[2004]
52 SCL 762 (Guj.)
High
Court of
v.
MV ‘San Fransceco Dipalola’
D.A.
Mehta, J.
Admirality
Suit No. 3 of 2004
and
Misc. Civil Application No. 14 of 2004
March 9,
2004
Section 34 of the Companies Act, 1956 read
with sections 651 to 653 of the British Companies Act, 1985 - Company - Effect
of registration of - Whether on date of filing suit a company whose name has
been struck off from Register of companies and as a consequence dissolved, can
initiate any legal proceedings so as to be valid in law - Held, no
In a suit filed
by the plaintiff, a
In the
meanwhile, the defendants filed a miscellaneous application (OJMCA) seeking to
set aside the order of arrest and award of damages for wrongful arrest and
detention of vessel. According to the defendants, the entire plaint was based on
false statement, suppression of material facts and reckless allegations with
complete knowledge that such statements and allegations were false, and also
that the plaintiff company had been dissolved after having been struck off from
Register of the Companies House under the provisions of sections 651 and 652 of
the British Companies Act, 1985.
The merits of
the dispute between the parties had not been gone into as both the sides
presented their case only in relation to the preliminary issue: viz., whether
the plaintiff could have presented the suit in the circumstances of the case.
In the circumstances, the question before the Court was not as to what was the
effect of an order of restoration but as to whether on the date of filing the
suit, a company, whose name had been struck off from the register of the
companies and as a consequence, it was dissolved, could initiate any legal
proceedings so as to be valid in law. [
One of the
characteristics of a company is that it is an incorporated body of persons. It
is not mere aggregate of its members : it is not like a partnership firm or a
family. The company is constituted into a distinct and independent person in
law and is endowed with special rights and privileges; it is in law a person
distinct from its members. The advantage of incorporation is that a company
never dies. It has perpetual succession and remains in existence, however,
often its members change, until its dissolution. This prevents the dissolution
of the company by the death, bankruptcy, or lunacy of any of its members -
unlike a partnership firm. This characteristic offers to a company and its
shareholders various special advantages and privileges; more particularly, the
company is permitted to acquire and hold property in its corporate name, and
enables the company to use a common seal, to contract with its shareholders and
others. [
A company is a
separate legal entity notwithstanding the fact that there is only one governing
director who also holds a majority of the shares of the company. The separate
legal entity enabled the director, representing the company, to enter into a
contract of employment with himself in his individual capacity. [
Companies
incorporated under the Act are capable of suing and being sued in their
corporate names. A company’s right to sue arises when some loss is caused to
the company, i.e., to the property or the personality of the company, as
distinct from a loss occasioned to the directors of the company. The rights of
the company and the rights of its shareholders are not co-extensive.
Incorporation brings into existence a legal person which develops into its own
separate existence as a business or enterprise. A company, as a person separate
from its members, may even sue one of its own members for libel. The
publication of any statement which disparages the business of the company,
defames the company at the same time. Hence, the company is entitled to sue in
damages for libel or slander as the case may be. [
A shareholder
has a limited restricted right only after an order of winding up is made,
liabilities of the company discharged and then if any surplus of assets is
left. In the instant case it was not possible even for the plaintiff to make a
statement that the shareholder was entitled to the vessel as being net surplus
of assets after discharging all liabilities of the company. In fact, during the
course of hearing a stand was adopted that one Mrs. ‘R’, was the sole
shareholder and director of the plaintiff company and, hence, was an interested
person. Once the position was admitted that the company was struck off from the
register and dissolved as a consequence there was no question of any particular
shareholder, even the sole shareholder, making a claim to the property of the
company without showing that all liabilities of the company stood discharge. [
Limited company
is a separate legal entity distinct from its shareholder. Merely because there
is only one shareholder, the entities which are otherwise distinct, one is a
natural person and the other is an artificial juristic person, it cannot be
contended that the said entities merge and one can act for and on behalf of
other. The principle of agency has to be understood and appreciated in light of
the provisions of the Act, memorandum and articles of association of the
company. [
Section 291
deals with general powers of the Board; but this does not include power to
institute suits/legal proceedings. [
Unless the
power to institute a suit is specifically conferred on a particular director,
he would have no authority to institute a suit on behalf of the company.
Individual directors are vested with only such powers as are available to them
either under the memorandum or articles of the company, or otherwise by the
board of directors. A managing director also does not have any power to manage
the affairs of the company over and above those available to the Board; the
managing director can exercise only such powers as have been delegated to him.
A company cannot orally authorise another person to sign a plaint on its
behalf. A company can act only as provided under its articles of association. [
On the date of
presentation of the suit, the company was admittedly struck off the register and
dissolved. There could be, therefore, no question of ratification of an action
which a non-existent entity could not have initiated in the first instance. [
Admittedly, the
plaint was signed and verified by a person who was neither secretary, nor
director, nor principal officer of the plaintiff. Hence, he was not a person
who was able to depose to the facts of the case. [
Moreover, there
were three statements of the same lady stating at one place that restoration
application was already made on 5-3-2004, another where it was accepted that as
the suit was filed in extreme urgency the plaintiff could not make an
application for restoration and third one where it stated that the application
was being moved on 8-3-2004. These by themselves did not determine the lis
between the parties, and appeared to be small blemishes when viewed in
isolation, but were factors which when cumulatively considered reflected upon
the conduct of the plaintiff/shareholder. [
It was thus,
clear that : (i) there was absence of full and frank disclosure; (ii) there was
a misstatement of a material fact or suppression of material fact; and, there
was withholding of a vital fact by the plaintiff. This amounted to commission
of fraud on the Court. Misrepresentation itself amounts to fraud. A
representation is fraudulent not only when the person making it knows it to be
false, but also when, he ought to have known, or must be taken to have known,
that it was false. The plaintiff was a limited company - a juristic entity -
acting through a living person. That person claimed to be sole
shareholder-director, who admitted that she instructed the Company Secretary in
July 2003 to apply for having the name of the company struck off from the
register; and that she received letter and notice from the Registrar in July
and September 2003 : and yet expected the Court to believe that there was no
suppression. There was no offer/attempt to amend the plaint even after receipt
of OJMCA. The offer, during course of hearing, was only to substitute the
plaint to remove defects. Therefore, that was a clear case of deception. Fraud
and deception are synonymous. [
A non-existent
entity cannot ratify any action which it could not have initiated : there is no
director, no secretary, no principal officer. The company having been dissolved
there is no entity/person who can authorise anyone. A shareholder of erstwhile
company cannot claim any right, title or interest in any particular
asset/property of the company. Then there is no question of executing any power
of attorney as authorised signatory. [
The legal
position is well settled that on dissolution, properties of a company vest in
the Government. By virtue of section 654 of the 1985 Act even if the property
of the company is not sold (as per the plaintiff), the property has vested in
the crown. Then there is no question of any person, including a shareholder,
staking a claim to the property; and, thus, filing a plaint by self or through
a power of attorney holder. [
On a conjoint
reading of provisions of sub-sections (1) and (2) of section 653 of the 1985
Act it is apparent that a company or any member or creditor can apply to a
Court if the company or member or creditor feels aggrieved by the name of the
company having been struck off from the register. The Court is required to be
satisfied that at the point of time when the name of the company was struck off
from the register, the company was carrying on business or was in operation, or
otherwise, that it is just that the company be restored to the register.
Therefore, the person applying for restoration has to be a person who is
aggrieved. The concept of ‘aggrieved’ here means that the order of striking off
has resulted in a situation which is detrimental to the applicant, viz.,
company or any member or creditor. Therefore, unless the applicant is
‘aggrieved’ there is no question of making an application seeking restoration.
Upon an application being made the Court is required to ascertain whether the
company was carrying on business or was in operation at the time of the
striking off the name from the register. In effect, it means that the
reasonable belief entertained by the Registrar of Companies under section
652(1) of the 1985 Act is found to be incorrect. For the Court to record such a
finding there must be some material available on record. The other alternative
contention which permits the Court to exercise discretion requires that ‘it is
just’ that the company be restored to the register. This requirement has to be
backed by facts and circumstances prevailing in a given situation so as to
enable the Court to exercise discretion in favour of the applicant, namely that
the action of the Registrar striking off the name of the company of the
register would result in creating a situation which is unfair and unjust to the
applicant. [
In the instant
case, admittedly, the plaintiff could not seek restoration on the ground that
it was carrying on business or was in operation at the time when its name was
struck off, as the plaintiff had applied that its name be struck off from the
register as the company was not carrying on business or was not in operation.
In light of the fact that an application had been moved, it was not necessary
to deal with the alternative situation whether it would be permissible for the
Court to exercise discretion on the basis of the consequence of striking off
being unjust to the applicant. Suffice it to state that there had to be cogent
and sufficient material in that regard. [
Section 654 of
the 1985 Act stipulates that property and rights of a dissolved company are
deemed to be bona vacantia and, accordingly, belong to the Crown. Once this was
the position, the plaintiff could not seek any relief on the basis of being
owner of the property without either impleading Crown or putting it to notice.
[
In the
aforesaid factual matrix even if the plaintiff had moved an application seeking
restoration of the company to the register it was not necessary to await
outcome of such application. Considering the fact that an order of arrest was
operating against the defendant it was not possible to do so, especially in
light of the fact that the plaintiff was not inclined to permit vacation of the
ex parte interim order of arrest. [
In the
aforesaid fact situation it was not possible to state that these were
procedural defects which did not go to the root of the matter and should not be
permitted to defeat a just cause. The plaintiff had failed to make out a case.
[
In the result,
the OJMCA was allowed and as a consequence the suit was dismissed. The order of
the arrest of the vessel was vacated/set aside. [
Lee v. Lee’s
Air Farming Ltd. [1961] 31 Comp. Cas. 233 (PC) (para 16), Nandgopal v. NEPC
Agro Foods Ltd. [1995] 83 Comp. Cas. 213 (
M.J. Thakor
and A.S. Vakil for the Plaintiff. Pratap and R.J. Oza for
the Defendant.
1. This suit has been
presented by the plaintiff seeking arrest of defendant No. 1-Vessel, i.e., M.V.
‘San Fransceco Di Paola’ in the following circumstances :
2. The case of the
plaintiff is that the plaintiff, a Limited Company, incorporated under the laws
of
3. In the
circumstances, the plaintiff seeks declaration to the effect that the plaintiff
is the sole owner of the vessel and title vests with the plaintiff, that
defendant No. 2 or any person claiming through the said 2nd defendant does not
have any right, title or interest in the vessel and the vessel is required to
be restored in lawful possession of the plaintiff. Over and above such a
declaration, the plaintiff has also sought a mandatory injunction against
defendant No. 2 or any other person claiming through the 2nd defendant and
being in possession of the vessel, directing them to hand over the possession
of the vessel to the plaintiff.
4. The suit came to
be filed on 1-3-2004. The learned Advocate for the plaintiff mentioned the
matter at 11.00 a.m. on the said day and sought circulation of the matter on
the ground of urgency. Upon such permission having been granted the matter was
taken up for hearing at 2.15 p.m.
5. Mr. M.J. Thakor,
learned senior counsel appearing for Mr. A.S. Vakil, learned Advocate for the
plaintiff submitted that in the aforesaid backdrop of facts and circumstances
the plaintiff had filed the suit claiming possession of ownership of the vessel
and as the same was a maritime lien and claim the suit under the Admiralty Act
was maintainable. It was submitted that the vessel was in port and
6. The defendants have
filed OJMCA No. 14 of 2004 and the same came to be presented on 4-3-2004.
Considering the urgency of the matter both the Misc. Civil Application and the
suit were taken up for hearing on 5-3-2004. Thereafter, the matters have been
heard continuously on 8th & 9th March, 2004. The defendants in the
application presented by them have prayed that the order of arrest dated
1-3-2004 (wrongly mentioned as 2-3-2004) be set aside and/or vacated. A further
prayer seeking damages @ US $ 4,000 per day for wrongful arrest and detention
of the vessel has also been made and consequential prayer seeking direction to
the plaintiff to furnish a bank guarantee has also been made. The case of the
defendants is that the entire plaint is based on false statements, suppression
of material facts and reckless allegations with complete knowledge that such
statements and allegations are false and hence, it is the say of the defendants
that the ex parte order of arrest of the vessel dated 1-3-2004 be vacated and
defendants be compensated by awarding adequate damages for wrongful arrest. The
basis for the stand adopted by the defendants is the factum of the plaintiff
company having been dissolved on 16-12-2003 after having been struck off from
the Register of Companies House of the
7. Before adverting
to the contentions raised on behalf of the respective parties it is necessary
to briefly recapitulate facts which are admitted and undisputed. The plaintiff,
a limited company, has come into existence on 29-6-2000 bearing company No.
04023540. The plaintiff purchased the vessel on 27-6-2000 from one Audrey
Ventures Company Limited,
8. On 18-7-2003
application for having name of the company struck off from the register of the
Companies House was made by or on behalf of the plaintiff, under instructions
of the plaintiff. The first Gazette notice for voluntary strike off as
statutorily required came to be published on 26-8-2003. Similarly the final
Gazette notice for voluntary strike off as statutorily required came to be
published on 16-12-2003, and upon such publication in the Gazette, as a
statutory consequence, plaintiff company came to be dissolved.
9. The suit has been
filed, as already noticed, by the Limited Company. The plaint has been signed
by the constituted attorney, viz., one Mr. Shridhar Burke. The dispute between
the parties is as to whether the plaintiff had executed the final sale in
favour of defendant No. 2 as per Bill of Sale dated 30-6-2003. The case of the
plaintiff is that the said Bill of Sale (Exh. ‘E’) is a forged document and
hence, there is no completed contract of sale entitling defendant No. 2 to
possess the vessel in absence of any right, title or interest in the said
property. There is a further dispute between the parties that the consideration
for the sale which was fixed as per Memorandum of Agreement at US $ 4 lacs (US
$ 4,00,000.00) has not fully passed from defendant No. 2 to the plaintiff. The
defendants have disputed both the averments. It is stated that the vessel was
already under existing charge and had various outstanding dues against its
name. That defendant No. 2 paid off those dues either in entirety or at a
settled figure and hence, as per the understanding between the parties the
plaintiff had executed the Bill of Sale dated 30-6-2003, which was in fact
executed on 12-7-2003.
