of fact the directors have not yet allotted any of these
272 4/5 shares. If and when the directors allot these shares otherwise than in
due course of law, i.e., without offering them to the shareholders, the
shareholders will then have cause for complaint and may then come to Court for
redress. It is said that 272 4/5 shares cannot in future be offered to so many
shareholders in a reasonable proportion. If it cannot be done, these odd shares
will remain in hand until the company at a general meeting decide to increase
the share capital by issuing new shares and then these odd shares together with
new shares will be easily capable of being offered to the shareholders
proportionately. These special considerations which arise in the case of this
company by reason of its own peculiar circumstances cannot, in my opinion,
affect or alter the meaning and effect of the section. From all that I can see,
upto the present time, there has been no contravention of the provisions of
Section 105-C. In my view the directors have substantially complied with the
requirements of the section and the plaintiffs can have no grievance. They
rushed to Court prematurely.
For the reasons stated above, I am clearly of opinion that
the conclusions of the Courts below were right and no ground has been made out
for interfering with the same. The result, therefore, is that this appeal is
dismissed with costs.
Mukherjea, J.—I agree
that this appeal should be dismissed and I concur substantially in the reasons
which have been given by my learned brother Mr. Justice Das in his judgment.
[1931] 1
Comp Cas 39 (MAD.)
Liquidator of the City Hygienic
Milk Supply Co. Ltd.
v.
Official Assignee of Madras
SIR VEPA RAMESAM AND CORNISH, JJ.
JANUARY 17, 1930
S. Varadachariar, T.V. Ramamurthi and K.S. Sankara Aiyar, for the appellant.
A. Viswanatha Aiyar and A. Ramaswami Aiyar, for the respondent.
Ramesam, J.—This is an appeal against an order of our brother Beasley, J., as he then was, dismissing an application of the Official Liquidator of the City Hygienic Milk Company, Limited, under s. 235 of the Indian Companies Act for an order compelling the directors of the company to pay certain amounts by way of compensation in respect of their acts of misfeasance, etc, Two points were raised before the learned Judge and both were decided against the appellant. The Official Liquidator appeals.
In appeal the two points that arise are: (1) whether directors of companies under the Indian Companies Act are trustees for the purpose of s. 10 of the Limitation Act? and (2) if they are not trustees, from what date does limitation run?
Taking up the first point, it is now clear that even in England in spite of occasional use of loose expressions to the contrary, it is now settled that directors of companies are not trustees. In In re Forest of Dean Coal Mining Company. Jessel, M.R., said at page 451: "Directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called managing partners…………"and at page 453 : "They are no doubt trustees of assets which have come into their hands, or, which are under their control, but they are not trustees of a debt due to the company. "In Fliteroft's Case, Exchange Banking Company, In re, Bacon, V. C., no doubt said: "That the relationship of trustees and cestui que trust subsists between the director of joint stock companies and the shareholders, I do not entertain the slightest doubt. "But this statement is inconsistent with the remarkes of Lords Justices in the Court of Appeal and with later special judicial opinions. On appeal in the same case, Jessel, M.R., said: "If directors who are quasi trustees for the company," etc., Brett, L. J., said: "They are trustees for the company not for the individual shareholders." But even this statement is too wide. Cotton, L.J., said: "They have misapplied funds as to which they stood in the position of trustees." In In re Faure Electric Accumulator Company, Kay, L.J., says; "They certainly are not trustees in the sense of those words as used with reference to an instrument of trust, such as a marriage settlement or a Will. One obvious distinction is that the property of the company is not legally vested in them, "etc. In In re Lands Allotment Company, Kay, L.J., says at page 639: "As directors they are not trustees at all. They are only trustees qua the particular property which is put into their hands or under their control," etc. Lindley, L.J., says: "Although directors are not properly speaking trustees," etc. In In re City Equitable Fire Insurance Company. Ltd., Romer, J., observes, "To say that directors are trustees is a wholly misleading statement." It is unnecessary to refer to English decisions at greater length, for all that we are concerned with is whether they are trustees for the purpose of s. 10 of the Limitation Act.
In Kathiawar Trading Company v. Virchand Dipchand, it was held by Sargent, C.J., and Bayley, J., that directors of companies are not trustees in whom the property of the companies has become vested in trust for any specific purpose. I entirely agree with this decision. It is contended that the purposes of the company are specific purposes within the meaning of the section. The purposes of the company are too wide and far from being specific; one would say they are very general purposes and even then it is doubtful whether it can be said that the property of the company is vested in the directors. Two decisions have been referred to by the learned Advocate for the appellant as somewhat weakening the decision in Kathiawar Trading Company v. Virchand Dipchand. These are Kishtappa Chetty v. Lakshmi Ammal and Pachaiyappa Cheiti v. Sivakami Ammal. I have nothing to say as to the actual decisions in these cases but I think that the statement of Schwabe, C.J., in the former of these cases, namely, wherever there is control over money there is an express trust, a statement probably based upon the observations of Lord Esher, M.R., in Soar v. Ashwell, must be understood in the light of the other judgments of the Court of Appeal, in that case, which show that "Control" (in Lord Esher's judgment) must be regarded as synonymous with vesting. As to the decision in Pachaiyappa Chetti v. Sivakami Ammal, the facts are very plain and there is an express trust. I do not think that the remarks in these decisions affect the decision in Kathiawar Trading Company v. Virchand Dipchand, with which I entirely agree. It follows, therefore, that directors can plead limitation.
Coming now to the second point, the question really turns upon whether entirely new rights with a new cause of action arise on the winding up of a company. That for certain purposes new rights may be conferred by the winding-up of a company, there can be no doubt. One such wellknown is the liability to pay calls as a contributory. Both English and Indian authorities are very clear on this matter but it does not follow from this that the right of a liquidator under s. 235 is a case of a new right accruing by reason of the winding-up. The corresponding section of the English Act of 1862 is s. 165 and it has been held by the House of Lords in Cavendish Bentinck v. Fenn, that that section creates no new rights but only provides a summary and efficient remedy. So also in In re City Equitable Fire Insurance Company, Ltd., case, where Pollock, M.R., said:
"that section deals only with procedure and does not give any new rights. It provides a summary mode of enforcing existing rights; and I think that is abundantly shown by the In re Canadian Land Re-claiming and Colonizing Company, Coventry and Dixons case, etc.
In the last case James, L.J., observed:
"I am of opinion that that section does not create any knew liability or any new right, but only provides a summary mode of enforcing rights which must otherwise have been enforced by the ordinary procedure of the Courts."
So far as contributories are concerned, we have got a specific section fixing the time when the amount is payable. Section 159 says that a contributory shall pay at the time when calls are made for enforcing liability. Naturally limitation runs from the time when calls are so made. We have no corresponding section in the case of liability for misfeasance under s. 235. On this matter two decisions of two Indian High Courts are in conflict—the decision in In the matter of the Union Bank, Allahabad, Ltd., and the decision in Bhim Singh v. Basheshar Nath Goela, which follows an earlier decision of the Punjab High Court. Agreeing with the learned trial Judge, I think we should prefer to follow the decision of the Punjab High Court.
If the cause of action arises from the time when the misfeasance was committed, it is admitted that the application is barred whether Art. 36 or Art. 120 applies. It is unnecessary to consider that question in this case.
Mr. V.K. Thiruvenkatachariar appearing for one of the directors argued that it is not all misfeasance for which directors may be liable under s. 235. This might be so: but it is unnecessary to consider this point in this appeal.
The appeal fails and is dismissed with costs.
The learned Judge has given leave to the Official Liquidator to appeal and has authorized him to incur the expenses of the appeals from the assets of the company and we need not pass any further order as we agree with the discretion exercised by him. There will be one set of costs to the respondents.
Cornish, J.—Section 10 of the Limitation Act is founded upon the equitable doctrine explained by Bowen, L.J., in Soar v. Ashwell, that, "Time (by analogy to the Statute) is no bar in the case of an express trust, but that it will be a bar in the case of a constructive trust."
In my Judgment it is settled by Kathiawar Trading Company v. Virchand Dipchand, and the English authorities there cited that a director of joint stock company is not, in the language of s. 10, "a person in whom property has become vested in trust for any specific purpose."
And a series of later English authorities confirms this view of the position of a director. In Flitcrojts case Jessel, M. R. described directors as quasi-trustees. In Soar v. Ashwell16, Kay, L.J., observed:
"Generally speaking, a person who is not an appointed trustee and whom it is sought to affect with a trust by reason of his conduct is not a trustee at all, although he may be liable as if he were ; which is commonly expressed by saying that he is not an express but a constructive trustee."
And in In re Lands Allotment Co., Lindley, L.J., said :
"Although directors are not, properly speaking, trustees yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control; and ever since joint stock companies were invented, directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees."
Lord Justice Kay in In re Faure Electric Accumulator Co., has pointed out an obvious distinction between directors and express trustees, viz., that the property of the company is not legally vested in the directors. That the property of the company does not become 'vested' in the directors by reason of such property being under their control is also made clear by the authorities referred to in Kathiawar Trading Company v. Virchand Dipchand. The dictum of Schwabe, C.J., in Kishtappa Chetti v. Lakshmi Ammal, that the word 'vested' in s. 10 of the Limitation Act "does not mean anything more than properly having control of the property" is opposed to those authorities and appears to have been expressed without those authorities having been brought to his notice. Nor can it be said that the entrustment of the company's moneys to the directors for the general purpose of carrying on the business of the company is an entrustment for a specific purpose within the section. In Khaw Sim Teh v. Chush Hooi Guoh Neoh, their Lordships of the Judicial Committee discussing a Limitation Ordinance similar in terms to the language of s. 10 of the Indian Act stated:
"A specific purpose, within the meaning of s. 10, must be a purpose that is either actually and specifically defined in the terms of the will or the settlement itself or a purpose which, from the specified terms, can be certainly affirmed."
It is clear upon these authorities that the directors in the matter before us cannot be regarded as express trustees and, if they are not express trustees, s. 10 of the Limitation Act does not operate to deprive them of their right to rely on any available provision or Article in the Act as a bar to the liquidator's claim.
The question then is, whether a bar is furnished either by Art. 36 or Art. 120 of the Act, these being the only Articles which are suggested as having any application to the case. Admittedly, if the starting point of limitation is the alleged acts of misfeasance or breach of trust by the directors, the remedy would be barred whichever Article governed it. But it has been contended by the learned Counsel for the liquidator that the winding-up order is the starting point of the liquidator's right of applying to the Court under s. 235 (1) of the Indian Companies Act, VII of 1913. Reliance for this proposition is placed on In the matter of the Union Bank, Allahabad, Limited, where this view prevailed, and the reasons for it are given by Mukerjee, J., at page 693 of the judgment as follows:
"The claim is by the Liquidator who had no existence at the dates on which the amounts claimed are alleged to have been mis-spent. If the liquidator is given permission by the law to claim these moneys, certainly it would be unfair and unjust to say that the claim became time-barred before he came into existence."
But, with all
respect, it may be pointed out that the right of application to the Court given
by s. 235 is not confined to the liquidator, it is given to a creditor and to
contributories. And if creditors of a company or the shareholders, who are
expected to be alive to their interest, choose to allow remedies which might be
open to them in respect of losses attributable to misfeasance by the directors
to become time-barred, it seems to me that neither fairness nor justice
requires that after the company has been ordered to be wound up the liquidator
shall have the right to enforce those remedies against the directors for the
benefit of the creditors and contributories. It is, however, unprofitable to
speculate upon the reasonableness of this particular aspect of s. 235, because
it has been most authoritatively settled that the corresponding provision in s.
215 of the English Act, the Companies Consolidation Act, 1908, is a procedure
section only and gives no new rights: See In re City Equitable Fire Insurance
Co.. Sir
Earnest Pollock, M.R., says with reference to this section: "I desire to
say, though this is not the first time that it has been said, that that section
deals only with procedure and does not give any new rights. It provides a
summary mode of enforcing existing rights." To the same effect is the
judgment of Sargent, L.J., at page 527. This ruling is decisive of the
question, and has been regarded as conclusive of it by a Bench of the
I agree to the order of costs passed by my learned brother.
v.
Venire Industries Ltd.
Y.K.
Sabharwal, C.J.
and S.H. Kapadia, J.
Appeal
No. 1038 of 1999
NOtice
of motion No. 2696 of 1999
Suit
No. 5010 of 1999
Section 81 of the Companies Act, 1956 - Further
issue of capital - Rights issue - Defendant No. 1 company decided to increase
paid-up share capital by issue of equity right shares on pro rata basis to
shareholders - After expiry of time specified in offer letter, defendant No. 1
company decided to allot right shares of plaintiff’s quota to defendant No. 2
- Plaintiff filed suit against action of defendant company and interim relief
to restrain defendants from taking any steps pursuant to resolutions passed in
respect of allotment of right shares was sought - Facts revealed that
defendants made repeated requests welcoming plaintiff company to put in funds
in proportion of their shareholding by contributing to rights issue but at no
stage plaintiff was interested in contributing any amount in defendant No. 1
company - Whether it could be said that intentions of plaintiff were not honest
and further since suit was filed two years after allotment of right issue,
question of injuncting defendants from taking any steps pursuant to resolutions
in respect of allotment of rights issue did not arise - Held, yes
Section 252, read with section 291, of the
Companies Act, 1956 read with Order 39, rules 1 and 2 of the Code of Civil
Procedure, 1908 - Directors - Number of - Plaintiff No. 2 was Chairman of
plaintiff No. 1 company and defendant No. 2 was Chairman and Managing Director
of defendant No. 1 company - Memorandum of Understanding was executed between
plaintiff No. 2 and defendant No. 2, which, inter alia, provided that till
plaintiff company held share capital in defendant company of face value of Rs.
10 lakhs, plaintiff company would continue to have a representative on board of
directors of defendant company and that number of directors on board of directors
of defendant company would not exceed three - In board meeting defendant
company proposed to induct defendant No. 3 as fourth director - Banking upon
MoU, plaintiff, filed suit seeking to restrain defendant from increasing number
of directors - Whether it is impermissible to construe an agreement between
shareholders as a contract binding on company even if company has taken note of
pooling agreement or even if company has acted thereon - Held, yes - Whether
specific performance of pooling agreements between shareholders to vote in
particular manner cannot be extended to denude or sterilise powers of directors
and any such agreement would be unenforceable - Held, yes - Whether pooling
agreement can be between directors regarding their powers as directors - Held,
no - Whether shareholders can infringe upon directors’ fiduciary rights and
duties - Held, no - Whether directors can enter into agreement thereby agreeing
not to increase number of directors in absence of such restriction in Articles
of Association - Held, no - Whether, therefore, Memorandum of Understanding to
extent it provided that number of Directors would not exceed three till
plaintiff company held share capital in defendant company of face value of Rs.
10 lakhs, could not be specifically enforced and in that view question of
restraining defendant Nos. 1 and 2 by issue of interim injunction did not arise
- Held, yes
Plaintiff No. 2 was the Chairman of plaintiff
No. 1 company. The defendant No. 2 was the Chairman and Managing Director of
Defendant No. 1 company which had three directors on its Board of Directors.
Defendant No. 1 was younger brother of plaintiff No. 2. A Memorandum of
Understanding was executed between the two brothers under which the plaintiff
No. 2, his wife and family trust, which held 10,551 shares equivalent to 30 per
cent of the issued capital of defendant company, agreed to transfer, without
any monetary consideration, the said shares in favour of defendant No. 1. The
plaintiff company owned 40 per cent of the issued capital of defendant company.
The Memorandum of Understanding inter alia, provided that till plaintiff
company held share capital in defendant company of the face value of Rs. 10
lakhs, it would continue to have a representative on Board of Director of
defendant company and that the number of Directors on the Board of Directors of
defendant company would not exceed three, out of which two should be the
nominees of defendant No. 2 and one would always be the nominee of the
plaintiff company.
The difference between the two brothers
started when defendant No. 1 company in
its meeting decided to increase the paid-up capital by issue of equity
rights shares on pro rata basis to the shareholders. It was resolved that,
after the expiry of time specified in the offer letter or on receipt of earlier
intimation from the person to whom such notice was given that he declined to
accept the shares offered, the Board of Directors might dispose them of in such
manner as they thought most beneficial to the company. According to the
plaintiffs, the offer of allotment of the rights shares was not sent
to/received by them. That had however been disputed by the defendents.
Defendant No. 1 company decided to allot rights shares of the quota of the
plaintiff company to the defendant No. 2 after expiry of stipulated time. In
further meeting the defendant No. 1 company decided to issue second rights
issue which was objected by the plaintiffs on the ground that the disputes
relating to first rights issue had not been resolved. In the board meeting, the
defendant company, inter alia, proposed to induct defendant No. 3 as the fourth
director. This was objected to on the ground that the proposed appointment of
additional director was contrary to Memorandum of Understanding. The plaintiffs
filed suit seeking interim relief by restraining defendants from taking any
steps pursuant to the resolution passed in respect of the allotment of rights
shares and restraining the appointment of any Additional Director on the Board
of Directors of defendant company.
As regards rights
issue :
On perusal of letters exchanged between the
two brothers it was difficult to accept the contention that the Letter of Offer
was not sent to the plaintiff company. At no stage, the plaintiffs were
interested in contributing any amount in defendant No. 1 company. In none of
the letters it was stated that the plaintiff company was interested in
subscribing to the rights shares. What the plaintiffs had been stating in the
correspondence and that too in the guarded language was that they would
consider the offer of allotment of rights shares. In the Letter of Offer which
defendant No. 1 said was sent to the plaintiff, it had also been stated that
if offer was not accepted, the first Defendant-company would consider grant of
additional shares to others. There was no other applicant, except defendant No.
2 who had sought allotment of additional shares.
If the object of defendants was to keep
plaintiffs in dark, they would not have written letters to plaintiffs, which
were all admitted and had rather been acknowledged by plaintiff. Repeated
requests were made welcoming plaintiff company to put in funds in proportion of
their shareholding by contributing to the rights issue. If the intentions of
defendant Nos. 1 and 2 were not honest, they would not have sent the type of
letters actually sent. Further, on these facts, it was also not possible to
accept the contention that defendant No. 2 was an interested Director and there
was no quorum for the meeting as urged on behalf of the plaintiffs. Further,
the allotment of the first rights issue was made in August, 1997. The present
suit was filed two years later. The question of injuncting the defendants from
taking any steps pursuant to or in implementation of or in furtherance of the
resolution in respect of the allotment of rights issue did not arise. Defendant
No. 2 did not deserve to be restrained from exercising his rights on the basis
of the rights shares. At this stage, the said allotments could not be held to
be void.
As regards resolution
to increase number of directors :
Defendant No. 1 was a closely-held family
company, though some outsiders, family friends and relatives had also a small
shareholding. There was no restriction in the Articles of Association of
defendant No. 1 of the type contemplated by clause 8 of the Memorandum of
Understanding regarding number of Directors. It had been provided in the
Articles of Association that until otherwise determined by a general meeting,
the number of Directors would be not less than three and not more than twelve.
It had also been provided that the Board would have power at any time and from
time to time to appoint any person as a Director as an addition to the Board
but the total number of directors would not any time exceed the maximum number
fixed by the Articles. Section 252 of the of the Companies Act, inter alia,
provides that every public company shall have at least three Directors. There
had been no amendment of Articles of Association on the aspect of number of
Directors. But for clause 8 of the MoU the board of directors had the power to
appoint any person as a Director as provided in the Articles of Association.
The question was whether a shareholder in his
capacity as a Director can be injuncted or not to vote for increasing the
number of Directors in view of terms of agreement but in absence of any such
restriction in the Articles of Association. Regarding pooling agreement, it may
be noted that it is an agreement between two or more shareholders which
generally provides that in exercising any voting rights, the shares held by the
shareholders shall be voted as provided therein; it is a contract to the effect
that the shares held by them shall be voted as one single unit. The
shareholders bind one another to vote as they mutually agree. In a pooling
agreement, each shareholder retains sole ownership of shares binding himself
only to vote for a specific person or in a certain way. These agreements are
enforceable because the right to vote is a proprietary right. The right to vote
may be aided and effecutated by a contract. Generally, pooling agreements are
thought of in relation to control of private companies and smaller public
companies. A pooling agreement may be utilised in connection with the election
of Directors and shareholders’ resolutions where shareholders have a right to
vote. However, a pooling agreement cannot be used to supersede the statutory
rights given to the Board of Directors to manage the company, the underlying
reason being that the shareholders cannot achieve by pooling agreement that which
is prohibited to them, if they are voting individually. Therefore, the power of
shareholders to unite is not extended to contracts, whereby restrictions are
placed on the powers of Directors to manage the business of the Corporation. It
is for this reason that a pooling agreement cannot be between Directors
regarding their powers as Directors. There is vast difference in principle
between the case of a shareholder binding himself by such a contract and the
Director of the company undertaking such an obligation by compromising his
fiduciary status. The shareholder is dealing with his own property. He is
entitled to consider his own interests, without regard to interests of other
shareholders. However, Directors are fiduciaries of the company and the shareholders.
It is their duty to do what they consider best in the interests of the company.
They cannot abdicate their independent judgment by entering into pooling
agreements. The company works through two main organs, viz., - the shareholders
and the Board of Directors.
In fact, in U.S.A. the law has made further
advances. The American Courts have accepted that Directors are fiduciaries of
the various constituencies in the Corporation. With globalisation, the
concepts of merger and amalgamation have come into picture. With the companies
issuing shares to employees and workers and also to set of creditors, the
American Courts have accepted that in the company there are various
constituencies like shareholders’ constituency, workers’ constituency,
creditors’ constituency etc. It is clear that Directors shall not only act
exclusively in the interests of shareholders or with reference to stock prices,
but shall also be obliged to charter a course for the company which is in its
best interest without regard to fixed investment horizon.
Applying the aforesaid principle of fixed
investment horizon, it would be noticed that the Memorandum of Understanding
was entered into essentially to favour a fixed investment pattern. It was to
protect the family interest in the event of division of the shareholding. It
was never contemplated that the company would do well and would require
infusion of capital. If this was the purpose, for which the Memorandum of
Understanding was entered into, and if this object was required to be kept in
mind, then, it was clear that the Memorandum of Understanding, which imposed a
ban on the increase on the number of Directors for all times, is likely to
denude the powers of the Board of Directors and may cause sterilisation of
Directors, a terminology used in America. It is for this reason that the
American Courts have taken the view that the pooling agreements, which are
based on fixed investment objectives, should not be made enforceable if such
agreements come in the way of Directors’ decision to charter a course which
favours expansion of the company. It is also because the Directors should not
only look to the shareholders’ interest or to maximise the shareholders’ value
in the context of a takeover, but it is their duty to make the Corporation
progressive. This approach is also very necessary because it encourages the
growth of the company which is vital for the economic progress of the company.
Moreover, the various authorities indicate that the pooling agreements are
short-term measures, viz., up to the next Annual General Meeting. They are
never meant to operate in perpetuity. They are essentially meant to protect
the proprietary interest of the shareholders. The Courts have been slow in
granting enforcement of such agreement. An agreement between shareholders
cannot be construed to be a contract binding on the company even if the company
has taken note of the pooling agreement or even if the company has acted
thereon and, on this basis, the English Courts have denied specific performance
of such agreements. Even if the Articles provides that the Directors shall give
effect to the pooling agreement between the shareholders, still such an
agreement shall not be construed as part of the Articles and acts performed
pursuant to such an agreement cannot be ratified subsequently. Even if such an
agreement is treated as being part of the Articles, still it would not result
in a binding contract qua the company.
It is thus clear that the specific performance
of pooling agreements between shareholders to vote in a particular manner
cannot be extended to denude or sterilise the powers of directors and any such
agreement would be unenforceable. Applying the aforesaid propositions to the
instant case, it would be noticed that the company was in need to increase the
capital. There was also need for professionalisation, but it would be deprived
of it despite the fact that there was no such restriction in the Articles of
Association. It was on the basis of clause 8 of the Memorandum of
Understanding. The curtailment of the powers of Director by enforcement of such
a clause would not be permissible. Clause 8 would result in curtailment of the
fiduciary rights and duties of the Directors. The shareholders could not
infringe upon the Director’s fiduciary rights and duties. Even Directors could
not enter into an agreement, thereby agreeing not to increase the number of
Directors when there was no such restriction in the Articles of Association.
The shareholders could not dictate the terms to the Directors, except by
amendment of Articles of Association or by removal of Directors. The agreement
infringed upon the right of the first Defendant to have more number of
Directors, in the interests of the company. The grant of interim injunction
would amount to stultifying management of the company. For the aforesaid
reasons, clause 8 of the Memorandum of Understanding, to the extent it
provided that the number of Directors would not exceed three till the plaintiff
company held share capital in the company of the face value of Rs. 10 lakhs,
could not be specifically enforced and, in this view, the question of
restraining defendant Nos. 1 and 2 by issue of intermin injunction did not
arise.
Ramshankar Prasad v. Sindri Iron Foundry (P.)
Ltd. AIR [1996] (Cal.) 512, Firestone Tyre & Rubber Co. v. Synthetics &
Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom.), V.B. Rangaraj v. V.B. Gopala
Krishnan [1992] 73 Comp. Cas. 201 (SC), Shanti Prasad Jain v. Kalinga Tubes
Ltd. [1965] 35 Comp. Cas. 351 (SC), Hickman v. Kent Marsh Shipbreakers
Association [1915] 1 CH. D. 881, Browne v. Trinidad 33, Ch. Dn. 1, Ringuet v.
Bergeron [1960] 24 DLR (2d) 449, Boulting v. Association of Cinematograph
Television & Allied Technicians [1963] 2 Q.B. 606, and Aberdeen Railway Co.
v. Blaikie Bros. [1854] 1 Macq. 461.
Sabharwal, CJ. - The appellants are Plaintiffs in the suit.
They are aggrieved by the impugned order dated 17-8-1999 passed by the learned
Single Judge declining to grant to them ad interim order of injunction restraining
the Defendants from taking steps pursuant to or in implementation of the
Resolutions in respect of the allotment of Rights shares and/or from appointing
any Additional Directors on the board of directors of the First
Defendant-company.
2. On
the request of the learned Counsel for the parties, considering the facts and
circumstances of the case, we have taken up for decision the application filed
in the suit for grant of interim injunction, (Notice of Motion No. 2696 of
1999) instead of only considering the question of grant of ad interim injunction.
In order to appreciate the rival contentions, facts, in brief, may be noticed
as follows :—
3. Plaintiff
No. 2 (Kamal K. Singh) is the Chairman of Plaintiff No. 1 company (for short
‘RIL’), Defendant No. 2 (Chetan K. Singh) is the Chairman and Managing Director
of Defendant No. 1 company, which has three Directors on its board of
directors. Defendant No. 3 is sought to be appointed as an Additional Director.
Chetan is younger brother of Kamal. Defendant No. 1 company, which was
originally known as “Rolta Motors Ltd.” (for short ‘RML’) was incorporated on
19-5-1983. Kamal was the Chairman and Chetan was the Director of the said
company. A Memorandum of Understanding (MoU) dated 19-4-1991 was executed
between the two brothers, under which the elder brother Kamal, his wife and
family trust, which held 10551 shares equivalent to 30 per cent of the issued
capital of RML, agreed to transfer, without any monetary consideration, the
said shares in favour of Chetan. RIL owned 40 per cent of the issued capital of
RML. The MoU, inter alia, provides that, till RIL holds share capital in RML of
the face value of Rs. 10 lakhs, it will continue to have a representative on
board of directors of RML and that the number of Directors on the board of
directors of RML shall not exceed three, out of which two shall be the nominees
of younger brother and one shall always be the nominee of RML. The younger
brother shall also procure release of the Guarantees given by the RIL and give
a Counter Guarantee/Indemnity to the Plaintiffs against any claim by the bank.
It also provides that till RIL holds shares of face value of Rs. 10 lakhs, the
younger brother and his family members would not dispose of the shareholding to
any outsider. Further, the younger brother shall also change the name of the
company from RML and use any other name without word ‘Rolta’ and shall also
take steps for shifting the Registered Office of RML from the address of RIL at
Mumbai. The requisite Resolutions were passed and other documents, including
Counter-guarantee/Indemnity Bond and Undertaking were executed in implementation
of the MoU, by Defendant No. 1 and 2. Resultantly, the 30.50 per cent shares of
Kamal were transferred in favour of Chetan.
4. The
Meeting of the board of directors of RML held on 27-8-1992 has noted the
contents of the MoU in the minutes which further record that the Managing
Director, Chetan Singh, stated that the board of directors of RML shall not
have any authority or discretion to change or modify the terms of the MoU,
unless and until such changes or modifications are approved personally by Kamal
Singh. Between 1992 and 1997, one S.L. Baluja was the nominee-Director of RIL
on the board of directors of Defendant No. 1.
5. It
seems that the working of defendant No. 1-company went on smoothly till middle
of 1997. The differences between the two brothers started somewhere in middle
of 1997. Defendant No. 1-company, in its meeting held on 25-6-1997, decided to
increase the paid-up capital from Rs. 50 lakhs to Rs. 100 lakhs by issue of
50,000 equity Rights shares on pro rata basis to the shareholders. In this
meeting, it was, inter alia, decided to offer to RIL 20036 shares on 1 : 1
basis. This meeting was attended by Chetan and his wife. Leave of absence was
granted to S.L. Baluja. It was resolved that, after the expiry of time
specified in the offer letter or on receipt of earlier intimation from the
person to whom such notice is given that he declines to accept the shares offered,
the board of directors may dispose them off in such manner as they think most
beneficial to the company. The correspondence exchanged between the two
brothers after 25-6-1997 has been placed on record. According to the
Plaintiffs, the offer of allotment of the Rights shares was not sent/received
by RIL. That has, however, been strenuously disputed by the Defendants 1 and 2.
Defendant No. 1-company, in Board’s Meeting dated 12-8-1997, which was attended
by Chetan, his wife and Baluja, decided to allot 20036 Rights shares of the
quota of RIL to Chetan. The correspondence exchanged between the two brothers
after 12-8-1997 has also been placed on record. In the Meeting of board of
directors of Defendant No. 1-company dated 4-10-1997, the resignation of Baluja,
nominee-Director was accepted and in his place the appointment of B.I.
Joshipura as nominee-Director of RIL was approved.
6. In
its Meeting dated 5-1-1999, the board of directors of Defendant No. 1 - company
decided to issue fresh rights issue of 62.5 lacs (second Rights issue). This
was objected by Joshipura. The offer of the second Rights issue was received by
RIL. RIL objected the decision to issue this rights issue on the ground that
the disputes relating to the first Rights issue had not been resolved.
7. The
First Defendant-company wrote a letter dated 22-6-1999 to Joshipura that in the
Board Meeting fixed for 26-6-1999, it inter alia, proposed to induct one Dr. S.
Singh - Defendant No. 3 - as the 4th Director. This was protested by Joshipura,
inter alia, on the ground of short notice of the meeting. The First
Defendant-company addressed a letter dated 21-7-1999 to Joshipura recording
that, at the last Board Meeting, Dr. Singh was not taken up as a Director, but,
at the next Board Meeting, he would be so taken. It was objected on the ground
that the proposed appointment of Additional Director was contrary to the MoU,
inasmuch as the MoU contemplates that, till RIL holds share capital of the face
value of Rs. 10 lacs, the number of Directors cannot exceed three. The meeting
of board of directors of Defendant No. 1 was fixed for 11-8-1999 and one of the
items of agenda was appointment of Defendant No. 3 as its Additional Director.
At this stage the present suit was filed. On 10-8-1999, an ex parte ad interim
order was granted restraining defendants 1 and 2 from appointing Defendant No.
3 as a Director on the Board of the First Defendant company. This order was
valid till 17-8-1999, on which date, the impugned order was passed vacating the
order dated 10-8-1999.
8. In
this Appeal and Notice of Motion, pending the decision of the suit, two interim
reliefs are sought by the Plaintiffs.
(1) Restraining the Defendants from taking any steps pursuant to or
in implementation or in furtherance of the Resolutions passed in respect of the
allotment of rights shares and
(2) Restraining the appointment of any Additional Director on the
board of directors of Defendant No. 1 company.
9. In
support of the first relief, the contention of the learned counsel for the
appellants is that the meeting dated 25-6-1997, in which decision was taken to
issue Rights shares, was itself illegal as Baluja, the nominee-Director of RIL
was not given any written notice of the meeting and, thus, section 286 of the
Companies Act, 1956 (‘the Act’) has been violated. The further contention is
that RIL was not sent any Letter of Offer in respect of this issue and the
Letter of Offer alleged to have been sent by Defendant No. 1 company under
Certificate of Posting, was never received by RIL. The Counsel also contends
that other correspondence was always sent through courier and, therefore, it
cannot be believed that the alleged letter of offer was sent by Defendant No.
1-company to RIL. Another contention urged is that there was no quorum for the
meeting of 12-8-1997 when the shares of quota of RIL were allotted in favour of
Chetan. The contention of Mr. Chinoy is
that Chetan was an interested Director, since additional allotment was sought
to be made in his favour, and therefore, he was not entitled to vote and thus there was no quorum.
10. We
have perused various letters exchanged between the two brothers as also other
material on record, including the Letter of Offer which Defendant No. 1 says
was sent to RIL and also the Certificate of Posting. On perusal thereof, we
find it difficult to accept the contention that the Letter of Offer was not
sent to RIL. To our mind, it seems that at no stage, the Plaintiffs were
interested in contributing any amount in Defendant No. 1 company. In none of
the letters, even after 12-8-1997, it was stated that RIL was interested in
subscribing to the Rights shares. What the Plaintiffs have been stating in the
correspondence and that too in the guarded language is that they would consider
the offer of allotment of Rights shares. In the Letter of Offer which defendant
No. 1 says was sent to RIL, it has also been stated that if offer is not
accepted, the First Defendant - Company would consider grant of additional
shares to others. There was no other applicant, except Chetan who had sought
allotment of additional shares. Further, in the plaint, the factum of the
holding of meeting on 25-6-1997 itself was disputed, but that plea was given up
by the learned Counsel for the appellants. Now it has not been disputed that
Baluja had the notice for the meeting of 25-6-1997. Mr. Chinoy contends that no
written notice was sent to him. It is clear from the material on record that
the Defendants were not acting in a clandestine manner. In fact, on the next
date after the meeting, i.e., on 26-6-1997, Chetan wrote a letter to Kamal,
inter alia, stating that it would be good if RIL could subscribe to the shares
and participate in the growth of first defendant company. He also stated that
he would ensure that the shares are not issued to any outsiders and that he had
avoided issue of Rights shares for the last five years, but now it had become
unavoidable. Kamal was thus requested to confirm the willingness of RIL to participate
in the Rights issue. Kamal in terms of his letter dated 2-7-1997 expressed
reservations to the idea of issue of Rights shares and gave other options to
raise capital. Chetan again, by his letter dated 3-7-1997, expressed the need
to raise the liability-free funds and stated that, in case RIL is willing to
put in funds in proportion of its shareholding, it is most welcome and
percentage shareholding would stand at the same rate as of the said date. It
was also stated that as per present Maruti Udyog Ltd. policies, they cannot
issue shares to public, unless the issue is directly for dealership expansion.
11. On
the aforesaid facts and circumstances of the present case, the decision of
Calcutta High Court in Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd. AIR
1966 Cal. 512 on the question of sending of notice under Certificate of Posting
will have no applicability. It is apparent that the conclusion in the said
decision that the notice was never sent and the Certificate of Posting had been
obtained in respect thereof, was arrived at on the facts of that case. As
already noticed, Defendant Nos. 1 and 2 were not acting in a clandestine
manner. If the object of defendants was to keep Plaintiffs in dark, Chetan
would not have written letter dated 26th June and subsequent letters to Kamal,
which are all admitted and have rather been acknowledged by Kamal. Repeated
requests were made welcoming RIL to put in funds in proportion of their
shareholding by contributing to the Rights issue. If the intentions of Defendants
No. 1 and 2 were not honest, they would not have sent the type of letters
acutally sent. Further, on these facts, it is also not possible to accept the
contention that Chetan was an interested Director and there was no quorum for
the meeting as urged on behalf of the Plaintiffs.
12. The
decision of the Bombay High Court in Firestone Tyre & Rubber Co. v.
Synthetics & Chemicals Ltd. [1977] 41 Comp. Cas. 377 has no applicability
to the facts and circumstances of the present case. There was no such conflict
of interests in the case in hand so as to contravene section 300 of the Act.
Further, the allotment of the first Rights issue was made in August, 1997. The
present suit was filed two years later. The question of in- juncting the
Defendants from taking any steps pursuant to or in implementation of or in
furtherance of the Resolutions in respect of the allotment of Rights issue does
not arise. Chetan does not deserve to be restrained from exercising his rights
on the basis of the Rights shares. At this stage, the said allotments cannot be
held to be void.
13. Reverting
now to the second relief, Mr. Chinoy strenuously contends that the appointment
of Additional Director by Defendant No. 1 company is in clear contravention of
clause 8 of the MoU, on the basis of which Kamal, without any monetary
consideration, had transferred his shareholding of about 30% comprising of more
than 10,000 shares in favour of his younger brother Chetan. The learned counsel
further contends that RML is a party to the MoU and has acted on the basis of
the MoU and has also confirmed it. The submission of the learned Counsel is
that the judgment of the Supreme Court in the case of V.B. Rangaraj v. V.B.
Gopalkrishnan [1992] 73 Comp. Cas. 201, on basis whereof the learned Single Judge
declined ad interim relief, has no applicability to the present case. It is
true, as already noticed, clause 8, inter alia, postulates that, till RIL holds
shares in Defendant No. 1 company of the face value of Rs. 10 lakhs, the number
of Directors on its board of directors shall not exceed three. It is not in
dispute that RIL holds shares of the face value of more than Rs. 10 lakhs.
14. At
this stage, we may note that Mr. Kapadia, the learned counsel for the
Defendants/Respondents, has seriously disputed the contention that the
Defendant No. 1 company is a party to the MoU or has acted upon it or confirmed
it and has also seriously disputed the contention that the MoU is a
Shareholders Agreement. Besides it, he has also raised the objection of misjoinder
of causes of action. But, for the present purposes, assuming aforesaid
contentions in favour of plaintiffs, we would examine the matter.
15. The
important question to be determined is about the enforceability of clause 8 of
the MoU to the extent it restricts the power of Directors to increase the
number of Directors of RML from more than three.
16. Now, some
undisputed aspects. Defendant No. 1 is a closely held family company, though
some outsiders, family friends and relatives have also a small shareholding.
There is no restriction in the Articles of Association of Defendant No. 1 of
the Type contemplated by clause 8 of the MoU regarding number of Directors. It
has been provided in the Articles of Association that until otherwise
determined by a General Meeting, the number of directors shall be not less than
three and not more than twelve (Article 113). It has also been provided that
the Board shall have power at any time and from time to time to appoint any
person as a Director as an addition to the Board but the total number of
directors shall not any time exceed the maximum number fixed by the Article
(Article 117). Section 252 of the Act, inter alia, provides that every public
company shall have at least three Directors. There has been no amendment of
Articles of Association on the aspect of number of Directors. But for clause 8,
the board of directors has the power to appoint any person as a Director as
provided in the Articles of Association.
17. The
question is, on aforesaid facts, can Chetan as a Director be restrained from
voting in favour of appointment of an Additional Director.
18. Let
us, first examine V.B. Rangaraj’s case (supra). In that case, the main question
that fell for consideration was whether the shareholders can among themselves
enter into an agreement, which is contrary to or inconsistent with the Articles
of Association of the company. In the said decision, the High Court had held
that the sale of shares by the First Defendant in favour of Defendant Nos. 4 to
6 was invalid being in breach of agreement between two brothers to the effect
that each of the brothers of the family would always continue to hold an equal
number of shares and that if any member in either branch wishes to sell he
would give the first option of the purchase to the members of that branch and
only if the offer is not accepted, shares would be sold to others. In this view
it was held that the plaintiffs and Second Defendant became entitled to
purchase the said shares and the Agreement was binding on the company, which
was bound in law to register the said shares in plaintiff’s name. It was not in
dispute that the Articles of Association of the company were not amended to
bring them in conformity with the agreement between two brothers. In that case
one of the contentions urged was that the agreement was entered into to
maintain the ownership of the company in the family and to ensure that the two
branches of the family had an equal share in the management and profits and
losses of the company and further that there was nothing in the Articles which
prohibits such Agreement and the two branches of the family being parties to
the agreement, it was enforceable against them. Answering the question in
negative, the Supreme Court held that the agreement imposed additional
restrictions on the member’s right of transfer of his shares which were not
stipulated in the Articles and, therefore, were not binding either on the
shareholders or on the company. It was also held that the shares are movable
property and transfer thereof is regulated by the Articles of Association of
the company. Mr. Chinoy pointing out that the only question considered in V.B.
Rangaraj’s case (supra) was about the non-enforceability of the restriction on
the transfer of shares of the company which restriction was not specified in
the articles and thus held by Supreme Court to be not binding on the company or
the shareholders, contends that in the present case, the question is about the
enforceability of clause 8 of MoU against Chetan who under the very MoU was
given shares without any monetary consideration. The Counsel contends that MoU
was like a shareholders agreement providing for voting in a particular manner
which has always been held to be enforceable. Thus, according to Mr. Chinoy,
Rangraj’s case has no applicability to the present case. A little later we will
examine what are shareholders or pooling agreements and their enforceability
and whether enforceability of such agreements can be extended to the present
case which limits or denudes powers of Directors.
19. To
reinforce the proposition that the restriction, on transfer of shares, which
is not specified in the Articles of Association, is not binding either on the
company or on the Shareholders, the earlier decision of the Supreme Court in
Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351, was also
referred to. In Kalinga Tubes, the company was not party to the Agreement,
which, inter alia, provided that the appellant, Shanti Prasad Jain, would be
allotted shares in the company equal to those held by Patnaik and Loganathan
after increasing the share capital of the company, so that the company would
have three groups of shareholders represented by Jain, Patnaik and Loganathan
holding equal number of shares, besides a foreign company and one Rath, who,
between themselves, held shares worth Rs. 4 lacs. Those shareholders, however,
were not parties to the agreement. In the said case, too, the agreement was
followed by certain Resolutions passed by the company by which some of the
terms of the Agreement were carried out. Further, no change was made in the
Articles of Association of the company to bring them in conformity with the
terms of the agreement. It was held by Supreme Court that the agreement was
not binding on the company as the terms thereof were not incorporated in the
Articles of Association. Pointing out that Shanti Prasad Jain’s case (supra)
is one under sections 397 and 398 of the Act dealing with the question of
operation and mismanagement, Mr. Chinoy contends that unlike the present case,
in Shanti Prasad Jain’s (supra) the agreement was between a non-member and two
members of the company and, therefore, that decision has no applicability to
the present case particularly when plaintiffs are seeking enforcement of
agreement against Chetan like any other enforceable shareholders agreement. One
of the basis for denial of relief to Jain in Shanti Prasad Jain’s case (supra)
was absence of stipulation in the Articles of the company. As pointed out by
Mr. Chinoy, it is no doubt true that the reference to Gore - Brown on
Companies, Palmer’s Company Law, Halsbury’s Laws of England and Penningtaon’s
Company Law in V.B. Rangaraj’s case (supra) as also in Shanti Prasad Jain’s
case (supra) was in relation to restriction on transfer of shares when there is
no such restriction incorporated in the Articles of Association for the
proposition that the shareholders’ right of transfer of shares cannot be taken
away, unless so provided in the Articles of Association, and is not with
reference to enforcement of shareholders agreement. In the present case, we are
concerned with the question whether a shareholder in his capacity as a
Director can be injuncted or not to vote for increasing the number of Directors
in view of terms of agreement but in absence of any such restriction in the
Articles of Association.
20. The
argument of Mr. Chinoy is that there is no legal mandate that the company must
have more than three Directors. The only mandate is that the minimum number of
Directors should be three. As per Articles the maximum number could be twelve.
He contends that, in these circumstances, a shareholder Directors can enter
into an agreement stipulating not to exceed the minimum number of three
Directors. According to the learned counsel, those are in the nature of
proprietary rights as opposed to corporate rights and like shareholders or
pooling agreements, such right could be circumscribed by the will of the
shareholders reflected by the Agreement entered into by them.
21. Regarding
pooling agreement, it may be noted that it is an agreement between two or more
shareholders which generally provides that in exercising any voting rights,
the shares held by the shareholders shall be voted as provided therein; it is a
contract to the effect that the shares held by them shall be voted as one
single unit. The shareholders bind one another to vote as they mutually agree.
In a pooling agreement, each shareholder retains sole ownership of shares
binding himself only to vote for a specific person or in a certain way. These
agreements are enforceable because the right to vote is a proprietary right.
The right to vote may be guided and effectuated by a contract. Generally,
pooling agreements are thought of in relation to control of private companies
and smaller public companies. (See Law Quarterly Review, Vol. 94, p. 561).
22. A
pooling agreement may be utilised in connection with the election of Directors
and shareholders’ Resolutions where shareholders have a right to vote.
However, a pooling agreement cannot be used to supersede the statutory rights
given to the board of directors to manage the company, the underlying reason
being that the shareholders cannot achieve by pooling agreement that which is
prohibited to them, if they are voting individually. Therefore, the power of
shareholders to unite is not extended to contracts, whereby restrictions are
placed on the powers of Directors to manage the business of the corporation. It
is for this reason that a pooling agreement cannot be between Directors
regarding their powers as Directors. There is vast difference in principle
between the case of a shareholder binding himself by such a contract and the
Director of the company undertaking such an obligation by compromising his
fiduciary status. The shareholder is dealing with his own property. He is
entitled to consider his own interests, without regard to interests of other
shareholders. However, Directors are fiduciaries of the company and the
shareholders. It is their duty to do what they consider best in the interests
of the company. They cannot abdicate their independent judgment by entering
into pooling agreements. The company works through two main organs, viz. the
shareholders and the Board of Directors.
23. In
fact, in U.S.A. the law has made further advances. The American Courts have
accepted that Directors are fiduciaries of the various constituencies in the
Corporation. With globalisation, the concepts of merger and amalgamation have
come into picture. With the companies issuing shares to employees and workers
and also to set of creditors, the American Courts have accepted that in the
company there are various constituencies like shareholders’ constituency,
workers’ constituency, creditors’ constituency etc. This advancement of law
has been very vividly mentioned in Harvard International Law Journal, Volume
38, page 540 under the Chapter dealing with Constituency Status. Implication
for Director Fiduciary Duties. The Article mentions the advancement of
Corporate Law. It is clear that Directors shall not only act exclusively in the
interests of shareholders or with reference to stock prices, but shall also be
obliged to charter a course for the company which is in its best interest
without regard to fixed investment horizon.
24. Applying
the aforesaid principle, in particular the principle of fixed investment
horizon, it would be noticed that the MoU was entered into essentially to
favour a fixed investment pattern. It was to protect the family interest in the
event of division of the shareholding : It was never contemplated that the
company would do well and would require infusion of capital. If this is the
purpose, for which the MoU was entered into, and if this object is required to
be kept in mind, then, it is clear that the MoU, which imposes a ban on the
increase on the number of Directors for all times, is likely to denude the
powers of the board of directors and may cause sterilisation of Directors, a
terminology used in America. It is for this reason that the American Courts
have taken the view that the pooling agreements, which are based on fixed
investment objectives, should not be made enforceable, if such agreements come
in the way of Directors’ decision to character a course which favours
expansion of the company. It is also because the Directors should not only look
to the shareholders’ interest or to maximise the shareholders’ value in the
context of a takeover, but it is their duty to make the Corporation
progressive. This approach is also very necessary because it encourages the
growth of the company which is vital for the economic progress of the company.
Moreover, the various authorities indicate that the pooling agreements are
short-term measures, viz., up to the next Annual General Meeting. They were
never meant to operate in perpetuity. They are essentially meant to protect the
proprietary interest of the shareholders. The Courts have been slow in granting
enforcement of such agreements. [See Hickman v. Kent Marsh Shipbreakers
Association [1915] 1 Ch. D. 881.]
25. The
aforesaid decision also lays down that an agreement between shareholders cannot
be construed to be a contract binding on the company even if the company has
taken note of the pooling agreement or even if the company has acted thereon
and, on this basis, the English Courts have denied specific performance of such
agreements. The aforesaid judgment also lays down that, even if the Articles
provides that the Directors shall give effect to the pooling agreement between
the shareholders, still, such an agreement shall not be construed as part of
the Articles and that acts performed pursuant to such an agreement cannot be
ratified subsequently. It further lays down that, even if such an agreement is
treated as being part of the Articles, still, it would not result in a binding
contract qua the company.
26. In
the case of Browne v. Trinidad 33, Ch. Dn. 1, the pooling agreement provided
that the founder-member shall not be removed as a Director for all times. He
was subsequently sought to be removed. The court took the view that, even if
the Directors had acted upon the agreement in the past, such acts will not be
binding on the company.
27. A
reading of the above judgments indicate that the Courts have been slow to
enforce such pooling agreements. The pooling agreements, which are enforced are
concerning only the right to vote of the shareholders. The Courts have not been
granting specific performance of the agreements whereby the powers of the
Directors stand denuded.
28. The
Supreme Court of Canada in Ringuet v. Bergeron [1960] 24 DLR (2d) 449, dealing
with shareholders entering into agreement to vote unanimously and observing
such agreements not to be illegal, at the same time held that the fiduciary
relationship occupied by Directors requires the exercise of these entire duties
and attention to the best interest of the company and its shareholders. It was
accordingly held that the discretion of the Directors to act in the
administration of the affairs of the company cannot be fettered by agreement
and, therefore, such agreement was invalid.
29. In
Boulting v. Association of Cinematograph Television & Allied Technicians
[1963] 2 Q.B. 606, Lord Denning M.R. while dealing with fiduciary nature of
Directors’ duties and also referring to the opinion of Lord Cranworth L.C. in
Aberdeen Railway Co. v. Blaikie Bros. [1854] 1 Macq. 461, 471, H.L. (SC) said :
“It seems to me that no one, who has duties of
a fiduciary nature to discharge, can be allowed to enter into an engagement by which
he binds himself to disregard those duties or to act inconsistently with them.
No stipulation is lawful by which he agrees to carry out his duties in
accordance with the instructions of another rather than on his own
conscientious judgment; or by which he agrees to subordinate the interests of
those whom he must protect to the interests of someone else.”
30. It
is thus clear that the specific performance of pooling agreements between
shareholders to vote in a particular manner cannot be extended to denude or
sterilise the powers of directors and any such agreement would be
unenforceable.
31. Applying
the aforesaid propositions to the present case, it would be noticed that the
company was in need to increase the capital. There was also need for professionalisation,
but it would be deprived of it despite the fact that there is no such
restriction in the Articles of Association. It is on the basis of clause 8 of
the MoU. In our view, the curtailment of the powers of Director by enforcement
of such a clause would not be permissible. Clause 8 would result in
curtailment of the fiduciary rights and duties of the Directors. The
shareholders cannot infringe upon the Directors’ fiduciary rights and duties.
Even Directors cannot enter into an agreement, thereby agreeing not to increase
the number of Directors when there is no such restriction in the Articles of
Association. The shareholders cannot dictate the terms to the Directors, except
by amendment of Articles of Association or by removal of Directors. The
agreement infringes upon the right of the first Defendant to have more number
of Directors, in the interests of the company. The grant of interim injunction
would amount to stultifying management of the company.
32. For
the aforesaid reasons, to our mind, clause 8 of the MOU, to the extent it
provides that the number of Directors shall not exceed three till Rolta India
Ltd., holds share capital in the company of the face value of Rs. 10 lacs,
cannot be specifically enforced and, in this view, the question of restraining
Defendant No. 1 and 2 by issue of interim injunction does not arise. Therefore,
appellants are not entitled to the second relief as well. The observations made
in this judgment are prima facie for the purpose of decision of the Appeal and
Notice of Motion and will not affect the rights and contentions of the parties
on merits which are subject-matter of the suit.
33. For
the aforesaid reasons, we dismiss the Appeal and Notice of Motion. In the facts
and circumstances of the case, parties are left to bear their own costs.
34. Status Quo regarding the appointment of the Additional Director will continue for a period of six weeks from today.
[1979] 49 COMP. CAS. 468 (KAR.)
HIGH COURT OF KARNATAKA
v.
State of
K. JAGANNATHA SHETTY
AND M.P. CHANDRAKANTARAJ URS, JJ.
March 30, 1979
Jayavittal Kolar and G. Sarangan for the Petitioners.
V.C. Brahmarayappa for the
Respondents.
Jagannatha Shetty, J. —The petitioners are directors of companies registered
under the Companies Act, 1956. They challenge the validity of the
"profession tax" levied on them under the Karnataka Tax on
Professions, Trades, Callings and Employments Act, 1976 (Karnataka Act No. 35
of 1976, which we will hereinafter refer to as "the Act").
The Act is to provide for the levy and
collection of tax on professions, trades, callings and employments in the State
of
|
"Sl.
No. |
Class
of persons |
Rate
of tax |
|
6. |
Directors (other than
those nominated by Government) of companies registered under the Companies
Act, 1956. |
Rs. 250 per annum." |
As per the said Entry, the
petitioners being the directors, are liable to pay and were also called upon to
pay Rs. 250 per annum as profession tax.
A few more facts may require
recapitulation for purposes of properly apprehending the true scope of the
controversy: The company of which the petitioners in W.P. No. 4600 of 1978 are
directors, is called "Balanoor Tea and Rubber Company Ltd." It is
having its registered office in the State of
The petitioners in W.P. No.
10084 of 1977 are directors of a company called "The Bellary Brucepettah
Hindu Mutual Benefit Permanent Fund Ltd." The registered office of the
company is in the State of
It may also be relevant to state
that these petitioners are not employed in any manner by the company.
The primary contention
urged for the petitioners is that they, as directors, are not exercising any
profession, calling or are engaged in any trade or hold any appointment, public
or private, in the State of Karnataka and the Entry 6 by which they are made
liable to pay the profession tax is, therefore, illegal and beyond the scope of
the Act. This contention must, necessarily be examined having regard to the
scope of the Act and sweep of the legislative entry. The basic requirement for
the levy of tax under the Act is that one must be engaged in some profession,
trade, calling or employment in the State. The relevant entry in the
legislative lists conferring taxing power on the State under which alone the
impugned levy could be supported is Entry 60 in the State List in the Seventh
Schedule of the Constitution. It reads:
"60. Taxes on
professions, trades, callings and employments."
The taxes specified in the
above Entry as stated by the Supreme Court in Rajagopalachari v. Corporation of
Madras [1964] 53 ITR 454 are taxes on the carrying on of a profession, trade,
calling or employment, and that, therefore, the tax under the Act could be
imposed if a person in fact carries on a profession, etc. Article 276, while
prescribing a limitation on this power to tax, further confirms this view.
The Act does not define the
words "profession, trade or calling". In the absence of any such
definition, we may look into the dictionary meaning. The word
"profession" is described in Jowitt's Dictionary of English Law,
Second Edn., Vol. 2, at p. 1442, as follows:
"Calling, vocation,
known employment."
It thus appears to be wide
in its conception. The meaning of the word "calling" as given by
Webster's Unabridged (New) Twentieth Century Dictionary, page 257, is:
"a vocation,
profession, trade or occupation."
It is again very wide; and
means practically to include one's usual occupation, vocation, business or
trade. Similarly is the conception of "trade" as explained by the
Supreme Court in State of Bombay v. Hospital Mazdoor Sabha [1960] 2 SCR 866 ;
AIR 1960 SC 610 at 613, para. 8 ; 17 FJR 423. It was observed:
" 'trade', according
to Halsbury, in its primary meaning is 'exchange of goods for goods or goods
for money', andin its secondary meaning it is ' any business carried on with a
view to profit, whether manual or mercantile, as distinguished from the liberal
arts or learned professions and from agriculture.' "
With these words of wide
import, we may now consider whether the petitioners as directors of companies
are exercising any profession, calling or are engaged in any trade or hold any
appointment.
As a preliminary to the
consideration of this question, it would be necessary to advert to the relevant
provisions in the Companies Act, 1956. Section 2(6) defines "Board of
Directors" or "Board" to mean "the Board of Directors of
the Company". Section 2(13) defines a "director" to include
"any person occupying the position of director by whatever name called".
Section 252 provides that every public company shall have at least three
directors. Section 285 states that a meeting of the board of directors of every
company shall be held at least once in every three months and at least four such meetings shall be held in every
year. Section 309 provides for remuneration payable to directors including any
managing or wholetime director. That payment shall be determined in accordance
with and subject to the provisions of s. 198 either by the articles of the
company or by a resolution passed by the company in general meeting. Sub-s. (2)
of s. 309 states that a director may receive remuneration by way of a fee for
each meeting of the board or a committee thereof attended by him. It is seen
from these provisions that the directors of a company are not its employees.
There can be little doubt on this proposition if we read the following passage
from Palmer's Company Law, Twenty-second edn., Vol. I, pages 625-626:
"Directors are not, as
such, employees of the company or employed by the company, nor are they
servants of the company, or members of its 'staff'......
A director can, however,
hold a salaried employment or an office in addition to that of his directorship
which may, for these purposes, make him an employee or servant, and in such a
case he would enjoy any rights given to employees as such: but his directorship
and his rights through that directorship are quite separate from his rights as
employee......."
If they are not employees
of the company, what else is their position? They were once regarded as
trustees by the courts of equity, but that description seems today to be
strictly not correct. In the words of Romer J. in In re City Equitable Fire Insurance Company [1925] Ch
407,4 26 (Ch D):
"It has sometimes been
said that directors are trustees. If this means no more than that directors in
the performance of their duties stand in a fiduciary relationship to the
company, the statement is true enough. But if the statement is meant to be an
indication by way of analogy of what those duties are, it appears to me to be
wholly misleading. I can see but little resemblance between the duties of a
director and the duties of a trustee of a will or of a marriage
settlement."
If they are not trustees,
are they then agents? Cairns L.J. in Ferguson v. Wilson [1867] 2 Ch App 77, 89
said :
"What is the position
of directors of a public company ? They are merely agents of a company. The
company itself connot act in its own person, for it has no person; it can only
act through directors, and the case is, as regards those directors, merely the
ordinary case of principal and agent. Wherever an agent is liable, those
directors would be liable; where the liability would attach to the principal,
and the principal only, the liability is the liability of the company."
But, according to Lord
Selborne, the directors have dual characters. In Great Eastern Rail Co. v.
Turner [1872] LR 8 Ch App 149, he said:
"The directors are the
mere trustees or agents of the company— trustees of the company's money and
property—agents in the transactions which they enter into on behalf of the
company."
The real position of
directors has been neatly summarised by L.C.B. Gower in his book The Principles of Modern Company Law. The
learned author states, at page 549, Third edn.
"Duties of Care and
Skill. —This subject can be disposed of briefly, for there is a striking
contrast between the directors heavy duties of loyalty and good faith and their
very light obligations of skill and diligence. Directors have to display some
degree of both, but the courts have found difficulty in deciding how much.
Here, as already pointed out, the trustee analogy breaks down for the type of
skill required of acautious trustee is quite different from that which an
enterprising director needs to display. The courts might no doubt, have
demanded of directors a degree of diligence comparable to that of trustees—a
high degree particularly where they are paid. But the courts cannot be too far
in advance of public opinion, and public opinion has come to recognise that directorships are ojten
little more than sinecures, requiring, at the most, attendance at occasional
board meetings." (Underlining is ours)
It is obvious from these
propositions that no clear-cut character role could be assigned to an ordinary
director of a company. He is not required to give continuous attention to the
affairs of the company. His duties are of an intermittent nature to be performed
at periodical board meetings, and at meetings of any committee of the board
upon which he happens to be placed. He is, however, not bound to attend all
such meetings and he who stays away runs the risk of being not appointed when
he next comes up for re-election. By the nature of the duties enjoined by the
Companies Act, he cannot certainly be said to be engaged in any profession or
calling. Neither he does any business. It is the company that carries on
business.
For confirmation of our
view, we may refer to the I.T. Act, 1961. Section 14 of the said Act sets out
heads of income for the purpose of charge of income-tax and computation of
total income. They include, among other items, salaries, profits and gains of
business or profession and income from other sources. Section 28 deals with
profits and gains of business or profession, and it states that that income
shall be chargeable to income-tax in accordance with the principles stated
therein. Section 56 deals with income from other sources and it shall be
chargeable to income-tax under that head if it is not chargeable to income-tax
under any of the heads specified in s. 14. Dealing with the scope of the
analogous provisions in the Indian I.T. Act (XI of 1922), Leonard Stone, Chief
Justice of the Bombay High Court, in CIT v. Lady Navajbai R.J. Tata [1947] 15
ITR 8, observed that the payment made to an assessee who was a permanent
director in a limited company for the services rendered was neither a salary
nor wages and it did not fall to be taxed under s. 7, but must be brought to
tax as income from other sources under s. 12. It thus becomes clear that the
fees paid to a director cannot be considered as profits or gains of business or
profession or be regarded as salaries. It could be taxed only as income from
other sources falling under the residuary head in the absence of specific terms
in the articles of association or an independent contract of employment. This
again presupposes that the directors are not exercising any profession or
calling or are engaged in any trade or hold any appointment.
Entry 6 of the Schedule
which makes them liable on these counts must, therefore, be struck down as it
is beyond the scope of the charging s. 3.
This takes us to the second
contention urged for the petitioners. It relates to the discrimination by the
unreasonable classification made by Entry 6 where under the directors of
companies nominated by Government are exempted from payment of tax. It was
urged that directors as a class, whether nominated by Government or appointed
by the company, fall into one class so far as their functions and powers are
concerned, and there is, therefore, no basis for not exempting the petitioners
from the liability to pay the tax. Mr. Brahmarayappa, learned High Court
Government advocate, however, urged that the directors nominated by the
Government are usually Government servants and are only interested in
safeguarding the Government investment in the company and their exclusion under
the Act is, therefore, reasonable. We do not think that that contention is
right. It proceeds on a misconception. The directors nominated by the
Government need not necessarily be Government servants. More often private
persons are also nominated by Government as directors. Apart from that, it
would be wrong to state that the duty of the Government nominees is limited
only to look after the interest of the Government investment. The Government
investment is not safe unless the overall performance of the company is on a sound
footing. He who looks at the narrow view and without a foresight on the
company's performance cannot safeguard the Government's investment.
Mr. V. Krishnamurthy,
learned senior advocate, who intervened in these petitions, urged one more
contention. According to him, a director in any event who is not ordinarily
residing inside the State is not liable to pay the profession tax. According to
him, his residence must be more than transient or casual. In the view that we
have already taken, we do not think that it is necessary to decide this
question in these petitions.
In the result, the rule is
made absolute; we hold that Entry 6 in the Schedule under s. 3 of the Act is
beyond the legislative competence and also beyond the scope of s. 3 and,
therefore, void.
The petitioners are
entitled to their costs. Advocate's fee Rs. 250.
[1942] 12 COMP
CAS 21 (ALL.)
HIGH COURT OF
v.
BRAUND, J.
AUGUST 11, 1941
M.N. Agarwala, for the applicants.
S.N. Verma, for the
Opposite Party.
This is an
application which is, in my view, quite hopeless. It appears that a company
called the General Transport Company Ltd. was incorporated in 1938 with shares divided
into two classes, A and B respectively. The General Transport Company Ltd., was
incorporated as a private company with articles of association which restricted
the right of transfer in a not unusual form. Articles 16 to 22, inclusive,
provide in a very usual way that, except in the case of a transfer by a member
to an immediate relative, no member was to be entitled to transfer his or her
shares without giving the directors an opportunity as therein provided for
finding a purchaser or purchasers from among the existing members themselves. I
need not set out the actual articles, because they are there to read and, in
fact, nothing actually turns on them in this case. There then follows Art. 23,
which again is a very common form of article and which is the material one in
this case. It is in these words:
"The directors
may in their discretion, refuse to register the transfer of any share to any
person whom it shall, in their opinion, be undesirable in the interest of the
company to admit to membership, but such right of refusal shall not be
exercisable in the case of any transfer made pursuant to Art. 16, except for
the purpose of ensuring that the number of members does not exceed the limit
prescribed by Art. 2. The directors may refuse
to register any transfer of shares on which the company has a lien."
It happened that 90 of the shares of the General
Transport Company Ltd., were held by another company called the Commercial
Finance Company Ltd. This latter company on 12th January 1941 went into voluntary
liquidation and the present applicants, Messrs. Prasad and Chatterji, are its
liquidators. On the liquidation of the Commercial Finance Company Ltd., it
seems that its liquidators cast about to find a purchaser or purchasers for the
shares it held in the General Transport Company Ltd., and, on 14th January
1941, the liquidators wrote a letter to the directors of the General Transport
Company Ltd., in which they said that they had succeeded in obtaining
purchasers for the shares and, in pursuance of Art. 19, they required the
company within 21 days either to find a member or members willing to purchase
them or to the alternative to register the transfer. It purported to be, in
short, a "sale notice" pursuant to Art. 18. The proposed transferees
were, in fact, three in number and were, I understand, actually share-holders
and directors of the Commercial Finance Company Ltd. What the directors of the
General Transport Company Ltd., did on receiving the letter of 14th January was
to hold a board meeting to consider the matter and on 5th February 1941 the
General Transport Company Ltd. wrote a letter to the liquidators. It was in
these terms:
"Dear Sirs,
With reference to your letter No. 23/41 of the
14th January 1941 we enclose herewith the true copy of Resolution No. 1 of the
Board of Directors of this Company held on the 3rd day of February 1941.
Please acknowledge and oblige.
Thanking you.
Yours faithfully, for the
General Transport Ltd.,
(
The actual resolution enclosed was in this language:
"Resolved that the directors in their
discretion under Art. 23 of the Company, are not inclined to register the names
of the intending purchasers named in their abovesaid letter, as they consider
them unsuitable for admission as members in the interest of the company."
I should of course say that technically
speaking no actual transfer was before them for registration. All the letter of
14th January had actually done was to give a sale notice under Section 1.8 of
the articles. That however is not material. On those facts the liquidators have
come to this Court to ask for an order on the directors of the General
Transport Company Ltd., to make them accept the transfer by the liquidators to the three named persons and to
register it accordingly. As I said in the beginning, in my view, this
application is quite hopeless. In their affidavit in support of the
application, after setting out the history of the matter, all that the
applicants say is (by para 10) that the action of the directors is mala fide
and contrary to the interests of the General Transport Company Ltd., and (by
para 11) that the directors' decision is not " judicial." They allege
that the majority of the share-holders in the General Transport Company Ltd. are
willing to recognize the transfer and they urge that as a ground why the
directors should be compelled to register it. After these ex cathedra
allegation of "mala fides" and lack of "judicial"
consideration, they say (by para 12) that:
"under the aforesaid circumstances the
discretion of the directors should be deemed to have been actuated by malice
and ulterior motives best known to them."
The respondents filed
an affidavit in reply in which, in effect, they allege that they were not bound
to give their reasons and finally by an affidavit in rejoinder, filed at the
very last moment, the applicant brings forward a number of extremely vague and
unconvincing charges against the directors. Now, the law applicable to matters
of this kind is extremely clear. The leading case is that of In re Gresham Life
Assurance Society; Ex parte Penney. The judgment
of Mellish, L.J., in that case has been referred to again and again in
subsequent cases. He says:
"But it is
further contended that in order to secure the existing shareholders against
being deprived of the right to sell his shares, the directors are bound to give
their reason why they reject the transferee, and if they reject him without
giving reason that is a ground from which the Court ought to infer that they
were acting arbitrarily. I cannot agree with that. It appears to me that it is
very important that directors should be able to exercise the power in a
perfectly uncontrollable manner for the benefit of the share-holders; but it is
impossible that they could fairly and properly exercise it if they were
compelled to give the reason why they rejected a particular individual. ... I
am therefore of opinion that in order to preserve to the company the right
which is given by the articles a shareholder is not to be put upon the register
if the board of directors do not assent to him, and it is absolutely necessary
that they should not be bound to give their reasons, although I perfectly agree
that if it can be shown affirmatively that they are exercising their power
capriciously and wantonly, that may be ground for the Court interfering.
..."
It is true that an
article such as Art. 23 of the articles of association of this company is not
intended to enable directors to act in a way
which Mellish, L.J., describes as "arbitrarily" or
"wantonly." But if a shareholder challenges the undoubted right of
directors in a case like this to use their discretion, the burden lies heavily
on that shareholder to allege with particularity and to prove such mala fides
on the part of the directors as amounts to arbitrary and wanton conduct. Quite
consistently with this view in Duke of Sutherland v. British Dominions Land
Settlement Corporation Ltd.,
interrogatories were allowed to be delivered to directors as to the particular
branch of the article under which they had exercised their discretion, but not
as to the reasons which influenced them in exercising it upon that ground. Lord
Tomlin in his judgment in that case says:
"I think therefore on the construction of
the article that the defendants are bound to say whether the directors declined
to register because they do not approve of the transferee or because the
transferor is indebted to the company, but that they are not bound to tell the
plaintiff why in those circumstances the directors did not choose to register
the transfer.........Prima facie the directors are assumed to act bona fide just
as ordinary trustees in exercising powers are assumed to act bona fide. If
anybody alleges the contrary the onus is on him to prove it, and if in fact he
adduces no evidence at the trial which justifies a conclusion either that there
has been no exercise of the discretion or that there has been a mala fide
exercise of the discretion, then the mere fact that the directors have refused
to give any reason for the exercise of the power, and for the manner in which
they have exercised it, throws no suspicion on them or in any sense shifts the
onus of proof so as to put upon them the burden of justifying that which they
have done........"