10. Mr. M.J. Thakor, appearing
on behalf of the plaintiff submitted that it was an admitted position that the
plaintiff company was dissolved on the date of presentation of the suit, but
the sole shareholder who is also the only Director of the plaintiff company,
was not aware of the fact of the name of the company having been struck off;
that the said shareholder-Director became aware of this fact only when OJMCA
was served on the plaintiff, and hence, the plaintiff has taken appropriate
steps to have the company restored to the Register by moving appropriate
application on 8-3-2004. Mr. Thakor also accepted the fact that the vessel
being the only asset of the plaintiff company and having entered into an
agreement to sell on 1-7-2003, the shareholder Director had pursuant to the
said agreement directed the Company Secretary to move an application for having
the name struck off from the Register. That accordingly on 18-7-2003 the
Company Secretary had moved such an application. It is reiterated with emphasis
that sole shareholder Director was not aware of any subsequent developments
viz. post 18-7-2003 and hence, the application seeking restoration. It was
submitted that the law was well settled that upon an order of restoration being
made the company would stand restored to the Register and the consequence of
such restoration would be that the company and all other persons would be
placed in the same position as if the company’s name had not been struck off
from the Register. Reliance was placed on provisions of sections 651, 652 and
653 of the Companies Act, 1985 (1985 Act) as well as various decisions to
contend that once an order of restoration was made it shall be deemed as if the
company was never struck off from the Register of Companies House. It was
further submitted that as could be seen from various decisions pressed into
service, the said decisions were rendered in different factual scenario, viz.,
one, where the company whose name had been struck off from the Register had
applied for restoration before initiating any proceedings; second, a situation
where the company whose name had been struck off from the register had moved an
application for restoration where proceedings had been initiated but no
effective hearing had taken place, and, last a situation where the parties,
including third parties, had acted in pursuance of such dissolution and an
application for restoration came to be moved after number of years, albeit
within the statutory period of limitation of 20 years. Thus, according to Mr.
Thakor in any set of circumstances the position in law was that once an
application for restoration had been made and restoration ordered the company
was deemed to be in existence as if its name had never been struck off from the
register. The contention, hence, was that the plaintiff in the present case had
already moved an application for restoration and once an order to restore the
plaintiff to the register was made all actions, including the present suit
initiated by the plaintiff would be legal and valid, being the consequence of
the legal position or a legal fiction that the company was never dissolved. It
was further submitted that the dissolution of the company was as a result of
the name of the company being struck off from the register and the dissolution
did not succeed as an order of winding up.
11. Mr. Pratap, learned
Advocate appearing on behalf of the defendants contended that as could be seen
from provisions of sections 651, 652 and 653 of the 1985 Act, the power of
restoration was discretionary in nature and the entire basis on which the case
of the plaintiff has proceeded is not warranted in light of the language
employed in the provisions. It was further submitted that the case built on
restoration is not a case which is coming out from the suit and an entirely different
case from the one stated in the plaint was being argued before the Court. It
was further submitted that, as stated in the OJMCA, the plaintiff had no locus
standi to present the suit, the plaintiff being a non existent entity in law
and hence, there was not only a fraud perpetrated on the Court but the entire
plaint was based on suppression of material facts. It was urged that the Court
was required to apply the test as to whether an ex parte order of arrest of the
vessel would have been made by the Court if the factum of dissolution of the
Company had been disclosed in the plaint. The test was, according to the
counsel that there should be full and frank disclosure of all material facts.
11.1 It was further
submitted that the plaint was even otherwise bad in law and the suit should not
be entertained as the same had been presented by a person who has not only
failed to identify himself but has prima facie not even shown the authority on
the basis of which the suit has been presented. Inviting attention to the power
of attorney accompanying the plaint, viz., Exh.13, it was submitted that the
said power of attorney did not mention the address of Mr. Shridhar Burke who
was signatory to the plaint nor is the power shown to have been executed and
authenticated before a Notary. Thus, in light of the provisions of section 85
of the Evidence Act the said document was not a valid document on the basis of
which any person named therein could have initiated any proceeding. It was
further submitted that the power of attorney was in the name of four different
individuals but did not specify as to whether the said individuals were
permitted to act independently or jointly or severally or in the alternative to
each other and hence, a presumption should be drawn that they were required to
act jointly. That the suit having been presented by only one individual was not
in accordance with the authority granted under such power of attorney. In
support of the submissions made various decisions were pressed into service.
12. Mr. Thakor in
response to the objection regarding power of attorney not having been executed
and authenticated by a notary public submitted that it was because of the
urgency of the situation that an ordinary copy received by Fax had been annexed
with the plaint. That he was in possession of copy of the power of attorney
which was duly notarised. That the suit had been presented on 1-3-2004 while
power had been executed on 29-2-2004 (a holiday) at
13. It requires to be
noted that the merits of the dispute between the parties have not been gone
into as both the sides have presented their case only in relation to be
preliminary issue : viz., whether the plaintiff could have presented the suit
in the circumstances of the case. In the circumstances, the question before the
Court is not as to what is the effect of an order of restoration but as to
whether on the date of filing the suit a company whose name has been struck off
from the register of the companies and as a consequence dissolved, can initiate
any legal proceedings so as to be valid in law.
14. Section 33 of the
Companies Act, 1956 (the Act) provides for Registration of Memorandum and
Articles. The effect of such registration is as laid down in section 34 of the
Act, i.e., the Registrar shall certify under his hand that the company is
incorporated. From the date of incorporation, the subscribers of the memorandum
and other persons, namely the members, shall be a body corporate by the name
contained in the memorandum, capable of exercising all the functions of an
incorporated company, and having perpetual succession and a common seal.
15. One of the
characteristics of a company thus is that it is an incorporated body of
persons. It is not mere aggregate of its members : it is not like a partnership
firm or a family. The company is constituted into a distinct and independent
person in law and is endowed with special rights and privileges; it is in law a
person distinct from its members. The advantage of incorporation is that a
company never dies. It has perpetual succession and remains in existence
however often its members change, until its dissolution. This prevents the
dissolution of the company by the death, bankruptcy, or lunacy of any of its members
- unlike a partnership firm. This characteristic offers to a company and its
shareholders various special advantages and privileges; more particularly, the
company is permitted to acquire and hold property in its corporate name, and
enables the company to use a common seal, to contract with its shareholders and
others.
16. A company is a
separate legal entity notwithstanding the fact that there was only one
governing director who also held a majority of the shares of the company. The
separate legal entity enabled the director, representing the company, to enter
into a contract of employment with himself in his individual capacity. - Lee v.
Lee’s Air Farming Ltd. [1961] 31 Comp. Cas. 233 (PC).
17. Companies
incorporated under the Act are capable of suing and being sued in their
corporate names. A company’s right to sue arises when some loss is caused to
the company, i.e., to the property or the personality of the company, as
distinct from a loss occasioned to the directors of the company. The rights of
the company and the rights of its shareholders are not co-extensive. Where a
company was the recipient of a cheque which was dishonoured, it was held that
the company was competent to make a complaint under section 138 of the
Negotiable Instruments Act. The money represented by the cheque was the
company’s money and not that of its functionaries and therefore the company
alone could file a complaint - Nandgopal v. NEPC Agro Foods Ltd. [1995] 83
Comp. Cas. 213 (Mad.). Incorporation brings into existence a legal person which
develops into its own separate existence as a business or enterprise. A
company, as a person separate from its members, may even sue one of its own
members for libel. The publication of any statement which disparages the
business of the company, defames the company at the same time. Hence, the
company is entitled to sue in damages for libel or slander as the case may be.
- Metropolitan Saloon Omnibus Co. Ltd. v. Hawkins [1859] 28 L.J.CL. 830.
18. In the case of
Agarwalla H.P. v. Union of
19. A one-man company
is a distinct assessable and legal entity as much as any other company - O.K.
Trust v. Rees 23 TC 217; Stanely v. Gramophone & Typewriter 5 Tax Cases 358
(CA); I.R. v. John 8 TC 20 (CA).
An individual
may control a company; but it does not necessarily follow, because the
individual controls the company, that the business carried on by the company
controlled is necessarily a business carried on by the Controller. - Kodak v.
20. In the case of Mrs.
Bacha F. Guzdar v. CIT AIR 1955 SC 74, the
“. . . That a shareholder acquires a right to
participate in the profits of the company may be readily conceded but it is not
possible to accept the contention that the shareholder acquires any interest in
the assets of the company. . . .
A shareholder has got no interest in the
property of the company though he has undoubtedly a right to participate in the
profits if and when the company decides to divide them. The interest of a
shareholder ‘vis-a-vis’ the company was explained in the ‘Solapur Mills case’ -
‘Charanjit Lal v. Union of India’, AIR 1951 SC 41 at pp. 54, 55(B). That
judgment negatives the position taken up on behalf of the appellant that a
shareholder has got a right in the property of the company. It is true that the
shareholders of the company have the sole determining voice in administering
the affairs of the company and are entitled, as provided by the articles of
association, to declare that dividends should be distributed out of the profits
of the company to the shareholders but the interest of the shareholder either
individually or collectively does not amount to more than a right to
participate in the profits of the company.
The company is a juristic person and is
distinct from the shareholders. It is the company which owns the property and
not the shareholders. . . .” (p. 77)
It is
necessary to note that the aforesaid law has been enunciated by the Apex Court
in the context of the contention raised before it to the effect that when an
investor buys share of a limited company the investor buys in the first place a
share of the assets of the company proportionate to the number of shares he has
purchased. It is this contention which has been negatived by the aforesaid
statement of law.
21. Applying the
aforesaid principles to the present case it is apparent that today the limited
company is no longer in existence, at least was not in existence on the date
the suit was presented. The suit has been brought in relation to the property
owned by and belonging to the limited company. Even if it could be stated that
the shareholder had any interest by virtue of the shareholding, as stated by
the
22. Therefore, a
shareholder has a limited, restricted right only after an order of winding up
is made, liabilities of the company discharged and then if any surplus of
assets is left. In the present case it is not possible even for the plaintiff
to make a statement that the shareholder is entitled to the vessel as being net
surplus of assets after discharging all liabilities of the company. In fact,
during the course of hearing a stand is adopted that one Mrs. Luany Rodriguez
Salas, is the sole shareholder and director of the plaintiff company and hence
is an interested person. Once the position is admitted that the company is
struck off from the register and dissolved as a consequence there is no
question of any particular shareholder, even the sole shareholder, making a
claim to the property of the company without showing that all liabilities of
the company stand discharged.
23. One more aspect of
the matter is that the limited company is a separate legal entity distinct from
its shareholder. Merely because there is only one shareholder, the entities
which are otherwise distinct, one is a natural person and the other is an
artificial juristic person, it cannot be contended that the said entities merge
and one can act for and on behalf of other. The principle of agency has to be
understood and appreciated in light of the provisions of the Act, Memorandum
and Articles of Association of the company.
24. Section 291 of the
Act deals with general powers of the Board; but this does not include power to
institute suits/legal proceedings. The provisions of section 291 of the Act
while entitling a Board of Directors of a company to exercise all such powers
provide, by way of exception that the Board shall not exercise any power which
is required to be exercised by the company in general meeting, as required by
the provisions of the Act or any other law for the time being in force as well
as Memorandum or Articles of the company. Similarly the second Proviso carves
out a further exception, that the Board while exercising powers shall be
subject to the provisions contained in the Act or any other law for the time
being in force as well as memorandum and articles of the company, and further
that such exercise shall not be inconsistent with provisions of the Act or
requirement of the Memorandum or Articles of the company.
25. Therefore, unless
the power to institute a suit is specifically conferred on a particular
director, he would have no authority to institute a suit on behalf of the company.
Needless to state that such a power can be conferred by Board of Directors only
by passing the resolution in that regard. Individual directors are vested with
only such powers as are available to them either under the memorandum or
articles of the company, or otherwise by the Board of Directors. A Managing
Director also does not have any power to manage the affairs of the company over
and above those available to the Board; the Managing Director can exercise only
such powers as have been delegated to him. A company cannot orally authorise
another person to sign a plaint on its behalf. A company can act only as
provided under its Articles of Association. The provisions of Order VI rule 14
of the Code of Civil Procedure, 1908 read with Order XXIX rule 1 stipulate that
pleadings of a corporation shall be signed by an authorised Director, Secretary
or other Principal Officer.
26. In the case of
United Bank of
“9. In cases like the present where suits are
instituted or defended on behalf of a public corporation, public interest
should not be permitted to be defeated on a mere technicality. Procedural
defects which do not go to the root of the matter should not be permitted to
defeat a just cause. There is sufficient power in the Courts, under the Code of
Civil Procedure, to ensure that injustice is not done to any party who has a
just case. As far as possible a substantive right should not be allowed to be
defeated on account of a procedural irregularity which is curable.
10. It cannot be disputed that a company like
the appellant can sue and be sued in its own name. Under order 6 rule 14 of the
Code of Civil Procedure a pleading is required to be signed by the party and
its pleader, if any. As a company is a juristic entity it is obvious that some
person has to sign the pleadings on behalf of the company. Order 29 rule 1 of
the Code of Civil Procedure, therefore, provides that in a suit by or against a
corporation the Secretary or any Director or other Principal Officer of the
Corporation who is able to depose to the facts of the case might sign and
verify on behalf of the company. Reading order 6, rule 14 together with order
29, rule 1 of the Code of Civil Procedure it would appear that even in the
absence of any formal letter or authority or power of attorney having been
executed a person referred to in rule 1 of order 29 can, by virtue of the
office which he holds, sign and verify the pleadings on behalf of the
corporation. In addition thereto and de hors order 29, rule 1 of the Code of
Civil Procedure, as a company is a juristic entity, it can duly authorise any
person to sign the plaint or the written statement on its behalf and this would
be regarded as sufficient compliance with the provisions of order 6, rule 14 of
the Code of Civil Procedure. A person may be expressly authorised to sign the
pleadings on behalf of the company, for example, by the board of directors
passing a resolution to that effect or by a power of attorney being executed in
favour of any individual. In absence thereof and in cases where pleadings have
been signed by one of its officers a Corporation can ratify the said action of
its officer in signing the pleadings. Such ratification can be express or
implied. The Court can on the basis of the evidence on record, and after taking
all the circumstances of the case, specially with regard to the conduct of the
trial, come to the conclusion that the corporation had ratified the act of
signing of the pleading by its officer.” (p. 5)
27. The plaintiff would
like to adopt the approach laid down in paragraph 9 as reproduced hereinbefore.
However, the observation regarding sufficient power being available to the
Court to ensure that injustice is not done to any party who has a just case has
to be read not only in the context of the facts of the case which were there
before the Apex Court, but also while applying the principle facts of the
present case have to be borne in mind. The distinction between a public
corporation representing public interest and limited company has to be taken
into consideration for the purpose of deciding whether it is only a procedural
defect or it affects the rights of a party.
28. The question is not
as to whether such a remedy is permissible, or whether defect is required to be
permitted to be cured by ratification of the action, as is sought to be done by
filing an affidavit dated 9-3-2004 by one Luany Rodriguez Salas, a shareholder
of the plaintiff, but whether this can really amount to a procedural
irregularity only. At the cost of repetition it requires to be reiterated that
on the date of presentation of the suit the company was admittedly struck off
from the Register and dissolved. There can be therefore, no question of
ratification of an action which a non existent entity could not have initiated
in the first instance.
29. As laid down by the
Supreme Court in the case of United Bank of
30. In the plaint in
paragraph 25 it is stated that one Mr. Shridhar Burke a Constituted Attorney of
the plaintiff who has made himself conversant with the facts of the case on the
basis of instructions, information and documents received has signed and
verified the plaint. Page No. 14 is the verification and the same reads as
under :
“I, Shridhar Burke, of adult, Indian
Inhabitant, having my office at .... the Constituted Attorney of the plaintiffs
abovenamed do hereby solemnly declare that what is stated in the foregoing
paragraph Nos. 1 to .... is based on documents made available to me and
instructions received by me and what is stated in the remaining paragraph Nos.
..... to ..... is based upon legal advise and I believe the same to be true.
Solemnly declared at Ahmedabad
this 1st day of March, 2004.”
As can be seen
from the verification the said gentleman after stating having my office at
......., has left the space for inserting address blank and in relation to
paragraph numbers also except for mentioning paragraph No. 1 the remaining
portion has been left blank; as to what are the paragraphs which are based on
documents made available to him and what are the paragraph numbers in relation
to instructions received by him as well as what are the paragraphs based on
legal advice has been conveniently omitted. Thereafter, reply dated 5-3-2004
tendered in OJMCA has been affirmed by Luany Rodriguez Salas, a shareholder of
the plaintiff company. Subsequently an affidavit dated ..... day of March, 2004
sworn at Mumbai by Luany Rodriguez Salas has been placed on record on 8-4-2004.
In the said affidavit the deponent has not been identified by anyone nor does
the notary state that he personally knows the lady. Similarly another affidavit
has been tendered again sworn at Mumbai which has been counter signed by the
learned Advocate for the plaintiff and notarized on the same day, viz.,
7-3-2004. Today, i.e., 9-3-2004 one more affidavit has been filed wherein it is
stated to have been sworn by Luany Rodriguez Salas but once again the deponent
has not been identified by anybody though the rubber stamp has been affixed
showing.
Identified by me.
Advocate.
31. In reply to OJMCA
in paragraph 5 Mrs. Luany Rodriguez Salas states : “An application for
restoration of the plaintiff to the register has been made and the restoration
shall, in law, relate back”. In the same paragraph further it is stated : “the
plaintiff had filed the suit in extreme urgency and could not make an application
for restoration”. This affidavit is sworn on 5-3-2004. As against the two
statements made by the same person there is one more affidavit without date,
notarized on 7-3-2004 and presented in the Court on 8-3-2004 wherein it is
stated that : “I say that I have signed the witness statement of claim and sent
it to Holman Fenwick and Willan, London Solicitors to enable them to take all
necessary steps for restoration of the company. I have been informed that the
filing procedure will be completed by
Hence, we have
three statements of the same lady stating at one place that restoration
application is already made on 5-3-2004, another where it is accepted that as
the suit was filed in extreme urgency the plaintiff could not make an
application for restoration and third one where it states that the application
is being moved on 8-3-2004. These by themselves do not determine the lis
between the parties, and appear to be small blemishes when viewed in isolation,
but are factors which when cumulatively considered reflect upon the conduct of
the plaintiff/shareholder.
32. Along with the second
affidavit notarized on 7-3-2004 Luany Rodriguez Salas has annexed a copy of the
witness statement of claim. This is what is stated in relation to dissolution
of the company.
“16. I understand that, in compliance with my
instructions, on 16th July, 2003 an application was filed for the voluntary
dissolution of the company (p.2). On 21st July, 2003, the Registrar of
Companies wrote to the directors of the company acknowledging receipt and
stating that he would take the requisite steps to remove the company from the
Register (p. 3, 4).
17. Unfortunately, the sale of the Vessel did
not materialize as expected. Under the MOA, the delivery of the Vessel was to
be effected on 7th July, 2003 with a cancellation date of 7th August, 2003 (in
the buyer’s option). By early August 2003 Simbolo had not paid the balance of
the purchase price and sought time extensions for various reasons. As the
Company did not have another potential purchaser for the Vessel, it did not
terminate the MOA. The first Gazette notice for voluntary strike off was done
on 26th August, 2003.
18. At this stage I should have ensured the
withdrawal of the company’s application for voluntary dissolution. I now
realise it was inappropriate for the Company to be struck off from the Register
whilst it still held assets and whilst it still had to perform the MOA (i.e.
give delivery of the Vessel under the MOA).
19. Regrettably, I did not give sufficient
consideration to the fact that the Company Secretary had already instigated a
procedure for the voluntary winding up of the company and that this procedure
would be continued with unless the Company Secretary or I intervened on behalf
of the company. This was a mistake on my behalf and I apologies to the Court.
20. On 2nd September, 2003 the Registrar of
Companies gave notice that, unless cause was shown to the contrary, at the
expiration of three months from the said date the name of the company would be
struck off the register and the company would be dissolved (p. 5). This notice
was received but, due to my failure to appreciate its significance, I did not
instruct the Company Secretary to withdraw the company’s application for
dissolution and show cause as to why the company should remain on the register.
21. Accordingly, the company was struck off from
the Register under section 652(5) of the Companies Act, 1985 on 9th December,
2003 and dissolved by voluntary dissolution by notice in the London Gazette
dated 16th December, 2003 (p. 6).”
Therefore, the
contention raised on behalf of the plaintiff that the sole shareholder-director
had no knowledge about the proceedings under section 652 of the 1985 Act, or
that it had escaped attention is not only not supported by any evidence on
record, but stands falsified by this statement of claim : when she accepts that
a letter dated 21-7-2003 and then a notice dated 2-9-2003 were received from
the Registrar of Companies. The statement during course of hearing that she
realised (that the company had been dissolved) only when she was served with
OJMCA is thus patently false.
33. In the case of
‘VASSO’ (Formerly ‘
“It is axiomatic that in ex parte proceedings
there should be full and frank disclosure to the Court of facts known to the
applicant, and that failure to make such disclosure may result in the discharge
of any order made upon the ex parte application, even though the facts were
such that, with full disclosure, an order would have been justified : See R.V.
Kensington Income Tax Commissioners, ex parte Princess Edmond de Polignac
[1917] 1 K.B. 486, Examples of this principle are to be found in the case of ex
parte injunctions (Daglish v. Jarvis [1850] 2 Mac & G.231), ex parte orders
made for service of proceedings out of the jurisdiction under order 11 of the
rules of the Supreme Court (The Hagen [1908] p. 189 at p. 201, per Lord Justice
Farewell), and Mareva Injunctions (Negocios del mar S.A. v. Doric Shipping
Corporation S.A. (The Assios) [1979] 1 Lloyd’s Rep. 331). In our judgment,
exactly the same applies in the case of an ex parte application for the arrest
of a ship where, as here, there has not been full disclosure of the material
facts to the Court.”
34. The High Court of
“10. The suppression of material fact by
itself is a sufficient ground to decline the discretionary relief of
injunction. A party seeking discretionary relief has to approach the court with
clean hands and is required to disclose all material facts which may, one way
or the other, affect the decision. A person deliberately concealing material
facts from court is not entitled to any discretionary relief. The Court can
refuse to hear such person on merits. A person seeking relief of injunction is
required to make honest disclosure of all relevant statement of facts otherwise
it would amount to an abuse of the process of the Court. Reference may be made
to decision in King v. General Commissioner for the purposes of the Income-tax
Acts for the District of Kensington 1917 (1) King’s Bench Division 486 where
the Court refused a writ of prohibition without going into the merits because
of suppression of material facts by the applicant. The legal position in our
country is also no different. [See : Charanji Lal v. Financial Commissioner AIR
1978 Punj. & Har. 326 (FB)]. Reference may also be made to a decision of
the Supreme Court in Udai Chand v. Shankar Lal AIR 1978 SC 265. In the said
decision the Supreme Court revoked the order granting special leave and held
that there was a misstatement of material fact and that amounted to serious
misrepresentation. The principles applicable are same whether it is a case of
misstatement of a material fact or suppression of material fact.” (p. 201)
35. The Supreme Court
in the case of S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 states :
“5. The High Court, in our view, fell into
patent error. The short question before the High Court was whether in the facts
and circumstances of this case, Jagannath obtained the preliminary decree by
playing fraud on the Court. The High Court, however, went haywire and made
observations which are wholly perverse. We do not agree with the High Court
that there is no legal duty cast upon the plaintiff to come to court with a
true case and prove it by true evidence’. The principle of ‘finality of
litigation’ cannot be pressed to the extent of such an absurdity that it
becomes an engine of fraud in the hands of dishonest litigants. The courts of
law are meant for imparting justice between the parties. One who comes to the
Court, must come with clean hands. We are constrained to say that more often
than not, process of the Court is being abused. Property-grabbers, tax-evaders,
bank-loan-dodgers and other unscrupulous persons from all walks of life find
the Court-process a convenient lever to retain the illegal-gains indefinitely.
We have no hesitation to say that a person, who’s case is based on falsehood,
has no right to approach the Court. He can be summarily thrown out at any stage
of the litigation.
6. The facts of the present case leave no
manner of doubt that Jagannath obtained the preliminary decree by playing fraud
on the Court. A fraud is an act of deliberate deception with the design of
securing something by taking unfair advantage of another. It is a deception in
order to gain by another’s loss. It is a cheating intended to get an advantage.
Jagannath was working as a clerk with Chunilal Sowcar. He purchased the
property in the Court auction on behalf of Chunilal Sowear. He had, on his own
volition, executed the registered release deed (Ex. B-15) in favour of Chunilal
Sowcar regarding the property in dispute. He knew that the appellants had paid
the total decretal amount to his master Chunilal Sowcar. Without disclosing all
these facts, he filed the suit for the partition of the property on the ground
that he had purchased the property on his own behalf and not on behalf of
Chunilal Sowcar. Non-production and even non-mentioning of the release deed at
the trial is tantamount to playing fraud on the Court. We do not agree with the
observations of the High Court that the appellants-defendants could have easily
produced the certified registered copy of Ex. B-15 and non-suited the
plaintiff. A litigant, who approaches the Court, is bound to produce all the
documents executed by him which are relevant to the litigation. If he withholds
a vital document in order to gain advantage on the other side then he would be
guilty of playing fraud on the court as well as on the opposite party.” (p. 5)
36. The concept of
fraud has been enunciated by the Apex Court in its latest decision in the
following words, after discussing the entire case law on the subject, in the
case of Ram Chandra Singh v. Savitri Devi [2003] 8 SCC 319 :
“15. Commission of fraud on Court and suppression of material facts are the core issues involved in these matters. Fraud as is well known vitiates every solemn act. Fraud and justice never dwell together.
16. Fraud is a conduct either by letter or
words, which induces the other person or authority to take a definite
determinative stand as a response to the conduct of the former either by word
or letter.
17. It is also well settled that
misrepresentation itself amounts to fraud. Indeed, innocent misrepresentation
may also give reason to claim relief against fraud.
18. A fraudulent misrepresentation is called
deceit and consists in leading a man into damage by wilfully or recklessly
causing him to believe and act in flasehood. It is a fraud in law if a party makes
representations which he knows to be false, and injury ensues therefrom
although the motive from which the representations proceeded may not have been
bad.
19. In
In an action of deceit the plaintiff must prove
actual fraud. Fraud is proved when it is shown that a false representation has
been made knowingly, or without belief in its truth, or recklessly, without
caring whether it be true or false.
A false statement, made through carelessness
and without reasonable ground for believing it to be true, may be evidence of
fraud but does not necessarily amount to fraud. Such a statement, if made in
the honest belief that it is true, is not fraudulent and does not render the
person making it liable to an action of deceit.
20. In Kerr on Fraud and Mistake,
at p. 23, it is stated :
‘The true and only sound principle to be
derived from the cases represented by Slim v. Croucher [1860] 1 De GF & J
518 is thus : that a representation is fraudulent not only when the person
making it knows it to be false, but also when, as Jessel, M.R., pointed out, he
ought to have known, or must be taken to have known, that it was false. This is
a sound and intelligible principle, and is, moreover, not inconsistent with
** ** **
22. Recently this Court by an order dated
3-9-2003 in Ram Preeti Yadav v. U.P. Board of High School & Intermediate
Education [2003] 8 SCC 311 held : (SCC pp. 316-317, paras 13-15)
‘13.
Fraud is a conduct either by letter or words, which induces the other person or
authority to take a definite determinative stand as a response to the conduct
of the former either by words or letter. Although negligence is not fraud but
it can be evidence on fraud. (See
14.
In Lazarus Estates Ltd. v. Beasley [1956] 1 All ER 341 the Court of appeal
stated the law thus : (All ER p. 345 C-D).
‘I
cannot accede to this argument for a moment. No court in this land will allow a
person to keep an advantage which he has obtained by fraud. No judgment of a
Court, no order of a minister, can be allowed to stand if it has been obtained
by fraud. Fraud unravels everything. The Court is careful not to find fraud
unless, it is distinctly pleaded and proved; but once it is proved it vitiates
judgments, contracts and all transactions whatsoever;’
15. In S.P. Chengalvaraya Naidu v.
Jagannath [1994] 1 SCC 1 this Court stated that fraud avoids all judicial acts,
ecclesiastical or temporal.’
23. An act of fraud on Court is always viewed
seriously. A collusion or conspiracy with a view to deprive the rights of the
others in relation to a property would render the transaction void ab initio.
Fraud and deception are synonymous.
** ** **
29. In Chittaranjan Das v. Durgapore Project Ltd.
[1995] 2 Cal.LJ 388 it has been held : (Cal LJ p. 402, paras 57-58).
‘57. Suppression of a material document which
affects the condition of service of the petitioner, would amount to fraud in
such matters. Even the principles of natural justice are not required to be
complied with in such a situation.
58. It is now well known that a fraud vitiates
all solemn acts. Thus, even if the date of birth of the petitioner had been
recorded in the service returns on the basis of the certificate produced by the
petitioner, the same is not sacrosanct nor the respondent company would be
bound thereby.’” (pp. 327-330)
Applying the
aforesaid principles it is clear that : (i) there is absence of full and frank
disclosure; (ii) there is a misstatement of a material fact or suppression of
material fact; and, there is withholding of a vital fact by the plaintiff. This
amounts to commission of fraud on the Court. Misrepresentation itself amounts
to fraud. A representation is fraudulent not only when the person making it knows
it to be false, but also when, he ought to have known, or must be taken to have
known, that it was false. The plaintiff is a limited company - a juristic
entity - acting through a living person. That person herein claimed to be sole
shareholder-director, who admits : (i) she instructed the Company Secretary in
July 2003 to apply for having the name of the company struck off from the
Register; (iii) received letter and notice from the Registrar in July and
September 2003 : and yet expects the Court to believe that there is no
suppression. There is no offer/attempt to amend the plaint even after receipt
of OJMCA. The offer, during course of hearing, is only to substitute the plaint
to remove defects. Therefore, this is a clear case of deception. Fraud and deception
are synonymous.
37. As already seen a
non existent entity cannot ratify any action which it could not have initiated
: there is no director, no secretary, no principal officer. The company having
been dissolved there is no entity/person who can authorise anyone. A
shareholder of erstwhile company cannot claim any right, title or interest in
any particular asset/property of the company. Then there is no question of
executing any power of attorney as authorised signatory. - [1986] BCLC 342
(CA).
38. In the case of
Pierce Leslie & Co. Ltd. v. Miss. Violet Ouchterlony Wakshare AIR 1969 SC
843 it is laid down thus :
“12. As already stated, technical escheat of
the real property of dissolved company was abolished in
13. Accordingly the shareholders or creditors
of the dissolved company cannot maintain any action for recovery of its assets.
No effective relief can be given in such action, as the company is not a party
and the assets cannot be restored to its coffers. On this ground in Coxon v.
Gorst 1891-2 Ch. 73 an action by creditors for recovery of moneys due to the
dissolved company was dismissed, and in re Lewis & Smart Ltd., In re 1954-1
WLR 755 it was held that a pending misfeasance summons abated on the
dissolution of the company.