Reverting now to the present case, what is it that
the directors of the General Transport Co. Ltd., have done? They have said that
they are not prepared to register these transfers, because they consider the
transferees to be "unsuitable for admission as members in the interest of
the company." That follows very closely the wording of art. 23 itself
which speaks of persons "undesirable in the interest of the company to
admit to membership." They have clearly indicated upon what ground under
art. 23 they take this stand and, conformably with Sir George Mellish's
judgment in In re Gresham Life Assurance Society Ex parte Penney, there is no
obligation whatever upon them to go any further and to give their actual
reasons for having come to that conclusion. Nor, as Lord Tomlin puts it, are
they to be exposed to suspicion of mala fides by reason merely of the fact that
they have chosen to withhold their reasons. The applicants come here and tell
me that the directors have acted mala fide and arbitrarily. And they have
asserted that the vary fact that they have given no reasons is proof of that.
In my view, it proves nothing of the kind, because the directors are doing
exactly what they are entitled to do. Nor, in my opinion, is it a circumstance
that affects the matter one way or the other, even if it be true, that the
majority of the shareholders would welcome the transferees. It is a first and
elementary principle of company law that, when powers are vested in a board of
directors by the articles of association of a company, they cannot be
interfered with by the shareholders as such. If the shareholders are
dissatisfied with what directors do, their remedy is to remove them in the
manner provided by the articles. But so long as a board of directors exists and
particular powers are vested in it by the article, then they are entitled to
exercise those powers without interference by the shareholders and it is, I
think, irrelevant whether the shareholders approve of what the directors have
done or not. For all these reasons, I must dismiss this application with costs.
[1968] 38 Comp. Cas. 13 (Ker.)
High Court of Kerala
v.
Thariath
V. Balakrishna Eradi, J.
July 3,
1967
T. S. Venkiteswara
Iyer and R. C. Plappilly for the Appellant.
M. V. Joseph for the
Respondents.
V.
Balakrishna Ekadi, J.─The appellant bank
had instituted a suit for recovery of amounts due from the defendants respondents
herein under a promissory note executed by them jointly along with their father
deceased Lonan, on 21st March, 1949, for an amount of Rs. 6,563-3-0. Exhibit
P-1 is the promissory note. The defence contention was that the promissory note
had been executed not for any cash consideration but to secure a liability of
the second defendant to indemnify the bank against the loss caused to it by
reason of the dishonour of a cheque which the second defendant discounted while
he was the agent of the bank at its Pazhayannur branch. The defendants further
averred that several payments had been made by the second defendant in respect
of this liability and that till 10th March, 1958, an amount of Rs. 6,690 had
been remitted by him to the bank. According to the defendants, in consideration
of these payments and of the faithful and meritorious service rendered by the
second defendant to the bank, the general body of the shareholders of the bank
had passed a resolution on 14th May, 1960, resolving to write off the balance
amount due from the defendants under the promissory note and that in view of
the said resolution the debt had become wiped off and no further amount was due
by the defendants to the bank. They, therefore, pleaded that the suit claim
based on the promissory note was not sustainable.
The
trial court rejected the defence contention and held that the resolution of the
general body relied on by the defendants was a mere recommendation which was
not binding on the board of directors of the bank and that since the board had
decided to realise the full amount due by the defendants on the suit promissory
note the defendants were liable to pay balance amount due on the promissory
note. In this view, the suit was decreed by the trial court as prayed for in the
plaint.
On
appeal by the second defendant, the lower appellate court held that even though
exhibit P-10 resolution passed in the general body meeting held on 14th May,
1960, was couched in the form of a recommendation, it was really a final decision
taken on the matter by the general body of shareholders and that the board of
directors had no right to override the said decision of the general body. it,
therefore, held that in the light of exhibit P-10 resolution the liability of
the defendants under the promissory note should be deemed to have been fully
remitted and that the bank was not entitled to realise any further amounts from
the defendants. In the result, the decree of the trial court was set aside and
the suit was dismissed. The plaintiff-bank has preferred this second appeal
challenging the aforesaid decision of the lower appellate court.
Exhibit
D-1 is the articles of association of the plaintiff-bank. It will be seen from
article 14 of exhibit D-l that the business of the company is to be managed by
the directors, who may exercise all such powers as are not required to be
exercised by the company in general meeting. There is no provision in any of
the articles enabling the general body of shareholders to interfere in the
day-to-day management of the business of the bank and the conduct of such
business is left by the articles entirely to the board of directors. Exhibit
D-7 is a copy of the rules and regulations of the plaintiff-bank, and rule 1
states that, subject to the provisions contained in the memorandum and articles
of association, the board of directors shall be in full control of all the
business, finance and affairs of the bank.
It
is now well-established that unless anything contained in the Companies Act or
in the articles of association of the company otherwise require the directors
to conform to the directions given by the company in general meeting, the
latter cannot, except by special resolution, take the conduct of the business
out of the directors or compel them to adopt a particular line of action. The
legal position is stated thus in Halsbury's Laws of England, third edition,
volume 6 at page 298 (para. 602) :
"If,
as is usual, the management of the company's affairs is entrusted to the
directors by the articles of association, a numerical majority of the
shareholders insufficient to alter the articles cannot, in the absence of any
provision in the articles reserving appropriate power, impose its will on the
directors as regards matters so entrusted to them. If the articles provide that
regulations may be made by extraordinary resolution, an ordinary resolution is
not sufficient to make a regulation which will control the directors. If no
power is reserved to the company to control the directors when acting within
the powers conferred on them by the articles, the articles must be altered by
special resolution, if it is desired to give the company the power. Where,
under the articles, the business of the company is to be managed by the
directors and the articles confer on them the full powers of the company
subject to such regulations, not inconsistent with the articles, as may be
prescribed by the company in general meeting, the shareholders are not enabled
by resolution passed at a general meeting without altering the articles, to
give effective directions to the directors how the company's affairs are to be
managed, nor to overrule any decision come to by the directors in the conduct
of its business. An agreement made by the company which is inconsistent with
the powers of management of the directors under the articles, as, for example,
an agreement purporting to confer authority upon the manager of a department to
act without interference by the directors, is ultra vires".
To
the same effect are the observations of Ray J. in Murarka Paint & Varnish
Works v. Mohanlal Murarka,
where he has held :
"The
directors and the shareholders in general meeting are the primary organs of the
company between whom the company's powers are divided. The general meeting
retains ultimate control, but only through its powers to amend the articles, to
take away powers from the directors and to remove the directors and to
substitute others to the taste of the shareholders".
In
Jagdish Prasad v. Paras Ram,
Braund J. has observed at page 363 :
"It is a first and elementary principle of
company law that, when powers are vested in a board of directors by the
articles of association of a company, they cannot be interfered with by the
shareholders as such. If the shareholders are dissatisfied with what directors
do, their remedy is to remove them in the manner provided by the articles. But
so long as a board of directors exists and particular powers are vested in it
by the articles, then they are entitled to exercise those powers without
interference by the shareholders and it is, I think, irrelevant whether the
shareholders approve of what the directors have done or not".
Applying
the aforesaid principles to the present case, it is seen from exhibits D-1 and D-7 that the
management of the affairs of the company was vested in the board of directors and they were not
subject to any control in
that respect by the company in general meeting. It is true that if the company in general meeting disapproved the
management by the directors, they could
remove the directors, but the general meeting could not, as the articles stood,
directly interfere with the management of the business by the directors. There is no case for the respondents that any special resolution had been passed by the company
in general meeting so as to
constitute a valid modification of the articles of association. It has, therefore, to be held that the directors had acted
fully within their powers in deciding
to enforce the liability under the promissory note, notwithstanding the recommendation contained in the resolution
exhibit P-10 passed by the shareholders at their general meeting. The view
taken by the lower appellate court
that the board of directors had no authority to override the decision of the general body is, therefore, incorrect.
In the result, the decree of the lower
appellate court is set aside and that of the
trial court restored with costs here and in the court below. No leave.
[1961] 31 COMP. CAS. 301 (
Murarka Paint And Varnish Works
(P.) Ltd.
v.
A.N.
RAY, J.
SUIT
NO. 426 OF 1960
AUGUST
1, 1960
A.N. RAY,
J. - This suit has been
instituted by Murarka Paint and Varnish Works (Private) Ltd. against Mohanlal Murarka,
Chunilal Murarka, Purushottamlal Murarka, Beharilal Murarka, Radheylal Murarka,
Kunjalal Murarka and Hiralal Murarka. The plaintiff has its registered office
at 4E,
Article 111 of
the company states that every director shall vacate his office, inter alia, on
his being requested in writing by all his co- directors to resign. On or about
February 24, 1960, Sohanlal Murarka, Kissenlal Murarka and Shankarlal Murarka
acting under article 111 requested Mohanlal Murarka in writing to resign. The
plaintiff’s case is that Mohanlal Murarka immediately thereafter ceased to be
director of the plaintiff. On or about February 25, 1960, the board of
directors of the plaintiff at a meeting held by it on the same day appointed in
accordance with the articles one Mahabir Prasad Murarka in place and stead of
Mohanlal Murarka. The plaintiff alleges that in the premises on and from
February 25, 1960, the lawful directors of the plaintiff were and are :
Sohanlal Murarka, Kissenlal Murarka, Shankarlal Murarka and Mahabir Prasad
Murarka.
On or about
February 25, 1960, the plaintiff, through its solicitors, Messrs. Khaitan and
Co., issued notices in various newspapers to the effect that all power and
authority of the defendant, Mohanlal Murarka, as a director had been
terminated. The defendants, Chunilal Murarka, Radheylal Murarka, Beharilal
Murarka, Hiralal Murarka and Kunjalal Murarka, it is alleged, are not
registered shareholders of the plaintiff. The defendant, Mohanlal, is the joint
registered owner of 6,250 ordinary shares in the plaintiff company along with
the defendants Purushottamlal Murarka and Shankarlal Murarka.
On or about
March 23, 1960, at about 2 p.m., it is alleged, the defendants, Mohanlal
Murarka, Chunilal Murarka, Purushottamlal Murarka and Beharilal Murarka
accompanied by about 25 unknown persons and police officers forcibly entered in
to the office of the plaintiff and attempted wrongfully and illegally to take
possession and charge of the affairs and properties of the plaintiff including
its books of accounts, papers, documents and moneys, etc. The plaintiff, on
March 23, 1960, lodged a complaint at Hare Street Police Station in
The
plaintiff’s solicitors received a letter dated March 23, 1960, from Radheylal
Murarka whereby Radheylal Murarka purporting to act as a director of the
plaintiff informed the plaintiff’s solicitors that Sohanlal Murarka, Kissenlal
Murarka and Shankarlal Murarka had been removed from the board of directors of
the plaintiff.
It is further
alleged in the plaint that, on March 24, 1960, the plaintiff’s law agent went
to the office of the plaintiff company when it was discovered that Kunjalal
Murarka was asserting that he and his father Hiralal Murarka were directors.
The plaintiff’s law agent further discovered almirahs to be broken and tampered
with, cash moneys having been forcibly taken away by Mohanlal Murarka and
Chunilal Murarka, and that several unknown persons were sitting and/or standing
in the office room.
The plaintiff
alleges that none of the defendants could be validly or at all appointed
director and that the defendants acted illegally and without any authority or
jurisdiction. It is alleged that the only persons entitled to manage the
affairs of the business and properties in accordance with the memorandance and
articles of association and the provisions of the Companies Act are the present
board of directors as mentioned in paragraph 9 of the plaint. It is further
alleged that the defendants trespassed into the office and interfered with the
management of the affairs, business and properties.
The plaintiff
company asks for a permanent injunction restraining the defendants, their
servants, nominees and/or agents from occupying the office of the plaintiff and
from interfering with the management and control of the plaintiff and also
injunction restraining the defendants from usurping the management and control
of the affairs, business and properties of the plaintiff and further injunction
restraining the defendants, their servants, nominees and/or agents from in any
way acting as directors of the plaintiff and reliefs regarding books, furniture
and cash moneys.
Defendants
Nos.1 to 6 filed a joint written statement. One of the points taken in the
written statement is that the suit has been instituted without the authority of
the board of directors and against the decision of the shareholders. As present
it is not necessary to deal with other defenses in this suit.
This suit came
up before me on June 3, 1960. None of the counsel on behalf of the plaintiff
and the defendants was present in court. Only the plaintiff’s solicitor and the
defendants’ solicitor were present in court. The solicitor for the defendants
suggested that a meeting be convened to ascertain the wishes of the shareholders
as to whether they wished to continue the suit. The solicitor for the plaintiff
was unable to show any reason as to why that should not be done. I made an
order to that effect.
A couple of
days thereafter counsel on behalf of the plaintiff expressed regret that they
were not present when the suit was called on and prayed for rehearing of the
matter. Counsel for the defendant also stated that the matter could be heard
under those circumstances.
Counsel on
behalf of the plaintiff contended that there were groups of shareholders on the
side of the defendants and some of such shareholders had no title to the
shares. To illustrate, it was contended that Mohanlal Murarka who was shown to
be holding 12,500 shares was restrained by orders of this court from asserting
rights in respect of such shares. These 12,500 ordinary shares standing in the
name of Mohanlal Murarka originally belonged to Radheylal Murarka and Chunilal
Murarka and were forfeited in exercise of lien and were allotted to Mohanlal
Murarka. Two suits were filed by Radheylal Murarka and Chunilal Murarka,
Nos.3264 of 1947 and 3265 of 1947 respectively. In those suits it was ordered
that the defendants to the suit were prohibited and restrained until the
determination of the suit or until further orders of this court from in any way
interfering with the rights of the plaintiff as registered shareholder in
respect of the shares. The suits are still pending. Under these circumstances
counsel of the plaintiff contended that no rights could be asserted in respect
of those shares by Mohanlal Murarka. Counsel for the defendants submitted that
Chunilal and Radheylal Murarka were supporting the defendants and, therefore,
those shares were in any event in support of the defendants. These suits are
still pending decision.
Counsel for
the defendants similarly contended that 6,250 shares standing in the name of
Maniklal Murarka and others jointly were registered in violation of the
provision contained in article 14. Maniklal Murarka and others are supporting
the plaintiff. These 6,250 shares are in the names of Maniklal Murarka,
Lachmiprasad Murarka, Ajit Prasad Murarka, Iswari Prasad, Narayan Prasad and
Mani Bai. Article 14 states that shares may be registered in the names of any
limited company but not in the name of a minor nor usually more than four
persons be registered as joint holders of any share. Counsel for the plaintiff
contended that article 14 referred to allotment of shares but did not relate to
transmission of shares on death et cetera It was contended on behalf of the
plaintiff that under article 47 there could be no limitation upon the number of
heirs to be registered in respect of any share.
It was also
contended on behalf of the plaintiff that 6,250 shares which were shown to be
standing in the name of Beharilal Murarka and which were alleged to be
transferred on Marh 24, 1960, were so done wrongfully. Similarly it was
contended that 2,750 shares standing in the name of Kunjalal Murarka were
purported to be transferred wrongfully. Beharilal Murarka and Kunjalal Murarka
are supporting the defendants. It was contended on behalf of the plaintiff that
article 84 did not apply to cases where persons claimed share by inheritance
and that article 84 was confined to transmission of shares under article 48. It
was contended on behalf of the plaintiff that article 47 related to
transmission of shares of deceased persons. It was further contended that only
executors or administrators of the deceased could apply under article 47.
Beharilal Murarka and Kunjalal Murarka who claim shares on the death of Laloola
Murarka, it was contended by counsel for the plaintiff, had further to satisfy
the directors under article 84 of the right to act in that capacity. It was
contended by counsel for the plaintiff that there was no evidence that
Beharilal Murarka or Kunjalal Murarka satisfied the directors of their right to
act in that capacity.
Counsel on
behalf of the defendants contended that Beharilal Murarka was entitled to vote
and, whether the shares in the name of Laloolal Murarka belonged to a joint
family or were held individually, Beharilal Murarka would be entitled to vote
in consequence of the death of Laloolal Murarka.
It is manifest
under these circumstances that the shareholding bristles with disputes as to
rights and counsel for the plaintiff, in my view, rightly characterised such
disputes relating to title to the shares as containing seeds of litigation
concerning the shares and assertion of rights in respect thereof. Counsel for
the defendants contended that if a general meeting were ordered it would not be
relevant at this stage to take any notice as to disputes to title of the
shares.
I am unable to
accept the contention of counsel for the defendants. I cannot allow a meeting
to be held without deciding who the shareholders are and who will vote. I am
extremely doubtful it I can inquire into these questions either in this suit or
at this stage.
Counsel for
the defendants contended first that it was specifically pleaded in the written
statement that the suit was bad being in the name of the plaintiff company and
that there was no resolution disclosed by the plaintiff showing the authority
of the plaintiff to institute the suit. It was secondly contended that even if
the initiation of the suit was good the company might discontinue and equally
if initiation were bad the company might continue the suit by ratification. A
general meeting would be necessary to find out if the suit is to be continued
or discontinued. It was thirdly contended that the dispute in the present case
related purely to the internal management and, therefore, the court would not
interfere.
As to the
first point, namely, the use of the name of the company by the plaintiff,
counsel for the plaintiff contended that it was not open to the defendants to
take that objection as a defence to the suit and that they should have
proceeded by way of motion to stay the suit. On behalf of the defendants
counsel contended that it was not an absolute rule that the objection should be
by way of motion to stay the suit but that it could be brought to the notice of
the court that the plaintiff was not authorised to sue in the name of the
company. Reliance was placed by the defendants on the decision of La Company de
Mayville v. Whitley [1896] 1 Ch.788, Daimler Co.Ltd. v. Continental
Counsel for
the plaintiff relied on the decision of Russian Commercial and Industrial Bank
v. Computer d’Escompte de
In the present
case counsel for the plaintiff opposed any right of the defendants to contend
as a defence to the suit that it was an unauthorised suit. The plaintiff
insisted that there should have been a motion to stay the action. Counsel for
the defendants submitted that not much time had elapsed since the institution
of the suit and that, since the plaintiff did not disclose any resolution
authorising the institution of the suit, it should be stopped. I am unable to
accept the contentions of the defendants. To my mind the majority of the
decisions shows that an objection as to the user of the name of the company by
the plaintiff cannot be raised as a defence but should be on a motion to stay
the action. Furthermore, the defendants have not furnished the necessary
information to discharge the onus that there is no resolution. The plaintiff
contends that the directors are empowered under the articles to institute an
action and that there is also a resolution to that effect. There is no
conclusive evidence that the plaintiff has not the right to proceed in the name
of the company or that the suit has been instituted without authority in the
name of the company. On the contrary the directors are empowered by the
articles to institute suits but the defendants contend that the exercise of
such powers by the directors is subject to the control of the members.
As to the
contentions of the defendants that the court will not interfere in disputes as to
internal management or that the court will allow a general meeting to be
convened for the purpose of continuing or discontinuing the suit counsel for
the plaintiff contended that articles 121 and 122(6) confer sufficient
authority on the board to commence the suit and such power conferred on the
board could not be taken away by any general meeting. It was contended that the
only way by which the management in the hands of the board could be controlled
was by virtue of the provisions in the Act or provisions in the articles and by
alterations of the articles. Under article 121 it is stated that the management
of the business of the company shall be vested in the managing agents or
directors, who, in addition to the powers and authorities by these presents or
otherwise conferred upon them, may exercise all such powers and do all such
acts and things as may be exercised or done by the company as are not hereby or
by statutes expressly directed or required to be exercised or done by the
company in general meeting but subject nevertheless to the provisions of the
statute and all these presents and to any regulations from time to time made by
the company in general meeting. Counsel for the defendants laid emphasis on the
words “any regulations from time to time made by the company in general
meeting” as empowering the shareholders by a general meeting to continue or
discontinue the suit. Counsel for the plaintiff on the other hand contended
that the word “regulations” was synonymous with “articles” and that the shareholders
could control the acts of the directors only by alteration of the articles.
The directors
and the shareholders in general meeting are the primary organs of the company
between whom the company’s powers are divided. The general meeting retains ultimate
control, but only through its powers to amend the articles, to take away powers
from the directors and to remove the directors and to substitute others to the
taste of the shareholders. Until one or other of the aforesaid steps be taken,
the directors, under the articles, according to the contention of the
plaintiff, can disregard the wishes of the members and that the general meeting
cannot restrain the directors from conducting actions in the name of the
company.
In the case of
Isle of Wight Railway Company v. Tahourdin the court refused an application by
the directors of a statutory company for an injunction to restrain the holding
of a general meeting. COTTON, L.J., said :”It is a very strong thing indeed to
prevent shareholders from holding a meeting of the company, when such a meeting
is the only way in which they can interfere, if the majority of them think that
the course taken by the directors, in a matter which is intra vires of the
directors, is not for the benefit of the company.” In Automatic Self-cleansing
Filter Syndicate Co.Ltd. v. Cuninghame. The directors of a registered company
refused to carry out a sale agreement resolved upon in general meeting. The
powers of management in that case were entrusted to the board under article 96 comparable
to article 121 in the present case. Under article 96 there the management in
the hands of the directors was subject to “such regulations, not being
inconsistent with these presents as may from time to time be made by
extraordinary resolutions.” It was, therefore, held that the general meeting
would be a nullity inasmuch as article 96 contemplated extraordinary
resolution. It was thus held to be incompetent for the majority of the
shareholders in an ordinary meeting to affect or alter the powers originally
given to the directors. In the case of Marshall’s Valve Gear Co. Ltd. v.
Manning Wardle & Co. Ltd. the management was vested in the directors under
article 55 which was similar to article 121 in the present case. A and three
other persons were the four directors of the company and they held
substantially the whole of the subscribed share capital of the company. A held
a majority but not a three-fourth majority of the shares. Disputes arose at a
meeting between A and the other three directors who were interested in a patent
vested in the N company which, so A was advised, infringed the M company’s
patent and was admittedly a competing patent. The three directors bona fide
declined to sanction any proceedings against the N company in the name of the M
company to restrain the alleged infringement. Thereupon the three directors
moved in the name and on behalf of the M company to strike out the name of that
company as plaintiff and to dismiss the action on the ground that the name of
the M company had been used without authority. It was held that under article
55 in Marchall’s case [1909] 1 Ch.267 the majority of the shareholders in the
company at a general meeting had a right to control the action of the directors
so long as they did not affect to control any direction contrary to any of the
provisions of the article which bound the company.
In the case of
Salmon v. Quin & Axtens Ltd. the Court of Appeal followed Cuninghame’s
case and the House of Lords upheld the
decision as will appear in Quin & Axtens Ltd. v. Salmon. In Salmon’s case
under article 75 the business of the company was to be managed by the board
subject to the provisions of any Act of Parliament or of the articles and to
such regulations as might be prescribed by the company in general meeting.
Article 80 in that case regulated that no resolution of a meeting of the
directors having the object of borrowing money, the acquisition by purchase,
lease or otherwise was to be valid or binding unless not less than 24 hours’
notice in writing by letter or telegram specifying the business proposed to be
transacted thereat had been given to each of the managing directors. A and B,
the managing directors, held the bulk of the ordinary shares in the company.
Resolutions were passed by the directors for the acquisition of certain
premises and for the letting of certain other premises, but B dissented from
each of these resolutions in accordance with the articles. At a general meeting
of the company resolutions to the same effect were passed by a simple majority
of the shareholders. It was contended that the resolutions were of no effect.
The resolutions were held to be inconsistent with article 80 as an attempt to
alter the terms of contract between the parties by a simple resolution instead
of by a special resolution. FARWELL, L.J., said that the directors were not
servants to obey directions given by the shareholders as individuals, but that
they were persons entrusted by the regulations with the control of the business
and could be dispossessed from that control only by the statutory majority
which could alter the articles. In the two recent decisions of John Shaw &
Sons (Salford) Ltd. v. Shaw and Scott v. Scott the modern doctrine is that a
resolution of the members disapproving the commencing of an action by the
directors would be a nullity, for, if powers of management are vested in the
directors they and they alone can exercise these powers. GREER, L.J., said (in
Shaw’s case : “The only way in which the general body of the shareholders can
control the exercise of the powers vested by the articles in the directors is
by altering the articles, or, if opportunity arises, under the articles by
refusing to re-elect the directors of whose action they disapprove. They cannot
themselves usurp the powers which by articles are vested in the directors, nor
the directors can usurp the powers vested by the articles in the general body
of the shareholders.” Similarly, in the case of Scott v. Scott [1943] 1 All
E.R. 582 it was held that when powers had been delegated to the directors the
members at the general meeting could not interfere with their exercise until
they were taken away by the amendment of articles.
The law as
laid down in Halsbury’s Laws of England, 3rd edition, volume VI, at page 445,
is as follows : “As regards litigation by an incorporated company, the
directors are, as a rule, the persons who have authority to act for the
company; but, in the absence of any contract to the contrary in the articles of
association, the majority of the members of the company are entitled to decide,
even to the extent of overruling the directors, whether an action in the name
of the company should be commenced or allowed to proceed.” The pre-eminent
question, therefore, is as to whether the directors under the articles in the
present case can be controlled by a general meeting with regard either to the
commencement or to the continuance of this suit. Counsel for the defendants
contended that in the absence of any contract to the contrary in the articles
the majority of shareholders are entitled to decide the course of action and
that in the present case there is no contract to the contrary. The words
“subject to any regulation from time to time made by the company in general
meeting” occurring in article 121 in the present case cannot, in my opinion,
overrule the directors’ powers by prescribing a regulation or passing a
resolution inconsistent with the articles. In Gramophone & Typewriter
Co.Ltd. v. Stanley BUCKLEY, L.J., said that even a resolution of numerical
majority at a general meeting of he company could not impose its will upon the
directors when the articles had confided to them the control of the company’s
affairs. As I have already indicated, the law is that directors can be denuded
of their powers of control and management either by alteration of the articles
or by their removal. Marchall’s case is
the only one on which counsel for the defendants laid considerable emphasis.
Marshall’s case appears not to have been
approved by the House of Lords in Quin & Axtens Ltd. v. Salmon.
Furthermore, the view expressed in Palmer’s Company Precedents, 17th edition,
volume I, at pages 543 to 545, is that where it is desired to give the general
meeting more effective control the articles should be so framed that the
exercise of such powers should be subject to the control and regulation of a
general meeting specially convancesed for the purpose. Such an article will
have the effect of being construed as a “contract to the contrary” of the
powers of the directors. Furthermore, Marshall’s case [1909] 1 Ch.267 seems to
suggest that the general meeting can commerce proceedings on behalf of the
company if the directors failed to do so. Ordinarily, the appropriate authority
to start an action on the company’s behalf is the board of directors to whom
this power is delegated as an incident to the management of the company. If the
directors cannot or will not start proceedings in the company’s name the power
to do so reverts to the general meeting.
In the present
case, I am of opinion, that the power of management is vested under the
articles in the board. This power is subject to alteration of the articles. The
word “regulation” in article 121 in the present case is, in my opinion,
synonymous with “articles” and the result is that the powers of management can
be challenged only by alteration of the articles. In my opinion, there is a
contract providing for management by the board and such a contract is contrary
to regulation of the exercise of the powers of directors by the general meeting.
Counsel for
the defendants contended that under section 284 of the Companies Act, the
directors could be got rid of at a general meeting and, therefore, if a general
meeting were convened, it would appeal whether the shareholders wireless accept
that acts of the directors. Under section 284 of the Companies Act it is
provided that a company may by ordinary resolution remove a director before the
expiry of his period of office. A special notice is contemplated under that
section of any resolution to remove a director or to appoint somebody instead
of a director so removed. It is further contemplated in that section that on
receipt of a notice of a resolution the company is to send a copy thereof to
the directors concerned and the director shall be entitled to be heard on the
resolution at the meeting. Counsel for the plaintiff, in my view, rightly
contended that no general meeting should be allowed to be convened in the
present suit for obtaining any relief under section 284 of the Act. I am of
opinion that no meeting convened for the purpose of ascertaining the wishes of
the shareholders as to whether a suit should be allowed to proceed or not
should be converted for another indirect purpose of removal of the directors.
Counsel for
the plaintiff relied on Dhanuka’s case. In that case there was an ordinary
resolution at a requisitioned general meeting and several persons were
appointed directors in addition to the four existing directors. There was an
action on behalf of the shareholders and others alleging that the resolution
was invalid on the ground that under the article it should have been passed
only by a special resolution. A question arose as to whether the court would
interfere in the internal management of the company. Dealing with that
contention their Lordships’ opinion was that, to treat the resolution as
effective would mean that the company could terminate the appointment of
managing agents by ordinary resolution contrary to the articles which required
an extraordinary resolution. In other words, an infraction of the article was
not permitted. Counsel for the plaintiff on the authority of Dhanuka’s case
[1950] 20 Comp.Cas.133 contended that to allow a general meeting and to get rid
of directors under section 284 of the Companies Act would be to allow by
ordinary resolution what had to be done only after observing formalities
contemplated in section 284. It is true that the directors can be removed in a
general meeting but any proposed resolution for such removal of directors is
conditional upon certain prior notice. In the present case there has been no
such notice. I am of opinion that the defendants cannot resort to the purpose
of removal of directors under the garb of a general meeting to be convened to
ascertain the wishes of shareholders as to the continuance of a suit. Counsel
for the plaintiff further contended relying on the decision of Cook v. Deeks
that to allow the holding of a meeting in the present case would be to allow an
alleged exercise of tyranny over the minority. Under these circumstances it
will not be a case of internal management but an infraction of the article, for
the majority would get hold of the company and get rid of the management, which
is being exercised by the present board under the articles. Such use of voting
power would be to allow the members to usurp powers of management which are
entrusted to the board by the articles.
Counsel for
the defendants made a distinction between a general and particular delegation
of powers to directors. As to particular delegation of powers counsel conceded
that they could not be taken away from the directors without amendment of
articles. Instances of such particular delegation were illustrated with
reference to articles 20, 26 and 45 which related to calls on shares,
forfeiture of shares and transfer of shares. Counsel for the defendants
contended that articles 121 and 122 were instances of general delegation and
related to the general management. Counsel for the defendants contended on the
authority of Burland v. Early that the court would not interfere with the
internal management. The two principles laid down in that case are, first, that
the court would not interfere with the internal management of the company
acting within their powers and, secondly, that in order to redress a wrong done
to the company or to recover money or damage alleged to be due to the company,
the action would prima facie be brought by the company itself. The doctrine of
supremacy of shareholders would apply, provided, first, it is within their
powers and, secondly, that the acts of the shareholders are to cure mere
informality and irregularity as opposed to the infraction of articles or
statutes. In the present case the directors have instituted the suit against
persons who have invaded the powers of directors and/or their management. The
acts complained of by the directors are an infraction of articles. Such acts
are impeached by the company as violation of the articles by persons described
as trespassing upon the powers of the board.
I am of
opinion, first, that it is not open to the defendants as a defence to the suit
to object to the use of the name of the company by the plaintiff. Secondly,
there is no conclusive evidence showing that the plaintiff is not authorised to
institute the suit. Thirdly, the articles confer sufficient powers on the
plaintiff to maintain this suit. Fourthly, no general meeting should be held to
deprive the directors of their powers under the articles.
For these
reasons I am of opinion that no general meeting in the present case should be
allowed to be held. I recall the order which I made on June 3, 1960. The suit
will appear in the list on August 25, 1960, subject to any part heard suit.
Costs cost in the cause. Certified for two counsel.
[1967]
37 COMP. CAS. 266 (KER)
V.
P
T RAMAN NAYAR, J.
COMPANY
PETITION NO. 22 OF 1965
JULY
22, 1966
JUDGMENT
This is a
contributory's winding up petition brought under the just and equitable clause on
the ground that the substratum of the company is gone.
The petition
is opposed by the company, a private limited company, which had only six
members at the time of the presentation of the petition. All of them are before
court. Two, including the petitioner, holding 1996 out of a total of 4000
shares, are in favour of the winding up while the remaining four, holding 2004
shares, are opposed to it. A contributory coming under the just and equitable
clause has generally an uphill task, for the statute establishes a domestic
tribunal as between the members and the company and thus enables the members
themselves by passing the requisite resolutions to determine whether there
shall be a voluntary liquidation or whether the court shall be asked to make a
compulsory order. The petitioner's course is not made any the less easy by the
circumstance that the majority of the members holding the majority of the
shares are opposed to the winding up. He will have to make out very strong
grounds indeed if he is to succeed.
Far from this
being the case, it seems to me that, even if the allegations made in the
petition are accepted, they would hardly justify a winding up order. What is
said is that as a result of difference with regard to the management of the
company, and the circumstances that the company was running at a loss, the
petitioner and the other member who supports him "did not wish to risk any
more of their property in the company" and that "as a result of the
discussion all the members came to a tentative proposal to voluntarily wind up
the affairs of the company". As a step towards this, the company held an
extraordinary general meeting on 15th March, 1965, at which it was unanimously
resolved that all of its assets should be sold. However, with a view to prevent
the necessary resolutions being passed, the directors, who had apparently
changed their mind about the winding up, were proposing to issue fresh shares
so as to secure a majority on their side. 1800 shares have been issued since
the presentation of this petition. But, as we have seen, even ignoring this
issue, there is a majority opposed to the winding up. Even on the basis of the
shareholding as at the time of the general meeting of 15th March, 1965, there
would be a majority opposed to the winding up so that it does not appear that
there was at any time chance of the special resolution necessary for either a
voluntary or compulsory winding up being passed. And, even if it be that the
members had in mind a winding up when they resolved to sell all the assets of
the company, nothing prevents them from changing their mind and deciding to
continue the company if that is possible. The company owned six undertakings.
Of these, only two have been sold, and even if it be, as alleged by the
petitioner, these were the most substantial of the undertakings, that would not
be a sufficient ground for a winding up order. The company was not formed for
taking over and running any particular undertaking. It can still continue to
run its four remaining undertakings and its objects are wide enough for it to
take up new ventures. Even where the sole undertaking of a company has been
actually sold, it cannot be said that its substratum has disappeared so long as
there is some other business which it can carry on coming within the objects
stated in its memorandum (In re Kitson & Co. Ltd. [(1946)1 All E.R. 435.]
and In re Taldua Rubber Co. Ltd. [(1946) 2 All E.R.763]. ). Hence, even if
counsel for the petitioner were right in his submission that the board was
bound by the resolution of the 15th March, 1965, to sell all the six
undertakings of the company, it would still not be a case where the substratum
of the company has disappeared. But counsel is wrong since, under the articles
of the company, the management is vested in the board and there is nothing in
the Companies Act, or in the articles, or in the regulations, which requires
the board to abide by the directions of the company in general meeting in the
matter of the sale of the assets of the company. The power to sell the assets
of the company is vested in the board, and, if the board feels that it is not
in the interests of the company to sell its assets, it is not bound to do so,
notwithstanding that the company in general meeting has resolved that they
should be sold (Automatic Self-Cleansing Filter Syndicate Company Ltd. v.
Cuninghame [(1906) 2 Ch.34], John Shaw & Sons (Salford) Ltd. v. Shaw
[(1935) 2 K.B.113; 5 Comp.Cas.369] and Murarka Paint and Varnish Works
(Private) Ltd. v. Mohanlal Murarka [(1961) 31 Comp.Cas..301], the last
mentioned of which refers to a large number of decided cases on the point ).
I might add
that it is by no means established that the resolution of the 15th March, 1965,
was passed with a view to put an end to the company. Exhibit R-8, the requisition
for the extraordinary general meeting, exhibit R-3 the notice of the meeting,
and exhibit R-9, the explanatory statement attached to the notice, suggest that
the idea was to sell one of the assets of the company, namely, the Cherupanni
Rubber Estate and/or other estates belonging to the company for the purpose of
clearing its liabilities since there was little prospect of clearing the
liabilities from the profits earned. There seems to be much substance in the
case put forward by the company that the resolution authorising the sale of all
the assets was designed to enable the board to choose and sell such of the
assets as would find a good and ready market for the limited purpose of
clearing the liabilities of the company and not for the purpose of winding up
the company. But, as I have already said, even if it be that, on the 15th
March, 1965, the members of the company thought that it would be advisable to
wind up the company there is nothing to prevent them from changing their mind
as obviously, on the very showing of the petitioner, the majority of them have
done.
One
circumstance is sufficient to show that the petition is not bona fide but for
some ulterior end. The case put forward in the petition is that the company had
ceased to make a profit, that its assets were just sufficient to meet its
liabilities, and that the petitioner and his friend were no longer prepared to
risk their property in the company. Their property in the company consists of
the shares held by them. If the averments in the petition were true, these
shares would be worth very little, and, in any event, not more than their face
value. Members who were opposed to the winding up offered to buy the shares of
both the petitioner and his friend at twice their face value. This offer was
rejected by the petitioner who demanded three times the face value,
accompanying the demand with a counter offer to buy the shares of the members
who were opposed to the winding up at the same price. This winding up petition,
it seems fairly obvious, is an abuse of the process of the court, being
designed for the purpose of putting pressure, so as to gain control over the
affairs of the company. I dismiss the petition with costs. This, of course,
means that the injunction granted in application No.507 of 1965 is no longer
in.force. Advocate’s fee Rs. 250.
[1940]
10 Comp Cas 196 (MAD.)
v.
Venkataramana
Rao, J.
April 30, 1940
K. Rajah Ayyar and S.V.B. Row, for the Appellant.
K.V. Krishnaswami Ayyar and T.S. Krishnaswami Ayyangar, for the Respondents.
The question for decision in this Second Appeal is whether the award of the sum of Rs. 1,295 paid as gratuity to the second defendant by the first defendant Bank in pursuance of a resolution of the General Body dated 23rd November 1935 is valid. The learned Judge in the Court below answered the question in the affirmative. The question is whether his view is sound.
Mr. Rajah Ayyar canvasses this view on two grounds: (1) the ex-secretary was permitted to retire on 17th March 1935 on production of a medical certificate which stated that he was suffering from chronic bronchitis and would not be in a position to attend to his duties for a period of six months. Under the Gratuity Rules which govern the payment of gratuity, the ex-secretary would not be entitled to claim any money as and by way of gratuity; because the rules contemplated certain conditions on fulfilment of which alone an ex-servant of the bank can claim gratuity. However the Board of Management seems to have granted the gratuity but exception was taken by the Deputy Registrar of Co-operative Societies and the Board of Management was requested to get the sanction of the General Body to the said payment. After the receipt of that letter from the said Registrar, the Board of Management seems to have amended the bye-laws by providing that in cases where the Board comes to the conclusion that an officer will have to be permanently incapacitated, though not supported by a medical certificate, it might pay gratuity. On the strength of the amended by-law, the Board of Management wanted to grant gratuity but however by way of abundant caution, they wanted to put the matter before the General Body. They accordingly framed a resolution to the following effect:—
"To sanction a sum of Rs. 1,295 as gratuity to the ex-secretary Mr. S.R. Subramania Aiyar as recommended by the Board in their resolution No. 19 dated 2nd October 1935."
The intended resolution was circulated to the share-holders and a General Body meeting of the share-holders was held on 7th December 1935 wherein they passed a resolution sanctioning the payment of the said gratuity. It is contended by Mr. Rajah Ayyar that the Board of Managemant had no power to give retrospective operation to the amended by-law and any payment of gratuity in pursuance of such an amended by-law would be illegal. Therefore, when the General Body passed a resolution sanctioning the said sum of Rs. 1,295 they were simply sanctioning an illegal resolution of the Board of Management. It must therefore be held that the payment was ultra vires. I am not inclined to agree with this contention. It cannot be denied that even though the by-laws did not provide for payment of a gratuity because under the rules, the Board of Management could not grant it, still, it is always open to the General Body to sanction a gratuity which an officer according to the sense of the meeting of the General Body deserved. In the particular case, how I construe the resolution of the General Body is this. They intended to pay the gratuity of Rs. 1,295 and treat the resolution communicated to them by the Board of Management as a recommendation to them. It is perfectly competent to them to grant the gratuity or to decline it. There is a statement in the resolution circulated to the shareholders that it was recommended by the Board in Resolution No. 19 dated 2nd October, 1935. But that would not invalidate the payment sanctioned by the General Body. At the meeting of the General Body, the General Body must have been apprised that according to the old by-laws, i.e., before they were amended, the payment of gratuity to the ex-secretary was not proper, that objection was taken by the Registrar of Co-operative Societies and that therefore the sanction of the General Body was sought. Considering all these facts, the General Body chose to pass the resolution which it is perfectly competent to do and Mr. Rajah Ayyar has not placed before me any authority to show that it was ultra vires of them to do so. The matter only relates to the administration and management of the affairs of a company and so long as the General Body acts within the ambit of the Articles of Association, any act done by them in regard to the management of the Bank will be intra vires and not ultra vires. It is next contended by Mr. Rajah Ayyar that the power to frame by-laws in regard to the payment of gratuity was delegated to the Board of Management and once they passed by-laws, both the Board of Management and the General Body were bound by them. I am not prepared to agree with this contention. The fact that the Board of Management is delegated the power to frame by-laws does not take away the power of the General Body to sanction any payment of gratuity in exceptional cases which have not been provided by the by-laws as framed by the Board of Management. This power is always vested in the General Body and by the mere fact of delegation, it cannot be taken away. Mr. Rajah Ayyar has again not placed before me any authority in support of his contention. Only these two contentions were advanced by Mr. Rajah Ayyar and I am clearly of opinion that both the contentions are unsustainable.
The appeal fails and is dismissed with costs (one set).
Leave to appeal refused.
[1933] 3 COMP. CAS. 153 (ALL.)
v.
NIAMATULLAH
AND BENNET, JJ.
JANUARY
19, 1933
P.L. Banerji, M.N. Raina and
Govind Das for the Appellant.
Bhagwati Shankar, S.N.
Seth,
Niamatullah, J.—This is an appeal from an order of temporary injunction passed
by the learned Additional District Judge, Cawnpore, in a pending suit brought
by the plaintiff-respondents for certain reliefs to be presently mentioned.
The suit was instituted by
eight plaintiffs for themselves and for plaintiff No. 9, a limited liability
company, styled as Ramchand Gursahaimal Cotton Mills., Ltd., registered under
the Indian Companies Act, of which the first eight plaintiffs claim to be the
directors. Eight persons were impleaded as defendants. B. Panna Lal Burman,
defendant No. 8, was the general manager of the company; but the plaintiffs
allege that he was lawfully dismissed in July 1932. Defendants 1 to 7 claimed
to be the directors of the company—a fact which is denied by the plaintiffs,
according to whom most of the defendants had either never been appointed
directors by any lawful authority or had ceased to be such prior to the
institution of the suit. The plaintiffs' case, as set forth in the plaint, is
that the defendants have practically excluded the plaintiffs from participation
in the management of the affairs of the company, the actual control of the
business being with defendant 8, who is in collusion with defendants 1 to 7.
The reliefs prayed for in the plaint include one for a declaration that
plaintiffs 1 to 7 are directors of the company. The position of plaintiff 8 as
a lawfully appointed director was never disputed by the defendants but the
plaintiffs pray for a declaration that plaintiff 8 is also the chairman of the
board of directors. A further declaration is sought to the effect that
defendants 1 to 6 are not the directors of the company and that defendant 8 is
no longer the general manager thereof.
The suit was instituted on
August 18, 1932. On September 3, 1932, the plaintiffs presented an application
asking for a temporary injunction in somewhat indefinite terms. In substance
they prayed for an injunction directing all the defendants to refrain from
interfering with the plaintiff's management of the affairs of the company,
defendant No. 8 to refrain from acting as the general manager of the company
and Gur Prasad and defendant 1, to refrain from acting as the chairman of the
board, of directors, a position which he claimed as against plaintiff 8. The
application was supported by an affidavit, and the parties produced a number of
documents which enabled the learned Additional District Judge to arrive at
findings on certain questions having an important bearing on the plaintiffs'
application for injunction.
That plaintiffs 1 to 7 are
directors of the company is denied by the defendants. If the determination of
the question had depended upon facts seriously controverted, it would not have
been desirable for the court to prejudge the case; but facts, either admitted
or proved by unimpeachable evidence, enabled the learned Judge to determine the
question at an early stage of the case. We were addressed on that question at
length and reference was made to facts admitted or sufficiently proved, and we
are in a position to safely pronounce an opinion on the question already
referred to for the purposes of these proceedings.
If plaintiffs 1 to 7 are
found to be the directors of the company but are being excluded from
participation in the management of the affairs of the company by the
defendants, it is clear that there is a continuing invasion of the plaintiffs'
rights, and the case is a fit one in which the court should grant a temporary
injunction to prevent what is undobutedly an injury to the plaintiffs, rights.
It has not been argued by the learned advocate for the defendants that the
court has no power, in the circumstances of the case, to grant a temporary
injunction. Order 39, Rule 2 of the Code of Civil Procedure, which is clearly
applicable, gives very wide power to the court to give protection against
injury to the plaintiffs during the pendency of suit.
Under the articles of
association of the company the maximum number of directors should be nine, with
a minimum of five. It is common ground that prior to March 29, 1930 the
following seven persons were the directors of the company:—
(1) R.B. Vikramajit Singh,
plaintiff No. 8. (2) B. Dwarka Prasad Singh, defendant No. 6 (3) B. Ram Gopal,
defendant No. 7. (4) B. Parshotam Das, since deceased. (5) L. Ram Kumar,
plaintiff No. 6. (6) B. Behari Lal, defendant No. 5, and (7) B. Sri Ram Khanna,
since resigned.
Parshotam Das died sometime
before March 29, 1930, so that there were only six directors left, and three
more could be appointed. Three new directors were elected by the Board of
directors on that date. They were Mr. Gur Prasad Kapoor, defendant 1, Mr.
Ranjit Singh, plaintiff 2, (who is the son of R.B. Vikramajit Singh, plaintiff
8) and Mr. Sri Kishen Khanna. Sometime afterwards, but before the next general
meeting of the shareholders, Sri Kishen Khanna resigned. On March 21, 1931, L.
Harcharan Das, defendant 2, was elected by the board of directors in place of
Sri Kishen Khanna. The general meeting of the shareholders took place on April
18, 1931, when the appointment of Gur Prasad, Ranjit Singh and Harcharan Das
was brought up for confirmation. Gur Prasad and Harcharan Das were duly elected
by the shareholders, but Ranjit Singh was not. It should be mentioned at this
stage that the election of a person by directors as a director entitles him to
hold office till the next general meeting; while if he is elected at the
general meeting of the shareholders, he is entitled to hold office for three
years.
Sri Ram Khanna, who was an
old director, resigned sometime before February 6, 1932, on which date the
Board of directors elected Rameswhar Prasad Bagla, plaintiff 1, and Ranjit
Singh, plaintiff 2, to fill the two vacancies which existed: one in consequence
of the resignation of Sri Ram Khanna, and the other in consequence of Ranjit
Singh not having been elected at the general meeting of the shareholders. There
was some controversy as regards the legality of this election. It was urged as
against Ranjit Singh that he, having been rejected by the shareholders, was not
eligible for re-election by the directors. Nothing definite was urged as
against Rameshwar Prasad Bagla. We do not think that any flaw exists in the
election of Ranjit Singh by the directors on February 6, 1932 in view of the
provisions of Rule 100 of the Articles of Association. The circumstance that he
failed to secure his election at the general meeting merely implied that he was
not elected for a longer term. It did not, in any way, detract from the
authority of the directors to co-opt him for the limited time which would
expire on the next general meeting.
An extraordinary general
meeting of the shareholders was convened on February 14, 1932. One of the
resolutions moved at that meeting was that the number of directors be increased
to sixteen. The resolution was carried, and the plaintiffs 1 to 5 were elected
directors for a full term of three years. It is not disputed by the plaintiffs
that this resolution was not a "special resolution" within the
meaning of Section 81 of the Indian Companies Act. A special resolution to be
valid must be confirmed at a subsequent meeting. Section 20 of the Indian
Companies Act lays down that no alteration in the Articles of Association can
be made except in pursuance of a special resolution. The learned abvocate for
the appellants contended that, in so far as the increase in the number of
directors involved an alteration of Article 98 of the Articles of Association,
it should have been sanctioned by a special resolution and that, in the absence
of such a resolution, the number of directors could not be increased. Article
98 is worded as follows:—
'Until otherwise determined
by a general meeting, the number of directors shall not be less than five, nor
more than nine.'
Having carefully considered
the argument addressed to us , on behalf of the appellants, I think that merely
increasing the numbers of directors does not involve any alteration in Article
98, which itself gives latitude to the shareholders in that respect. The words
"Until otherwise determined by a general meeting" clearly imply that
it was open to the shareholders to alter the number of directors mentioned in
Article 98. If the shareholders do alter it, their action is in pursuance of
Article 98 and not otherwise. If the contention put forward on behalf of the
appellants be accepted, the article will have to be read as if the aforesaid
words were not part of it. No clear authority was quoted in support of the view
urged on one side or the other. The cases that were referred to in course of
the argument are those in which the question did not directly arise and no
opinion was definitely expressed. It is, therefore, unnecessary to examine them
in this connection. In my opinion the right construction of the articles is, as
already indicated, that it is open to the shareholders to vary the number of
directors therein referred to without in any way necessitating an alteration in
the article itself. In the view of the case I have taken, it must be held that
plaintiffs 1 and 2, who had been previously elected by the directors at their
meeting of February 6, 1932, and plaintiffs 3 to 5 were validly elected for the
normal term at the general meeting of shareholders held on February 14, 1932.
The learned Additional District Judge has taken a different view on this part
of the case, but the above conclusion affords an additional ground in support
of his order.
Another crucial point in
the case relates to what transpired on June 25, 1932, and April 22, 1932. At a
meeting of directors held on the former date, it was resolved that R.B.
Vikramajit Singh, plaintiff 8, be authorised by a power of attorney to be
executed by two of the directors named in the resolution, "to appoint at
his discretion, remove, or suspend agents, secretaries, managers, officers,
clerks and servants of the company." Such power of attorney was, in fact,
executed, and Mr. Vikramajit Singh passed an order dismissing B. Panna Lal
Burman, defendant 8, who was the general manager. On July 22, 1932, the
directors themselves passed a resolution terminating the services of B. Panna
Lal Burman as general manager. The plaintiffs' case is that defendant 8 ceased
to be the general manager on the order of dismissal passed by Mr. Vikramajit
Singh and, at any rate, on July 22, 1932, when the directors resolved to that
effect. As regards the resolution of the directors passed on July 22, 1932,
dismissing defendant 8, it is pointed out by the defendants that no notice of
the meeting was given to some of the directors, particularly defendants 1 and
2. It is not necessary to consider the legality or otherwise of the directors'
resolution of July 22, 1932, in reference to defendant 8, as the resolution of
July 22, 1932, authorising two of their numbers to execute a power of attorney
in favour of R.B. Vikramajit Singh, authorising him to dismiss servants of the
company, coupled with what happened in pursuance thereof is enough to make out
the plaintiffs' case as against defendant 8. It cannot be disputed that the
board of directors had power to terminate the services of any of the company's
servants. It is equally undeniable that they could delegate their power in this
respect to one of themselves acting as their agent. There is no flaw in the
argument addressed to us on behalf of the plaintiffs, namely, that the two
director who executed a power of attorney, had the power to do so and that R.B.
Vikramajit Singh became vested with the authority which was conferred on him by
the power of attorney. This being so, his order terminating the services of
defendant 8 as general manager is unquestionable, and defendant 8 ceased in law
to be the general manager of the company from the date of that order. It is, of
course, true that some other persons, who were either directors or claimed to
be such, took a different view and continued to recognise defendant 8 as the
general manager, who has had the control of the affairs of the company up to
date. We are, however, concerned with the legal aspect of the matter and as
already indicated, defendant 8 was lawfully dismissed by the order of R.B.
Vikramajit Singh.
July 16, 1932 is another
eventful date. A general meeting of shareholders took place on that date. A
meeting of directors had also been fixed for that date to be held at 2 p.m., at
the registered office of the company. Defendants 1 and 2 issued a notice
calling another meeting of the directors to be held at 1-45 p.m. at the
residence of L. Gur Prasad Kapoor, defendant 1.
It is in evidence that the
meeting which was to be held at the registered office of the company had been
decided on several days before July 16, 1932, and due notice thereof had been
given to all the directors. Of the other meeting, convened by the defendants'
party, very short notice was given to some directors and none to those who had
been elected on February 14, 1932. Apparently the defendants did not recognise
them as lawfully elected directors, as they have now been found to be. The
meeting cannot, therefore, be considered to be that of the directors of the
company and any resolutions passed at such meeting cannot be deemed to be
valid. The question assumed importance because at the meeting of the directors
held at the registered office of the company defendant 1 L. Gur Prasad Kapoor,
defendant 5, B. Behari Lal, and defendant 6 B. Dwarka Prasad, were declared to
have retired according to the rule of retirement by rotation. At the meeting
held at the residence of defendant 1, Gur Prasad Kapoor, defendant 1 was
elected chairman of the board of directors, while at the other meeting R.B.
Vikramajit Singh was elected chairman of the board of directors. One of the
important questions raised in the case is whether R.B. Vikramajit Singh is the
chairman. Reference has already been made to the fact that Mr. Gur Prasad
Kapoor and L. Harcharan Das, who called the meeting of directors held at the
residence of the former, did not send notices to plaintiffs 1 to 5, who in my
view had been duly elected on February 14, 1932, and, as already held, no
resolution passed at that meeting can be regarded as valid and binding. In this
view, Gur Prasad Kapoor, defendant 1, cannot be considered to have been duly elected
as chairman. As regards the meeting held at the registered office of the
company, no flaw has been suggested. The meeting had been duly called. There
was a quorum, and the directors had the power to elect one of their number as
the chairman. In these circumstances, R.B. Vikramajit Singh, plaintiff 8,
should be considered to have been duly elected as the chairman of the board of
directors.
On the same day, July 16,
1932, a general meeting of shareholders was held at which Lalas Behari Lal,
defendant 5, Dwarka Prasad, defendant 6, and Gur Prasad Kapoor, defendant 1,
were declared to have retired in accordance with rules, as had been done at the
meeting of the directors. The question whether these persons were in fact due
to retire, as was declared at the meetings of directors and shareholders held
on July 16, 1932, is highly controversial, and it is not desirable to express a
definite opinion on it. That question will have to be decided after the entire
evidence, oral and documentary, have been examined by the lower court.
L. Kamlapat and L.
Balmakund Burman, defendants 3 and 4, claim to be the directors by virtue of a
resolution passed at the meeting of directors held at the residence of L. Gur
Prasad Kapoor, defendant 1, on July 16, 1932, the regularity of which has been
already considered in relation to the appointment of L. Gur Prasad, as chairman
of the board of directors. For the same reasons, defendants 3 and 4 cannot be
considered to have been fully elected directors of the company.
The learned advocate for
the appellants impugned the elections held on February 6, and 14, 1932, also on
the ground that the proceedings on those dates had not been taken in good faith
to further the interests of the company but had been designed merely to give a
clear majority to the party of R.B. Vikramajit Singh. His contention was that
any proceeding, not taken in good faith for advancing the interests of the
company, is invalid in law. The propositions involved in this contention are of
facts and law. It is not possible to examine them at this stage and to
pronounce a definite opinion as to whether or not the proceedings on February 6
and 14, 1932, had been taken bona fide, and whether, as the law stands, they
were illegal, even though they were not characterised by any error of
procedure. This is a question which will have to be decided by the trial court,
if it is persisted in. Similarly, it cannot be held at this stage that L.
Kishan Lal, plaintiff No. 7, who claims to be the director under a resolution
passed at the meeting of July 22, 1932, was validly elected on that date, as
the legality of that meeting is in issue and cannot be satisfactorily examined
in these summary proceedings.
The result is that the
plaintiffs 1 to 6 and 8 and defendants 2 and 7 may, subject to what the court
may eventually decide and for the purposes of these proceedings, be accepted as
directors. Defendants 3 and 4 cannot be accepted as such. The position of
defendants 1, 5 and 6 is problematical and is left to-be decided after the
trial of the case. The plaintiffs 1 to 6 and 8 are entitled to discharge their
duties as directors of the company and the defendants have no right to do anything which may
amount to an infringement of their right. I have also found that B. Panna Lal
Burman, defendant 8, ceased to be the general manager sometime in June 1932.
The suit, which is pending before the learned Additional District Judge, may
have protracted trial: and in the meantime, unless a temporary injunction is
granted, the plaintiffs will not be allowed by the defendants to participate in
the management of the affairs of the company. In my opinion a case has been
made out for the exercise by the court of its powers under under Order 39 Rule
2 of the Code of Civil Procedure.
The
terms in which the injunction has been prayed for by the plaintiffs are
somewhat vague and indefinite. The learned Judge has granted an injunction in
terms of the application. I think he meant to pass the same order substantially
as I think should be passed. In my opinion the injunction should be in precise
terms. Accordingly I direct the defendants to refrain from interfering with the
discharge by the plaintiffs 1 to 6 and 8 of their duties, and with the exercise
by them of their powers, as directors of the Ramchand Gursahaimal Cotton Mills
Co., Ltd. I direct B. Panna Lal Burman, defendant 8, to refrain from performing
the functions of the general manager. I further direct the defendants to
refrain from interfering with R.B. Vikramajit Singh, plaintiff 8, in performing
the function of the chairman of the board of directors. B. Gur Prasad,
defendant 1, is directed to refrain from acting as chairman of the board of
directors. Subject to the directions set out above, I confirm the order
appealed from and dismiss this appeal with costs.
Bennet,
J.—I agree with
the judgment of my learned brother and desire to add a few words on the
argument of the appellants on Article 98 of the Articles of Association. The
appellants correctly pointed out that, under Section 20 of the Indian Companies
Act, any alteration or addition to the Articles of Association must be by a
special resolution. The chief points about a special resolution are that, under
Section 81 of the Indian Companies Act, a special resolution must be passed by
a majority of not less than three-fourths of the members entitled to vote at a
general meeting, and the special resolution must be confirmed by a majority of
the members entitled to vote at a subsequent general meeting under certain conditions of notice. The Act draws a distinction between
the matters which are to be dealt with by special resolutions and the ordinary
matters. The matters which are to be dealt with by special resolutions are
those which relate to the constitution of the company, that is, its articles of
association. The question before us is whether there was alteration or addition
to Article 98 by the resolution passed at the general meeting of February 14,
1932. The article states that, until otherwise determined by a general meeting,
the number of directors shall not be less than five, nor more than nine. The
resolution altered the maximum from 9 to 16. The argument for the appellants is
that, by this alteration, the article has been altered. No direct authority was
shown for this proposition. There are the following reasons to consider that
the raising of the maximum is not an alteration of the article:—
Firstly, the increase in
the number of directors is not a matter which the Act lays down in any part as requiring
a special resolution. On the contrary, we find in Schedule 1, Table A,
Regulation 83, the following provision:—
"The company may from
time to time in general meeting increase or reduce the number of
directors..."
The lower court took a peculiar
view that this Table A was no part of the Act; but in Section 17, Sub-section
2, it is stated that articles of association may adopt all or any of the
regulations contained in Table A in the First Schedule. I consider that there
is an analogy between this Regulation 83 of Table A and the Article 98 in
question. It is true that Regulation 83 does not lay down the number of
directors; but there is a provision in Regulation 68 that the number of
directors shall be determined in writing by a majority of the subscribers of
the memorandum of association. Regulation 83, therefore contemplates a change
being made in the original number of directors, and that change to be made by a
general meeting and not by a special resolution.
Another authority against
the appellants is Palmer's Company Precedents, 13th Edition, 1927, Part I, page
698, where there is a specimen of one of the articles of association exactly
similar to Article 98. This specimen says,
"Until otherwise
determined by a general meeting, the number of directors shall not be less than
three or more, than seven."
This
article gives the English practice, and apparently under this article the
number of directors is altered by a general meeting, as a note given by Palmer
states that there is only a doubt in the absence of the first seven words as to
whether a special resolution is necessary. Palmer, therefore, considers that,
when these first seven words were present, there was no doubt that a general
meeting could make the alteration required.
Lastly,
in regard to the ruling quoted by the lower court, Navnitlal Chabildas v.
Scindia Steam Navigation Co., Ltd., that ruling has been reported more fully in
29 Bom. L.R. 1362. In the Law Reporter the terms of the article in question are
given, and we find that the words "unless otherwise determined by a
general meeting" do not appear in the article which was the subject-matter
of that case. That case, therefore, is no authority for the case before us.
For
these reasons I consider that the number of directors was validly altered by
the resolution of the general meeting of February 14, 1932.
By
the Court—We grant an injunction to the plaintiffs directing the defendants to
refrain from interfering with the discharge by the plaintiffs 1 to 6 and 8 of
their duties, and with the exercise by them of their powers, as directors of
the Ramchand Gursahaimal Cotton Mills Co., Ltd., and directing B. Panna Lal
Burman, defendant 8, to refrain from performing the function of the general
manager. The defendants are further directed to refrain from interfering with
R. B. Vikramajit Singh, plaintiff 8, in performing the functions of the
chairman of the board of directors. B. Gur Prasad, defendant 1, is directed to
refrain from acting as chairman of the board of directors. Subject to the
directions set out above, we confirm the order appealed from and dismiss this
appeal with costs.
[1939] 9 COMP. CAS. 324 (ALL.)
HIGH
COURT OF
v.
Holyland Cinetone Ltd.
ALLSOP, J.
AUGUST 23, 1939
B. Malik, for the
Applicants.
A. Sanyal, for the Opposite Party.
Allsop, J.—This is an
application by Vishwanath Prasad Jallan and Piare Lal Srivastava containing three
prayers, namely (1) that the register of the members of the Holyland Cinetone
Co., Ltd., should be rectified and that the names of the applicants should be
included in the said register, (2) that it be declared that the applicants are
still directors and members of the company and (3) that it be declared that the
action taken after January 26, 1936, is void and illegal and does not bind the
company and its shareholders. It is admitted that the first prayer only can be
granted under the provisions of Section 38 of the Indian Companies Act. This
Court cannot give the other declarations asked for and I may say at once that
the application in so far as it asks for those declarations is hereby rejected.
There remains the question whether the names of the applicants
should be entered in the register of the members of the company. In order to
understand the dispute between the parties it is necessary to set forth certain
facts in the history of the company.
The memorandum and articles of association were subscribed
by 17 persons on November 18, 1935. The capital authorised was 25 lacs, of
which 10 lacs were to be issued. There were to be 20,000 ordinary shares of Rs.
100 each and 5,000 preferential shares of the same value. It was set forth that
the qualification of a director was that he must have subscribed for 100 shares
and that he must have paid all calls or any other moneys due to the company.
Twelve of the signatories of the memorandum and articles of association
undertook to purchase 100 shares each and they were to be the first directors
of the company. Their names
were Madhoramsand, Gurucharan Prasad Khattri, Harnarain Moolchand, Gopal Lal
Khanna, Durga Prasad, Bindbasni Prasad, Madangopal Kedia, Vishwanath Prasad
Jalan, Vishnushankar, Kedarnath Singh, Thakur Chhedi Singh and Piare Lal
Srivastava. It is to be noticed that the applicants are included in the list.
Each of the directors undertook in the memorandum to subscribe for 100 shares
and no more. Of the other five signatories three undertook to purchase 5 shares
each and the other two to purchase one share each. A meeting of the directors
was held on December 14, 1935 and four managing directors were elected, namely,
Madhoramsand, Gurucharan Prasad Khattri, Bindbasni Prasad and Madangopal Kedia
Doubtless the directors purported to act under Art. 115 of the articles of
association, but this article sets forth that the directors shall elect from
amongst themselves five directors constituting the board of managing directors
of the company. It is to be noticed that only four were elected. The managing
directors under the articles of association have been given very large powers.
A meeting of this board of managing directors was held on December 26, 1935,
and it was decided at the meeting that the subscribers to the memorandum who
were directors should be asked to pay Rs. 2,000 to the company. This resolution
was based on Article 7 of the articles of association which says that the
amount payable on application for each share offered to the public for subscription
shall be 20 per cent. of the nominal amount of the share and another 20 per
cent. shall be payable on the allotment of the share. The managing directors
were asking the directors to pay on their shares the percentage corresponding
with that which any member of the public would have to pay on application for
shares. Rs. 2,000 being 20 per cent. of Rs. 10,000, the price of the shares
which each of the directors had contracted to purchase. On January 17,1936, the
secretary of the company who happened at that time to be the applicant, Piare
Lal Srivastava, wrote a letter to all the directors drawing their attention to
the provisions of Section 85 of the Indian Companies Act and indicating that
they would cease to be directors if they did not pay the sum of Rs. 2,000 each
on or before January 26, 1936. Section 85 of the Indian Companies Act lays down
that it shall be the duty of every director, who is by the articles required to
hold a specified share qualification and who is not already qualified, to obtain
his qualification within 2 months after his
appointment, or such shorter time as may be fixed by the articles. The 26th of
January, 1936 was the end of the period of 2 months next after November 25,
1935, the date of registration. Madhoramsand, Gurucharan Prasad Khattri, Durga
Prasad and Madangopal Kedia, each paid a sum of Rs. 2,000 on January 25, 1936.
On January 26, 1936 there was a meeting at which the resignation of Moolchand
was accepted and Thakur Chhedi Singh was elected to the board of managing directors,
although he had not paid his sum of Rs. 2,000. Moti Chand was elected to the
board either under Article 89 of the articles of association which gives the
directors power to co-opt a qualified share-holder as a director or under
Article 90 which empowers the directors to elect any shareholder as an honorary
director to the board it not being necessary for such director to hold a
qualification share. Moti Chand had not paid anything at that time to the
company and he was not one of the signatories of the memorandum and articles of
association. Then on March 4, 1936, there was another meeting of the directors
at which those present were Madhoramsand, Durga Prasad and Madangopal Kedia. No
notice of this meeting was sent to those directors who had not paid the sum of
Rs. 2.000. Presumably those who had paid had decided that the other directors
could no longer act. It was originally set forth in the articles of association
that the number of directors should not be less than 11 nor more than 21, but
at this meeting the directors resolved that the minimum number should be
reduced from 11 to 5 and that an extraordinary general meeting of shareholders
should be held as soon as possible. The articles required that there should be
a quorum of five directors until it was otherwise determined, but that article
gave the directors power to regulate their meetings and proceedings as they
thought fit and to determine the quorum necessary for the transaction of
business. A meeting of the directors was held again on March 5, 1936, but
nobody appeared and the meeting was therefore adjourned by the general manager
to the next day, March 6. On that date the directors present were Madhoramsand,
Durga Prasad and Madangopal Kedia and they decided that the quorum should be reduced
to three. A meeting of shareholders was called for March 23, 1936, but it was
adjourned for want of a quorum, the article requiring that it was necessary for
15 members personally to be present to form a quorum at a general meeting. The
meeting was adjourned to
March 30, 1936, when it was attended by Madhoramsand, Durga Prasad and S.N.
Mitra. This meeting proceeded to transact business under the provisions of
Article 68 of the articles of association which allows an adjourned meeting to
transact business even if a quorum has not been formed. This meeting reduced
the minimum number of directors to four. On April 11, 1936, there was again a
meeting of directors at which Madhoramsand, Durga Prased, Madangopal Kedia and
Gurucharan Prasad were present. They confirmed the resolution of March 6, 1936.
They accepted the resignation of Moti Chand who had been elected on January 26,
and decided that legal action should be taken against those directors who had
not paid the sum of Rs. 2,000 which they had been required to pay. On April 14,
1936, a meeting of the shareholders took place, but it was adjourned to April
21, 1936 for want of a quorum and on April 21 the resolution of March 23, 1936
was confirmed. The next meeting of the directors was held on November 17, 1936.
Those present were Gurucharan Prasad, Madhoramsand, Madangopal Kedia and Durga
Prasad. They elected Shyam Sunder Lal, Jagannath Prasad and S.N. Mitra to be
honorary directors. Article 90 of the articles of association states that the
number of honorary directors shall in no case exceed three. At the same meeting
Madangopal Kedia's resignation was accepted and it was decided that the
directors should pay another sum of Rs. 2,000, this being the equivalent of the
sum which would be payable by members of the public on 100 shares at the time
of allotment. On the same date Durga Prasad resigned his position as managing
director and Jagannath Prasad and S.N. Mitra were appointed to the board of
managing directors. The next date with which we are concerned is December 13,
1936. By that time apparently an application had been made to the Registrar,
Joint Stock Companies that the company should be allowed to commence business
and a certificate of commencement had been received from the Registrar. On that
date the directors present were Gurucharan Prasad, S. N. Mitra, Jagannath
Prasad, Shyam Sunder Lal and Durga Prasad. They saw the commencement
certificate and decided that they would approach the defaulting directors
individually in order to obtain payment. On December 28 at another meeting it
was decided that further attempts should be made to obtain payment of this
money. These efforts succeeded to some extent because Harnarain Mulchand paid
Rs. 2,000 on January 18, 1937. Madhoramsand and Gurucharan Prasad had paid a further sum of Rs. 2,000 each on April 18, 1936 and Durga
Prasad paid a sum of Rs. 2,000 on November 17, 1936. On December 29 there was a
meeting at which Gurucharan Prasad, Shyam Sunder Lal and S.N. Mitra were
present. They passed a resolution that a notice should issue formally to all
the defaulting directors to make payment of the sums due from them. They warned
the directors that their shares would be forfeited if they did not pay the sums
due on or before January 15, 1937. Then there was a meeting on January 19, 1937
at which Jagannath Prasad, Gurucharan Prasad, Shyam Sunder Lal and Durga Prasad
were present and this meeting passed a resolution forfeiting the shares. The
applicants did nothing about this matter at the time but the company then sued
them for a sum of Rs. 4,000 each and it appears that a decree has been passed
against one of them while the suit of the other is pending. The decree which
has been passed is now in appeal.