14. The plaintiffs’ contention that the
properties of a dissolved company passed to its shareholders is based upon
American law, which is stated in American Jurisprudence, 2d, Corporations, Art.
1659 thus :
** ** **
15. The law in our country is very different.
Here the winding up precedes the dissolution. There is no statutory provision
vesting the properties of a dissolved company in a trustee or having the effect
of abrogating the law of escheat. The shareholders or creditors of a dissolved
company cannot be regarded as its heirs and successors. On dissolution of a
company, its properties, if any, vest in the Government. . . .” (p. 850)
39. In so far as
applicability of order VI rule 14 of the Code of Civil Procedure is concerned :
the moot question is : does the non existent company own any property? The
legal position is now well settled : on dissolution, properties of a company
vest in the Government. As can be seen hereinafter, by virtue of section 654 of
the 1985 Act, even if the property of the company is not sold (as per the
plaintiff), the property has vested in the Crown. Then there is no question of
any person, including a shareholder, staking a claim to the property; and,
thus, filing a plaint by self or through a power of attorney holder.
40. In light of the
fact that the entire case of the plaintiff rests on the effect of restoration
of the name of the company to the register it is necessary to examine, however
briefly, the provisions in relation to restoration. At the same time it is
necessary to bear in mind that the present proceedings are not for the purpose
of restoration and this Court is not called upon to decide any such issue but
so as to appreciate the contentions raised on behalf of the plaintiff it is
necessary to look at the provisions dealing with the restoration.
41. Section 651 of the
1985 Act pertains to power of Court to declare dissolution of company void.
Under sub-section (1) of section 651, the Court may at any time within two
years from the date of dissolution, where a company has been dissolved, make an
order, on such terms as the Court thinks fit, declaring dissolution to be void,
on an application made for the purpose by liquidator of the company or by any
other person (appearing to the Court to be interested). Sub-section (2) of
section 651 states that thereupon such proceedings may be taken as might have
been taken as if the company had not been dissolved. Under sub-section (3) a
person making application is required within seven days after the making of the
order by the Court to deliver to the Registrar of the Companies an office copy
of the order. Therefore, under this section only the liquidator of the company
or a person who appears to the Court to be interested can move the Court; and
once the Court declares the dissolution to be void thereupon such proceedings
may be taken as might have been taken as if the company had not been dissolved.
42. In the present case
admittedly there being no winding up order a liquidator stands ruled out. Then
question that requires to be looked into is whether the plaintiff or
shareholder can be termed as a person who appears to the Court to be
interested. It is not necessary for the present purpose to determine this
question as, on behalf of the plaintiff, it is an accepted position that the
plaintiff does not seek restoration under section 651 of the 1985 Act.
43. Section 652 of the
1985 Act provides powers to the Registrar to strike off a defuntct company off
the register. Sub-sections (1) and (2) of section 652 pertain to the procedure
to be adopted. Sub-section (3) provides that if the Registrar either does not
receive an answer in response to the communication required to be sent under
sub-sections (1) and (2), or receives an answer to the effect that the company
is not carrying on business or is not in operation, he may publish in the
Gazette a notice and also send a notice by post to the company that at the
expiration of three months from the date of such notice the name of the company
will be struck off from the register and the company will be dissolved, unless
a contrary cause is shown. Sub-section (4) of section 652 pertains to a
situation where a company is being wound up and hence, is not relevant for the
present purpose. Sub-section (5) of section 652 stipulates that at the
expiration of the time mentioned in the notice the Registrar may strike the
name of the company off the register, unless contrary cause has been shown by
the company and shall publish notice of such striking off in the Gazette; and
the company is dissolved on the publication of such notice in the Gazette.
44. Admittedly, in the
present case sub-sections (1) & (2) of section 652 of the 1985 Act have no
play. It is an accepted position that it was the plaintiff who had moved the
Registrar for having the name of the company struck off from the register, and
the Registrar had acted in pursuance of such application resulting in
dissolution of the company, publication in the Gazette as required both under
sub-sections (3) and (5) of section 652 having been complied with. The
application for striking off had been made on 18-7-2003. The first notice for
voluntary strike off had been published in the Gazette on 26-8-2003 and the
final notice for voluntary striking off had been published in the Gazette on
16-12-2003, resulting in dissolution on the said day.
45. Section 653 of the
1985 Act pertains to objection to striking off by an aggrieved person.
Sub-section (1) of section 653 states that the following sub-section applies if
a company or any member or creditor of the company feels aggrieved by the
company having been struck off the register. Under sub-section (2) on an
application by the company or a member or creditor within stipulated period of
limitation the Court, may, if satisfied that the company was at the time of
striking off carrying on business or in operation, or otherwise that it is just
that the company be restored to the register, order the company’s name to be
restored. Sub-section (3) of section 653 is made up of two parts : The first
part states that on an office copy of the order being delivered to the
Registrar of Companies for registration the company is deemed to have continued
in existence as if its name had not been struck off; while the second part of
the provision stipulates that the court may by order give such directions and
make such provisions as seem just for placing the company and all other persons
in the same position (as nearly as may be) as if the company’s name had not been
struck off.
46. Thus, on a conjoint
reading of provisions of sub-sections (1) and (2) of section 653 of the 1985
Act it is apparent that a company or any member or creditor can apply to a
Court if the company or member or creditor feels aggrieved by the name of the
company having been struck off from the register, while sub-section (2) of
section 653 of the 1985 Act provides for the condition on fulfilment of which
the Court may exercise discretion of restoring the company to the register. The
Court is required to be satisfied that at the point of time when the name of
the company was struck off from the register (a) company was carrying on
business or was in operation, (b) or otherwise, that it is just that the
company be restored to the register. Therefore, the person applying for
restoration has to be a person who is aggrieved. The concept of ‘aggrieved’
here means that the order of striking off has resulted in a situation which is
detrimental to the applicant, viz., company or any member or creditor. Therefore,
unless the applicant is ‘aggrieved’ there is no question of making an
application seeking restoration. Upon an application being made the Court is
required to ascertain whether the company was carrying on business or was in
operation at the time of the striking off the name from the register. In
effect, it means that the reasonable belief entertained by the Registrar of
Companies under section 652(1) of the 1985 Act is found to be incorrect. For
the Court to record such a finding there must be some material available on
record. The other alternative contention which permits the Court to exercise
discretion requires that ‘it is just’ that the company be restored to the
register. This requirement has to be backed by facts and circumstances prevailing
in a given situation so as to enable the Court to exercise discretion in favour
of the applicant, namely that the action of the Registrar striking off the name
of the company of the register would result in creating a situation which is
unfair and unjust to the applicant.
47. In the present
case, admittedly, the plaintiff cannot seek restoration on the ground that it
was carrying on business or was in operation at the time when its name was
struck off, as the plaintiff had applied that its name be struck off from the
register as the company was not carrying on business or was not in operation.
In light of the fact that an application has been moved, as stated at the bar,
it is not necessary to deal with the alternative situation whether it would be
permissible for the Court to exercise discretion on the basis of the
consequence of striking off being unjust to the applicant. Suffice it to state
that there has to be cogent and sufficient material in this regard.
48. Section 654 of the
1985 Act stipulates that property and rights of a dissolved company are deemed
to be bona vacantia and accordingly, belong to the Crown. Once this is the
position, the plaintiff cannot seek any relief on the basis of being owner of
the property without either impleading crown or putting it to notice.
49. In the aforesaid
factual matrix even if the plaintiff has moved an application seeking
restoration of the company to the register it is not necessary to await outcome
of such application. The learned counsel on behalf of the plaintiff had orally
requested that the matter may be adjourned to await outcome of the restoration
application. However, considering the fact that an order of arrest is operating
against the defendant it is not possible to the said request, especially in light
of the fact that the plaintiff was not inclined to permit vacation of the ex
parte interim order of arrest.
50. There is a serious
dispute between the parties as regards whether any sale has been effected by
the plaintiff as averred by the defendants in OJMCA. In this context the
defendants have in paragraphs 10 of OJMCA, in support of their averments that
the plaintiff had executed a sale in favour of the defendants, placed reliance
on factum of the Director of the plaintiff having provided a copy of her
passport for identification purpose and provided confirmation that she was a
Director of the plaintiff company. In support of the averment a copy of the
passport has been annexed and marked as Exhibit-6 of OJMCA. No explanation is
forthcoming on behalf of the plaintiff even though an affidavit-in-reply has
been tendered as to in what circumstances the said lady had furnished a copy of
her passport to the defendants. Therefore, this is one factor which remains
uncontroverted and would go to show that the plaintiff has not approached the
Court with full and true disclosure of all material facts.
51. In relation to the
payment of sale consideration it is averred by the defendants in paragraph 12 of
OJMCA that defendant No. 2 had paid all outstanding dues of
52. In the plaint paragraph 2 reads as under :
“2. At the outset, the plaintiffs wish to
state that the present suit is being filed under circumstances warranting
extreme urgency. The plaintiffs only a very short while ago learnt about the
arrival of the 1st defendant vessel at Alang/Bhavnagar for scrapping.
Immediately thereupon the plaintiffs instructed their Advocates to address a
letter dated 28th February, 2004 (Saturday) to the Commissioner of Customs,
At the time of
hearing on 1-3-2004 a specific query was put to the learned counsel of the
plaintiff as to what had prompted insertion of such paragraph in the plaint.
The answer was that having regard to the urgency and the documents being in
foreign language, it was found necessary to make such averment. All that can be
said after hearing the parties in relation to such averment is that it appears
that the plaintiff has sought to prevaricate and build a proposed defence, with
the knowledge that the suit was being presented on behalf of defunct company
which had already been struck off from the Register.
53. In the aforesaid
fact situation applying the test and adopting the approach stated by the
54. In the result, the
OJMCA is allowed and as a consequence the suit is dismissed. The order of the
arrest of the vessel made on 1-3-2004 is hereby vacated/set aside. The
plaintiff shall bear the cost of the suit and the OJMCA. It will be permissible
to the defendants to communicate this order by fax at their own costs. At this
stage, Mr. Thakor, learned counsel appearing on behalf of the plaintiff makes a
request that the order of arrest may be continued so as to enable the plaintiff
to approach the higher forum. On the facts and the circumstances which have
come on record the said request is rejected.
[1998] 93 COMP. CAS. 750 (DELHI)
HIGH COURT OF
v.
Jai Manga Ram Mukhi
MAHINDER
NARAIN J.
S. No. 2146 of 1993
NOVEMBER
9, 1993
A.K. Sen, S. Shroff and Ms. Ritu
Bhalla for the Plaintiff.
R.K.
Garg, R.P. Dave, G. Ramaswamy, Rajiv Shakdhar, M.H. Beg and Ms. Pallavi Shroff for
the Defendants.
Mahinder
Narain, J.—This
suit for damages, declaration and injunction was filed by the plaintiff Mr.
Ferruccio Sias, stating that he is whole-time director in the company, known as
SAE (India) Limited. The persons who are sued for damages, declaration and
injunction, are defendants Nos. 1 to 11. All of whom were directors and/or
employees of SAE (
The
plaintiff asserted that the present suit is directed against the conspiracy and
tortious action of defendants Nos. 1 to 7, and against their mala fide,
unauthorised and illegal activities. It was asserted that these actions are
detrimental to the interest of SAE (India) Limited and its shareholders ; that
the said defendants were usurping the control of the company, and that
presently their interest is directly in conflict with the interest of SAE
(India) Limited. It was also asserted that the said defendants are not entitled
or authorised to represent SAE (
The
important fact which has to be kept in mind, is that it was asserted in the
plaint itself, that SAE (
The
disputes which are raised in this plaint, appear to have crystallised as a
result of the economic liberalisation policies of the present Narasimha Rao
Government. Consequent upon the liberalised economic policies, it appears that
those who were behind the scenes in SAE (
It
is asserted in the plaint that the aforesaid foreign company (hereinafter
called "Elettrofin") was a member of the "Asea Brown Boveri
group" (hereinafter called the "ABB group"). Elettrofin owns
32.32 per cent. of the issued share capital of Rs. 49,35,150, equity shares of
Rs. 10 each, and is the single largest shareholder of SAE (India) Limited. It
was asserted that one Dr. Cesare Rossi was an ordinary director of the company,
who died some time in July, 1993. After Rossi's death, there were only five
directors. After Rossi's death, J.M. Mukhi, who is an ordinary director of the
company, in the absence of Dr. Cesare Rossi, used to be voted to be the
chairman at the meeting of the board. The directors after the demise of Dr.
Rossi, were J.M. Mukhi, K.N. Shenoy, Luigi Ruggieri, Ferruccio Sias and
Niranjan Swaroop Mittal.
After
the demise of Dr. Cesare Rossi, there were, therefore, five directors on the
board of SAE (India) Ltd. Consequent upon the economic liberalisation policy of
the Narasimha Rao Government, these five directors adopted and passed a
resolution, being resolution dated August 24, 1993, wherein it was agreed in
principle that SAE (India) Limited, the increase of share capital of the company,
which capital should be subscribed to by Elettrofin Societa Anonima Finanziaria
at a price which was "a fair price". The fair price was to be
determined by Mr. Malegan of S.B. Billimoria and Co., chartered accountants,
who was stated to be well versed in the field of valuation of shares. This
resolution is passed on August 24, 1993.
It
is also asserted in the plaint that the proposal to be put up before the board
for using the Asea Brown Boveri logo and on the stationery of SAE (India)
Limited, as also on visiting cards, etc., so as to indicate that SAE (India)
Limited is part of the Asea Brown Boveri group. It is asserted in the plaint
that the board of directors in the meeting of the company on August 24, 1993,
took the following unanimous decisions :
1. Resolved that the board of directors approve in
principle the increase of share capital for issue of shares to Elettrofin
2. Resolved that ICICI Securities and Finance
Company Limited be asked to suggest a fair price for the said shares.
3. Resolved that the board of directors approved
in principle the amalgamation of the company with Asea Brown Boveri Ltd.
4. Resolved that S.B. Billimoria and Co.,
chartered accountants, be asked to suggest a fair exchange ratio for the shares
for the purpose of amalgamation.
5. Resolved that Amarchand and Mangaldas and
Hiralal Shroff and Co., Solicitors and Advocates, be asked to prepare a draft
of a scheme for amalgamation.
6. Resolved that a committee of the board of
directors be appointed comprising Mr. J.M. Mukhi and Mr. N.S. Mittal to examine
the assessments and evaluations and to recommend fair terms for the said
increase and issue of shares as above and the amalgamation of the company with
Asea Brown Boveri Limited for consideration of the board of directors.
It
appears from what is stated in the plaint that serious disputes arose between
some of the members of the board of directors, namely, J.M. Mukhi, Mr. Madan
and Mr. N.S. Mittal, firstly, regarding valuation of the shares of SAE (India)
Limited, and, secondly, on the exchange rate regarding the shares of SAE
(India) Limited and ABB (India) Limited vis-a-vis the amalgamation proposal.