It is explained on behalf of the applicants that they did
not really wish to have anything to do with the company and that they would be
quite content to give up their shares if they were not required to pay Rs.
4,000; but now they are in a position that they may be required, if the decree
is upheld to pay a sum of Rs. 4,000 each and at the same time to lose their
shares in the company and they feel therefore that they are entitled to stand
upon their strict rights to demand, if the resolution of forfeiture is invalid,
that their names should be restored to the register of the members of the
company.
The argument put forward in the first instance on behalf of
the company was that the signatories to the memorandum became members of the
company and were allotted shares automatically on the date when the company was
registered and consequently on that date they were bound to pay a sum of 20 per
cent. of the value of their shares as they would have had to do if they had
applied for shares on that date and a further 20 per cent. as they would have
to do if shares had been allotted to them on that date as members of the
public. At a later stage in the arguments the company had to abandon this
position because if it was the proper position, then a sum of Rs. 4,000 was due
from each of the original directors on November 25, 1935, and no director was
qualified to act under the articles of association unless he had paid the sum
of Rs. 4,000 on or before January 26, 1936. If this is the true position, then
none of the directors who continued to act on behalf of the company was entitled to do so
because none of them had paid Rs. 4,000 on or before January 26, 1936 and those
who had acted would render themselves liable to a penalty of Rs. 50 a day under
Section 85, Sub-section (2) of the Indian Companies Act provided that the
argument of the company was correct that sub-section (1) of Section 85 applied
not only to the purchase of shares but also to the payment for those shares as
part of the qualification for directorship under the articles of association.
The directors who now purport to represent the company were on the horns of a
dilemma. If this original argument of theirs was correct, they were liable at
least to a severe penalty and if it was not correct, then they were certainly
not entitled to forfeit the shares of the other directors merely because
payments were not made on or before January 26, 1936.
The company therefore fell back
upon the argument that these sums of 20 per cent. corresponding with
application money and 20 per cent, corresponding with allotment money were
payable from the dates on which they were respectively demanded by the company.
Learned counsel for the company relied on Section 21(2) of the Indian Companies
Act which says that any money payable by any member to the company under the
memorandum or articles of association shall be a debt due from him to the
company. He maintains that this money which he considers to be due from the
directors was a debt payable on demand. On the other side, it is argued on
behalf of the applicants that there is nothing in the memorandum or articles of
association which requires them to pay any sums corresponding with those which
would be payable by members of the public subscribing for shares at the time of
application or at the time of allotment. It is undoubtedly true that there is
no such specific provision either in the articles of association or in the
memorandum. It seems to me that Section 21 (2) of the Indian Companies Act does
not help the company in this case. It is no doubt true that money becomes a
debt when it is due under the articles of association and memorandum, but I
think that money does not become due merely because signatories of the articles
of association or the memorandum have undertaken to purchase shares and pay for
them. Subscribers who are members of the public also promise to take up and pay
for shares, but the amounts due from them at any time are only such part of the
price of the shares as they are required to pay at a particular time, that is, the part they are required to pay to application, the
part they are required to pay on allotment and the part that they may be
required to pay if the calls are made upon them in accordance with the
provisions of the articles of association. From the model articles set forth in
table A of the 1st Schedule of the Companies Act it will appear that a
distinction is made between money which is due and money which is presently due
and in my judgment it is only money which is presently due which can be
described as a debt. A question of this nature arose in the case of Alexander
v. The Automatic Telephone Co., where some directors of a company sought to
compel others to pay on their shares in the same proportion as had been paid by
shareholders who were members of the public. The case was decided under an
English Act in which there were provisions similar to those in Section 21 of
the Indian Companies Act and it was held that the directors were not legally
bound to make the payments, but that the Court of Chancery would compel them to
pay upon the ground that they had been acting in contravention of the trust
which had been reposed in them as directors of the company. The Indian
Companies Act seeks to deal with a situation of this kind by the provisions of
Section 103 which do not allow a company to commence business until every
director has paid to the company on each of the shares taken or contracted to
be taken by him and for which he is liable to pay in cash a proportion equal to
the proportion payable on application and allotment on the shares offered for
public subscription. In the case before me the directors who had signed the
memorandum of association were bound to pay a sum of Rs. 4,000 each before the
company was entitled to commence business. From this it does not necessarily
follow that they were liable to forfeiture of their shares if they did not make
the payment. As I have already said, there is no term in the articles of
association or memorandum by which the signatories contract to pay any sum on
any particular date or any particular time or on demand or otherwise except in
so far as the articles allow the company to make calls on its members. The
provision for calls was originally that the directors might from time to time
make such calls as they thought fit upon the members in respect of all moneys
unpaid on the shares held by them respectively and not by the condition of
allotment thereof made payable at fixed times, and each member should pay the
amount of every call so made on him to the persons and at the times and places
appointed by the directors. There is no resolution of the board of directors
requiring any members to make payments. There is only a resolution of the
so-called board of managing directors, but as I have already pointed out the
articles of association required that the board of managing directors should
consist of five directors and four directors only were appointed. It seems to
me, therefore, that these four directors were not entitled to exercise the
functions of the board of managing directors and the resolution passed by them
requiring the other directors to pay these sums of Rs. 2,000 was not valid. The
directors might have treated the so-called managing directors as a committee
which could make a recommendation to them and, if the board of directors as
such had passed a resolution that the recommendation of the managing directors
that money should be demanded should be accepted, then possibly the directors
would have had to pay these sums and if they had not paid them, they would have
been sums presently due. In the circumstances of this case, however, I hold
that these sums of Rs. 2,000 were never presently due and consequently that the
directors were not bound to make payments.
It has been urged on behalf of the company that the result
is unfortunate because some directors have prevented the company from
functioning properly. I do not think that any unfortunate result need have
arisen if the proper procedure had been adopted. If the majority of the
directors were unwilling to pay the sums which they should have paid under
Section 103 of the Indian Companies Act, then the company would not have been
able to commence business and if it did not commence business within a certain
period, then it could have been wound up on the application of any member. Once
it was wound up, all the sums due on the shares would have been available to
the company and any necessary expenses incurred for promoting and registering
the company could have been paid out and the whole matter would have come to an
end. The company may say that it should not have been at the mercy of some of
its directors, but on the other hand, those directors are equally entitled to
say that they should not have been at the mercy of the minority of their body.
If the majority were unwilling to proceed with the matter and by their conduct
automatically caused the winding up of the company, they were perfectly
entitled to do so.
I hold that these sums of Rs. 2,000 were never presently
due from the applicants and, therefore, that their shares were not liable to
forfeiture. I may add that there are provisions for forfeiture in the articles
of association and it is at least doubtful whether all the provisions were
observed so as to lead to forfeiture even if it could be said that there was a
call upon the applicants, but I do not think that it is necessary to go into
the details of that matter because I have already held that there was no proper
call and for that reason no money was due to be paid at any particular time by
the applicants.
On the other hand, it seems to me that it is discretionary
in the court to pass an order for the rectification of the register of members
and the fact remains that the Registrar of Joint Stock Companies has issued a
certificate enabling the company to commence business which he would not have
done if he had known that the present applicants as directors should have paid
a sum of Rs. 4,000 each before the date when he issued his certificate. In
these circumstances I do not think that I should exercise my discretion in
favour of the applicants unless they make the payment which they should have
made to enable the company to commence business. Learned counsel on behalf of
the applicants has suggested that his clients, if they pay Rs. 4,000, may find
themselves in a very difficult position. He contends that all the proceedings
of the company through the remaining directors after January 26, 1936, were
absolutely void and there may be many complications. I do not think that any
possible complications should prevent me from passing a conditional order in
favour of the applicants because what I propose to do is to impose the
condition that the applicants shall pay these sums of money within a certain
time and that their application shall be rejected if they do not pay the money.
The money will be deposited in court and what eventually happens to it may be
left to subsequent decision. It may be that it will be utilised towards the
payment of any decrees which may be ultimately passed in favour of the company
or it may be that it will be paid to the company when all disputes are set at
rest or finally it may eventually be returned to the applicants.
I direct that the register of members of the company shall
be rectified by the entry of the names of the applicants or either of them on
condition that each of the applicants or either of them deposits a sum of Rs.
4,000 in this Court on or before November 24, 1939. If either applicant fails
to make the deposit within that time, his application shall be rejected. I do
not pass any order for the payment of costs because both parties seem to be in
some measure to blame for the state of affairs which has arisen.
[1954] 24 COMP. CAS. 330 (MAD.)
HIGH
COURT OF
v.
Srirangam Janopakara Bank Ltd.
RAJAGOPALA AYYANGAR, J.
CIVIL REVISION PETITION NO. 515
OF 1954.
APRIL 14, 1954
R.
Gopalaswami Iyengar and M.R. Narayanaswami, for the Petitioner.
V.C.
Rajagopala Ayyangar J.—This is a petition to revise the
order of the District Munsif of Tiruchirapalli, regarding certain findings on
two preliminary issues, which were raised for his decision.
The first defendant is the
petitioner in this revision petition. He was the president of the Srirangam
Janopakara Bank Ltd., which is a banking company incorporated under the Indian
Companies Act. This company was managed by a board of 13 directors, with the
first defendant as the president. There appear to have been some differences
and disputes in the board of management, which at this stage it is unnecessary
to detail, and the directors called for a meeting of the board on November 14,
1953, when they purported to remove the first defendant from the office of
presidentship and appointed the second plaintiff in his stead. As the
petitioner refused to recognise the validity of his removal and to hand over
charge to the person appointed as president, the suit out of which this
revision arises was filed by the company by its newly elected president as the
first plaintiff, the newly elected president as the second plaintiff, and
plaintiffs 3 to 10 being 8 other directors. To this suit were impleaded as
defendants, the petitioner as the first defendant, and as defendants 2 to 5 the
other four directors stated to be siding with the first defendant and refusing
their co-operation to the plaintiffs. The paid secretary of the bank was
impleaded as the sixth defendant.
The plaint, after setting out the circumstances which
necessitated the proceedings for the removal of the first defendant from his
office as president, and, after affirming the validity of the proceedings held
therefor, went on to state in paragraph 17:
"In the circumstances stated above it has become
necessary for the plaintiffs to sue for a declaration that the first defendant
has ceased to be the president and for an injunction against him from
functioning as such and from interfering with the second plaintiff functioning
as president of the first plaintiff's board of directors."
The plaintiffs valued the relief claimed in the suit in the
sum of Rs. 100 for the purpose of court-fee and jurisdiction and paid a
court-fee of Rs. 11-3-0 under Section 7(iv)(c) of the Court-fees Act. The
reliefs claimed in the plaint were stated in paragraph 21 as follows:
(a) for a
declaration that the first defendant's office as president of the board of
directors has validly been terminated at the meeting of the board of directors
held on November 14, 1953, and that the second plaintiff has duly been
appointed president of the board of directors, and consequently,
(b) for an
injunction restraining the defendants from interfering with the second
plaintiff functioning as president of the board of directors,
(c) for costs of suit, and
(d) for
such further or other reliefs as may be deemed fit and proper to grant in the
circumstances of the case.
The first defendant filed a written statement, in which
several contentions raising questions of law and fact were formulated, but this
petition is concerned only with two objections raised by him. The first is
contained in paragraphs 3 and 4 of the written statement and they read as
follows:
"The plaintiffs are not in possession of the bank or
any of its properties. The person in actual possession of the bank, its
documents and its properties is the secretary who has been impleaded as the
sixth defendant in this suit subject to the control of the first defendant the
president. The second plaintiff is not in possession of all or any portion of
the bank or its properties and has never functioned as president. The
plaintiffs ought therefore to have sued defendants 1 and 6 for possession as
they are in actual possession of the bank and its properties. The plaintiffs'
suit has to be dismissed as it offends Section 42 of the Specific Relief Act.
The suit has not been properly valued. Even according to
the balance sheet of the first plaintiff the properties of the bank are worth
many lakhs. If properly valued the suit will be beyond the pecuniary
jurisdiction of this court. The court fee paid is also insufficient."
The second objection is contained in paragraph 5 and is
stated in these terms:
"The plaintiffs have no right to maintain this suit.
Under the articles of association the only persons who can maintain a suit for
and on behalf of the bank are the president and the secretary. So far as the
second plaintiff is concerned his claim to the office of the president has
still to be established. The allegation that the sixth defendant was asked to
join as plaintiff and refused to do so is false. In any event the articles do
not contemplate a suit being filed on behalf of the bank by anybody other than
the president and the secretary. The other plaintiffs have also no right to sue
on behalf of the bank."
Issues were framed in the suit, and the points covered by
these paragraphs were raised by three issues, which run as follows:
1. Whether the plaintiff is entitled to the
declaration and injunction prayed for?
2. Whether the suit as laid is not maintainable?
and an additional issue,
3. Whether the suit is beyond the pecuniary
jurisdiction of this court?
These there issues were heard as preliminary issues, and
the learned District Munsif has held in favour of the plaintiffs on all of
them. It is this finding of the District Munsif that is challenged in this
revision as erroneous and illegal.
The learned counsel for the petitioners argued before me to
points. The first is as regards the valuation of the suit for the purposes of
court fee and jurisdiction, and the second whether the suit by the first
plaintiff, that is the company, was maintainable, without the secretary also
figuring as a co-plaintiff.
The argument upon the first point is this. This suit in
substance is one for the recovery of the office of the president based upon the
resolution of the board of directors appointing the second plaintiff as the
president. Under article 41 of the articles of association the president has a
general control over all the affairs of the Nidhi. The affairs of the Nidhi
include the management of the properties of the Nidhi. The office of president,
it is therefore stated, is intimately connected with the right to possession of
the properties of the bank, and as the office and the right to manage the
property are intimately connected, it is stated that a suit for the recovery of
such an office is virtually a suit for the possession of the properties, which
the holder of such
an office has the right to manag . Reliance is also placed on certain other
powers of the president under the articles. On the basis of this reasoning, it
is urged that the suit ought to be valued under Section 7(iv)(c) of the
Court-fees Act, on the basis of the market value of the properties of the
institution of which the second plaintiff claims to be the president. For this
position reliance is placed on the judgment of this court in Karupanna Nadar v.
Karuppa Nadar. The dispute there related to an educational institution, known
as Nadar Kshatria Vidyasala situated in the
The next question dealt with was
as to the valuation of the suit for purposes of jurisdiction. The properties
owned by the institution, including the school building were worth at least Rs.
12,000. The learned Judge referred to the decision in Vasireddi Veeramma v.
Butchayya, and held that where the subject matter of the suit is wholly
unrelated to anything which can be readily stated in definite money terms, the
plaintiff, having to put some money value for the purpose of jurisdiction, must put a more or less arbitrary value; but
that where the subject matter is so related to things, which have a real money
value that the relief asked for will affect these, then the value of the suit
for the purpose of jurisdiction is to be taken as the market value of the
property affected. Examples of the former class—where the subject matter of the
suit is not related to anything which can readily be stated in money value were
stated to include a suit for restitution of conjugal right, and a suit for
declaration that the plaintiff is a member of a charity committee. "Of the
second class we have suits to establish a right to a fishery or a right to a
royalty, to set aside an award or to establish or set aside an adoption."
The learned Judge then went on to state that the District Munsif was wrong in
holding that the suit with which that revision petition was concerned came
under the first category. "It cannot be said that the relief of possession
of the office of the managership is not related to things which have a definite
money value and that the reliefs do not affect those things. The right to the
managership certainly affects the right to be in possession of and to manage
the institution and its properties. Hence the value for purpose of jurisdiction
is the value of the properties affected." It will be seen that in that
case the properties belonged to an institution, which was not a corporation,
but were vested in the committee and the members of the committee were alone
entitled to be in possession of the properties, which were committed to their
management.
In the present case, the bank is an incorporated company
which owns the properties. Its directors have merely the custody and management
of the affairs of the bank, and it is only in such capacity and in such
relationship, that they deal with the property of which the company is the
owner. There is, therefore, no analogy furnished at all by the decision in
Karupanna Nadar v. Karuppa Nadar. Further it will be noticed that the decision
in Vasireddi Veeramma v. Butchayya, which is referred to and followed by
SOMAYYA J. puts in the category of suits, "whose subject matter is wholly
unrelated to anything, which can be stated in definite money terms", suits
for a declaration that the plaintiff is a member of a charity committee. The
case referred to for this illustration, which is approved in Vasireddi Veeramma
v. Butchayya is a decision of BAKE WELL J. in Murza Hyder All v. Husain Rasa.
The learned Judge stated there:
"The plaint in this case does not set out the
properties of the charity, or their value; nor even alleged that they consist
of land. And the declaration sought relates to an office and not to property.
On the other hand it has been held in Kunhan v. Sankara, that a suit for the
removal of a karnavan is incapable of valuation and within the jurisdiction of
a District Munsif and I think that a suit with respect to an office not of
profit falls within the principle of that decision."
I respectfully agree with this observation and reasoning.
In the present case what is sought for by the plaintiff is merely a declaration
to the office and though the holder of such office might enjoy certain powers
under the articles of association, the subject matter of the suit is unrelated
to anything, which can be stated in definite money terms. The learned District
Munsif was perfectly correct in holding that the suit as framed was within the
jurisdiction of his court.
The next point relates to the maintainability of the suit
by the first plaintiff. The point arises this way. Under article 40 the
management of the Nidhi is vested in a board, consisting of not more than 15
directors. Under sub-clause (5) of article 40 after the board of directors is
elected by the general body, they are to elect from among themselves certain
office bearers, and among them are the president and certain other officers.
Under article 48 it is provided that the Nidhi shall sue and shall be sued in
the name of the president and the secretary and treasurer. The present suit is
filed by the bank, by its president, the second plaintiff. It is stated in the
plaint that as the secretary refused to join as plaintiff, he had been made a
defendant, and he is the sixth defendant in the case. The objection raised is
that the articles of association are binding upon the members of the company,
and that the company cannot without an alteration of its articles institute a
suit or other proceeding, except through the president and secretary, and that
the suit as instituted at present cannot be treated as a suit by the company.
One thing might be mentioned before dealing with the legal contention, and that
is that it is not denied that the secretary, who has been impleaded as the
sixth defendant, refused to join the plaintiffs in filing the present suit.
Further a majority of the directors figure as co-plaintiffs, along with the
bank, and if the company could sue through its directors, the present suit
would certainly be a competent one, as the majority of the directors are
desirous of proceeding with the suit. The learned District Munsif has repelled
this contention holding that the suit has been properly instituted by the
company. I am clearly of the opinion that the District Munsif was right in
rejecting the objection raised by the first defendant.
In the first place, the defendants have to admit that the
second plaintiff was entitled to the reliefs claimed by him in the plaint, even
without impleading the first plaintiff. This is not a case where without the
company being on the record, as the plaintiff, the suit must fail, for here we
have a case where the second plaintiff, who claims to be validly appointed as
president is seeking to assert as against the first defendant, and certain
other directors siding with him, his right to the office of president. This
would certainly be an individual right in respect of which he can get the
declaration and injunction without impleading the company as plaintiff. It is,
therefore, only as a matter of abundant caution that the first plaintiff has
been impleaded and the relief is prayed for in favour of the company also. I am
saying this because as the relief prayed for can be granted to the second
plaintiff without reference to the other plaintiffs on record, the objection
taken by the first defendant can in no sense be taken as a preliminary
objection, which must be one which goes to the root of the suit, and which if
decided in favour of the defendant, must result in the dismissal or rejection
of the suit.
The next point for consideration is whether the first
plaintiff is properly on record through its president, but with the secretary
figuring as a defendant. This point may be viewed from more than one angle.
Let us first proceed on the footing that article 48 under
which the two functionaries are designated in whose name the company shall sue
and be sued were not there and that the articles had merely made the usual
provision that the company might sue and be sued in the name of the directors,
in whom the management of its affairs is vested. If in such a case, there is a
difference of opinion among the directors, if the argument of the learned
counsel for the petitioner were sound, the company can never file any suit,
since the entire number of the directors would not be willing to sue on behalf
of the company, and even the addition of the dissentient directors as
defendants would not satisfy the article. An exactly similar situation arose in
Satya Charan v. Rameshwar Prasad which came up before the Federal Court. The
relevant articles of association of the Lothian Jute Mills Co. Ltd., which was
the subject of consideration ran as follows:
"Article 149(6): Without prejudice to the general
powers conferred by the last preceding article and to any other power or
authorities conferred by these presents on the directors or on the managing
agents, it is hereby expressly declared that the directors shall have the
following powers, that is to say power subject to the provisions of Section
86-H(b) of the Act, to institute, conduct, defend, compound or abandon any
legal proceedings by or against the company or its officers or otherwise
concerning the affairs of the company and also to compound and allow time for
payment or satisfaction of any debts due and of any claims or demands by or
against the company."
In the suit the company was named as a plaintiff with three
of the directors also figuring as co-plaintiffs, while 4 other directors whose conduct was impugned in the
proceedings were impleaded as defendants. An objection was taken to the form of
the action on the ground that it was the directors alone who could file a suit
on behalf of the company, in view of the articles of association set out above.
This argument is set out at page 42 thus:
"It is contended on behalf
of the appellants that, on the basis of the above articles, the directors alone
are authorised to use the name of the company in any litigation concerning the
Company and if the majority of the ordinary shareholders are dissatisfied with
the policy adopted by the directors, the only course open to them is to change
the articles of association or remove the directors by a special resolution and
to appoint other directors in their place by an ordinary resolution. It is also
contended that, by adopting these articles, the shareholders must be taken to
have divested themselves of the control and management of the company and, even
if they are in a majority, they have no right to conduct any litigation on
behalf of the company, nor can a numerical majority of the shareholders, at a
general meeting of the company, impose its will upon the directors, who can be
deprived of their control and management of the company only by a statutory
majority which can alter the articles."
As on the facts of the case it
was a matter of admission that plaintiffs would be able by a majority to assure
the passage of a resolution in the general body of members empowering them to
continue the suit, their Lordships negatived the contention raised by the
defence and held that the suit as framed was maintainable.
The argument addressed by the
learned counsel for the petitioner in this case is exactly identical with that
raised by the appellants before the Federal Court, and I do not see any
difference in substance between the scope of the article as contained in the
Lothian Jute Mills case, and the present. In the present case, the directors
would act on behalf of the company, but for the special provision which names
particular officers of the company for the purpose of proceeding with actions
in court. But that does not mean that without them, the company cannot be brought
into the court. Nor is it necessary that the board of management must dismiss
the secretary, and replace him by another of their choice, and institute
proceedings in his name as well, which was the argument raised by the learned
counsel for the petitioner in answer to an objection that if the secretary was
colluding with a minority of the directors, there must be some way for the
company to assert its rights in a court of law. This answer further shows that
there is really no substance in the objection raised to the procedure now
followed for impleading the company as plaintiff.
The usual manner in which an objection is taken to a suit
in the name of a company by a defendant, who contests the fact that the company
is properly brought as a plaintiff, is by an application for striking off the
plaint on the ground that the plaintiffs have no right to use the name of the
company, as they are not in a majority in the company. If such an objection
were raised, and the facts are disputed, the court would determine the
question, after ascertaining the wishes of the majority of the shareholders. In
the present case, there can be no doubt at all that the majority of the
directors are supporting or are in favour of the company's name appearing in
the record as the plaintiff. In such circumstances, I do not see any point in
the objection that the company is not entitled to be a co-plaintiff in this
action.
Holding as I do that the decision of the learned District
Munsif of Tiruchirapalli on the preliminary issues is correct, the civil
revision petition fails and is dismissed with costs. One set.
[1958] 28 COMP. CAS. 523 (ORI.)
v.
Western India
Theatres Ltd.
MUKHARJI AND BACHAWAT, JJ.
DECEMBER 5, 1956
P.B.MUKHARJI
J.-This appeal questions the
refusal by the board of directors of the defendant, Western India Theatres
Ltd., to register certain shares transferred by defendant Shantaraman Raghurao
Hemmand in favour of the plaintiff Babulal Choukhani. Two essential points
arise for determination in this appeal. The first point relates to the
construction of the articles of association restricting the right of transfer
and limiting such transfer by certain conditions mentioned in the articles. The
second point raises the question of proper exercise of such power by the
directors under those articles and how far and to what extent the director’s
decision in this respect is reviewable by the courts.
The
plaintiff’s case briefly is that he obtained shares of the face value of Rs.
5,00,000, in the defendant company bearing Nos. 30057 to 35056 together with
blank transfer deed duly executed and completed and transferred by the
defendant Hemmad. The transfer was made on or about the 27th April 1950, and is
said to be for the consideration of debts owned by defendant Hemmand to
plaintiff Choukhani. It is the plaintiff’s case in the plaint that Hemmand
executed the relevant transfer deed in favour of the plaintiff in respect of
the said shares and also completed the same. The plaintiff thereupon applied to
the defendant company for registration of those shares in his name, but at
meetings held on the 5th June, 1950, and 30th June, 1950, the board of
directors of the defendant company refused to register such transfer of shares
in the name of the plaintiff.
The plaintiff
challenges such refusal as wrongful and not bona fide. H pleads that there is
on valid reason for such refusal. In paragraph 16 of the plaint the plaintiff
states that the directors of the defendant company did not exercise their
powers bona fide under the articles of association of the defendant company in
refusing to register the shares. He then proceeds to set out in different
sub-paragraph, namely (d) to (1), the different facts and circumstances on
which the states that the defendant company in refusing to register his name
did to act bona fide.
The defendant
company by its written statement stated that the decision of the board of
directors to refuse to register the transfer was arrived at bona fide and after
due consideration. It also pleads that the said transfer deed was not duly
stamped as required by law. It denied all charges of bad faith.
The defendant
Hemmad neither entered appearance, nor filed any written statement.
Three issues
were raised before the learned trial Judge.
The first
issue was: “Was the transfer deed duly completed as alleged in paragraph 11 of
the plaint? If not, has the defendant company waived the conditions ? Is the
defendant stopped from stating that the deed was not duly executed ?”
The second
issue was : “Did the directors of the defendant company act mala fide in
refusing to accept or register the transfer of the shares in favour of the
plaintiff as alleged in the plaint?”
The third
issue was a general one : “To what reliefs, if any, is the plaintiff entitled?”
The learned
Judge after hearing the evidence dismissed the suit with costs.
The right to
transfer shares is regulated by the company’s articles. The Companies Act lays
down that the shares of any member in a company shall be movable property,
transferable in the manner provided by the articles of the company. The
relevant article of the defendant company in this case is article 52 which
reads as follows :
“The directors
may at their absolute and uncontrolled discretion decline to register or
acknowledge any transfer of shares and shall not be bound to give any reason
for such refusal and in particular may so decline in respect of shares upon
which the company has a lien or whilst any member executing the transfer is
either alone or jointly with any other person or persons indebted to the
company on any account whatsoever or whilst any moneys in respect of the shares
desired to be transferred or any of them remain unpaid or unless the transfer
is approved by the directors and such refusal shall not be affected by the fact
that the proposed transferee is already a member. The registration of a
transfer shall be conclusive evidence of the approval by the directors of the
transfers.”
This is an
express charter of large powers given to the directors of the company to
decline to register shares and also gives them the power to withhold reasons
for such refusal to register. Expressly the power is said to be absolute and
uncontrolled. The director’s discretion is uncontrolled and absolute. But if it
is shown that there has been no exercise of any discretion but an exercise of a
whim or a caprice, then such purported exercise of power under such an article
can be examined by the court. The test of “discretion” is not satisfied if the
act or the decision of the directors declining to register is oppressive,
capricious, corrupt or mala fide or not in the interest of the company at all.
But once it is shown to the court that the directors have exercised their
discretion, then this court does not sit as a court of appeal reviewing or
revising that discretion. This court in that event will not set aside that
discretion of the directors even though it would have come to a different
conclusion on the same se of facts. It has been held that such power is not
illegal and under such power the directors are not bound to give reasons for
their refusal. Cases have gone so far as to lay down the law that the court
should not draw even an adverse inference because the directors under such a
power refuse to disclose or reasons are given by the directors in a particular
case, the court can always enquire if they are legitimate or not. But even then
when the court considers whether such reasons are legitimate or not, that only
means that it tries to ascertain whether the directors have proceeded on a
right or wrong principle. CHITTY J. in In re Bell Brothers Ltd. : Ex parte
Hodgson, explain this part of the law in these words :
“If the
reasons assigned are legitimate, the court will not overrule the director’s
decision merely because the court itself would not have come to the same
conclusion. but if they are not legitimate, as, for instance, if the directors
state that they rejected the transfer because the transferor’s object was to
increase the voting power in respect of his share by splitting them among his
nominees, the court would hold that the power had not been duly exercised. So
also, if the reasons assigned is that the transfer’s name is Smith, or is not
In a more
recent case, In re Smith and Faweett Ltd., the English Court of Appeal had to
construe a similarly worded power under the articles of association. There the
power was couched in these words :
“The directors
may at any time in their absolute and uncontrolled discretion refuse to
register any transfer of shares.”
SIMONDS J.
held that the directors under such a clause had the widest power to refuse to
register a transfer and that whilst such powers are of a fidicuary nature and
must be exercised in the interest of the company, there was nothing to show
that they had been otherwise exercised in that particular case. The court of
Appeal with Lord GREENE M.R. presiding affirmed that decision. At page 308 of
the report the Master of the Rolls observed:
“There is
nothing, in my opinion, in principle or in authority to make it impossible to draft
such a wide and comprehensive power to directors to refuse to transfer as to
enable them to take into account any matter which they conceive to be in the
interests of the company, and thereby to admit or not to admit a particular
person and to allow or not to allow a particular transfer for reasons not
personal to the transferee but bearing on the general interests of the company
as a whole-such matters, for instance, as whether by their passing a particular
transfer the transferee would obtain too great a weight in the councils of the
company or might even perhaps obtain control. The question, therefore, simply
is whether on the true construction of the particular article the directors are
limited by anything except their bona fide view as to the interests of the
company. In the present case the article is drafted in the widest possible
terms, and I decline to write into that clever language any limitation other
than a limitation which is implicit by law, that a fiduciary power of this kind
must be exercised bona fide in the interests of the company. Subject to that
qualification, an article in this form appears to me to give the directors what
it says, namely, an absolute and uncontrolled discretion.”
It is,
therefore, clear on the construction of this articles in the present case that
unless it is established that there has not been any bona fide exercise of this
power in the interest of the company, the decision of the directors must remain
inviolate. The appellant wants to establish this by a number of arguments.
The first
argument on behalf of the appellant is that the defendant company refused to
register the transfer on the ground that the defendant Hemmand was indebted to
the company y when in fact the was not so at any material time. In support of
this argument reliance was placed on a letter. It is a letter which is undated
and in fact originally unsigned and was never used or dispatched to the
addressee. In other words, it was a draft which was never used but which
remained on the file of the defendant company, and in the usual course of the
discovery of documents appeared in the brief of documents appeared in he brief
of documents disclosed it will be useful to set out the contents of that
letter. It was addressed to the plaintiff and is in these terms:
“Dear Sir,
Re. 5,000
shares Nos. 30057/35056 standing in the name of Mr. S R Hemmad.
With reference
to your letter of the 24th instant we are to say that the various statements
made in para. I of your said letter are absolutely untrue.
With reference
to the last para, of your letter, our directors are not bound to give any
reason for their refusal to register any transfer ; without prejudice to our
aforesaid contention, we may state that if you will refuse this matter to Mr.
Hemmad he will tell you that he is heavily indebted to our company.
Yours
faithfully,
(In
pencil)
This draft of
a letter even on its own language does not seem to us to be a refusal based only
on the ground of Hemmad’s indebtness to the company. Even in the draft it is
quite expressly clear that the directors are relying on their powers not to
give any reasons for their refusal. It is only at the end that the draft
proceeds to say, and that also expressly without prejudice to that contention,
that even if the plaintiff referred the matter to Mr. Hemmad, he would tell him
that Hemmad was heavily indebted to the company. A true construction of even
the draft cannot in our view mean that the directors gave reasons for their
refusal and one of the reasons for such refusal was Hemmad’s indebtedness to
the company.
There are,
however, features in respect of this draft which show that it does not achieve
the purposes for which it was attempted to be used by the appellant before the
learned trial Judge. To appreciate that aspect of the case it is necessary to
state the circumstances in which this draft came to be used at the trial court.
According to the usual price on the original side of this court an admitted
brief of documents containing this draft was repaired and was sent by the
plaintiff’s attorneys to the defendant company’s attorneys for comparison. At
that stage the defendant company’s attorney put the words “Western India
Theaters Limited” in pencil on that draft signifying that the draft had been
signed by the company. Then the plaintiff’s attorneys asked the defendant
company’s attorney to initial that copy draft when they replied that they would
take instructions on the matter from, the defendant company. Subsequently, the
draft was initialed by the attorneys of the defendant company and the brief of
documents containing this draft was admitted. At the trial the learned
Advocate- General who appeared on behalf of the defendant company admitted that
brief of documents without taking any exception to that draft. The
Advocate-General in his address before the learned trial Judge said that he
admitted the draft on a misapprehension of facts. The facts as they appear now
are what have been stated before, namely, (1) that this wa only a draft, (2)
that it was not actually signed and used by he company, (3) that it was not
dispatched to the addressee at all and (4) that the addressee who was the
plaintiff did not get, he could not, the original of that letter.
Whether the
defendant in refusing to register shares did so on the ground of indebtedness
of Hemmad or not has in our opinion first to be found from the terms of the
resolution of the meeting of the board of directors. The company or the board
of directors speak primarily through its or their resolution. If the enquiry is
as to what was the decision taken by the board of directors the court would
look more and depend more on he actual terms of the resolution that on the
terms and that language in which such decision was conveyed by dispatched. It
is, therefore, necessary to refer to the resolutions in this case. The first
resolution is the one that was passed at the meeting of the board of directors
on 5th June, 1950. The terms of that resolution are:
“It was
proposed by C J Desai that the application for transfer of shares received from
Mr. Babulal Choukhani be declined in exercise of article 52 of the articles of
association of the company and Mr. Babulal Choukhani be informed accordingly.
The said resolution was seconded by Mr. B K Pai and passed unanimously.
(Sd).
K M Modi,
Chairman.
(Sd)
C L Diwan,
Secretary.”
The second
resolution is the one passed at the meeting of the board of directors on 30th
June 1950. Its terms are:
“The chairman
then placed before the board a letter dated 24th June, 1950, received from Mr.
Babulal Choukhani in respect of 5000 shares standing in the name of Mr. S R
Hemmad. The said application for transfer of shares was not accepted for
registration and transfer by the directors at the meeting held on 5th June,
1950. Mr. Babulal Choukhani has now again requested the board of reconsider
their decision. After careful consideration, the directors once again
unanimously decided to adhere to the former decision not to register the said
application for transfer of shares under article 52 of he company’s articles of
association and the managing agents were asked to inform the applicant
accordingly.
(Sd).
K M Modi,
Chairman.
(Sd).
C L Diwan,
Secretary.”
It is clear from
the actual terms of the resolution that no reason whatever was disclosed or
stated by the board of directors for refusing to register this transfer.
Hemmad’s indebtedness to the company is not one of the reasons on which the
refusal was made accordingly to the terms of the resolution of the board of
directors.
The letters of
the defendant company dated 5th July, 1950, conveying the unanimous and
considered opinion of the board of directors arrived a on 30th June, 1950, also
does not state Hemmad’s indebtedness as one of the grounds or as any ground for
refusing to register the shares.
The whole
object of this argument was that the statement of Hemmad’s indebtedness to the
company in that draft showed that the company was repaired to put forward a
false reason as a ground for company was prepared to put forward a false reason
as a ground for refusing the register and, therefore, being based on a false
reasons the company was not acting in bona fide exercise of it powers under
article 52 of the articles of association. We have found it extremely difficult
to appreciate this argument for may reasons. The first reason is that this was
not a letter which was in fact used or sent to the plaintiff at all. The second
reason is that the very fact that this letter was not sent to the plaintiff
shows that the company was not prepared to put forward a false reason to the
plaintiff. That is a point in favour and not against the defendant company. If
the defendant company were going to put forward a false reason and that false
reason was Hemmad’s indebtedness to that company, there was nothing to prevent
the defendant company from sending this letter to the plaintiff with that false
reason. Thirdly, neither the two relevant resolutions nor the letter dated July
5, 1950, suggested to the plaintiff that the defendant company was refusing to
register on the ground of Hemmad’s indebtedness to the company. Even if the
unused draft be regarded as an attempt to find a false reason, that does not
all help the appellant. Assuming that at one stage the company thought of
putting forward a false reason and that false reason was Hemmad’s indebtedness
to the company and, therefore, a draft was under preparation putting that
forward as a reason. But then what is the explanation of its not being sent to
the plaintiff. The explanation can only be that the company thought better. It
may also be that the company thought that that was not the right thing and the
right ground on which they had taken the decision and the draft did not correctly
represent the facts. It will be idle for us in this court of appeal to
speculate overt this unused, undated and undespatched letter and hold the
company guilty of mala fides on that ground. Releasing the difficulty that this
argument died not find any support either from the resolutions from the letter
of 5th July, 1950, the appellant tried to use the evidence of K M Modi where
the counsel introduced this draft as if it were a letter. In fact, he was being
asked at that time by the counsel whether there was any reason for the refusal
to register. When the witness, Modi, wanted to refer to his letter he was at
once shown this particular document and asked whether this was not the reason
that he gave in the letter. The questions we have in view are questions 487 to
493. We do not read Modi’s answer to those questions as any admission that this
draft was in fact a letter duly signed and despatched to the plaintiff. In
fact, it is now common ground that this letter was never sent to the plaintiff,
ourselves in agreement with the conclusion of the learned trial Judge on this
point.
Before leaving
this branch of the case, a reference perhaps will not be inappropriate to a
certain distinction which has been made in some of the decision between grounds
and reasons in considering articles of association of similar import although
not couched in the same language. The cases that we have in view are Duke of
Sutherland v. British Domision Lan Settlement Corporation Ltd. and Berry and
Stewart v. Tottenham Hotspur Football and Athletic Co. Ltd. IN the first case
Tomlin J. said, on the construction of the article and the expression there
“without assigning any reason,” that the reason for exercising the power is a
distinct thing from the grounds which gave rise to its exercise. In that case
the interrogatories, therefore, on the grounds as distinguished from the
reasons were allowed. The ratio of that decision was that the company was not
entitled to refuse to state which of the grounds mentioned in the article the
director s had acted under although the company had the right to refuse t say
what reasons influenced them in exercising their discretion upon that ground.
In the second case CROSSMAN J. very rightly pointed out that in coming to that
conclusion the actual language of the article was important. In fact, at page
726 of the report the learned Judge observed :
“I think they
are quite different things, and that what the directors are excused or saved
from doing in the case before me is naming the species of ground under which
they have acted; that is to say the particular interrogatories which it is
sought to administer here ask them to do the very thing which in my judgment,
on the construction of this article, it is provided that they are not bound to
do.”
The point is
not important in the facts of this of case first because no distinction was
attempted to be made by the appellant at any stage between grounds and reasons
a such, secondly because no question of interrogatories arises in this case
because at no stage did the appellant apply to deliver interrogatories to find
out the grounds, and thirdly because the language of article 52 of the articles
of associations in this case is in our opinion plain and unambiguous. Here the
intention of the article as gathered from the express language in which the
article is framed is clear. The director may at their absolute and uncontrolled
discretion decline to register decline to register or acknowledge any transfer
of shares and shall not be bound to give any reason for such refusal. That is
the first part of article 52. It is in our view, subject to the discretion
having been exercised, absolute and uncontrolled. The letter part of articles
52 is only illustrative of the grounds on which the direction could decline to
register but not exhaustive. It does not control the absolute and uncontrolled
discretion given in the first part of article 52.
For these
reasons we hold in this case the directors did not give any reason for
rejecting to register the shares transferred to the plaintiff and that they
were not bound to give nay reason. We also hold that the draft cannot be used
and read in this case as an actual letters informing the plaintiff putting
forward Hemmad’s indebtedness to the company as a reason for their refusal to register
the shares.
The more
fundamental attack of the appellant is based on the ground of mala fides. The
list of the appellant’s case is that the real object of the defendant company’s
refusal to register the transfer was that Modi wanted to buy the shares himself
and as the plaintiff had refused to sell the shares to Modi he, that is Modi,
was exercising his influence and control over the board of directors and by
practicing such influence and control denied registration of these shares. In
support of this contention the appellant urged a number of reasons. He tried to
show that Modi has been attempting to corner the shares of the company for some
time past. In fact, the appellant also urged that the shares of this company
when transferred to the name of some persons were refused registration and
ultimately were allowed to be registered when they were retransferred in the
name of Modi. The outstanding incident which the appellant relies in proof of
this contention is the transfer of certain shares to the Sahas. In support of
this branch of the appellant’s case it has also been argued that most of the
directors were under the influence and control of Modi. These directors, it was
argued , were in fact indebted to Modi. That in briefs is the appellant’s case
on the allegation of mala fides against the company.
It is in
evidence that Modi had been purchasing large blocks of shares of this company.
But concerning as such or purchase of large blocks of shares as such so long as
they are permissible by law is not unjustified. That by itself does not prove
mala fide or bad faith either in fact or in law. To acquire a control which the
law permits cannot be illegal.
It is said
that between March and December, 1950 Modi Bought in the name of himself and
his wife 11,536 shares from Wadi H. Kazi and Hari Bhusan Ghose. In fact certain
shares which had been transferred by the defendant Hemmad to other persons like
the Sahas were not recognised by the board of directors on the ground that the
defendant Hemmad was in debt to the company. But when those very identical
shares were sold to Modi , the transfer was duly registered in his name. The
minutes of the board of directors of the meeting held on Saturday, the 20th
May, 1950, show that Hari Bhusan Ghose transferred 1,000 shares to Modi and
Mrs. Modi and the applications for such transfer of those shares were duly
approved and it was resolved that the shares be transferred and entered in. the
company’s register as holders of the said shares in place of the transferors. Although
the shares were thus duly registered in name of Mr. and Mrs. Modi as
transferees on 20th May,1950, yet in respect of these very shares the board had
resolved at a meeting of the directors on 9th March, 1950, that :
“The chairman explained
to the board that Mr. Hari Bhusan Ghose was actually the nominee of Mr.
S.R.Hemmad who was the virtual holder of the shares. Mr. Hemmad, however, was
indebted to the company and as such the chairman was of the opinion that in
exercise of the article 52 of the company’s articles of association this
application for transfer should be rejected. Accordingly, it was proposed by
Mr. C.J.Desai that in exercise of article 52 of the company’s articles of
association the directors are unable to register the said transfer. The said
resolution was seconded by Mr. J.B.H.Wadia and passed unanimously.
(Sd).
K.M.Modi,
Chairman.”
The appellant
urged us to infer mala fides and bad faith from this particular instance as
showing that there was no inherent defect in the shares transferred by Hemmad.
So long as the transfer was to other persons they could not be registered, but
the same when the transferred in favour of Modi or his nominees the company
found no difficulty in registering such transfers. For that purpose our
attention has also been drawn to the actual attempt at transfer by Hari Bhusan
Ghose to whose names had been crossed out in the transfer deeds to be
subsequently replaced by the names of Modi and his wife. Our attention has also
been drawn to Mr. Modi’s evidence on this subject of transfer of shares in the
name of the Sahas. Modi’s evidence appears in his answers to question 321 to
334 as also 240 to 262. Modi’s evidence is that a public auction was held with
regard to these shares and that he purchased those shares at Rs. 50 per share.
On this evidence and on those facts it was contended on behalf of the appellant
that a glance at the transfer deeds showed that the shares had been or
originally sold to the Sahas for Rs. 75 and, therefore, the Sahas had not
voluntarily sold the shares but were in fact compelled or forced to sell the
shares to Modi.
Before
considering how far the court would be justified in drawing an inference of
fraud and mala fides or bad faith from one solitary instance as that of the
transfer regarding the Sahas it is necessary to discuss the legality and the
weight of such extraneous evidence of transactions not in issue in the suit and
not between the parties to the suit. Mr. A.C.Gupta the learned counsel
appearing for the appellant argued that the transaction of the Sahas is
admissible under section 11(2) of the Evidence Act. That section lays down that
facts not otherwise relevant are relevant if by themselves or in connection
with other facts they make the existence or non-existence of any fact in issue
or relevant fact highly probable or improbable. Neither by canons of common
sense nor by construction of the statute of Evidence Act can it be said in our
opinion that one particular, such as the one in this case, can render the issue
of bad faith and mala fide in a totally different transaction “highly
probable”? The words “highly probable” are significant. The words are not
“reasonably probable”. The words is not just only “probable”. The significant
words is “highly”. That means more than the normal standard of probability. the
illustration although not controlling the section indicate clearly what is the
standard of high probability or high improbability. We have no hesitation in
holding that the single instance of the Sahas in this case does not reach
anywhere near such standard of high probability as in our view is contemplated
under section 11(2) of the Evidence Act. After all section 11 of the Evidence
Act is making irrelevant facts relevant in other words, section 11 represents
an exception. the general rule of evidence is contained in section 5 of the
Evidence Act which says that evidence may be given in any suit or proceeding of
the existence or non-existence of every fact in issue and of such other facts
as are declared to be relevant and of no others. Then section 6 of the Evidence
Act says that facts which, though not in issue, are so connected with a fact in
issue as to form part of the same transaction, are relevant, whether they
occurred at the same time and place or at difference times and places. This is
usually known as the rule of res gestae in evidence, the essence of which
doctrine is that the facts which though are not in issue are so connected with
the fact in issue as to form part of the same transaction and thereby become
relevant like the fact in issue. By that standard the transaction of the Sahas
cannot be said to be so connected with the transaction of the plaintiff which
is in issue in the case as to form part of the same transaction. In face there
is no connection between the transaction of the Sahas and the transaction of
the plaintiff in suit, and these two transactions in shares are independent
transactions. The Evidence Act goes on to provide in section 8 that any fact in
issue or relevant fact. We cannot imagine how bad faith, assuming it to exist,
in the case of the transfer regarding the Sahas can be motive or preparation of
bad faith for the plaintiff’s transaction. Whether the evidence relating to the
transaction of the Sahas could be evidence on other points such as cornering of
shares by Modi we need not pause to enquire. We are, however, satisfied that
the transaction of the Sahas cannot be used as evidence of mala fides or bad
faith in the transaction in respect of the plaintiff. The only other section of
the Evidence Act to which reference is necessary is section 15. Section 15 of
the Evidence Act lays down that when there is a question whether an act was
accidental or intention, or done with a particular knowledge or intention, the
fact that such act formed part of a series of similar occurrences in each of
which the person doing the act was concerned, is relevant. If the transaction
of the Sahas could be brought within the limits of section 15, then certainly
it would be a piece of relevant evidence on the intention of Modi or the
company. But in order to become relevant under section 15 such act has to form
part of a series of similar occurrences. A solitary act or a single instance is
the very antihesis of the expression “part of a series of similar occurrences.”
Here again, the illustration at least ar good guides to indicate what “series
of similar occurrences” would mean. Common sense would suggest quite apart from
legal consideration, that one act cannot be called the “series” of similar occurrences.
It will not be inappropriate in this connection to refer to an English decision
which although cannot be regarded as an authority under section 15 of the
Evidence Act here represents the principle on which the court would act apart
from the express language of any particular statute.
In Berry v.
Tottenham Hotspur Football and Athletic Co. Ltd. evidence as to rejection of
transfers on previous occasions was held to be inadmissible as it could not be
material to the issue in the case and an attempt was there made to adduce
evidence that directors had systematically refused to register transfer of
shares which would increase the voting power of shareholders. The relevant
article of association of the defendant company in that case was :
“The director
may decline to register any transfer of shares made by a member who is indebted
to the company, or i case the transferee shall be a person of whom the
directors do not approve or shall be considered by them to be objectionable, or
the transfer shall be considered as having been made for purposes not
conductive to the interest of the company and the directors shall not be bound
to specify the grounds upon which the registration of any transfer is declined
under this article.”
A shareholder
in that case sought to transfer a number of his shares, but the directors
declined to register the transfer. By another article the holder of one share
had one vote, the holder of 5 shares had 2 votes and there was an additional
vote for every addition 10 shares, with the result that by splitting a holding
of shares, the voting power could be increased. It was alleged that the
directors had systematically rejected transfers in order to prevent an increase
in the voting power of the shareholders. The plaintiff brought an action to
enforce registration of the transfer and there attempted to adduce evidence to
show that the directors had refused registration in accordance with that
systematic practice. CLAUSON J. expresses his decision on this particular
point, at page 556 of that report, in his judgment in this manner:
“The plaintiff
sought to establish their case by putting in certain evidence which was
directed to show that on certain previous occasions the directors had rejected
other transfers for reasons which would not justify the rejection and were to
within the terms of the article. I rejected that evidence on the ground that
the issue before me was as to what the directors did on November 5, 1935, and
that I was not entitled to listen to evidence as to what took place on other
occasions, as it could not be material to the issue. I have been referred to a
certain number of authorities but it will be sufficient to indicate the nature
of them if I mention Makin v. A.G. for
CLAUSON J.,
having ruled that evidence out, said that in that event there was no evidence
before him in any shape or way to justify the inference by the court that the
directors had exercised their powers otherwise than reasonably and bona fide.
In the English Case, however, there was more than one act attempted to be put
in evidence. Here, however, the only reliance is on this solitary instance in
respect of the Sahas which fact makes it worse because on cannot make up a
“series” with one incident.
We are,
therefore, of opinion that the evidence of what happened in respect of the
transfer of Sahas shares is not admissible on the point of bad faith and mala
fides in respect of an subsequent transaction in respect of the transfer to the
plaintiff which is in issue in this case.
We need only
add that the learned Judge also referred to the fact that at best this piece of
evidence was only a suggestion because no independent evidence was adduced in
respect of the transaction of the Sahas and certainly the Sahas did not give
evidence. Any court would hesitate long and much to condemn a transaction as
one of bad faith (1) when the transaction is to in issue, (2) when all the
interested parties in the transaction are not before the court, and (3) when
the most material evidence of the person whose transaction is condemned is not
available to the court.
The next
branch of the case of bad faith and mala fide relates to the influence of modi
on the other directors. It is essential to recite certain facts in this
connection. Now, at the relevant times the company had six directors of whom
three were Modi Brothers and the other three were J.B.P.Wadia, C.J.Desai, and
B.K.Pai. All that is suggested in evidence is that at all material times all
the directors except one were indebted to Modi. The evidence of indebtedness of
course is not satisfactory but assuming that there was indebtedness we fail to
see how that fact goes to prove either influence or mala fides on the part of
the defendant company. The fact that a person is indebted to somebody else does
not necessarily make the debtor surrender al his judgment in other respects to
the creditor. The fact that the other directors are indebted is in our opinion
not sufficient to induce the conclusion that the creditor director exercised
the biggest influence even in this particular matter in suit. Even then one of
the directors was in fact not indebted to Modi. There is in our opinion hardly
any real or substantial evidence to show first that Modi had such influence
over the other directors, and, secondly, that even if he had exercised such
influence, all the other directors in fact were so overcome as to act in fraud
of the power contained in the article and not in the best interests of the
company. After all, these other directors were also interested in the company
and they had their stakes. It is difficult to believe how they could surrender
all their interests to modi. In fact, the conclusion would appear to be the
other way and if some of them were indebted to Modi, then far from surrendering
the rest of their interests to Modi the natural instinct would impel them to
protect such of the remaining rights and interests which they had and stick on
to them. In fact, this is the inherent contradiction in the appellant’s case to
which reference has been made by the learned trial Judge, and on the ground of
which the learned Judge has rightly ejected the plaintiff’s evidence. The
plaintiff’s evidence was that he met the directors in May when they told him
that they had no voice in the affairs of the company because everything was in
Mr. Modi’s hands, the suggestions being that the registration of the transfer
in favour of the plaintiff depended entirely on Modi. That would mean that the
directors confessed their own helpless in the matter. But then again the plaintiff’s
evidence is that the directors gave assurance to the plaintiff that the
registration in his favour would be effected as soon as possible. Naturally the
learned trail Judge said how could the directors give assurance when they had
already expressed their helpessness in the matter. We do not, therefore, think
that the influence or control of Modi on the other directors is at all,
established in evidence.
The central
core of the plaintiff’s case on this point of mala fides and bad faith is that
the board refused to register the transfer as the plaintiff had refused to sell
the shares to Modi and so Modi by the exercise of control over the other
directors induced the board of decline to register the transfer with a view to
put pressure on the plaintiff to sell the shares ultimately to Modi. But then
to find in favour of the plaintiff the court has to be satisfied that there was
in fact an offer of Modi to buy the plaintiff’s shares and there is in fact
refusal by the plaintiff to sell the shares to Modi. Apart from the evidence of
the plaintiff on this point which the learned trial judge in our opinion
rightly disbelieved, the circumstances are all against this contention. The
most important circumstances is the correspondence of the time. The material
letters from the plaintiff to the company dated the 24th June, 11950, and the
18th July,1950, appear to show conclusively that there was no offer by Modi to
buy those shares of the plaintiff or that there was any refusal by the
plaintiff to sell the shares to Modi. It is difficult to get away from the fact
why the plaintiff should not put forward the very central reason, his very
major grievance, at least in the letter of the 18th of July, 1950, when the
disputes had come to a breaking point with the plaintiff charging bad faith ad
mala fides and threatening to hand over his papers to his solicitors to take
legal proceedings. to make the charge of mala fides and bad faith no to put
forward the main act of bad faith which was the attempt of Modi to buy the plaintiff’s
shares at an under-value and the plaintiff’s refusal to sell the same to Modi
is inexplicable and must be taken as the most consent evidence disproving the
plaintiff’s contention on this most material allegation of bad faith against
the defendant company.
We, therefore,
hold that the charge of bad faith and mala fides has not been established
against the defendant company. The charge of bad faith and mala fides is
against the defendant company and it is not proved by crating what at best may
be called suspicion against the conduct of one individual director, Modi. The
hurdles the plaintiff had to overcome in proving fraud and mala fides are (1)
that Modi had the requisite influence over each one of the other directors ad
(2) that Modi in fact successfully exercised that influence and (3) that in
pursuance of such influence of such influence all the other directors of the
company acted in the way that Modi had suggested. We are of opinion that the
plaintiff had failed on these hurdles. The onus of proving fraud, mala fides
and dishonestly is upon the party who alleges them. The onus in this case is
upon the plaintiff to prove his charge that the directors of the defendant
company acted dishonestly and that their act was in fraud upon their powers in
the articles of association. It is difficult to prove fraud and dishonesty and
rightly so because they are grave charges and imputations. Because they are
difficult to prove that is no reason why the court should take a lenient view
and make that light and easy for which law seeks most satisfactory proof in
order to hold a person guilty of fraud and dishonesty. That proof is absent
here. We were asked to inter fraud in this case from the circumstances which we
have analysed. The circumstances in our opinion are not such that fraud or
dishonesty can safely or reasonably be inferred. They are too remote to prove
fraud or bad faith. It is necessary to say that fraud is not proved by mere
suspicion.
The defendant
company in its written statement has justified refusal to register on the
ground that the transfer deed was not stamped as required by law. Section 34(3)
of the former Companies Act, which governs this case, provides :
“It shall not
be lawful for the company to register a transfer of shares....unless the proper
instrument of transfer duly stamped and executed by the transferor and the
transferee has been delivered to the company along with the scrip.”
Now it is
admitted that the deed of transfer in this case was not duly stamped at the
time when it was delivered to the company. What happened was that he plaintiff
net a cheque for the value of the stamp necessary to be affixed on the transfer
deed to the company. The law however is quit clear that the obligate on is not
of the company but of the transferee to deliver he transfer deed duly stamped
and executed. In a stamp reference the Special Bench of the Bombay High Court
presided over by the learned Chief Justice in In re Jagdish Mills Ltd., came to
the conclusion that if a company registered an instrument of transfer of shares
which was not duly stamped. It would be doing something which was not lawful.
That decision is also an authority for the proposition that there is on the
provision in the Companies Act or in the Stamp Act which would make the company
liable for payment of the proper stamp duty and that the liability to pay stamp
duty in the case of an instrument of transfer is upon the executant.
Mr. Gupta
arguing for the appellant submitted that the point that the transfer deed was
not duly stamped was not one of the grounds or reasons in article 52 of the
articles of association of the company on which the company has refused
registration. The main thesis of his argument was that article 52 naturally
operation in a field of discretion, but where the law required the doing of act
it was not a matter of discretion at all but of legal compulsion. As article 52
uses the word “discretion” the legal requirement of stamp cannot come under
article 52 of the articles of association. We are unable to accept this
argument as a sufficient and valid excuse for the plaintiff in this case.
After all this
was plaintiff’s suit against the defendant company for the relief that the
register of the defendant company be rectified by acknowledging the plaintiff
as transferee and owner of the shares. The complaint is against refusal of the
company to register such transfer. If the law prohibits registration without
stamp, then the company is entitled to refuse such registration on that ground
that whether it does so under a particular article, article 52 or not seems to
us to be immaterial. It is quite true that the company informed the plaintiff
that the rejection was under article 52, but that does not carry the plaintiff
further. Assuming that it was only under article 52 that the company head
rejected the registration of the transfer of the shares, but the law gives the
company power to refuse to register in case the transfer deed is not duly
stamped. That point is taken in the written statement of the defendant company.
In fact, it is one of the main issues in the suit. The issue was “Was the
transfer deed duly completed?” If the law requires stamp on the transfer deed,
it cannot be said to be completed without the stamp. It is unnecessary for us
from that point of view to pronounce on the question of construction of he word
“discretion” in article 52 namely whether the company could refuse to register
shares on the ground that the relative transfer deed was not duly stamped. We
are, however, prepared to hold that if a transfer deed is not duly within the
ambit or meaning of article 52 because, although the article speaks of the
directors’ discretion to register: that only means that it must be discretion
and not whim but a discretion which takes into consideration the legal
requirement nevertheless remains a discretion. To be alive the law is part of
the well-informed discretion which the board of directors are required to
exercise under the article.
In this
connection reference to the decision in Maynard v. Consolidated Kent Collieries
Corporation Ltd., may appropriately be made. There was presented for
registration it was found that the stamp on the transfer, although in
accordance with the consideration stated on the face of it, yet was less than
what it should have been, whereupon the directors refused to register the
transfer. The court came to the conclusion that as a due stamping was a
requirement under the English Stamp Act on a transfer deed the directors were
entitled to refuse to register the transfer and that in determining whether the
transfer was duly stamped they were entitled to go behind what appears on the
face of the document. COLLINS M.R. at page 130 of the report came to the
conclusion :
“It seems to
me that this consideration affords an absolute justification to the directors
in their refusal to register this transfer. It was the duty of the plaintiff to
tender a transfer which was right in all respects in point of law, and that he
never did; and unless he did that the company were under no obligation to put
him on the register.”
because this
conduct of retaining the transfer deed and the cheque is inconsistent with the
plaintiff’s own readiness and willingness. At any rate, as the pleadings do not
proceed on the basis of specific performance this point of the appellant cannot
be sustained.
We, therefor,
hold that the transfer deed in this respect not having been stamped was rightly
refused registration by the defendant company.
We cannot also
shut out eyes to the fact that in the cross- examination of he plaintiff the
fact was brought out that the plaintiff has suffered conviction and
imprisonment for a year for theft of electricity in connection with a cinema
house. As no reason was disclosed by the company for refusing to register the
shares we do not know whether the plaintiff’s conviction with incarceration was
one of the reasons. It would be a valid personal objection against the
plaintiff under article 52 of the articles of association. In fact it is
significant that when Modi said in his evidence that apart from indebtedness of
Hemmad there were other reasons, no cross-examination on behalf of the
plaintiff about such other reasons was made or ventured. Against a possible
personal objection to the plaintiff and when the transfer deed was not stamped
it is impossible for this court to hold that the director’s refusal to register
was fraudulent and dishonest.
Mr. Hazra, the
learned junior counsel for the appellant, in this argument in reply, tried to
salvage the wreck of his client’s case by suggesting that as the defendant
Hemmad has not appeared in this case and as the plaintiff has asked for an
injunction restraining the defendant Hemmad from exercising any right in
respect of these shares, this court should grant him that injunction. Now, the relief
of permanent injunction in suits must be governed by section 54 of the Specific
RElief Act. The requirements of that section are well known. It says that a
perpetual injunction may be granted to prevent the breach of qan obligation
existing in favour of the applicant whether expressly or by implication. In
this connection the material part of section 54 is that when the defendant
invades or threatens to invade the plaintiff;s right to or enjoyment of
property, the court may grant a perpetual injunction. There is, however, no
pleading in the plaint alleging that defendant Hemmad has invaded or treat to
invade the plaintiff’s right to or enjoyment of the shares. Mr. Hazra tried to
induce us to hold that there is a pleading in paragraph 16(i) of the plaintiff
where it is suggested that the dividend in respect of these shares was
wrongfully appropriated by Modi in collusion with the defendant Hemmad. The
charge even there is directed against Modi and not against Hemmad because if
anybody appropriates the dividend it is not alleged that Hemmad is
appropriating the dividend but Modi is. Then Mr. Hazra suggested that an
injunction against the defendant Hemmad would do him no harm. This court has
previously no numerous occasions held that the principle on which it grants
injunction is to that an injunction will not hurt a party against whom it is
granted, but it grants, an injunction on the principle that the applicant for
injunction must satisfy the court that he has made out a case within the law to
be clothed with an order of injunction from this court. We, therefore, reject
Mr. Hazra;s contention.
We affirm the
judgment and decision of the learned trail Judge.
We dismiss
this appeal with costs.
The appeal is
certified fit for the employment of two counsel.
BACHWAT J.-I
agree.
Supreme court
companies act
[2005]
60 scl 280 (sc)
v.
Manjula S.
Agarwalla
P.
Venkatarama Reddi and P.P. Naolekar, JJ.
Criminal
Appeal No. 712 of 2005
May 11,
2005
Section 630 of the Companies Act, 1956 -
Penalty - For wrongful withholding of property - A flat was allotted to ‘S’ for
residential purposes while he was in employment with appellant-company - After
his death, said flat was not vacated by his legal heirs, respondent Nos. 1 and
2 on ground that Chairman of board of directors of appellant had assured them
to continue to stay in said flat until contract of sale entered into between
‘S’ and company in respect of another flat in another society was completed -
Before complaint filed under section 630 by appellant, respondents had filed a
civil suit for specific performance of contract of sale wherein High Court had
directed that respondents could not be dispossessed from property in question
except by due process of law - Appellant’s complaint under section 630 was
dismissed by High Court on ground that section 630 being penal in nature,
proceeding thereunder could not be construed to be proceeding taken in due
course of law - Whether order of High Court passed in civil suit filed by
respondents could be read to mean that company had to necessarily approach
civil court only for obtaining possession of flat in question and that remedy
available under Companies Act could not be resorted to - Held, no - Whether in
absence of evidence to indicate that Chairman gave assurance on basis of any
authorisation given by board of directors or that his act was incidental to
business of company or done as a matter of necessity, assurance given by him
would bind company - Held, no - Whether therefore, possession of company’s flat
by respondents, after service of notice to vacate premises by company, was
wrongful withholding of property of company attracting offence under section
630(1) - Held, yes - Whether however, so long as order of High Court in civil
suit appointing Court receiver and delivering him symbolic possession and
actual possession as agent of receiver to respondent No. 1 stood, no direction
could be given under section 630(2) for delivery of actual possession of
disputed flat to appellant and petitioner should approach civil court for
suitable orders - Held, yes
One ‘S’, husband of the respondent No. 1 and
father of the respondent No. 2, was employed with the appellant-company. A flat
in a building called ‘Sonmarg’ owned and possessed by the appellant-company was
allotted to ‘S’ to be used for residential purpose for himself and members of
his family during the period, he was in service of the appellant. However, the
respondent Nos. 1 and 2 continued to occupy the said flat even after death of
‘S’. The appellant-company issued notice calling upon the respondents to vacate
the said flat and hand over the possession. The respondents however, replied
that there were discussions between them and the Chairman of the board of
directors of the appellant and the Chairman had assured them to continue to
stay in Sonmarg flat until the contract in respect of sale of another flat in
blue heaven cooperative society was implemented and, therefore, the possession
of Sonmarg flat could not be given until the contract of sale in respect of
blue heaven flat was completed. Since the blue heaven flat could not be sold
and transferred and the respondents did not comply with the request made by the
appellant, the appellant filed a complaint under section 630 alleging that the
respondents had wrongfully withheld and continued to withhold the property.
Before the said complaint was filed, a civil suit had been filed by the
respondent Nos. 1 and 2 against the appellant-company for specific performance
of the contract for sale, transfer and to hand over possession of blue heaven
flat and the High Court in the said suit had passed an interim order that the
respondents would not be dispossessed from the Sonmarg flat except by due
process of law. Subsequent to the complaint filed under section 630, the
appellant-company had also filed a suit for possession of Sonmarg flat and
other reliefs against the respondents and the High Court therein passed an
order whereby the Court receiver was given symbolic possession of the flat and
the respondent No. 1 was to be treated as the agent of the receiver to remain
in actual possession of the flat during the pendency of the suit. The
Additional Chief Metropolitan Magistrate dismissed the complaint filed by the
appellant holding that the respondents were under bona fide impression that
they had a right to continue in the said flat in Sonmarg untill they got
possession of the flat in blue heaven as per assurance given by Chairman of the
company and, thus, it could not be said that they had wrongfully withheld the
property of the company. On appeal, the High Court dismissed the appeal holding
that proceedings initiated by the appellant-company for recovery of possession
would be in breach of express injunction order issued by the High Court.
On appeal to the Supreme Court :
From the various decisions of the Supreme
Court, it is absolutely clear that section 630 does not only cover cases of the
present employee or officer of the company and this provision, strictly speaking,
is not penal in the sense as understood under penal law. The main purpose to
make action an offence under section 630 is to provide a speedy and summary
procedure for retrieving the property of the company where it has been wrongly
obtained by the employee or officer of the company or where the property has
been lawfully obtained but unlawfully retained, after termination of the
employment of the employee or the officer and to impose a fine on the officer
or employee of the company if found in breach of the provision of section 630
and further to issue direction if the Court feels it just and appropriate for
delivery of the possession of the property of the company and to impose a
sentence of imprisonment when there is non-compliance of the order of the Court
regarding delivery or return of the property of the company. [
In the suit for specific performance of the
contract for transfer of the flat at blue heaven cooperative housing society,
the High Court had passed an order with the consent of the parties that the
respondent No. 2 would not be dispossessed from the premises, i.e., flat at
Sonmarg except with due process of law. The proceedings taken up by the
appellant in the Court under section 630 were held not to be the proceedings
under due process of law. Due process of law in the present context would
ordinarily mean such an exercise of power by the parties as the settled
principles of law permit and/or a course of legal proceedings, according to
those rules and principles which have been established in our systems of
jurisprudence for the enforcement and protection of private rights. Due process
of law would in short mean a procedure established by law, which is a procedure
fixed or laid down in law. When the High Court had passed an order of
injunction, in the aforesaid terms, what was meant by the High Court was, that
the company would not take forceable possession of Sonmarg flat during the
pendency of the suit and the company was given liberty to take steps for
possession as was permissible under law including the provisions of any statute
giving right to obtain possession to the company in the facts and the
circumstances of the case. The company could prove unlawful possession of the
property by the employee or his/her legal representative after the demise of
the employee or an officer of the company. The company had the remedy to
initiate action under section 630(1) and on conviction by the competent
criminal Court it would approach the same Court for directing delivery of
possession which sub-section (2) of section 630 provides. The remedy was
provided in the statute itself and the High Court’s order passed in civil suit
filed by respondents, by no stretch of imagination, could be read to mean that
company had to necessarily approach the civil court only for obtaining
possession of flat in question and that the remedy available under the
Companies Act could not be resorted to. The decision of the High Court holding
that section 630 being penal in nature, the proceeding thereunder could not be
construed to be a proceeding taken in due process of law, could not be
sustained. Filing of the civil suit for possession by the company did not
deprive the company of the right to institute prosecution under the Companies
Act and incidentally get an order for delivery of possession. [
In the matter of company affairs, directors
act as a body and collectively as a board. Any director acting individually has
no power to act on behalf of the company in respect of any matter except to the
extent to which any power or powers of the board have been delegated to him by
the board within the limit permitted by the Companies Act or any other law. The
position of the Chairman of the board of directors is not substantially
different from an individual director. Under the Companies Act, Chairman of the
company does not have any special or extraordinary rights to be exercised by
him without being authorized by the board of directors. The board of directors,
of course, have an authority to delegate the power or authority to act for and
on behalf of the company to the Chairman of the board of directors. [
Under section 291, the action of the board of
directors should be in conformity with the provisions of the company law or any
other enactment or in conformity with the memorandum or articles of association
of the company. It was the specific case of the respondents which had been
found correct by the Courts that they were holding possession of the company’s
flat at Sonmarg on the oral assurance given by Chairman of the board of
directors that they could continue to reside in the said flat until the
possession of the flat in blue heaven cooperative society was given to them.