The differences seem to have come to a head, and a meeting of the board of
directors of SAE (
It
is not disputed in the plaint that while the additional directors were
appointed, the pre-existing five directors, namely, J.M. Mukhi, K.N. Shenoy,
Luigi Ruggieri, Ferruccio Sias and Niranjan Swaroop Mittal, continued to be the
directors. The appointment of four additional directors at the board meeting on
September 15, 1993, as whole-time directors, has effected a fundamental change
in the management of the company, and in the board of directors of the company.
It is also asserted in the plaint that this has resulted in causing damage to
the "corporate interest" of SAE (
This
was the original plaint.
The
suit then was for recovery of damages in the sum of Rs. 10,00,000. The suit was
filed by the plaintiff against all the defendants. The suit as filed, did not
have proper court fee affixed upon it. On September 23, 1993, I gave two
directions : (a) that the plaint in suit be made in accordance with the
practice and procedure of this court ; and (b) that the additional court fee
paid after filing of the suit, be taken on record.
Thereafter,
an application under Order VI, rule 17 of the Code of Civil Procedure, 1908,
I.A. No. 8507 of 1993 was filed for amendment of the plaint in the suit. By that time,
Mr. Dave had presented himself in court, and stated, without entering
appearance in court as required by Order III, rule 4 of the Code of Civil
Procedure, 1908, that they have filed a caveat which was, at that time, not on
record.
I
dealt with I.A. No. 8507 of 1993, by my order dated September 28, 1993. I
allowed the same. As by September 29, 1993, caveat has been lodged, summons in
the suit and notice of the application were taken by Mr. R.P. Dave, who was
being led by Mr. R.K. Garg, senior advocate. Copies of the amended plaint and
documents were ordered to be given to Mr. Dave. Direction was given to file
written statement within two weeks.
I
had heard the parties in part, and directed on August 27, 1993, that the
interim orders sought by the plaintiff, be crystallised by counsel for the
plaintiff.
By
the next date, counsel for the defendants also wanted to make submissions, and
I have heard them also.
I
had pointed out to Mr. Sen that the instant plaint is a very unusual plaint,
inasmuch as it lacked an averment, as per practice in this court, the plaint
did not have an assertion at its beginning, or within the first few paragraphs,
that the plaint in the suit is being signed and verified by a person named in
the plaint, (as required by Order 29 of the Code of Civil Procedure, 1908, when
suits are instituted by corporations or by individuals on behalf of
corporations), and that the person who has signed and verified the plaint, has
got authority to institute the suit on behalf of the corporation.
This
has become consequential, as in the amended plaint, notice of which was given
to the defendants, not only Ferruccio Sias has sued as plaintiff, but he is
added as SAE (India) Limited as plaintiff No. 2. The corporation as a corporate
entity, as required by Order 29 has to sue by and through a plaint which has
been signed and verified by a person in accordance with Order 29 of the Code of
Civil Procedure.
I
had also pointed out to Mr. Sen that by virtue of an early decision of this
court in the case of Oberoi Hotels (India) Pvt. Ltd. v. Observer Publications
(P) Ltd. (Suit No. 469 of 1966, decided on 26th November, 1968), which has
never been dissented from, it is also necessary that there be proper
authorisation for the purposes of institution of the suit, in case the
plaintiff in the suit is a corporation. It is a necessary requirement that
there be proper authority by resolution of the board of directors, or there has
to be a power of attorney authorising institution of the suit on behalf of the
corporation, or there has to be power conferred by the articles of association
of a corporation, in a particular officer, to institute suits on behalf of the
corporation.
Later
on, Bhandare J. in a case Nibro Limited v. National Insurance Co. Ltd. [1991]
70 Comp Cas 388 ; AIR 1991 Delhi 25, has reviewed a large number of cases
bearing upon the question of signing and verification of plaints, postulated by
Order 29 of the Code of Civil Procedure, 1908, the authority to act and
authority to institute suits, when a suit is instituted by a corporation. In
that judgment also, this court has reiterated what was stated in Oberoi Hotels
(
The
authority to institute a suit is distinct from and in addition to what is
contemplated by Order 29 of the Code of Civil Procedure, 1908, which deals only
with signing of plaints and verification of pleadings by certain persons
mentioned in that provision.
It
was contended by Mr. Sen that all the documents and papers which confer
authority to institute a suit on behalf of SAE (
The
defendants had filed a caveat in court, and during the course of hearing,
handed over copies of the power of attorneys granted in favour of Mr. Sias.
They have also shown the original power of attorney to me. The relevant
provisions of the power of attorney indicate that Mr. Sias has also been given
power to institute suits jointly with certain persons named in that power of
attorney.
All
the powers of attorney are to be strictly construed, and the power of attorney
in favour of Mr. Sias, being power of attorney, dated May 28, 1993, only gives
power to sue jointly with others. That power of attorney cannot come to the aid
of Mr. Sias vis-a-vis the authority to institute the present suit against the
defendants on behalf of SAE (
The
relevant provisions of the power of attorney dated May 28, 1993, are clauses
14, 15, 16 and 21 which read as under :
"14.To commence, prosecute or enforce and defend
answer or oppose any suits and other legal proceedings (whether civil or
criminal) in any court or tribunal wherever or before any Government touching
any matter in which the company may hereafter be interested or concerned and as
the said attorney shall think fit and to compromise refer to arbitration
abandon submit to judgment or become non-suited in any such action or
proceeding as aforesaid.
15. To appoint and retain solicitors, advocates, and
pleaders and such appointments and retainers from time to time to revoke and
others again to appoint as occasion shall require.
16. To make sign execute present and file all applications
plaints petitions or written statements warrants of attorney tabular statements
vakalatnamas or any other document expedient or necessary in the opinion of the
said attorney to be made signed executed presented or filed in relation to any
of the purposes aforesaid and such documents again to receive back.
21. The attorney shall do and perform all or any of the
acts and things covered by this power of attorney by joint signature with any
of the following persons signing within the limits of the power of attorney
granted to them by the company."
|
(i) Mr. N.S. Mittal |
: |
Director |
|
(ii) Mr. Y.L. Madan |
: |
General Manager (Finance) |
|
(iii) Mr. M. Dutta |
: |
General Manager (Customer Focus Facilitate) |
|
(iv) Mr. W. Fossa |
: |
General Manager (PTL Construction) |
|
(v) Mr. S.K. Bhattacharya |
: |
General Manager (PTL Commercial) |
Faced
with this situation, Mr. Sen has urged that the abovesaid rules regarding authority
to institute suits are there only because what has to be asserted, is whether
the corporation is the entity which intended to sue the defendants, and if a
suit is brought by a person not authorised, then the court could call for a
meeting of the shareholders of the company so that the majority of them could
determine whether they are willing to ratify the institution of the suit.
It
must be noted that authority to institute a suit, and ratification of the act
of institution of the suit, are two different things. The authority to
institute pre-exists the institution of the suit, and ratification of the act
of institution of suit which is filed, is after the suit has been instituted by
a person not authorised to do so.
As
regards the authority to commence an action, it cannot be doubted that the
board of directors of the company are authorised by resolutions to act on
behalf of the company. In fact, the memorandum and articles of association of
SAE (
"Subject
to the provisions of the Act, the control of the company shall be vested in the
board who shall be entitled to exercise all such power, and to do all such acts and things as the company is
authorised to exercise and do: Provided that the board shall not exercise any
power or do any Act or thing which is directed or required, whether by the Act
or any other statute or by the memorandum of the company or by these articles
or otherwise, to be exercised or done by the company in general meeting :
Provided further that in exercising any such power or doing any such act or
thing, the board shall be subject to the provisions as may be prescribed by the
company in general meeting but no regulation made by the company in general
meeting, shall invalidate any prior act of the board which would have been
valid if that regulation had not been made."
Regarding
the authorisation of other persons to act on behalf of the company, the
relevant articles are articles 122 and 123, the relevant parts whereof read as
under :
"122.
Subject to the provision of the Act and in particular to the prohibitions and
restrictions contained in section 292 thereof and subject to article 123
hereof, the board may, from time to time entrust to and confer upon a managing
director for the time being such of the powers exercisable under these presents
by the board as it may think fit and may confer such powers for such time and
to be exercised for such objects and purposes, and upon such terms and
conditions, and with restrictions as it thinks fit ; and the board may confer
such powers, either collaterally with, or to the exclusion of, and in
substitution for all or any of the powers of the board in that behalf ; and
may, from time to time, revoke, withdraw, alter or vary all or any of such
powers.
123.
Notwithstanding anything to the contrary in article No. 122, and other powers
conferred by these articles, it is hereby expressly declared that the managing
director and the joint managing director shall always subject to the provisions
of the Act, have the following powers jointly and severally, that is to say ;
(17)
To institute, prosecute, compound, defend, compromise, withdraw or abandon any
legal proceedings by or against the company or its officers or otherwise
concerning the affairs of the company and to act on behalf of the company in
all matters relating to insolvencies or liquidations and to apply for and
obtain letters of administration with or without will annexed to the estate of
persons with whom the company have dealings."
It
is to be noted that the authority conferred by the aforesaid articles is on the
managing director and the joint managing director to institute suits. Mr. Sias
is a whole-time director in terms of the power of attorney which has been
granted to him. He has accepted that he is the director of the company. It is
not permissible to say that he is the managing director of the company in view of the
provisions of the Companies Act. Mr. Sen referred to the provisions of section
2(26) of the Companies Act, which relate to the managing director. That section
reads as under :
"
'managing director' means a director who, by virtue of an agreement with the
company or of a resolution passed by the company in general meeting or by its
board of directors or by virtue of its memorandum or articles of association,
is entrusted with substantial powers of management which would not otherwise be
exercisable by him, and includes a director occupying the position of a
managing director, by whatever name called :
Provided
that the power to do administrative acts of a routine nature when so authorised
by the board such as the power to affix the common seal of the company to any
document or to draw and endorse any cheque on the account of the company in any
bank or to draw and endorse any negotiable instrument or to sign any
certificate of share or to direct registration of transfer of any share, shall
not be deemed to be included within substantial powers of management :
Provided
further that a managing director of a company shall exercise his powers subject
to the superintendence, control and direction of its board of directors."
In
the instant case, the provisions of section 2(26) relating to managing director
given in the Companies Act are not attracted for the reasons that Mr. Sias has
himself accepted by the power of attorney given to him by the company that he
is not managing director. He is a whole-time director and general manager, but
not the managing director. He is, therefore, not covered by articles 122 and
123 of the articles of association of the company, which give power to the
managing director to institute a suit. He, therefore, has no authority to
institute this suit thereunder.
In
view of the above position, Mr. Sen referred to a number of cases, the purport
of which cases was that even if a person is not a person authorised to
institute a suit on behalf of the company, yet he could institute a suit on
behalf of the company, and what the court would do in such cases, is to pass
interim orders, if necessary, calling for a meeting of the shareholders of the
company to find out whether the majority of shareholders would ratify the
action of the unauthorised person to institute a suit on behalf of the company.
Mr.
Sen referred to Danish Mercantile Co. Ltd. v.
In
my view the board of directors of the company, incorporated in
Mr.
Sen also referred to Pender v. Lushington [1877] 6 Ch 70. The observations at
pages 78 and 79 go to show that the court is empowered to hold over an action,
to call a meeting of the shareholders to assert the wishes of the majority of
the shareholders. The facts of that case are different from the present one.
The principle of law laid down may be good, but does not merit application to
the present case.
Mr.
Sen also referred to Dr. Satya Charan Law v. Rameshwar Prosad Bajoria [1950] 20
Comp Cas 39 (FC).
According
to Mr. Sen, an unusual situation has arisen vis-a-vis the affairs of SAE (
According
to Mr. Sen, only the abovesaid three directors could be present at the meeting
of the board of directors on that date, as Mr. Shenoy and Ruggieri were known
to be outside India on that date and J.M. Mukhi and N.S. Mittal used the
majority to induct other persons as directors of the company at the meeting of
the board of directors, held on September 15, 1993. According to Mr. Sen, there
was no proper notice to the directors of the company regarding the meeting to
be held on that date.
The
new directors who were elected on the board at the two meetings held, one on
September 15, 1993, and another on September 17, 1993, by use of majority by
J.M. Mukhi and N.S. Mittal against Mr. Sias, are Y.L. Madan, S.C. Singhal, P.
Dasgupta, J. Narayanan, P. Verma and S.K. Bhat-tacharya.
Of
these new directors, Y.L. Madan, S.C. Singhal, P. Dasgupta, J.Narayanan were
elected at the meeting held on September 15, 1993, and P. Verma and S.K.
Bhattacharya were elected at the meeting held on September 17, 1993.
It
is to be noted that none of the old directors ceased to be directors of the
company, that is to say, J.M. Mukhi, N.S. Mittal, Sias, K.N. Shenoy and
Ruggieri continued to be directors of SAE (India) Limited.
Mr.
Sen asserts that the fundamental change has happened in the management of the
company, and there is a "hijacking" because of additional persons
being appointed on the board of directors.
I
must, however, note that the persons who have been appointed on the board of
directors of the company, as a result of the majority of J.M. Mukhi and N.S.
Mittal, are not strangers to the company. Y.L. Madan was the General Manager
(Finance) of the company, S.C. Singhal was the Deputy Manager (Personnel), P.
Dasgupta was the Deputy Manager (Personnel), in charge of provident fund
service, J. Narayanan was the Commercial Officer in the company, P. Verma was
Deputy General Manager (Construction) of the company and S.K. Bhattacharya was
Deputy General Manager (PTL Com).
It
must also be noted that of the old directors, J.M. Mukhi is an advocate by
profession. Mr. Sias apparently has old connections with Elettrofin Societa
Anonima Finanziaria, an Italian company, which is in turn, connection with Asea
Brown Bovery,
K.N.
Shenoy is a director of Asea Brown Boveri (India) Limited, and Ruggieri is
based in Milano, Italy, and is connected with the companies, associated with or
connected with Asea Brown Boveri Limited, namely, Asea Brown Boveri, Zurich,
Asea Brown Boveri, Sadelmi and Elettrofin Societa Anonima Finanziaria.
Mr.
Sen also referred to and relied upon the observations mentioned in Gower's
Principles of Modern Company Law, at page 643, which are as under :
"1. The proper plaintiff in an action in respect
of a wrong alleged to be done to a corporation is prima facie the corporation.
2. Where the alleged wrong is a transaction
which might be made binding on the corporation and on all its members by a
simple majority of
the members, no individual member of the corporation is allowed to maintain an
action in respect of that matter because, if the majority confirms the
transaction, cadit quaestio : or, if the majority challenges the transaction,
there is no valid reason why the company should not sue.
3. There is also no room for the operation of
the rule if the alleged wrong is ultra vires the corporation because the
majority of members cannot confirm the transaction.
4. There is also no room for the operation of
the rule if the transaction complained of could be validly done or sanctioned
only by a special resolution or the like, because a simple majority cannot
confirm a transaction which requires the concurrence of a greater majority.
5. There is an exception to this rule where
what has been done amounts to fraud and the wrongdoers are themselves in
control of the company. In this case, the rule is relaxed in favour of the
aggrieved minority, who are allowed to bring a minority shareholders' action on
behalf of themselves and all others. The reason for this is that, if they were
denied that right, their grievance would never reach the court because the
wrongdoers themselves, being in control, would not allow the company to
sue."