Admittedly, the flat at Sonmarg belonged to the company. ‘S’ was the ex-employee
of the company. He expired when he was in the employment of the company and
respondent Nos. 1 and 2 were residing in the flat after his demise as his
heirs. Thus, it was for respondent Nos. 1 and 2 to show the authority of the
Chairman to bind the company on the basis of the oral assurance given to them
by him to retain the possession of the flat. The High Court had not referred to
any evidence to that effect led by the respondents, nor there was any finding
that the board of directors had authorized the Chairman to give such an
assurance for and on behalf of the company. [
The correspondence placed on record by parties
also did not indicate that the Chairman gave assurance on the basis that he had
been authorized to do so by the board of directors. In the absence of any
authority to the Chairman by the board of directors to act for and on behalf of
the company, the assurance given by him to the respondents would not bind the
company, nor it would create a binding agreement between the parties, namely,
respondent Nos. 1 and 2 and the company, to permit the respondents to remain in
possession even after the death of ‘S’ of the flat in Sonmarg. Apart from that,
the board of directors itself could exercise the powers in accordance with the
memorandum of association or the articles of the company. Any power exercised
beyond the memorandum or the articles of the company would not bind the
company. Any assurance given by the board of directors either should be
authorised object of the company by the memorandum of association or the
articles of the company or its purpose should be reasonably ancillary or
incidental to carrying on the companies business. Evidence produced on record
indicated that agreement was entered into between the company and husband of the
respondent No. 1 regarding blue heaven flat. Late ‘S’ was an old employee of
the company since 1971. He expired on 2-11-1992 and an assurance was given by
the Chairman to widow of ex-employee with whom he had long standing relation,
when he went to console her on 4-11-1992, barely two days after the death of
‘S’. Such evidence irresistibly pointed, predominant, if not the only
consideration operating in the mind of Chairman to console the widow and to
permit her to live in the flat for some time. The assurance given to the
respondent Nos. 1 and 2 by the Chairman of the company had more of a gratuitous
and compassionate flavour and less to do with the interest of the company in
mind. Moreover, it was difficult to comprehend how the Chairman could promise on
behalf of the company that the respondents would be permitted to remain in flat
till delivery of flat of blue heaven, when he himself was not sure about the
time the company would get the possession of the blue heaven flat. That apart,
the act of the Chairman could not be construed to be one done incidental to the
business of the company or as a matter of necessity. [
After the death of ‘S’, the respondent Nos. 1
and 2 remained in possession of the company’s Sonmarg flat. Admittedly, they
were not in employment of the company nor company had authorized them to remain
in possession of the same, particularly after notice to vacate the premises and
hand over the possession to the company. The possession of company’s flat by
respondents, after service of notice to vacate premises by company, was
wrongful withholding of property of company. The respondents, by having
wrongfully withheld the possession of the company’s flat and not delivering the
property to the company, had committed an offence. The interim order of the
High Court in the civil suit filed by the appellant-company did not wipe out
the offence committed already for which a criminal complaint was filed.
Subsequent to that order, the possession might not be wrongful, but on the date
of complaint and till the date of that order, the respondents did wrongfully
withhold that property, attracting the offence under section 630(1). Having
regard to the factual position of the case, the imposition of fine of rupees
one thousand each would be a proper punishment for wrongful withholding the
Sonmarg flat. Accordingly, the respondent Nos. 1 and 2 were sentenced to pay
fine of rupees one thousand each. However, so long as the order of the High
Court dated 16-11-1998 in the civil suit appointing the court receiver and
delivering him symbolic possession and actual possession as agent of receiver
to respondent No. 1 stood, no direction could be given under section 630(2) for
delivery of actual possession of Sonmarg flat to appellant. It was, of course,
open to the petitioner to approach the civil court for suitable orders. [
For the aforesaid reasons, the appeal was
partly allowed. The judgment and order of the High Court and that of the
Additional Chief Metropolitan Magistrate was set aside. [
Baldev Krishna Sahi v. Shipping Corpn. of
India Ltd. [1987] 4 SCC 361 (para 11), Amrit Lal Chum v. Devoprasad Dutta Roy
[1988] 2 SCC 269 (para 11), Atul Mathur v. Atul Kalra [1989] 4 SCC 514 (para
12), Smt. Abhilash Vinod-kumar Jain v. Cox & Kings (India) Ltd. [1995] 3
SCC 732/4 SCL 167 (para 13) and Lalita Jalan v. Bombay Gas Co. Ltd. [2003] 6
SCC 107/44 SCL 130 (para 14).
Arun Jaitely, J.A. Rana, Levi Ruben and Madhup
Singhal for the Appellant. Haresh M. Jagtiani, Bhargava V. Desai, Curush
Bilimoria, Sanjeev Kumar Singh and Pradeep Kumar Malik for the
Respondent.
P.P. Naolekar J. - Leave granted.
2. This appeal is directed against the judgment and order dated
8-4-2004 passed by the High Court of Bombay in Crl. Appeal No. 48 of 2000
acquitting the respondents Mrs. Manjula S. Agarwalla, Respondent No. 1 and Ms.
Anisha S. Agarwalla, Respondent No. 2 of the offence punishable under section
630 of the Companies Act, 1956.
The complainants, viz., Herdillia Chemicals
Ltd., non-chemical business was de-merged and vested in Shubh Shanti Company
Ltd., by a Scheme of arrangement, approved by the Bombay High Court. Hence,
M/s. Shubh Shanti Services Limited came to be substituted in place of M/s.
Herdillia Chemicals Ltd. as appellants during the pendency of the appeal before
High Court.
3. Brief facts of the case are that the complaint was filed by
the Company on 13-1-1995 on the allegation that one Shri Suresh Chander
Agarwalla, husband of Respondent No. 1 and father of respondent No. 2 was employed
with the appellant
The appellant
4. From the case set up by the respondent and the evidence led, the
case of the respondents is that there were discussions between them and the
Chairman of the Board of Directors of the appellant and the Chairman, Board of
Directors has assured them to continue to stay in Sonmarg flat until such time
as the contract in respect of sale of Blue Heaven flat was implemented and
therefore the possession of the respondent of Sonmarg flat is not unauthorized
or wrongful.
Before complaint was filed, a Civil Suit No. 7
of 1995 was filed by Respondents 1 and 2 against appellant company on
23-12-1994 in the High Court for specific performance of the contract dated
10th of February, 1978 for sale, transfer and to hand over possession of Flat
No. 33, 3rd Floor, Blue Heaven Cooperative Housing Society Ltd., Mount Pleasant
Road, Bombay. In the suit further relief claimed is that the defendants be
ordered and decreed not to dispossess or interfere with the occupation and
residence of the 1st plaintiff and her family in Sonmarg flat, Napean Sea Road,
Bombay until such time as the Defendant company transfer and hand over vacant
possession of aforesaid Blue Heaven flat. In the said civil suit the High Court
on 10th of January, 1995 passed an interim order “counsel for the defendant has
made a statement that the plaintiff shall not be dispossessed from the premises
in question except by due process of law. The statement is accepted”.
5. Subsequent to the complaint filed under section 630,
appellant company has also filed a suit in the High Court (Suit No. 2391 of
1997) for possession of Sonmarg flat and other reliefs against the respondents.
The High Court by its order on 16th of November, 1998 passed an order for
appointment of the Court Receiver for Flat No. 67-B, 25 Sonmarg,
6. After issuance of summons both parties led evidence. The
Magistrate dismissed the complaint holding that the respondents are in
possession of Sonmarg flat as they have not handed over possession of the Blue
Heaven flat for which they were required to file a suit for specific
performance. The respondents are under bona fide impression that they have
right to continue in the said flat in Sonmarg till they get possession of the
flat in Blue Heaven as per assurance given by Chairman of the Company and thus
it cannot be said that they have wrongfully withheld the property of the
company. It was further held that the matter is pending consideration before
the civil court and, therefore, the Court cannot pass order of restoration of
possession to the appellant
7. The appellant-company preferred an appeal before the High
Court. The High Court dismissed the appeal holding that the respondents have
made out a bona fide, probable and plausible defence that they were allowed to
occupy the flat at Sonmarg by the Chairman of the Board of Directors till the
flat in Blue Heaven is made available to them. Respondents shall ultimately
succeed in the suit for specific performance or not is another matter. The
respondents have made out a case that an assurance was so given and thus the
appellant has failed to prove that the respondents are in wrongful possession
of the flat in Sonmarg. Apart from this, the High Court has further held that a
suit for recovery of the possession of the flat in Sonmarg filed by the
appellant-company, a Court Receiver has been appointed and the respondent has
been appointed as an agent of the Court Receiver and therefore also it cannot
be held that the respondents are in wrongful possession of the premises nor can
it be said that the respondent have no right to continue in occupation of the
flat in Sonmarg. The High Court has said that in a suit for specific performance
of the agreement filed by the respondents, the High Court has granted an
injunction prevented the respondents from being dispossessed except by due
process of law and section 630 proceedings being, penal in nature, cannot be
said to be the “due process of law”. Any order in the proceedings initiated by
the appellant-company for recovery of possession of the Sonmarg flat from the
respondents would be in breach of express injunction order issued by the Court.
The High Court has dismissed the appeal filed by the appellant company.
Consequently complaint filed by the appellant stands dismissed.
8. Learned counsel for the appellant-company has urged that the
High Court has not properly understood the scope and ambit of section 630 of
the Companies Act and thereby committed an error in holding that the
proceedings under section 630 of the Companies Act could not be encompassed
within its fold “due process of law” not being civil proceedings. The provision
being penal in nature cannot be taken recourse to for possession of the flat
when the matter relating to flats in question are pending in the Court.
9. Before we embark upon the discussion, we may first notice the
scope of language of section 630 of the Companies Act.
The said section reads as under
:
“630. Penalty for wrongful
withholding of property—(1) If any officer or employer of the company—
(a) wrongfully
obtains possession of any property of a company; or
(b) having any such property in his possession, wrongfully withholds
it or knowingly applies it to purposes other than those expressed or directed
in the articles and authorized by this Act;
he shall, on the complaint of the company or
any creditor or contributory thereof, be punishable with fine which may extend to
ten thousand rupees;
(2) The Court trying the offence may also order such officer or
employee to deliver up or refund, within a time to be fixed by the Court, any
such property wrongfully obtained or wrongfully withheld or knowingly
misapplied, or in default, to suffer imprisonment for a term which may extend
to two years”.
10. From the bare reading of the section, it is apparent that
sub-section (1) is in two parts. Sub-section (1) of clauses (a) and (b) creates
two different and separate offences. Clause (a) contemplates a situation
wherein an officer or employee of the company wrongfully obtains possession of
any property of the company during the course of his employment to which he is
not entitled whereas clause (b) contemplates a case where an officer or
employee of the company having any property of the company in his possession,
wrongfully withholds it or knowingly applies it to purposes other than those
expressed or directed in the articles and authorized by the Company. Under this
provision, it may be that an officer or an employee may have lawfully obtained
possession of any property during the course of his employment, still it is an
offence if he wrongfully withholds it after the termination of his employment.
Clause (b) also makes it an offence, if any officer or employee of the Company
having any property of the company in his possession knowingly applies it to
purposes other than those expressed or directed in the articles and authorized
by the Act. This section does not make any difference between the movable and
immovable property. The property in section 630 includes both movable and
immovable property. Sub-section (2) of section 630 authorizes the Court trying
the offence, in its discretion to order any such officer or employee of the company
which includes past or present, or his or her legal representative, to deliver,
within a specified time, possession of such property which has been wrongfully
obtained or wrongfully withheld or knowingly misapplied. In default, the Court
may impose a punishment of imprisonment for a term which may extend to two
years.
11. In the matter of Baldev Krishna Sahi v. Shipping Corporation of
India Ltd. [1987] 4 SCC 361 this Court resolved the conflict and has held that
the expression ‘officer’ or ‘employee’ of the company applies not only to the
existing officer or employee but also includes past officer or employee where
such officer or employee either wrongfully obtained or wrongfully withheld or
knowingly misapplied any property after the termination of his employment. This
decision was approved by a Three Judges Bench of this Court in Amrit Lal Chum
v. Devoprasad Dutta Roy [1988] 2 SCC 269 where it is held that section 630 of
the Act makes it an offence if an officer or employee of the company who was permitted
to use the property of the company during his employment wrongfully retains or
occupies the same after the termination of his employment and that there is no
warrant to give a restrictive meaning to the term “officer or employee”
appearing in sub-section (1) of section 630 of the Act as meaning only an
existing officer or an existing employee and not those whose employment had
been terminated or had otherwise come to an end.
12. While interpreting and laying down the object of the provision
of section 630 of the Companies Act, this Court in the matter of Atul Mathur v.
Atul Kalra [1989] 4 SCC 514 has emphasized that the object of the provision of
section 630 of the Act is to retrieve the property of the company and that even
though the provisions are penal in nature, the object of the provision is
required to be given a purposive interpretation so as not to choke the
beneficent provision.
13. In the matter of Abhilash Vinodkumar Jain (Smt.) v. Cox &
Kings (
“Even though section 630 of the Act falls in
Part XIII of the Companies Act and provides for penal consequences for wrongful
withholding of the property of the company, the provisions strictly speaking
are not penal in the sense as understood under the penal law. The provisions
are quasi-criminal. They have been enacted with the main object of providing
speedy relief to a company when its property is wrongfully obtained or
wrongfully withheld by an employee or officer or an ex-employee or ex-officer
or anyone claiming under them.”
The Court has explained and interpreted the
term ‘officer’ or ‘employee’ of the Company in section 630 of the Companies Act
and said that it would include the legal heirs and representatives of the
employee or the officer concerned, continuing in occupation of the property of
the company after the death of the employee or the officer.
14. A Three Judges Bench of this Court in Lalita Jalan v. Bombay
Gas Co. Ltd. [2003] 6 SCC 1071 has drawn a distinction between the
provisions of the Statute which are purely of a penal nature and the Companies
Act, particularly provisions of section 628 to section 631 of the Companies Act
and held :
“17. The purpose of criminal justice is to
award punishment. It is a method of protecting society by reducing the occurrence
of criminal behaviour. It also acts as a deterrent. Where the punishment is
disabling or preventive, its aim is to prevent a repetition of the offence by
rendering the offender incapable of its commission. The Companies Act is
entirely different from those statutes which basically deal with offences and
punishment like the Indian Penal Code, the Terrorist and Disruptive Activities
(Prevention) Act etc. It makes provision for incorporation of the companies,
its share capital and debentures, management and administration, allotment of
shares and debentures, constitution of Board of Directors, prevention of
oppression and mismanagement, winding up of the company etc. The heading of
Part XIII of the Companies Act is ‘General’ and a few provisions therein,
namely, sections 628 to 631 create offences and also prescribe penalty for the
same. Having regard to the purpose for which section 630 has been enacted viz.
to retrieve the property of the company and the salient features of the statute
(Companies Act) it is not possible to hold it as a penal provision as the
normal attributes of crime and punishment are not present here. It cannot be
said to be an offence against the society at large nor is the object of
awarding sentence preventive or reformative. In such circumstances the
principle of interpretation relating to criminal statutes that the same should
be strictly construed will not be applicable.
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19. Even otherwise as shown earlier, the wrongful
withholding of property of the company has been made punishable with fine only.
A substantive sentence or imprisonment can be awarded only where there is a
non-compliance with the order of the court regarding delivery or refund of the
property. Obviously, this order would be passed against a specific person or
persons whether an employee, past employee or a legal heir or family member of
such an employee and only if such named person does not comply with the order
of the court, he would be liable to be sentenced which may extend to
imprisonment for two years. At this stage, namely, where the court would award
a substantive sentence of imprisonment for non-compliance with its order the
question of enlarging or widening the language of the section cannot arise as
the order would be directed against a specifically named person.” (p. 119)
From above narration of authorities, it is
absolutely clear that section 630 of the Companies Act, does not only cover
cases of the present employee or officer of the company and this provision
strictly speaking is not penal in the sense as understood under penal law. The
main purpose to make action an offence under section 630 is to provide a speedy
and summary procedure for retrieving the property of the company where it has
been wrongly obtained by the employee or officer of the company or where the
property has been lawfully obtained but unlawfully retained after termination
of the employment of the employee or the officer and to impose a fine on the
officer or employee of the company if found in breach of the provision of
section 630 of the Companies Act and further to issue direction if the Court
feels it just and appropriate for delivery of the possession of the property of
the company and to impose a sentence of imprisonment when there is
non-compliance of the order of the Court regarding delivery or refund of the
property of the company.
15. On 23-12-1994, Respondents 1 and 2 filed a civil suit No. 7 of
1995 for specific performance of the contract for transfer of the flat at Blue
Heaven Cooperative Housing Society. The High Court had passed an order with the
consent of the parties that the plaintiff i.e., Respondent No. 2 shall not be
dispossessed from the premises i.e., flat at Sonmarg except with due process of
law. The proceedings taken up by the appellant in the Court under section 630
of the Companies Act were held not to be the proceedings under due process of
law. We have already seen that section 630 of the Companies Act provides for
summary legal remedy for seeking possession of the property of the company. Due
process of law in the present context would ordinarily mean such an exercise of
power by the parties as the settled principles of law permit and/or a course of
legal proceedings, according to those rules and principles which have been
established in our systems of jurisprudence for the enforcement and protection
of private rights. Due process of law would in short mean a procedure
established by law, which is a procedure fixed or laid down in law. When the
High Court has passed an order of injunction, in the aforesaid terms, what is
meant by the High Court is, that the Company shall not take forceable
possession of Sonmarg flat during the pendency of the suit and Company was
given liberty to take steps for possession as is permissible under law
including the provisions of any statute giving right to obtain possession to
the company in the facts and circumstances of the case. The company can prove
unlawful possession of the property by the employee or his or her legal
representative after the demise of the employee or an officer of the company.
The company has the remedy to initiate action under section 630(1) and on
conviction by the Competent Criminal Court it can approach the same Court for
directing delivery of possession which sub-section (2) of section 630 of the
Companies Act provides. The remedy is provided in the statute itself and the
High Court’s order by no stretch of imagination can be read to mean that the
Company has to necessarily approach the civil court only for obtaining
possession of the Sonmarg flat and that the remedy available under the
Companies Act cannot be resorted. In our opinion the decision of the High Court
that section 630 of the Companies Act being penal in nature, the proceeding
thereunder cannot be construed to be a proceeding taken in due process of law,
cannot be sustained. Filing of civil suit for possession by the Company does
not deprive the Company of the right to institute prosecution under the
Companies Act and incidentally get an order for delivery of possession. It is
stated that the civil suit was filed by way of abundant caution as well as to
obtain reliefs which cannot be granted by a Criminal Court trying an offence
under section 630.
16. The next important question is whether the possession of
respondents of the property belonging to the company, namely, the Sonmarg flat,
after the death of
17. It is urged by the learned senior counsel for the appellant
that the High Court has failed to appreciate that the permission, if any, given
to Respondent No. 1 to live in Sonmarg flat till the possession of the flat at
Blue Heaven was delivered to respondents, by the Chairman Shri Goenka, being
without any authority of law and being outside the powers vested in the
Chairman, would not be binding on or enforceable against the company. It is
submitted that those powers could only be exercised by the Board of Directors
or by Chairman only with specific authorization to that effect by the Board of
Directors. Countering this argument, it is urged by the learned counsel for
Respondents 1 and 2 that the findings arrived at by both the courts below that
possession of Respondents 1 and 2 is permissible and not wrongful as the
respondents have been assured by the Chairman of the Company to continue to
live in the flat at Sonmarg till the possession of the flat at Blue Heaven is
delivered to them is based on proper assessment of relevant material on record
and does not warrant any interference by this Court. The respondents’
possession of the flat being permissible cannot be held to be wrongful to
attract the provisions of section 630 of Companies Act.
18. The question really is whether the Chairman of the Board of
Directors of the Company has the authority to give such an assurance to
Respondents 1 and 2 when he met them at the condolence meeting after the demise
of Shri S.C. Agarwalla, which could bind the company and thereby could it be
taken as a permission given by the company to respondents 1 and 2 to reside in
Sonmarg flat and thereby their possession could be said to be a lawful
possession. In the matter of company affairs, Directors act as a body and
collectively as a Board. Any Director acting individually has no power to act
on behalf of the company in respect of any matter except to the extent to which
any power or powers of the Board have been delegated to him by the Board within
the limit permitted by the Companies Act or any other law. The position of the
Chairman of the Board of Directors is not substantially different from an
individual Director. Under the Companies Act, Chairman of the company does not
have any special or extraordinary rights to be exercised by him without being
authorized by the Board of Directors. The Board of Directors of course have an
authority to delegate the power or authority to act for and on behalf of the
company to the Chairman of the Board of Directors.
Section 291 of the Companies Act authorizes
the Board of Directors of the Company to exercise such powers or of such acts
or things as the company is authorized to exercise and do such acts or things,
except in the matter where the power is to be exercised by the company in
general meeting. The exercise of the powers by the Board shall be subject to
the provisions contained in the Companies Act or any other Act or in the
Memorandum or Articles of the company. Therefore, under section 291 of the
Companies Act, the action of the Board of Directors should be in conformity
with the provisions of the Company Law or any other enactment or in conformity
with the memorandum or articles of association of the company. It is the
specific case of the respondents which has been found correct by the Courts
that they are holding possession of the company’s flat at Sonmarg on the oral
assurance given by Shri Goenka, Chairman of the Board of Directors that they
can continue to reside in the said flat until the possession of the flat at
Blue Heaven Cooperative Society is given to them. Admittedly the flat at
Sonmarg belongs to the Company. Shri S.C. Aggarwalla, husband of Respondent No.
1 and father of Respondent No. 2 was the ex-employee of the Company. He expired
when he was in the employment of the company and respondents 1 and 2 were
residing in the flat after the demise of Shri Aggarwalla as his heirs. Thus it
is for Respondents 1 and 2 to show the authority of Shri Goenka to bind the
company on the basis of the oral assurance given to them by him to retain the
possession of the flat. The High Court has not referred to any evidence to that
effect led by the respondents, nor there is any finding that the Board of
Directors have authorized the Chairman Shri Goenka to give such an assurance
for and on behalf of the company.
19. On 28th of December, 1993 a letter was sent by appellant requesting
Respondent No. 1 to vacate the premises and hand over peaceful possession of
the premises within 45 days of the receipt of the letter. The contents of the
letter are that Shri S.C. Agarwalla was occupying the premises as a facility
granted to him by the company until he was in the employment of the company. On
account of the demise of Shri Agarwalla, the company deferred the request for
vacation of the said premises; that more than a year has lapsed since the
demise of Shri Agarwalla, it is essential for the company to take possession of
the same. The correspondence placed on record by parties also does not indicate
that the Chairman of the Company Mr. Goenka gave an assurance on the basis that
he has been authorized to do so by the Board of Directors. In the absence of
any authority to the Chairman by the Board of Directors to act for and on
behalf of the company, the assurance given by him to the respondents would not
bind the company, nor it will create a binding agreement between the parties, namely,
Respondents 1 and 2 and the company to permit the respondents to remain in
possession even after the death of Shri Agarwalla, of the flat in Sonmarg.
Apart from this, the Board of Directors itself could exercise the powers in
accordance with the Memorandum of association or the Articles of the company.
Any power exercised beyond the memorandum or the articles of the company would
not bind the company. Any assurance given by the Board of Directors either
should be authorised object of the company by the memorandum of association or
the articles of the company or its purpose should be reasonably ancillary or
incidental to carrying on the companies business.
Evidence produced on record indicates that
agreement was entered into between the company and husband of the respondent
No. 1 regarding Blue Heaven flat. Late Shri Agarwalla was old employee of the
company since 1971. He expired on 2-11-1992 and assurance was given by the
chairman to widow of ex-employee with whom he had long standing relation, when
he went to see her to console her on 4-11-1992, barely two days after the death
of Shri Agarwalla. Such evidence in our opinion irresistibly point,
predominant, if not, the only consideration operating in the mind of chairman
was to console the widow and to permit her to live in the flat for some time.
The assurance given to respondents 1 and 2 by the chairman of the company has
more of a gratuitous and compassionate flavour and less to do with the interest
of the company in mind. Moreover, it is difficult to comprehend how the
chairman could promise on behalf of the Company that the respondents will be
permitted to remain in flat till delivery of flat of Blue Heavan, when he
himself was not sure of the time the company would get the possession of the
Blue Heaven flat. That apart, the act of the Chairman cannot be construed to be
one done incidental to the business of the Company or as a matter of necessity.
20. After the death of Shri Agarwalla on 2-11-1992, the respondents
1 and 2 remained in possession of the company’s Sonmarg flat. Admittedly they
were not in employment of the company nor company has authorized them to remain
in possession of the same particularly after notice dated 9-11-1994 to vacate
the premises and hand over the possession to the company. The possession of the
company’s flat by the Respondents, after the service of notice to vacate the
premises by the company, is wrongful withholding of the property of the
company. The respondents by having wrongfully withheld the possession of the company’s
flat and not delivering the property to the company, have committed an offence.
The interim order of the High Court dated 16-11-1998 in the civil suit filed by
the appellant-Company does not wipe out the offence committed already for which
criminal complaint was filed. Subsequent to that order, the possession may not
be wrongful, but on the date of complaint and till the date of that order, the
Respondents did wrongfully withhold that property, attracting the offence under
section 630(1). Having regard to the factual position of the case, we think
that imposition of fine of Rupees One thousand each would be a proper
punishment for wrongful withholding the Sonmarg flat. Accordingly, respondents
1 and 2 are sentenced to pay fine of Rupees one thousand each. We would like to
make it clear that so long as order of the High Court dated 16-11-1998 in Civil
Suit No. 2391 of 1997 - M/s. Herdillia Chemicals Ltd. v. Smt. Manjula Agarwala
and others, appointing the Court Receiver and delivering him symbolic possession,
and actual possession as agent of Receiver to Respondent No. 1 stands, no
direction can be given under section 630(2) for delivery of actual possession
of Sonmarg flat to appellant. It is of course open to the petitioner to
approach the
21. For the aforesaid reasons, the appeal is partly allowed. The
judgment and order of the High Court and that of the Addl. Chief Metropolitan
Magistrate,
SUPREME COURT
NEGOTIABLE INSTRUMENTS ACT
[2005] 63 SCL 93 (SC)
SUPREME COURT OF
v.
Neeta Bhalla
Y. K. SABHARWAL, ARUN KUMAR AND B.N.
SRIKRISHNA, JJ.
CRIMINAL APPEAL NO. 664 OF 2002
WITH S.L.P. (CRL) NOS. 2286 OF 2002, 1926-1927, 2090-2091, 2214 OF 2003, 4795, 4992, 5073, 5097, 5130 OF 2004, 612 TO 616 OF 2005
SEPTEMBER 20, 2005
Section 141 of the Negotiable Instruments Act, 1881 - Dishonour of
cheque for insufficiency, etc., of funds in account - Offences by companies -
Whether under section 141, liability arises from a person being in-charge of
and responsible for conduct of business of company at relevant time when
offence was committed and not on basis of merely holding a designation or
office in a company - Held, yes - Whether, therefore, it is necessary to
specifically aver in a complaint under section 141 that at time offence was
committed, person accused was in charge of and responsible for conduct of
business of company and without this averment being made in a complaint,
requirements of section 141 cannot be said to be satisfied - Held, yes -
Whether merely being a director of a company is not sufficient to make person
liable under section 141 - Held, yes - Whether however, managing director or
joint managing director, who admittedly would be in charge of company and
responsible to company for conduct of its business and signatory of cheque, who
is clearly responsible for incriminating act, can be proceeded against under
section 141 even in absence of specific averments in complaint - Held, yes
FACTS
Following questions were involved in the instant case :
"(a) whether for purposes of section 141, it is sufficient if the substance of the allegation read as a whole fulfil the requirements of the said section and it is not necessary to specifically state in the complaint that the person accused was in charge of or responsible for the conduct of the business of the company
(b) whether a director of a company would be deemed to be in charge of and responsible to the company for conduct of the business of the company and, therefore, deemed to be guilty of the offence unless he proves to the contrary
(c) even if it is held that specific averments are necessary, whether in the absence of such averments, the signatory of the cheque and or the managing director or joint managing director, who admittedly would be in charge of the company and responsible to the company for conduct of its business, could be proceeded against."
HELD
Criminal liability on account of dishonour of cheque primarily falls on
the drawer company and is extended to officers of the company. The normal rule
in the cases involving criminal liability is against vicarious liability, that
is, no one is to be held criminally liable for an act of another. This normal
rule is, however, subject to exception on account of specific provision being
made in statutes extending liability to others. Section 141 is an instance of
specific provision which in case an offence under section 138 is committed by a
company extends criminal liability for dishonour of cheque to officers of the
company. Section 141 contains conditions which have to be satisfied before the
liability can be extended to officers of a company. Since the provision creates
criminal liability, the conditions have to be strictly complied with. The
conditions are intended to ensure that a person, who is sought to be made
vicariously liable for an offence of which the principal accused is the
company, had a role to play in relation to the incriminating act and further
that such a person should know what is attributed to him to make him liable. In
other words, persons who had nothing to do with the matter need not be roped
in. A company being a juristic person, all its deeds and functions are result
of acts of others. Therefore, officers of a company, who are responsible for
acts done in the name of the company are sought to be made personally liable
for acts which result in criminal action being taken against the company. It
makes every person who, at the time the offence was committed, was incharge of
and was responsible to the company for the conduct of business of the company
as well as the company, liable for the offence. The proviso to the sub-section
contains an escape route for persons who are able to prove that the offence was
committed without their knowledge or that they had exercised all due diligence
to prevent commission of the offence. [
Section 203 of the Code of Criminal Procedure (CrPC) empowers a
Magistrate to dismiss a complaint without even issuing a process. It uses the
words ‘after considering’ and ‘the Magistrate is of opinion that there is no
sufficient ground for proceeding’. These words suggest that the Magistrate has
to apply his mind to a complaint at the initial stage itself and see whether a
case is made out against the accused persons before issuing process to them on
the basis of the complaint. For applying his mind and forming an opinion as to
whether there is sufficient ground for proceeding, a complaint must make out a
prima facie case to proceed. This, in other words, means that a complaint must
contain material to enable the Magistrate to make up his mind for issuing
process. It is settled law that at the time of issuing of the process, the
Magistrate is required to see only the allegations in the complaint and where
allegations in the complaint or the chargesheet do not constitute an offence
against a person, the complaint is liable to be dismissed. [
Process on a complaint under section 138 starts normally on basis of a
written complaint which is placed before a Magistrate. The Magistrate considers
the complaint as per provisions of sections 200 to 204 CrPC. The question of
requirement of averments in a complaint has to be considered on the basis of
provisions contained in sections 138 and 141 of the Act read in the light of
powers of a Magistrate referred to in sections 200 to 204 of CrPC. The fact
that a Magistrate has to consider the complaint before issuing process and he
has power to reject it at the threshold, suggests that a complaint should make
out a case for issue of process. [
A perusal of provisions of sections 291 to 293 of the Companies Act shows
that what a board of directors is empowered to do in relation to a particular
company depends upon the role and functions assigned to directors as per the
memorandum and articles of association of the company. There is nothing which
suggests that simply by being a director in a company, one is supposed to
discharge particular functions on behalf of a company. It happens that a person
may be a director in a company but he may not know anything about day-to-day
functioning of the company. As a director, he may be attending meetings of the
board of directors of the company where usually they decide policy matters and
guide the course of business of a company. It may be that a board of directors
may appoint sub-committees consisting of one or two directors out of the board
of the company who may be made responsible for day-to-day functions of the
company. These are matters which form part of resolutions of board of directors
of a company. Nothing is oral. What emerges from this is that the role of a
director in a company is a question of fact depending on the peculiar facts in
each case. There is no universal rule that a director of a company is in charge
of its everyday affairs. There is no magic as such in a particular word, be it
director, manager or secretary. It all depends upon respective roles assigned
to the officers in a company. When the requirement in section 141, which
extends the liability to officers of a company, is that such a person should be
in charge of and responsible to the company for conduct of business of the
company, a person cannot be subjected to liability of criminal prosecution
without it being averred in the complaint that he satisfies those requirements.
Not every person connected with a company is made liable under section 141.
Liability is cast on persons who may have something to do with the transaction
complained of. A person, who is in charge of and responsible for conduct of
business of a company, would naturally know why the cheque in question was
issued and why it got dishonoured. [
The position of a managing director or a joint managing director in a
company may be different. These persons, as the designation of their office
suggests, are in charge of a company and are responsible for the conduct of the
business of the company. In order to escape liability, such persons may have to
bring their case within the proviso to section 141(1), that is, they will have
to prove that when the offence was committed, they had no knowledge of the
offence or that they exercised all due diligence to prevent the commission of
the offence. [
Section 141 operates in cases where an offence under section 138 is
committed by a company. The keywords which occur in the section are ‘every
person’. These are general words and take every person connected with a company
within their sweep. Therefore, these words have been rightly qualified by use
of the words ‘who, at the time the offence was committed, was in charge of and
was responsible to the company for the conduct of the business of the company,
as well as the company, shall be deemed to be guilty of the offence, etc.’ What
is required is that the persons who are sought to be made criminally liable
under section 141 should be, at the time the offence was committed, in charge
of and responsible to the company for the conduct of the business of the
company. Every person connected with the company shall not fall within the
ambit of the provision. It is only those persons who were in charge of and
responsible for conduct of business of the company at the time of commission of
an offence, who will be liable for criminal action. It follows from this that a
director of a company, who was not in charge of and was not responsible for the
conduct of the business of the company at the relevant time, will not be liable
under the provision. The liability arises from a person being in charge of and
responsible for conduct of business of the company at the relevant time when
the offence was committed and not on the basis of merely holding a designation
or office in a company. Conversely, a person not holding any office or
designation in a company may be liable if he satisfies the main requirement of
being in charge of and responsible for conduct of business of a company at the
relevant time. Liability depends on the role one plays in the affairs of a
company and not on designation or status. If being a director or manager or
secretary was enough to cast criminal liability, the section would have said
so. Instead of ‘every person’ the section would have said ‘every director,
manager or secretary in a company is liable… etc’. The legislature is aware
that it is a case of criminal liability which means serious consequences so far
as the person sought to be made liable is concerned. Therefore, only persons
who can be said to be connected with the commission of a crime at the relevant
time have been subjected to action. [
A reference to sub-section (2) of section 141 fortifies the above
reasoning because sub-section (2) envisages direct involvement of any director,
manager, secretary or other officer of a company in commission of an offence.
This section operates when in a trial it is proved that the offence has been
committed with the consent or connivance or is attributable to neglect on the
part of any of the holders of these offices in a company. In such a case, such
persons are to be held liable. Provision has been made for directors, managers,
secretaries and other officers of a company to cover them in cases of their
proved involvement. [
The conclusion is inevitable that the liability arises on account of
conduct, act or omission on the part of a person and not merely on account of
holding an office or a position in a company. Therefore, in order to bring a
case within section 141, the complaint must disclose the necessary facts which
make a person liable. [
There is almost unanimous judicial opinion that necessary averments ought
to be contained in a complaint before a person can be subjected to criminal
process. A liability under section 141 is sought to be fastened vicariously on
a person connected with a company, the principal accused being the company
itself. It is a departure from the rule in criminal law against vicarious
liability. A clear case should be spelled out in the complaint against the
person sought to be made liable. Section 141 contains the requirements for
making a person liable under the said provision. That respondent falls within
parameters of section 141 has to be spelled out. A complaint has to be examined
by the Magistrate in the first instance on the basis of averments contained
therein. If the Magistrate is satisfied that there are averments which bring
the case within section 141, he would issue the process. Merely being described
as a director in a company is not sufficient to satisfy the requirement of
section 141, Even a non-director can be liable under section 141. The averments
in the complaint would also serve the purpose that the person, sought to be
made liable would know what is the case which is alleged against him. This will
enable him to meet the case at the trial. [
In view of the above discussion, the answers to the questions posed in the reference are as under:
(a) It is necessary to specifically aver in a complaint under section 141 that at the time the offence was committed, the person accused was in charge of and responsible for the conduct of business of the company. This averment is an essential requirement of section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of section 141 cannot be said to be satisfied.