These
observations are in connection with the rule in Foss v. Harbottle [1843] 2 Hare
461. The fifth exception to the rule in Foss v. Harbottle will be relatable to
an action to prevent oppression of the minority by a majority. In the Indian
context action lies under sections 397 and 398 of the Companies Act, not a
suit.
I
have heard Mr. R.K. Garg, senior advocate, who appeared for the caveator. By my
order dated October 6, 1993, I have said that the caveat filed in the case by
Mr. R.P. Dave, advocate, has to be treated as a caveat in the instant case.
Mr.
Garg asserted that the suit has got two plaintiffs, one Mr. Sias and other is
the company. According to Mr. Garg, Mr. Sias has no authority, either in law,
nor is he appointed by the power of attorney to institute the suit on his own.
According
to Mr. Garg, Mr. Sias, the plaintiff, is a director of the company. He is a
manager of the company, but he is not a manager in terms of section 2(24) of
the Companies Act, as he is not the manager of the whole or substantially the
whole of the business.
Mr.
Garg also asserts that in view of the fact that Mr. Sias holds power of
attorney dated May 28, 1993. He cannot assert that he is managing director in
terms of section 2(26) of the Companies Act, as he has accepted by the said
power of attorney, to be designated as the whole-time director and manager of
the company, and he is estopped from contending otherwise.
I
think there is force in the contention of Mr. Garg. Mr. Sias has accepted by
the said general power of attorney that he is director, and also manager, for
the purposes specified in that power of attorney, it is not possible for him to
contend that he is the managing director of the company. Furthermore, according
to the said general power of attorney issued in favour of Mr. Sias, it is not
permissible for him to act otherwise than in accordance therewith. That power
of attorney authorises Mr. Sias to institute the suit, but only in a particular
manner. The particular manner of institution of the suit is that he must join
with the persons named in the power of attorney, while instituting the suit. He
has not done so. The relevant provisions of the power of attorney dated May 28,
1993, have been reproduced above. Mr. Sias has to join with others. Unless the
others join with him, and none of them has joined him, he does not have
authority to institute the suit on behalf of the company.
Mr.
Garg has contended that according to the articles of association of the
company, the quorum of the meeting for the board of directors is two directors,
and for the meeting of the board to be held on September 15, 1993, notice
whereof had been given to all the existing directors by facsimile, and that
notice had been received by all the directors also. It is of no consequence
that some of the directors were not present at that meeting. Notice having been
received, the option was with the directors to whom the notice was sent, to
attend the meeting. As they did not do so, they are themselves responsible for
absenting themselves from the meeting of September 15, 1993.
The
notice dated September 13, 1993, was sent by facsimile. The meeting was
scheduled for September 15, 1993. The notice which was sent to Ruggieri in
He
was also notified with the facsimile notice. He could have also attended the
meeting, had he been so inclined. As no particular manner of notifying
directors of the company, in my view, Mr. Garg is right in his submission.
Mr.
Sen relied upon the judgment of Justice North in Homer District Consolidated
Gold Mines, In re [1888] 39
In
the instant case it has been rightly contended by Mr. R.K. Garg, that the said
case will have no application, inasmuch as facsimile notice message had been
sent to all the directors concerned, which notice message had been duly
received, and there was sufficient time to attend the meeting, had they been so
inclined, and as a matter of fact, Mr. Sias did attend the meeting. The notices
were received not only by Ruggieri at
In
any case, Mr. Garg contends that by virtue of article 88 of the articles of
association of SAE (India) Limited, the board of directors can make additional directors of the
company, and these additional directors, according to section 2(6) of the
Companies Act, shall remain additional directors of the company till the next
annual general meeting of the company.
It
is also contended by Mr. Garg that by virtue of section 106 of the Companies
Act, a secretary is duty bound to convene a meeting of the board of directors
on being asked by any of the directors of the company, and the directors of SAE
(India) Limited were right in calling for a meeting of the board of directors
in view of the letter received from the employees of the company on September
11, 1993.
Mr.
Garg is also right in his submission that no particular form of notice is
prescribed for a meeting of the board of directors. The notice sent by
facsimile will be adequate notice.
Mr.
Sias has filed his agreement with SAE (
In
view of the fact that Mr. Sias has accepted the agreement dated June 20, 1983,
I do not think it is open to him to contend that he is governed by section
2(24) of the Companies Act. It is rightly contended by Mr. Garg that Mr. Sias
is a manager of SAE (India) Limited, having powers of attorney, the terms
whereof have been approved by the Government of India, as contained in the
power of attorney dated May 28, 1993, and inasmuch as the general power of attorney
dated May 28, 1993, also gives power or authority to Mr. Sias only to institute
a suit jointly with other persons, mentioned in clause 21 of the power of
attorney, he has no authority to institute the instant suit. In this
connection, Mr. Garg has referred to and relied upon Turner Morrison and Co.
Ltd. v. Hungerford Investment Trust Ltd. [1972] 42 Comp Cas 512 ; AIR 1972 SC
1311.
Mr.
Garg has also relied upon and referred to Nibro Limited v. National Insurance
Co. Ltd. [1991] 70 Comp Cas 388 (Delhi) ; AIR 1991 Delhi 25, in which Bhandare
J., after reviewing cases bearing upon the subject, has come to the conclusion,
a conclusion with which I am in respectful agreement, that the authority to
institute a suit is distinct from signing and verification of the plaint under
Order 29 of the Code of Civil Procedure, 1908.
It
is in these circumstances contended that Mr. Sias has no authority to institute
the suit, and, therefore, no interim order, as sought in the suit, can be
passed by this court.
Mr.
Garg has also relied upon and referred to Prudential Assurance Co. Ltd. v.
Newman Industries Ltd. (No. 2) [1982] 1 All ER 354 (CA), wherein it is stated
that the preliminary issue is whether the plaintiff is entitled to sue.
According to Mr. Garg, and I think he is right in his contention, that reading
articles 122 and 123 of the articles of association, along with the power of
attorney dated May 28, 1993, it is clear that Mr. Sias is the director and
general manager of SAE (India) Limited. He is not the managing director, as
contemplated by articles 122 and 123 of the articles of association. Nor is he
the joint managing director, duly authorised to institute suits. Therefore,
this suit cannot be filed by Mr. Sias on behalf of the company.
Mr.
Garg says that the disputes which have arisen in the instant case, have arisen
because of the fact that the board of directors with the weight of Mr. Sias,
Mr. Ruggieri and K.N. Shenoy [who is the director of Asea Brown Bovery (India)
Limited], managed to pass a resolution with a majority of three of them had in
the board of directors of SAE (India) Limited, that the liberalised economic
policy of the present Government, be taken advantage of for issuing additional
shares to Elettrofin Societa Anonima Finanziaria only, instead of issuing the
shares to all the shareholders of the company, and the dispute also was
regarding the valuation of the shares, that is to say the price at which the
shares were to be allotted to the foreign company, and also about the proposed
amalgamation with ABB India and the proportion in which the shares were to be
issued to the existing shareholders of the company.
It
is also asserted by Mr. Garg that the amalgamation with Asea Brown Boveri
(India) Limited would not be in the interest of the company when Asea Brown
Bovery has issued bonus shares to its own shareholders, and has also diluted
the value of each share vis-a-vis the share of SAE (India) Limited, and in view
of the dilution in the value of the shares of Asea Brown Bovery (India)
Limited, the proportion proposed for amalgamation of SAE (India) Limited, and
the proportion proposed between the shares of SAE (India) Limited and Asea
Brown Bovery (India) Limited shares was unfair.
According
to Mr. Garg, it will be clear from a note on valuation of shares prepared by
J.M. Mukhi, that the only thing which was being sought was that the valuation
of the shares should be a fair valuation, and not an unfair valuation.
It
is also contended by Mr. Garg that with the increased shareholding of
Elettrofin Societa Anonima Finanziaria, the sanctioning of the amalgamation
scheme, would be a matter of formality, and a majority shareholding of 51 per
cent. will be able to push the matter of amalgamation through in accordance
with a time-bound programme of merger, which had been drawn up for the
amalgamation of the two companies.
Mr.
Garg meets the contention of Mr. Sen that there was no cause for holding a
meeting of the board of directors on September 15, 1993, by asserting that
inasmuch as the decision had already been taken by the board of directors
regarding the issue of additional shares to Elettrofin Societa Anonima
Finanziaria, and amalgamation of the company with Asea Brown Bovery (India)
Limited by the resolution of the board of directors, in which J.M. Mukhi and
N.S. Mittal had participated, that a letter dated September 11, 1993, had been
received from the employees of the company in which serious reservations have
been made regarding their future, and in view of the fact that the Supreme
Court of India had, in National Textile Workers' Union v. P.R. Ramakrishnan
[1983] 53 Comp Cas 184 ; [1983] 1 SCC 228 stated that the workmen of the
company have to be heard in the matter of amalgamation under section 391 of the
Companies Act. It was but proper for the board of directors to meet on
September 15, 1993, and for that meeting of September 15, 1993, notice was sent
by facsimile to all the directors concerned. The board of directors met to
consider the said letter of the employees, and in addition, to consider the
exchange ratio between the shares of SAE (India) Limited and Asea Brown Bovery
(India) Limited, [which have been diluted in value by issue of bonus shares of
Asea Brown Boveri (India) Limited], and to consider the valuation of the shares
of SAE (India) Limited, at which the said shares were to be offered to
Elettrofin Societa Anonima Finanziaria. Mr. Garg says that the amount of Rs. 90
per share which seems to have been determined by S.B. Billimoria and Co. was
inadequate inasmuch as the share of SAE (
According
to Mr. Garg, the board of directors of every company, as observed in Gower's
Principles of Modern Company Law, has a duty to that company alone, to the
company in which they are the directors. They do not owe any allegiance, nor
should they look after the interest of a company which may be the holding
company of the company in which they are directors. I am in agreement with what
is stated by Mr. Gower, and what is stated in
Mr.
Garg also referred to
It
appears to me that it is fundamental to the functioning of any company that the
board of directors of the company should owe allegiance only to the company in
which they are the directors. It is not permissible for the board of directors
to act on the dictates of any other company, even if it is a subsidiary of that
other company. It also cannot be that the directors of the company give up
their duty and right of independent action, to act for the well being and the
interest of the company in which they are the directors, as also the interest
of the entirety of shareholders of the company in which they are directors.
Mr.
Garg contends that there is no corporate injury to the company SAE (
Mr.
Garg has brought to my notice that before Mr. Sias came to
It
is pointed out by Mr. Garg that Mr. Sias who is the director of the company,
was originally paid Rs. 6,000 per month, and is now being paid Rs. 15,000 per
month. There is a strong suggestion that this is not the payment which would be
acceptable to a European, which Mr. Sias is, working in
Mr.
Sen also contends that the valuation of the shares at which the shares are to
be given to Elettrofin Societa Anonima Finanziaria, is not an unfair valuation.
Nor is it going to be an unfair valuation. That valuation has presently been
approved by a known "expert" Mr. Malegam of S.B. Billimoria and Co.,
but is also the subject-matter of approval of the valuation department of the
Industrial Credit and Investment Corporation, and as such there is no likelihood of unfairness in the
valuation. He also asserts that the market value of the shares does not reflect
the true and intrinsic worth of the shares, as it represents the speculative
value of the shares. These are matters for the shareholders of the company to
accept, after due deliberation.
If
the holding company desires to take advantage of the policy of liberalisation
of the Government of India, and to gain majority control of a subsidiary, and
if a subsidiary company desires to amalgamate with another Indian company in
which the holding company has substantial interest or control, then the
interest of the shareholders of the company must be protected by the directors,
by insisting upon a proper and fair and just valuation of shares of the company
in which they are directors, and it is only at that proper, fair and just value
that the shares of the company should be offered to the holding company, which
seeks to gain majority control of the company in which there are distinct
shareholders. The interest of the shareholders of any company must, at all
times, be protected by the directors of the company. In the instant case, the
directors of SAE (India) Limited were duty bound to protect the interest of the
company, which is an independent legal entity under the Indian Companies Act,
and the entity is quite distinct from Elettrofin Societa Anonima Finanziaria,
which is a foreign company. It was the duty of the directors of SAE (
The
company is represented by a board of directors, which board of directors continues
to have persons on its board who were on the board prior to September 15, 1993.
They have additional directors in the company, their continuance on the board
shall be determined by the shareholders in the general meeting, in accordance
with the provisions of the Companies Act. No corporate injury appears to have
been done to SAE (
SAE
(
In
the aforesaid circumstances, I hold that Mr. Sias has no authority to institute
the suit, and as such following the principles laid down in Oberoi Hotels
(India) Pvt. Ltd. v. Observer Publications (P) Ltd. (Suit No. 469 of 1966,
decided on 26th November, 1968) and Nibro Limited v. National Insurance Co.
Ltd. [1991] 70 Comp Cas 388 ; AIR 1991 Delhi 25, the same is liable to be
dismissed.
The
suit is accordingly dismissed.
[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
COMPANY PETITION NO. 79 OF 1982
MAY 15, 1986
Arun Jain for the
Petitioners.
N.K. Sodhi, H.S.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs.
10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up
capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in
arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
|
No.
1 |
20 |
|
Hardev Singh Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev Singh," |
No. 3 |
20 |
|
Smt. Nasib Kaur," |
No. 4 |
20 |
|
Iqbaljit Singh," |
No. 5 |
20 |
|
Smt. Kirpal Kaur," |
No. 6 |
20 |
|
Smt. Chanan Kaur," |
No. 7 |
20 |
It is alleged that the affairs of the company are
being conducted prejudicially to public interest and in a manner oppressive to
the petitioners, who are in minority, as detailed below:
(i) The company had been allotted 490 equity shares of
Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124
shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran
Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares).
These were transferred in a clandestine manner and without having been offered
to any other shareholder including the petitioners, for a consideration of Rs.
3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other
irregularities were also committed by the board of directors in calling and
holding the meeting. Thus, the transfer of shares is not binding on the
company.
(ii) Shri Ramesh Inder Singh was the managing director of the
company in the year 1976 and he had been operating the bank account of the
company maintained in the Central Bank of
(iii) Mohinder Singh had been appointed as
manager-cum-cashier of the company during the regime of Pavittar Singh, father
of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh.
As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by
him in the year 1976. The board of directors decided to take action against
him. The matter was taken in various meetings of the board of directors but no
action was taken against him. Thus, the interest of the shareholders was not
protected by the management.
(iv) The minutes book of the company relating to the meetings
of the board of directors and shareholders was not kept properly from November,
1978, to September, 1979. Some of the proceedings have not been signed by the
chairman. There are various violations of the provisions of section 193 of the
Act. Therefore, the business transacted in the meetings during that period is
illegal and void ab initio.
(v) The company had been advancing loans to some persons
without any documents. It is alleged that it advanced loan without interest and
without getting executed any document to PISCO. An amount of Rs. 14,309.57
stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder
Singh as on December 31, 1978, but no action has been taken to recover the
amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and
mismanagement of the affairs of the company and its winding up on just and
equitable grounds. The petition is mala fide and had been filed at the behest
of Col. P. S. Dhillon who had been the managing director till April 20, 1982,
when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of
Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in
the petition, it is stated, related to the transfer of 490 shares held by the company
in PISCO. The matter had been decided in company petition filed by Col. P. S.
Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared
invalid in the absence of PISCO. The other allegations in the petition have
been controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first preliminary
objection raised by Mr. Sodhi is that the petitioners have no right to maintain
the present petition as they did not own 10 per cent, shareholding on the date
of filing the petition. On the other hand, Mr. Jain, counsel for the
petitioners, has argued that the petitioners had 150 shares out of 1,000 shares
on the date of filing the petition as given in the petition. Thus, they had the
right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the time
of filing the petition, the petitioners were shareholders of the company. From
the list, exhibit P-88, and statement of Col. Dhillon, it is evident that the
petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made
reference to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that
subsequent withdrawal of the consent could not affect the right of the
petitioner to proceed with the petition or the jurisdiction of the court to
dispose of it on merits. In my view, the observations in the above case are of
no assistance to Mr. Sodhi. Consequently, I overrule this preliminary
objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands established.
In support of his contention, he places reliance on Shanti Prasad Jain v.
Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth Mohan
Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas P.
Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976 SC
565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression by the majority in
the management of the company's affairs and such oppression must involve at
least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is just
and equitable not only to the persons applying for winding up but also to the
company and to all its shareholders. It is further observed that the court will
have to keep in mind the position of the company as a whole and the interest of
the shareholders and to see that they do not suffer in a fight for power that
may ensue between the two groups. Similar observations were made in Seth Mohan
Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in making an
order for winding up on the ground that it is just and equitable that a company
should be wound up, the court shall consider the interest of the shareholders
as well as of the creditors. It is not necessary to dilate further on this
matter. It is sufficient to observe that if the allegations in the petition are
taken to be established, the petitioners are entitled to obtain an order of
winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35
Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and
Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand,
Mr. Jain has argued that if the effect of a single act is continuously
oppressive, the court is entitled to pass an order under sections 397 and 398.
He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 that in order to file an application under section 397, if must be shown
that the conduct of the majority shareholders was oppressive to the minority
members and this requires that events have to be considered not in isolation
but as part of a consecutive story. There must be continuous acts on the part
of the majority shareholders, continuing up to the date of the petition,
showing that the affairs of the company were being conducted in a manner
oppressive to some part of the members. Same view was expressed by P. N.
Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777
(Guj). It was observed therein that sections 397 and 398 postulate that there
must be at the date of the application a continuing course of conduct of the
affairs of the company which is oppressive to any shareholder or shareholders
or prejudicial to the interests of the company. I am in respectful agreement
with the above observations. It is true that in Sindhri Iron Foundry's case
[1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta
High Court that if the court is satisfied that a single wrongful act is such
that its effect will be a continuous course of oppression and there is no
prospect of remedying the situation by the voluntary act of the party
responsible for the wrongful act, the court is entitled to interfere by an
appropriate order under section 397 of the Act. However, the above observations
are not in consonance with those of the Supreme Court in Shanti Prasad Jain's [1965]
35 Comp Cas 351. Consequently, it is not possible for me to rely upon the view
expressed by the Calcutta High Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that
arises for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to
attend three consecutive meetings and thus they would be deemed to be not
present in the meeting. In this way, only six directors would be deemed to be
present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had
been re-elected as director on June 30, 1978, and, therefore, he did not suffer
from any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of
section 287 provides that the quorum for a meeting of the board of directors of
the company shall be one-third of its total strength or two directors,
whichever is higher. In clause (a) of sub-section (2) of section 287, the total
strength of the board of directors of a company has been denned as the total
strength of the board of directors as determined in pursuance of the Act, after
deducting there from the number of directors, if any, whose places may be
vacant at the time. It is thus evident that for constituting quorum, l/3rd of
the total number of directors who do not suffer from any disability are to be
taken into consideration. The effective number of directors who admittedly
ceased to be so is 8. Thus, the number of effective directors was 24 and out of
them 8 directors could constitute the quorum. The directors present in the
meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt.
Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar
Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt.
Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a
dispute as to whether Shri Pavittar Singh was re-elected as a director or not.
Even if it may be assumed that Shri Pavittar Singh had been re-elected as
director, the quorum was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if not
with what effect. Mr. Jain has argued that the copy of the despatch register of
the company from October 16, 1978, to February 19, 1979, exhibit P-74, does not
show that any notice was issued for the said meeting. On the other hand, Mr.
Sodhi, has argued that the only requirement under section 286 is that the
notice of the meeting should be in writing. It does not prescribe the manner in
which it is to be served on the directors. The notice under article 82 of the
articles of association can be served personally. He submits that notices were
not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no reliable
evidence on record to prove that notices were sent through messenger and,
therefore, it cannot be held that notices were given to the directors. It is
essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed
at the meeting and where no notice was even given to one of the directors, the
resolution passed at the meeting of the board of directors is invalid. Consequently,
I am of the opinion that the resolution dated November 30, 1978, is invalid on
this ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my
notice the fact that the signatures of the chairman at the end of the minutes
bear the date November 30, 1979, instead of November 30, 1978. The arguments
have been considered by me but I do not agree with them. The proceedings book
is page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the resolution,
exhibit P-2, passed in the meeting held on December 30, 1978. Mr. Jain has
challenged the said resolution on four grounds, out of which three grounds are
the same on which resolution, exhibit P-1, was challenged. The fourth ground is
that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur, Shri
Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri Swaran
Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt. Nasib Kaur. |
|
2. |
Smt. Mohinder Kaur, |
|
3. |
Smt. Rajinder Singh Johal, |
|
4. |
Smt. Gurbax Kaur, |
|
5. |
Shri Pavittar Singh, |
|
6. |
Shri Ravinder Singh, |
|
7. |
Shri Swaran Singh, |
|
8. |
Smt. Inderjit Kaur, |
|
9. |
Shri Rameshinder Singh, and |
|
10. |
Shri Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the
following persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B. Out of 6
transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were
transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder
Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to
be a director. If the presence of the five transferee-directors and that of
Smt. Inderjit Kaur is not taken into consideration, then the quorum is
incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh,
after he had ceased to be a director, was re-elected on June 30, 1978. However,
he admits that Smt. Inderjit Kaur ceased to be a director. He further submits
that the transferees did not cease to be directors at the time of passing the
resolution and at the most they ceased to be so after the resolution had been
passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder,Singh
and Shri Rameshinder Singh had ceased to be directors on that date because they
took part in the meeting at the time of passing the resolution, exhibit P-2.
Relevant parts of sections 283(1)(i) and 299 read as follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by director.—(1)
Every director of a company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into, by or on behalf of the
company, shall disclose the nature of his concern or interest at a meeting of
the board of directors.".
From a reading of section
283, it is clear that the office of the director becomes vacant when a director
acts in contravention of section 299. It is enjoined by section 299 that a
director, who is interested in a contract entered into by or on behalf of the
company, should disclose the nature of his interest at a meeting of the board
of directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises,
whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1)
of section 300 provides that no director of a company shall, as a director, take
any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently,
the resolution, exhibit P-2, cannot be held to be invalid on this ground.
However, it may be reiterated that the shares were transferred in the names of
some of the directors. Thus, the action of the directors in passing the
resolution amounts to oppression of the minority shareholders in spite of the
fact that it is not an invalid resolution. In the above observation, I find
support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it
was held that a resolution may be passed by the directors which is perfectly
legal in the sense that it did not contravene any provision of law, and yet it
may be oppressive to the minority shareholders or prejudicial to the interest
of the company. Such a resolution can certainly be struck down by the court
under section 397 or 398.
Now, it is to be seen
whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt.
Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978,
and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on
June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter
she ceased to be so. Consequently, she was a director on the date of the
meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be
directors. If the presence of two directors, namely, Ravinder Singh and Smt.
Inderjit Kaur, is not taken into consideration, eight directors were still
present in the meeting. The total number of directors, as already mentioned,
was 24. Thus, the quorum was complete.
Mr. Jain next submits that
no notice of the meeting was sent to the directors and, consequently, the
meeting was illegal. There is force in this submission. The copies of the
despatch register from October 16, 1978, to February 19, 1979, exhibit P-74,
show that no notice was sent regarding the meeting. A similar argument was
raised earlier and was dealt with while determining the validity of the
resolution dated November 30, 1978. For similar reasons, the resolution dated
December 30, 1978, is also invalid.
Mr. Jain has then argued
that in the resolution dated November 30, 1978, it was decided that the shares
be offered to the existing shareholders. Shri R. S. Johal was authorised to do
so. However, he did not offer the shares to the other shareholders and,
therefore, the transfer of shares to Pavittar Singh, etc., amounts to
oppression on the minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should
have been transferred to one who made the highest offer. However, it was not
done. It is true that Shri Johal says that he told orally all the shareholders
in this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them from
the company for interest at the rate of 15% per annum and that amount has not
been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took
part in the meeting dated December 30, 1978, without disclosing their interest
in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and
Shri Avtar Singh admittedly ceased to be directors. The total number of
directors present was eleven and in case the aforementioned seven directors are
excluded, the number of directors present remained four. The quorum of the
meeting should have been eight and thus the resolution is invalid. I agree with
the submission of learned counsel. It is not necessary to dilate (further) on
the paint as the matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on
February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of
Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to
whether the quorum of the meeting was complete. Eleven directors were present
in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder
Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As
already held, they ceased to be directors on December 30, 1978. Out of the
remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt.
Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six
directors are to be excluded for the purposes of quorum. Consequently, five
directors would be deemed to be present in the meeting. The quorum for the
meeting was eight. I am, therefore, of the opinion that the resolution dated
February 28, 1979, is also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh,
Ravinder Singh and Swaran Singh and voted against the resolution. The
resolution, therefore, stood defeated. The directors who signed the letter
walked out of the meeting in protest against the overbearing, arbitrary,
unconstitutional and illegal action, arrogant attitude and threatening
behaviour of the directors interested in the transferees. The latter prevailed
upon the managing director and, therefore, he refused to record their
disapproval and vote of dissent. It was requested by them that the minutes be
not recorded, contrary to the will and verdict of the majority of the
directors. The letter is signed by 11 directors and addressed to the managing
director. From the above letter, it is evident that eleven other directors were
present in the meeting but neither their presence nor their vote of dissent
against the resolution was recorded. Shri R. S. Johal appeared in the
witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76.
He stated that in the meeting held on February 28, 1979, there was a dispute
regarding the sale of shares in favour of Rameshinder Singh and his partymen
and that some of the directors, namely, Shri N. S. Domeli, Shri Puran Chand,
Smt. Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri
Puran Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of
the meeting. There is no mention about the dispute in the minutes. Shri Domeli
also admits his signature on the letter. I am, therefore, of the opinion that
the resolution dated February 28, 1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty-one days' notice in writing.
(2) A general meeting may be called after giving
shorter notice than that specified in sub-section (1), if consent is accorded
thereto—
(i) in the case of
an annual general meeting, by all the members entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent, of such
part of the paid-up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than
95 per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the
members who are entitled to vote in the meeting accord their consent for doing
so. Previously, fourteen days' notice was provided but later the period of
notice was extended to 21 days on the report of the Company Law Committee. The
reasons for extension of period have been given in the report, the relevant
portion of which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days
is too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have
further challenged the validity of the resolution of the board of directors
dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and
loss account for the year ending December 31, 1978. Mr. Jain submits that the
quorum in the meeting was not complete and, therefore, the resolution was
invalid. I do not find any substance in the argument. In the meeting, eight
directors were present. As already mentioned, there were only twenty-four
directors of the company. Consequently, eight directors constituted the quorum.
I am, therefore, of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his contention,
he places reliance on the balance-sheet ending December 31, 1976, exhibit R.
2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the
balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance
in this submission. The shares were not quoted on the stock exchange. No
reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the
balance-sheet ending December 31, 1978, some profit is shown to have been
earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs
odd. The aforesaid figure shows that PISCO was not faring well.
The respondents produced
Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs.
625 in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was given
to the company. It is further stated that Shri Mohinder Singh had introduced
false credits in the account books in favour of
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the
petitioners that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on January
1, 1977. No amount of interest was debited to their account. No document was
got executed from the said debtors. The aforesaid amounts have not been repaid
by the said persons. Col. K. S. Dhillon, petitioner, deposed that Shri Pavittar
Singh was the managing director of PISCO and Shri Swaran Singh, Shri Ravindar
Singh, Shri Rameshin-der Singh and Amar Singh were its directors. It appears
that the amounts were advanced to PISCO without interest because the said
directors wanted to help their concern. After taking into consideration all the
circumstances, I am of the view that the affairs of the company were conducted
by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits P-l,
P-17 and P-18 have been declared invalid on the ground that the quorum at the
meetings was incomplete and no proper notice of the meeting was given to the
directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act
provides that the acts done by a person as a director shall be valid
notwithstanding that it may afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. It is evident from
the language of the section that it gives protection to the acts of the
directors if their appointments were invalid on account of any defect or
disqualification or the same had come to an end. It does not give protection to
their acts which are otherwise illegal. Thus, the resolutions passed in a
meeting which had not been properly convened are not valid resolutions.
Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot
be held valid under the said section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were
directors of the company and the sixth was the wife of one of them. The sole
object of the directors in passing the resolution was to promote their
self-interest. Moreover, the benefit of the said section can normally be taken
by a third person and not by the directors or their close relations. It is
further noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the
observations therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
COMPANY PETITION NO. 79 OF 1982
MAY 15, 1986
Arun Jain for the
Petitioners.
N.K. Sodhi, H.S.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs.
10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up
capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in
arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
|
No. 1 |
20 |
|
Hardev Singh Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev Singh," |
No. 3 |
20 |
|
Smt. Nasib Kaur," |
No. 4 |
20 |
|
Iqbaljit Singh," |
No. 5 |
20 |
|
Smt. Kirpal Kaur," |
No. 6 |
20 |
|
Smt. Chanan Kaur," |
No. 7 |
20 |
It is alleged that the affairs of the company are
being conducted prejudicially to public interest and in a manner oppressive to
the petitioners, who are in minority, as detailed below:
(i) The company had been allotted 490 equity shares of
Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124
shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran
Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares).
These were transferred in a clandestine manner and without having been offered
to any other shareholder including the petitioners, for a consideration of Rs.
3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other
irregularities were also committed by the board of directors in calling and
holding the meeting. Thus, the transfer of shares is not binding on the
company.
(ii) Shri Ramesh Inder Singh was the managing director of the
company in the year 1976 and he had been operating the bank account of the
company maintained in the Central Bank of
(iii) Mohinder Singh had been appointed as
manager-cum-cashier of the company during the regime of Pavittar Singh, father
of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh.
As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by
him in the year 1976. The board of directors decided to take action against
him. The matter was taken in various meetings of the board of directors but no
action was taken against him. Thus, the interest of the shareholders was not
protected by the management.
(iv) The minutes book of the company relating to the meetings
of the board of directors and shareholders was not kept properly from November,
1978, to September, 1979. Some of the proceedings have not been signed by the
chairman. There are various violations of the provisions of section 193 of the
Act. Therefore, the business transacted in the meetings during that period is
illegal and void ab initio.