(b) The answer to question posed in sub-para (b) has to be in negative. Merely being a director of a company is not sufficient to make the person liable under section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for conduct of its business. The requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.
(c) The
answer to question (c) has to be in affirmative. The question notes that the
managing director or joint managing director would be admittedly in charge of
the company and responsible to the company for conduct of its business. When
that is so, holders of such positions in a company become liable under section
141. By virtue of the office, they hold as managing director or joint managing
director, these persons are in charge of and responsible for the conduct of
business of the company. Therefore, they get covered under section 141. So far
as signatory of a cheque which is dishonoured is concerned, he is clearly
responsible for the incriminating act and will be covered under sub-section (2)
of section 141. [
CASES REFERRED TO
State of
P.S. Mishra, L.N.Rao, Avadh Behari Rohtagi, S. Chandra Shekhar, T.Harsh Varshan, D. Srinivas Prasad, Ravi Chandra Prasad, Upendra Mishra, Amitesh Chandra Mishra, Dhruv Kumar Jha, Anip Sachthey, Shriniwas R. Khalap, E. Venu Kumar, Arvind Kumar, Mahesh Agarwal, Manu Krishnan, E.C. Agrawala, H.P. Sharma, Ashok Bhan, Satbir Pillania, Sudarsh Menon, Raj Nathan, Subramonium Prasad for the Appellant. Ranjit Kumar, Sanjay Karol, Guntur Prabhakar, Ms. Meenakshi Arora, Sandeep Narain, Shri Narain, Ms. Anjali Jha, Ms. D.Bharathi Reddy, Pranab Kumar Mullick, Rajesh Srivastava, Naveen Kumar, Ms. Ruby Singh Ahuja and Ravindra K. Adsure for the Respondent.
JUDGMENT
Arun Kumar, J. - This matter arises from a reference made by a two Judge Bench of this Court for determination of the following questions by a Larger Bench :
"(a) whether for purposes of section 141 of the Negotiable Instruments Act, 1881, it is sufficient if the substance of the allegation read as a whole fulfil. The requirements of the said section and it is not necessary to specifically state in the complaint that the persons accused was in charge of, or responsible for, the conduct of the business of the company.
(b) whether a director of a company would be deemed to be in charge of, and responsible to, the company for conduct of the business of the company and, therefore, deemed to be guilty of the offence unless he proves to the contrary.
(c) even if it is held that specific averments are necessary, whether in the absence of such averments the signatory of the cheque and or the Managing Directors or Joint Managing Director who admittedly would be in charge of the company and responsible to the company for conduct of its business could be proceeded against."
2. The controversy has arisen in the context of prosecutions launched against officers of Companies under sections 138 and 141 of the Negotiable Instruments Act, 1881 (‘the Act’). The relevant part of the provisions are quoted as under :
"Section 138 : Dishonour of cheque for insufficiency, etc., of funds in the account - Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall, without prejudice to any other provisions of this Act, be punished with imprisonment for a term which may be extended to two years, or with fine which may extend to twice the amount of the cheque, or with both:
Provided that nothing contained in this section shall apply unless-
(a) the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said account of money by giving a notice in writing, to the drawer of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
Explanation - For the purposes of this section, ‘debt or other liability’ means a legally enforceable debt or other liability.
Section 141: Offences by companies - 1. If the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:
Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.
|
Provided ** |
** |
** |
2. Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly."
3. It will be seen from the above provisions that section 138 casts criminal liability punishable with imprisonment or fine or with both on a person who issues a cheque towards discharge of a debt or liability as a whole or in part and the cheque is dishonoured by the Bank on presentation. Section 141 extends such criminal liability in case of a Company to every person who at the time of the offence, was incharge of, and was responsible for the conduct of the business of the Company. By a deeming provision contained in section 141 of the Act, such a person is vicariously liable to be held guilty for the offence under section 138 and punished accordingly. Section 138 is the charging section creating criminal liability in case of dishonour of a cheque and its main ingredients are :
(i) Issuance of a cheque
(ii) Presentation of the cheque
(iii) Dishonour of the cheque
(iv) Service of statutory notice on the person sought to be made liable, and
(v) Non-compliance or non-payment in pursuance of the notice within 15 days of the receipt of the notice.
4. Sections 138 and 141 of the Act form part of Chapter XVII introduced in the Act by way of an amendment carried out by virtue of Act 66 of 1988 effective from 1st April, 1989. These provisions were introduced with a view to encourage the culture of use of cheques and enhancing the credibility of the instruments. The Legislature has sought to inculcate faith in the efficacy of banking operations and use of negotiable instruments in business transactions. The penal provision is meant to discourage people from not honouring their commitments by way of payment through cheques. Section 139, occurring in the same Chapter of the Act creates a presumption that the holder of a cheque receives the cheque in discharge, in whole or in part, of any debt or other liability.
5. In the present case, we are concerned with criminal liability on account of dishonour of cheque. It primarily falls on the drawer company and is extended to officers of the Company. The normal rule in the cases involving criminal liability is against vicarious liability, that is, no one is to be held criminally liable for an act of another. This normal rule is, however, subject to exception on account of specific provision being made in statutes extending liability to others. Section 141 of the Act is an instance of specific provision which in case an offence under section 138 is committed by a Company, extends criminal liability for dishonour of cheque to officers of the Company. Section 141 contains conditions which have to be satisfied before the liability can be extended to officers of a company. Since the provision creates criminal liability, the conditions have to be strictly complied with. The conditions are intended to ensure that a person who is sought to be made vicariously liable for an offence of which the principal accused is the Company, had a role to play in relation to the incriminating act and further that such a person should know what is attributed to him to make him liable. In other words, persons who had nothing to do with the matter need not be roped in. A company being a juristic person, all its deeds and functions are result of acts of others. Therefore, officers of a Company who are responsible for acts done in the name of the Company are sought to be made personally liable for acts which result in criminal action being taken against the Company. It makes every person who, at the time the offence was committed, was incharge of and was responsible to the Company for the conduct of business of the Company, as well as the Company, liable for the offence. The proviso to the sub-section contains an escape route for persons who are able to prove that the offence was committed without their knowledge or that they had exercised all due diligence to prevent commission of the offence.
6. Section 203 of the Code empowers a Magistrate to dismiss a complaint without even issuing a process. It uses the words "after considering" and "the Magistrate is of opinion that there is no sufficient ground for proceeding". These words suggest that the Magistrate has to apply his mind to a complaint at the initial stage itself and see whether a case is made out against the accused persons before issuing process to them on the basis of the complaint. For applying his mind and forming an opinion as to whether there is sufficient ground for proceeding, a complaint must make out a prima facie case to proceed. This, in other words, means that a complaint must contain material to enable the Magistrate to make up his mind for issuing process. If this were not the requirement consequences could be far-reaching. If a Magistrate had to issue process in every case, the burden of work before Magistrates as well as harassment caused to the respondents to whom process is issued would be tremendous. Even section 204 of the Code starts with the words "if in the opinion of the Magistrate taking cognizance of an offence there is sufficient ground for proceeding……" The words "sufficient ground for proceeding" again suggest that ground should be made out in the complaint for proceeding against the respondent. It is settled law that at the time of issuing of the process the Magistrate is required to see only the allegations in the complaint and where allegations in the complaint or the charge sheet do not constitute an offence against a person, the complaint is liable to be dismissed.
7. As the points of reference will show, the question for consideration is what should be the averments in a complaint under sections 138 and 141. Process on a complaint under section 138 starts normally on basis of a written complaint which is placed before a Magistrate. The Magistrate considers the complaint as per provisions of sections 200 to 204 of the Code of Criminal Procedure. The question of requirement of averments in a complaint has to be considered on the basis of provisions contained in sections 138 and 141 of the Negotiable Instruments Act read in the light of powers of a Magistrate referred to in sections 200 to 204 of the Code of Criminal Procedure. The fact that a Magistrate has to consider the complaint before issuing process and he has power to reject it at the threshold, suggests that a complaint should make out a case for issue of process.
8. As to what should be the averments in a complaint, assumes importance in view of the fact that, at the stage of issuance of process, the Magistrate will have before him only the complaint and the accompanying documents. A person who is sought to be made accused has no right to produce any documents or evidence in defence at that stage. Even at the stage of framing of charge the accused has no such right and a Magistrate cannot be asked to look into the documents produced by an accused at that stage, State of Orissa v. Debendra Nath Padhi [2005] 1 SCC 568.
9. The officers responsible for conducting affairs of companies are generally referred to as Directors, Managers, Secretaries, Managing Directors etc. What is required to be considered is: is it sufficient to simply state in a complaint that a particular person was a director of the company at the time the offence was committed and nothing more is required to be said? For this, it may be worthwhile to notice the role of a director in a company. The word ‘director’ is defined in section 2(13) of the Companies Act, 1956 as under:
"‘director’ includes any person occupying the position of director, by whatever name called";
There is a whole chapter in the Companies Act on directors, which is Chapter II. Sections 291 to 293 refer to powers of Board of Directors. A perusal of these provisions shows that what a Board of Directors is empowered to do in relation to a particular company depends upon the role and functions assigned to Directors as per the Memorandum and Articles of Association of the company. There is nothing which suggests that simply by being a director in a company, one is supposed to discharge particular functions on behalf of a company. It happens that a person may be a director in a company but he may not know anything about day-to-day functioning of the company. As a director he may be attending meetings of the Board of Directors of the Company where usually they decide policy matters and guide the course of business of a company. It may be that a Board of Directors may appoint sub-committees consisting of one or two directors out of the Board of the company who may be made responsible for day-to-day functions of the company. These are matters which form part of resolutions of Board of Directors of a company. Nothing is oral. What emerges from this is that the role of a director in a company is a question of fact depending on the peculiar facts in each case. There is no universal rule that a director of a company is in-charge of its everyday affairs. We have discussed about the position of a Director in a company in order to illustrate the point that there is no magic as such in a particular word, be it Director, Manager or Secretary. It all depends upon respective roles assigned to the officers in a company. A company may have Managers or Secretaries for different departments, which means, it may have more than one Manager or Secretary. These officers may also be authorised to issue cheques under their signatures with respect to affairs of their respective departments. Will it be possible to prosecute a Secretary of Department-B regarding a cheque issued by the Secretary of Department-A which is dishonoured? The Secretary of Department-B may not be knowing anything about issuance of the cheque in question. Therefore, mere use of a particular designation of an officer without more, may not be enough by way of an averment in a complaint. When the requirement in section 141, which extends the liability to officers of a company, is that such a person should be in-charge of and responsible to the company for conduct of business of the company, how can a person be subjected to liability of criminal prosecution without it being averred in the complaint that he satisfies those requirements ? Not every person connected with a company is made liable under section 141. Liability is cast on persons who may have something to do with the transaction complained of. A person who is in-charge of and responsible for conduct of business of a company would naturally know why the cheque in question was issued and why it got dishonoured.
10. The position of a Managing Director or a Joint Managing Director in a company may be different. These persons, as the designation of their office suggests, are in-charge of a company and are responsible for the conduct of the business of the company. In order to escape liability such persons may have to bring their case within the proviso to section 141(1), that is, they will have to prove that when the offence was committed they had no knowledge of the offence or that they exercised all due diligence to prevent the commission of the offence.
11. While analysing section 141 of the Act, it will be seen that it operates in cases where an offence under section 138 is committed by a company. The key words which occur in the section are "every person". These are general words and take every person connected with a company within their sweep. Therefore, these words have been rightly qualified by use of the words " who, at the time the offence was committed, was in-charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence etc." What is required is that the persons who are sought to be made criminally liable under section 141 should be at the time the offence was committed, in-charge of and responsible to the company for the conduct of the business of the company. Every person connected with the company shall not fall within the ambit of the provision. It is only those persons who were in-charge of and responsible for conduct of business of the company at the time of commission of an offence, who will be liable for criminal action. It follows from this that if a director of a company who was not in-charge of and was not responsible for the conduct of the business of the company at the relevant time, will not be liable under the provision. The liability arises from being in-charge of and responsible for conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company. Conversely, a person not holding any office or designation in a company may be liable if he satisfies the main requirement of being in-charge of and responsible for conduct of business of a company at the relevant time. Liability depends on the role one plays in the affairs of a company and not on designation or status. If being a Director or Manager or Secretary was enough to cast criminal liability, the section would have said so. Instead of "every person" the section would have said "every Director, Manager or Secretary in a company is liable" ………etc. The legislature is aware that it is a case of criminal liability which means serious consequences so far as the person sought to be made liable is concerned. Therefore, only persons who can be said to be connected with the commission of a crime at the relevant time have been subjected to action.
12. A reference to sub-section (2) of section 141 fortifies the above reasoning because sub-section (2) envisages direct involvement of any Director, Manager, Secretary or other officer of a company in commission of an offence. This section operates when in a trial it is proved that the offence has been committed with the consent or connivance or is attributable to neglect on the part of any of the holders of these offices in a company. In such a case, such persons are to be held liable. Provision has been made for Directors, Managers, Secretaries and other officers of a company to cover them in cases of their proved involvement.
13. The conclusion is inevitable that the liability arises on account of conduct, act or omission on the part of a person and not merely on account of holding an office or a position in a company. Therefore, in order to bring a case within section 141 of the Act the complaint must disclose the necessary facts which make a person liable.
14. The
question of what should be averments in a criminal complaint has come up for
consideration before various High Courts in the country as also before this
Court. Secunderabad Health Care Ltd. v. Secunderabad Hospitals Pvt. Ltd. [1999]
96 Comp. Cas. 106 (AP) was a case under the Negotiable Instruments Act
specifically dealing with sections 138 and 141 thereof. The Andhra Pradesh High
Court held that every Director of a company is not automatically vicariously
liable for the offence committed by the company. Only such Directors or
Director who were in-charge of or responsible to the company for the conduct of
business of the company at the material time when the offence was committed
alone shall be deemed to be guilty of the offence. Further it was observed that
the requirement of law is that "there must be clear, unambiguous and
specific allegations against the persons who are impleaded as accused that they
were in-charge of and responsible to the company in the conduct of its business
in the material time when the offence was committed." The same High Court
in Sudheer Reddy v. State of
15. Cases
have arisen under other Acts where similar provisions are contained creating
vicarious liability for officers of a company in cases where primary liability
is that of a company. State of
16. In State of Haryana v. Brij Lai Mittal 1998 (5) SCC 343 it was held that vicarious liability of a person for being prosecuted for an offence committed under the Act by a company arises if at the material time he was in- charge of and was also responsible to the company for the conduct of its business. Simply because a person is a director of a company, it does not necessarily mean that he fulfils both the above requirements so as to make him liable. Conversely, without being a director a person can be in charge of and responsible to the company for the conduct of its business.
17. K.P.G.
Nair v. Jindal Menthol India Ltd. [2001] 10 SCC 218 was a case under the
Negotiable Instruments Act. It was found that the allegations in the complaint
did not in express words or with reference to the allegations contained therein
make out a case that at the time of commission of the offence, the appellant
was in charge of and was responsible to the company for the conduct of its
business. It was held that requirement of section 141 was not met and the
complaint against the accused was quashed. Similar was the position in Katta
Sujatha v. Fertilizers & Chemicals Travancore Ltd. [2002] 7 SCC 655. This
was a case of a partnership. It was found that no allegations were contained in
the complaint regarding the fact that the accused was a partner in charge of
and was responsible to the firm for the conduct of business of the firm nor was
there any allegation that the offence was made with the consent and connivance
or that it was attributable to any neglect on the part of the accused. It was
held that no case was made out against the accused who was a partner and the
complaint was quashed. The latest in the line is the judgment of this Court in
Monaben Ketanbhai Shah v. State of
"4. It is not necessary to reproduce the language of section 141 verbatim in the complaint since the complaint is required to be read as a whole. If the substance of the allegations made in the complaint fulfil the requirements of section 141, the complaint has to proceed and is required to be tried with. It is also true that in construing a complaint a hypertechnical approach should not be adopted so as to quash the same. The laudable object of preventing bouncing of cheques and sustaining the credibility of commercial transactions resulting in enactment of sections 138 and 141 has to be borne in mind. These provisions create a statutory presumption of dishonesty, exposing a person to criminal liability if payment is not made within the statutory period even after issue of notice. It is also true that the power of quashing is required to be exercised very sparingly and where, read as a whole, factual foundation for the offence has been laid in the complaint, it should not be quashed. All the same, it is also to be remembered that it is the duty of the court to discharge the accused if taking everything stated in the complaint as correct and construing the allegations made therein liberally in favour of the complainant, the ingredients of the offence are altogether lacking. The present case falls in this category as would be evident from the facts noticed hereinafter." (p. 17)
It was further observed:
"6. . . The criminal liability has been fastened on those who, at the time of the commission of the offence, were in charge of and were responsible to the firm for the conduct of the business of the firm. These may be sleeping partners who are not required to take any part in the business of the firm; they may be ladies and others who may not know anything about the business of the firm. The primary responsibility is on the complainant to make necessary averments in the complaint so as to make the accused vicariously liable. For fastening the criminal liability, there is no presumption that every partner knows about the transaction. The obligation of the appellants to prove that at the time the offence was committed they were not in charge of and were not responsible to the firm for the conduct of the business of the firm, would arise only when first the complainant makes necessary averments in the complaint and establishes that fact. The present case is of total absence of requisite averments in the complaint." (p. 18)
18. To sum up, there is almost unanimous judicial opinion that necessary averments ought to be contained in a complaint before a persons can be subjected to criminal process. A liability under section 141 of the Act is sought to be fastened vicariously on a person connected with a Company, the principal accused being the company itself. It is a departure from the rule in criminal law against vicarious liability. A clear case should be spelled out in the complaint against the person sought to be made liable. Section 141 of the Act contains the requirements for making a person liable under the said provision. That respondent falls within parameters of section 141 has to be spelled out. A complaint has to be examined by the Magistrate in the first instance on the basis of averments contained therein. If the Magistrate is satisfied that there are averments which bring the case within section 141 he would issue the process. We have seen that merely being described as a director in a company is not sufficient to satisfy the requirement of section 141. Even a non-director can be liable under section 141 of the Act. The averments in the complaint would also serve the purpose that the person sought to be made liable would know what is the case which is alleged against him. This will enable him to meet the case at the trial.
19. In view of the above discussion, our answers to the questions posed in the Reference are as under:
(a) It is necessary to specifically aver in a complaint under section 141 that at the time the offence was committed, the person accused was in charge of and responsible for the conduct of business of the company. This averment is an essential requirement of section 141 and has to be made in a complaint. Without this averment being made in a complaint, the requirements of section 141 cannot be said to be satisfied.
(b) The answer to question posed in sub-para (b) has to be in negative. Merely being a director of a company is not sufficient to make the person liable under section 141 of the Act. A director in a company cannot be deemed to be in charge of and responsible to the company for conduct of its business. The requirement of section 141 is that the person sought to be made liable should be in charge of and responsible for the conduct of the business of the company at the relevant time. This has to be averred as a fact as there is no deemed liability of a director in such cases.
(c) The answer to question (c) has to be in affirmative. The question ‘notes that the Managing Director or Joint Managing Director would be admittedly in charge of the company and responsible to the company for conduct of its business. When that is so, holders of such positions in a company become liable under section 141 of the Act. By virtue of the office they hold as Managing Director or Joint Managing Director, these persons are in charge of and responsible for the conduct of business of the company. Therefore, they get covered under section 141. So far as signatory of a cheque which is dishonoured is concerned, he is clearly responsible for the incriminating act and will be covered under sub-section (2) of section 141.
20. The Reference having been answered, individual cases may be listed before appropriate Bench for disposal in accordance with law.
[1983] 53 COMP. CAS.
586 (ALL)
v.
D. P. AGARWAL
A.N. VERMA J.
JULY 23, 1980
JUDGMENT
Varma J.—This is a plaintiffs' petition directed
against orders passed by the courts below refusing to grant an interim
injunction to the plaintiffs restraining respondents Nos. 1A to 12 from
interfering with the right of petitioner No. 1- to function as managing
director of petitioner No. 2 company.
These are the relevant facts. Petitioner No. 2 is a
public limited company. Petitioner No. 1, Sri Pyare Lal Gupta, was appointed as
managing director of the said company on August 14, 1975, for a term of five
years. The necessary approval of the Central Govt; is also stated to have been
obtained in regard to the appointment of Sri Pyare Lal Gupta under s. 269 of
the Companies Act. It appears that on or about July 1, 1978, differences arose
between the managing director and other directors of the company. As a result
of the dispute, said to have arisen between petitioner No. 1 and other
directors, a meeting of the board of directors was called by the petitioner, on
the one hand, for July I, 1978, and allegedly by the other directors also for
July 1, 1978. The defendants' case is that a meeting was in fact held on July
1, 1978, to consider the removal of petitioner No. 1 as the managing director
of the company and at the said meeting a resolution was passed purporting to
remove Sri Pyare Lal Gupta as managing director of the company.
In the background of the aforesaid differences and
disputes the petitioners filed a suit in the court of learned Munsif,
In order to appreciate the controversy involved in
this petition, it is necessary to set out the pleadings of the parties. Shortly
stated, the plaint case was that Sri Pyare Lal Gupta had been duly appointed as
the managing director of the aforesaid company for a term of five years
beginning from August 14, 1975. The appointment was approved by the Central
Govt. under s. 269 of the Companies Act. Petitioner No. 1 had called a meeting
of the board of directors on July 1, 1978, for considering certain complaints
against some of the defendants. As a counter-blast the said defendants, some of
whom were directors of the company, also called a meeting of the board of
directors for July 1, 1978, though they had no authority to do so and in point
of fact no such meeting was either called or held. However, the defendants
asserted that such a meeting was held on July 1, 1978, and at that meeting Sri
Pyare Lal Gupta was removed from the managing directorship of the company. The
defendants' action in purporting to remove Sri Pyare Lal Gupta was entirely
unauthorised and illegal, but these defendants were interfering with the right
of Sri Pyare Lal Gupta to act as managing director of the company and hence the
suit.
The injunction application mentioned above filed by
the petitioners came up for orders on August 23, 1978. The defendants not
having been served by that date, an order was passed restraining the defendants
from holding any meeting and directing that if a meeting was held, the same
shall not be given effect to.
The case of the defendants, on the other hand, was
that there were serious charges of misappropriation against Sri Pyare Lal Gupta
giving rise to discontent among the board of directors. As a result, a meeting
of the board of directors was called for on July 1, 1978. The meeting was duly
held and at that meeting a resolution was passed by the board removing Sri
Pyare Lal Gupta from the managing directorship of the company. Subsequently, at
an extraordinary general meeting of the company held on February 23, 1979, Sri
Pyare Lal Gupta was removed even from the directorship of the company. The
defendants asserted that Sri Pyare Lal Gupta had been lawfully removed from the
managing directorship of the company and, therefore, he was not entitled to any
injunction.
In support of their cases both the parties filed
certain documents and affidavits. Both the parties filed minutes of the
meetings said to have been called by them. The defendants filed notices and
agenda of the meeting of the board of
directors held on July 1, 1978, as well as of the extraordinary general meeting
held on February 23, 1979.
Upon a consideration of the material on record the
trial court, while dismissing the application for temporary .injunction, held
that the petitioners did not have any prima facie case nor was the balance of
convenience in their favour. These findings have been affirmed by the learned
District Judge in the appeal filed by the petitioners.
The learned District Judge has held, in agreement
with the trial court, that the board of directors were at liberty to remove the
managing director who was only an agent of the board of directors to carry out
the duties assigned to him. The learned District Judge has referred to some
authorities in support of his view that the authority of a person to act as a
managing director could be lawfully revoked by the board of directors. The
learned District Judge further observed that the fact that Sri Pyare Lal Gupta
was appointed as managing director with the approval of the Central Govt. did
not derogate from the right of the board of directors to remove him from the
managing directorship.
Another important finding recorded by both the courts
below is that the present board of directors, consisting of some of the
defendants, was in effective control of the affairs and management of the
company and that consequently even from the point of balance of convenience it
was not a fit case for the issuance of an ad interim injunction.
Counsel for the petitioners first submitted that Sri
Pyare Lal Gupta having been appointed with the approval of the Central Govt.
under s. 269 of the Companies Act, he could not be removed by the board of
directors without the concurrence of the Central Govt. However, this
proposition canvassed by the learned counsel for the petitioners was not
supported by any authority or any specific provision either in the Companies
Act or in the articles of association of the company produced before me. I am
clearly of the view that the argument advanced by the learned counsel for the
petitioners cannot be accepted. The Companies Act provides for an approval of
the Central Govt. only for the appointment of a director as a managing director
of the company. There is no corresponding provision for the removal of the
managing director.
The learned District Judge has referred to some
authorities in support of his finding that the board of directors does have the
power to revoke the authority and appointment of the managing director appointed
by it. Prima facie, the view taken by the learned District Judge appears to be
correct.
Learned counsel for the petitioners placed reliance
on the provisions of s. 268 of the Companies Act which provides that no
amendment can be made relating to the appointment or reappointment of the
managing director, etc., in the memorandum or articles of association of a
company or in any agreement entered into by it or any resolution passed by the
company in a general meeting unless that amendment has been approved by the
Central Govt. Obviously, this provision can have no application to the present
situation. No amendment in the matters mentioned in s. 268 is being sought.
Consequently, there is no question of obtaining the approval of the Central
Govt.
Having considered the matter at some length I am
clearly of the view that the finding of the courts below that the petitioners
did not have a prima facie case is perfectly correct and calls for no
interference by this court.
The other finding recorded by the courts below that
the balance of convenience does not lie in favour of the petitioner is equally
unexceptionable. The courts below have adverted to circumstances which point to
the conclusion that prima facie it is the defendants who are in effective control
of the management and affairs of the company. It is the defendants who have
been operating the bank accounts and conducting other important business of
the- company. In my view these are legitimate considerations for deciding
whether interim injunction should be issued or not. At any rate, I see no
ground for disagreeing with the view of the learned District Judge on this
aspect of the matter.
There is another circumstance which needs mention. On
the own showing of the petitioners the appointment of Sri Pyare Lal Gupta was
for a term of five years which expires on August 14, 1980. That being so it is
hardly a case in which this court should interfere with the orders passed by
the courts below, in any view of the matter.
Learned counsel for the petitioners laid considerable
stress on the fact that the averments made in the petition have not been denied
by any of the respondents arrayed in the petition. I do not think there is any
substance in this objection. The matter has to be decided on the basis of the material
which was placed before the courts below and not on the basis of allegations
and counter allegations made in this court. In any case, having regarded to the
nature of the controversy involved in the present case, I do not think that any
serious objection can be taken to the fact that none of the respondents has
filed any affidavit in reply to the petition.
In view of what has been stated above this petition
fails and is dismissed. There will be no order as to costs.
[1938] 8 COMP. CAS.
308 (MAD)
HIGH COURT OF THE
v.
The South Indian Industrials Ltd.
MADHAVAN NAIR,
O.C.J., AND
KRISHNASWAMY AYYANGAR, J.
AUGUST 10, 1938
V. Ramaswamy Iyer and S. Narasingha Rao, for the Appellant.
V. Rajagopalachari and K. P. Raman Menon, for the Respondents,
Madhavan Nair, O.C.J.—This is an appeal against the order of Gentle, J., confirming the order of the Master giving the appellant (defendant in C. S. No. 167 of 1937) leave to defend on his furnishing security for a. sum of Rs. 25,000 within a period of two months from the date of his order. The security has not been furnished. The appellant contends that leave to defend the suit should have been given to him unconditionally.
The circumstances are these. The respondent (plaintiff) is the South Indian Industrials Ltd. The suit has been filed by its managing director. The appellant is another managing director. The claim against the appellant is for a sum of Rs. 2,83,878-6-11 the amount over-drawn by him from the company previous to the year 1928. There is no contest regarding this amount owing by the appellant to the company. In defence, the appellant raised various contentions, the most important of which is that the suit has not been filed with proper authority, inasmuch as the plaint purports to be signed by the managing director. His case on this point is that there is nothing to show that he has been properly authorised to file the suit on behalf of the company. So far as the merits of the claim are concerned the defences are twofold. The appellant seeks to set off against the amount claimed a considerable sum of money—we are told that it would amount to a little over a lakh of rupees—owing to him by the company in respect of unpaid bonus declared some years ago. He claims also to set off another amount, namely, the amount which he as a shareholder, might receive upon the winding up of the company. The third point raised is that the suit is barred by limitation.
On behalf of the company it is alleged that the proceedings of the board of directors will show that the managing director who has signed the. plaint is authorised to institute suits on behalf of the company, that there is no substance in the two claims to set off made by the appellant, for he has waived his right to claim the bonus, and that a. shareholder cannot claim to set off what he might eventually receive on a winding up of the company against the amount which he owes to the company. It is also urged by the respondent that the plea that the suit is barred by limitation cannot stand having regard to the letter written by the appellant acknowledging his liability to pay the amount claimed.
Both the Master and the learned Judge were not impressed with the defences raised, but as they did not desire to shut out altogether an opportunity for defending the suit, the appellant was given permission to defend it provided he furnished security for the sum of Rs. 25,000. As already stated it is urged before us that in the circumstances of the case the Court is bound to grant the appellant permission to defend unconditionally.
[His Lordship referred to the law on the subject of granting leave to defend and proceeded :]
All the cases cited before us indicate that the defendant's case should be bona fide and should raise a triable issue which would show that he has a fair defence to put forward against the plaintiff's claim. It is not necessary that the Court should enter fully into the merits of the case and decide, but it should be satisfied that the defences raised show that there is a fair issue to be tried by a competent tribunal before leave to defend is given unconditionally.
We will now examine whether with respect to the contentions put forward by the appellant he has a fair case to set up against the respondent. Having regard to the facts the only point which appears to be of some importance is whether the suit has been properly filed on behalf of the company. The plaintiff respondent is only one of the directors of the company. It is argued that neither Clause 69(k) of the Articles of Association which relates to the powers of the directors to institute suits nor the resolution passed by the company at its meeting of 31-7-1937 that a "lawyer's notice be sent to Mr. H. M. Ibrahim Sait (defendant-appellant) demanding payment of his dues with interest within fifteen days otherwise to file a suit against him for the recovery of the amount", authorises the plaintiff respondent to institute this suit. Admittedly notice of the meeting which passed the resolution referred to was not given to the appellant by the directors, but having regard to another proceeding it is not necessary for the respondent to rely on the resolution to show that he had authority to institute the suit. Clause 69(k) of the Articles of Association gives power to the directors of the company to institute, conduct, defend, compromise and abandon any legal proceedings etc. It is true that under this provision all the directors should join to validly institute a suit, but under Clause 69(d) "the director may from time to time entrust to and confer upon a managing director for the time being such of the powers exercisable under the Articles of Association of the company by the directors as they may think fit…….."
It is argued for the respondent that the directors have entrusted him with full powers to institute suits on behalf of the company by himself. The proceedings of the directors dated 7-7-1918 to which the present appellant along with others was a party show that it was "resolved that the Chairman M. Mohammad Hashim Sait (respondent) and M. Hajee Ebrahim Sait (appellant) be appointed Managing Directors of the Company on a remuneration of Rs. 2000 per mensem each to manage the business of the company either jointly or severally". It follows that the two persons mentioned have power either jointly or severally to "manage the business of the company". It appears to us that managing the business of the company, would include institution of suits as well, when it becomes necessary, in the course of management to recover moneys due to the company. The present one is a case of this kind. No authority, has been quoted to show that institution of legal proceedings would not fall within the meaning of the expression "to manage the business of the company ". As such management as has been delegated to them by the directors can be conducted by either of them the suit instituted by the respondent would certainly be a, validly instituted suit. We are told that as a matter of fact in the past both the respondent and the appellant have instituted suits on behalf of the company each by himself and this practice is relied on as lending additional support to the respondent's contention. We have no doubt that the resolution mentioned above read with Clauses 69(k) and 69(d) of the Articles of Association enables the respondent to institute suits validly on behalf of the company. In this view it is not necessary to canvass the question whether the respondent can rely on the special resolution of the company dated 30-7-1937 authorising the company to file a suit against the appellant in support of his argument. However, we may point out that in law, a meeting of directors is not duly convened unless due notice has been given to all the directors : (See 5 Halsbury 337) and if this is so, the resolution cannot be called in aid to support the respondent's position as admittedly no notice of the meeting was given to the appellant. But as we have stated the other proceeding referred to gives sufficient power to the respondent to. institute the suit validly.
On the merits, the contentions of the appellant have no force at all. He may have a claim for a portion of the undistributed bonus but this claim amounting at best only to Rs. 1,00,000 and odd, has been given up by him by letter dated 8-6-1927 wherein he says :
"I find that there is absolutely no chance of recovering all or any portion of the bonus and dividends due to me and as such I hereby release my right to the same".
It is true that owing to some legal formalities not having been complied with it was resolved that the acceptance of this surrender might not be given effect to till the said legal formalities have been complied with. But we know nothing as to whether these have been complied with or not. The other directors also have surrendered their claims to bonuses and suitable entries have been made in the company's books in all cases. In the circumstances the appellant can have no right to set off his claim to bonus as against the claim made by the company. With regard to the other claim to set off, no authority has been shown that a shareholder is entitled to set off what he might receive on a winding up against moneys due by him. The contention appears to be a novel one. Surely, the company cannot be expected to await the winding up for the recovery of the moneys due to it from the share-holders.
The plea of the bar of limitation stands on an equally slender basis. The appellant has acknowledged his liability to pay the amount and the letter Ex. A dated 18-11-1934 will save the suit from this plea.
It is not necessary for us to go into the merits of the appellant's case but from the facts which appear from the affidavits and the papers filed before us it. is clear that these pleas are vexatious and not bona fide. He admits the correctness of the amount due from him and acknowledges also his liability to pay it. He knows full well that as managing director he or the respondent can institute suits validly each by himself as they have done in the past. He also knows that he surrendered his right to claim the bonus. In the circumstances, the pleas urged by him in defence of the suit cannot be considered to be bona fide but must be considered as being urged simply to gain time. For these reasons we confirm the order passed by Genlte, J. and dismiss the appeal with costs. Time for furnishing security is extended for 3 weeks from this day.