(v) The company had been advancing loans to some persons
without any documents. It is alleged that it advanced loan without interest and
without getting executed any document to PISCO. An amount of Rs. 14,309.57
stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder
Singh as on December 31, 1978, but no action has been taken to recover the
amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and
mismanagement of the affairs of the company and its winding up on just and
equitable grounds. The petition is mala fide and had been filed at the behest
of Col. P. S. Dhillon who had been the managing director till April 20, 1982,
when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of
Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in
the petition, it is stated, related to the transfer of 490 shares held by the company
in PISCO. The matter had been decided in company petition filed by Col. P. S.
Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared
invalid in the absence of PISCO. The other allegations in the petition have
been controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first
preliminary objection raised by Mr. Sodhi is that the petitioners have no right
to maintain the present petition as they did not own 10 per cent, shareholding
on the date of filing the petition. On the other hand, Mr. Jain, counsel for
the petitioners, has argued that the petitioners had 150 shares out of 1,000
shares on the date of filing the petition as given in the petition. Thus, they
had the right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the
time of filing the petition, the petitioners were shareholders of the company.
From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that
the petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made
reference to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that
subsequent withdrawal of the consent could not affect the right of the
petitioner to proceed with the petition or the jurisdiction of the court to
dispose of it on merits. In my view, the observations in the above case are of
no assistance to Mr. Sodhi. Consequently, I overrule this preliminary
objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands
established. In support of his contention, he places reliance on Shanti Prasad
Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth
Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas
P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976
SC 565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders must be burdensome, harsh and wrongful and mere lack of confidence
between the majority shareholders and the minority shareholders would not be
enough unless the lack of confidence springs from oppression by the majority in
the management of the company's affairs and such oppression must involve at
least an element of lack of probity or fair dealing to a member in the matter
of his proprietary rights as a shareholder.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is
just and equitable not only to the persons applying for winding up but also to
the company and to all its shareholders. It is further observed that the court
will have to keep in mind the position of the company as a whole and the
interest of the shareholders and to see that they do not suffer in a fight for
power that may ensue between the two groups. Similar observations were made in
Seth Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in
making an order for winding up on the ground that it is just and equitable that
a company should be wound up, the court shall consider the interest of the
shareholders as well as of the creditors. It is not necessary to dilate further
on this matter. It is sufficient to observe that if the allegations in the
petition are taken to be established, the petitioners are entitled to obtain an
order of winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35
Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and
Jute Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand,
Mr. Jain has argued that if the effect of a single act is continuously
oppressive, the court is entitled to pass an order under sections 397 and 398.
He refers to In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 that in order to file an application under section 397, if must be shown
that the conduct of the majority shareholders was oppressive to the minority
members and this requires that events have to be considered not in isolation
but as part of a consecutive story. There must be continuous acts on the part
of the majority shareholders, continuing up to the date of the petition,
showing that the affairs of the company were being conducted in a manner
oppressive to some part of the members. Same view was expressed by P. N.
Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777
(Guj). It was observed therein that sections 397 and 398 postulate that there
must be at the date of the application a continuing course of conduct of the
affairs of the company which is oppressive to any shareholder or shareholders
or prejudicial to the interests of the company. I am in respectful agreement
with the above observations. It is true that in Sindhri Iron Foundry's case
[1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta
High Court that if the court is satisfied that a single wrongful act is such
that its effect will be a continuous course of oppression and there is no
prospect of remedying the situation by the voluntary act of the party
responsible for the wrongful act, the court is entitled to interfere by an
appropriate order under section 397 of the Act. However, the above observations
are not in consonance with those of the Supreme Court in Shanti Prasad Jain's
[1965] 35 Comp Cas 351. Consequently, it is not possible for me to rely upon
the view expressed by the Calcutta High Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that
arises for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to attend
three consecutive meetings and thus they would be deemed to be not present in
the meeting. In this way, only six directors would be deemed to be present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had
been re-elected as director on June 30, 1978, and, therefore, he did not suffer
from any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of section
287 provides that the quorum for a meeting of the board of directors of the
company shall be one-third of its total strength or two directors, whichever is
higher. In clause (a) of sub-section (2) of section 287, the total strength of
the board of directors of a company has been denned as the total strength of
the board of directors as determined in pursuance of the Act, after deducting
there from the number of directors, if any, whose places may be vacant at the
time. It is thus evident that for constituting quorum, l/3rd of the total
number of directors who do not suffer from any disability are to be taken into
consideration. The effective number of directors who admittedly ceased to be so
is 8. Thus, the number of effective directors was 24 and out of them 8
directors could constitute the quorum. The directors present in the meeting
were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt. Gurbax Kaur,
Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar Singh, Shri Amar
Singh and Shri Swaran Singh. Out of them, admittedly, Smt. Inderjit Kaur and
Shri Ravinder Singh ceased to be directors. There is a dispute as to whether
Shri Pavittar Singh was re-elected as a director or not. Even if it may be
assumed that Shri Pavittar Singh had been re-elected as director, the quorum
was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if not
with what effect. Mr. Jain has argued that the copy of the despatch register of
the company from October 16, 1978, to February 19, 1979, exhibit P-74, does not
show that any notice was issued for the said meeting. On the other hand, Mr.
Sodhi, has argued that the only requirement under section 286 is that the
notice of the meeting should be in writing. It does not prescribe the manner in
which it is to be served on the directors. The notice under article 82 of the
articles of association can be served personally. He submits that notices were
not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no reliable
evidence on record to prove that notices were sent through messenger and,
therefore, it cannot be held that notices were given to the directors. It is
essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed
at the meeting and where no notice was even given to one of the directors, the
resolution passed at the meeting of the board of directors is invalid. Consequently,
I am of the opinion that the resolution dated November 30, 1978, is invalid on
this ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my
notice the fact that the signatures of the chairman at the end of the minutes
bear the date November 30, 1979, instead of November 30, 1978. The arguments
have been considered by me but I do not agree with them. The proceedings book
is page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the resolution,
exhibit P-2, passed in the meeting held on December 30, 1978. Mr. Jain has
challenged the said resolution on four grounds, out of which three grounds are
the same on which resolution, exhibit P-1, was challenged. The fourth ground is
that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur, Shri
Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri Swaran
Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt. Nasib Kaur. |
|
2. |
Smt. Mohinder Kaur, |
|
3. |
Smt. Rajinder Singh Johal, |
|
4. |
Smt. Gurbax Kaur, |
|
5. |
Shri Pavittar Singh, |
|
6. |
Shri Ravinder Singh, |
|
7. |
Shri Swaran Singh, |
|
8. |
Smt. Inderjit Kaur, |
|
9. |
Shri Rameshinder Singh, and |
|
10. |
Shri Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the
following persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B. Out of 6
transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were
transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder
Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to
be a director. If the presence of the five transferee-directors and that of
Smt. Inderjit Kaur is not taken into consideration, then the quorum is
incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh,
after he had ceased to be a director, was re-elected on June 30, 1978. However,
he admits that Smt. Inderjit Kaur ceased to be a director. He further submits
that the transferees did not cease to be directors at the time of passing the
resolution and at the most they ceased to be so after the resolution had been
passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder,Singh
and Shri Rameshinder Singh had ceased to be directors on that date because they
took part in the meeting at the time of passing the resolution, exhibit P-2.
Relevant parts of sections 283(1)(i) and 299 read as follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by director.—(1)
Every director of a company who is in any way, whether directly or indirectly,
concerned or interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into, by or on behalf of the
company, shall disclose the nature of his concern or interest at a meeting of
the board of directors.".
From a reading of section
283, it is clear that the office of the director becomes vacant when a director
acts in contravention of section 299. It is enjoined by section 299 that a
director, who is interested in a contract entered into by or on behalf of the
company, should disclose the nature of his interest at a meeting of the board
of directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises,
whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1)
of section 300 provides that no director of a company shall, as a director, take
any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently,
the resolution, exhibit P-2, cannot be held to be invalid on this ground.
However, it may be reiterated that the shares were transferred in the names of
some of the directors. Thus, the action of the directors in passing the
resolution amounts to oppression of the minority shareholders in spite of the
fact that it is not an invalid resolution. In the above observation, I find
support from Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it
was held that a resolution may be passed by the directors which is perfectly
legal in the sense that it did not contravene any provision of law, and yet it
may be oppressive to the minority shareholders or prejudicial to the interest
of the company. Such a resolution can certainly be struck down by the court
under section 397 or 398.
Now, it is to be seen
whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt.
Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978,
and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on
June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter
she ceased to be so. Consequently, she was a director on the date of the
meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be
directors. If the presence of two directors, namely, Ravinder Singh and Smt.
Inderjit Kaur, is not taken into consideration, eight directors were still
present in the meeting. The total number of directors, as already mentioned,
was 24. Thus, the quorum was complete.
Mr. Jain next submits that no
notice of the meeting was sent to the directors and, consequently, the meeting
was illegal. There is force in this submission. The copies of the despatch
register from October 16, 1978, to February 19, 1979, exhibit P-74, show that
no notice was sent regarding the meeting. A similar argument was raised earlier
and was dealt with while determining the validity of the resolution dated
November 30, 1978. For similar reasons, the resolution dated December 30, 1978,
is also invalid.
Mr. Jain has then argued that
in the resolution dated November 30, 1978, it was decided that the shares be
offered to the existing shareholders. Shri R. S. Johal was authorised to do so.
However, he did not offer the shares to the other shareholders and, therefore,
the transfer of shares to Pavittar Singh, etc., amounts to oppression on the
minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should
have been transferred to one who made the highest offer. However, it was not
done. It is true that Shri Johal says that he told orally all the shareholders
in this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them
from the company for interest at the rate of 15% per annum and that amount has
not been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took
part in the meeting dated December 30, 1978, without disclosing their interest
in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and
Shri Avtar Singh admittedly ceased to be directors. The total number of
directors present was eleven and in case the aforementioned seven directors are
excluded, the number of directors present remained four. The quorum of the
meeting should have been eight and thus the resolution is invalid. I agree with
the submission of learned counsel. It is not necessary to dilate (further) on
the paint as the matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on February
28, 1979, exhibit P-18, by which the sale of 490 shares in favour of Shri
Pavittar Singh, etc., was approved. The first thing to be seen is as to whether
the quorum of the meeting was complete. Eleven directors were present in the
meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder Singh and
Shri Pavittar Singh, were the transferees of the shares of PISCO. As already
held, they ceased to be directors on December 30, 1978. Out of the remaining
eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt. Inderjit Kaur
admittedly, ceased to be directors. Thus, the names of six directors are to be
excluded for the purposes of quorum. Consequently, five directors would be
deemed to be present in the meeting. The quorum for the meeting was eight. I
am, therefore, of the opinion that the resolution dated February 28, 1979, is
also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh,
Ravinder Singh and Swaran Singh and voted against the resolution. The
resolution, therefore, stood defeated. The directors who signed the letter
walked out of the meeting in protest against the overbearing, arbitrary,
unconstitutional and illegal action, arrogant attitude and threatening
behaviour of the directors interested in the transferees. The latter prevailed
upon the managing director and, therefore, he refused to record their
disapproval and vote of dissent. It was requested by them that the minutes be
not recorded, contrary to the will and verdict of the majority of the
directors. The letter is signed by 11 directors and addressed to the managing
director. From the above letter, it is evident that eleven other directors were
present in the meeting but neither their presence nor their vote of dissent
against the resolution was recorded. Shri R. S. Johal appeared in the
witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76.
He stated that in the meeting held on February 28, 1979, there was a dispute
regarding the sale of shares in favour of Rameshinder Singh and his partymen
and that some of the directors, namely, Shri N. S. Domeli, Shri Puran Chand,
Smt. Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri
Puran Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of
the meeting. There is no mention about the dispute in the minutes. Shri Domeli
also admits his signature on the letter. I am, therefore, of the opinion that
the resolution dated February 28, 1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty-one days' notice in writing.
(2)A general meeting may be
called after giving shorter notice than that specified in sub-section (1), if
consent is accorded thereto—
(i) in the case of
an annual general meeting, by all the members entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent, of such
part of the paid-up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than 95
per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the
members who are entitled to vote in the meeting accord their consent for doing
so. Previously, fourteen days' notice was provided but later the period of
notice was extended to 21 days on the report of the Company Law Committee. The
reasons for extension of period have been given in the report, the relevant
portion of which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days
is too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have
further challenged the validity of the resolution of the board of directors
dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and
loss account for the year ending December 31, 1978. Mr. Jain submits that the
quorum in the meeting was not complete and, therefore, the resolution was
invalid. I do not find any substance in the argument. In the meeting, eight
directors were present. As already mentioned, there were only twenty-four
directors of the company. Consequently, eight directors constituted the quorum.
I am, therefore, of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his contention,
he places reliance on the balance-sheet ending December 31, 1976, exhibit R.
2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the
balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance
in this submission. The shares were not quoted on the stock exchange. No
reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the
balance-sheet ending December 31, 1978, some profit is shown to have been
earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs
odd. The aforesaid figure shows that PISCO was not faring well.
The respondents produced
Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs.
625 in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the
respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was given
to the company. It is further stated that Shri Mohinder Singh had introduced
false credits in the account books in favour of
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the
petitioners that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on
January 1, 1977. No amount of interest was debited to their account. No
document was got executed from the said debtors. The aforesaid amounts have not
been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that
Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh,
Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors.
It appears that the amounts were advanced to PISCO without interest because the
said directors wanted to help their concern. After taking into consideration
all the circumstances, I am of the view that the affairs of the company were
conducted by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits
P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at
the meetings was incomplete and no proper notice of the meeting was given to
the directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act
provides that the acts done by a person as a director shall be valid
notwithstanding that it may afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. It is evident from
the language of the section that it gives protection to the acts of the
directors if their appointments were invalid on account of any defect or
disqualification or the same had come to an end. It does not give protection to
their acts which are otherwise illegal. Thus, the resolutions passed in a
meeting which had not been properly convened are not valid resolutions.
Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot be
held valid under the said section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were
directors of the company and the sixth was the wife of one of them. The sole
object of the directors in passing the resolution was to promote their
self-interest. Moreover, the benefit of the said section can normally be taken
by a third person and not by the directors or their close relations. It is
further noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might afterwards be discovered that his appointment was
invalid by reason of any defect or disqualification or had terminated by virtue
of any provision contained in the Act or in the articles. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the observations
therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
[1968]
38 Comp. Cas. 543 (SC)
Supreme Court of
v.
Grain Chambers Ltd.
J.C. SHAH AND S. M. SIKRI, JJ.
CIVIL APPEAL NOS. 114 AND 115 OF 1965
NOVEMBER 15, 1967
N.D. Karkhanis, (J.P. Aggarwal,) for the Appellants.
Shanti Bhushan and B.P. Maheswari for the Respondent.
Shah, J.—The Grain Chamber Ltd., Muzaffarnagar, a company registered under the Indian Companies Act, 1913, with a share capital of Rs. 1,00,000 divided into 1,000 shares of Rs. 100 each, was formed for the purpose of carrying on business of an exchange in grains, cotton, sugar, gur, pulses and other commodities. By article 5 of its articles of association no person or firm could remain a member of the company who was found not to be doing any transaction or business through the company for a continuous period of six months. By article 46 it was provided that a member of the company who owned 10 shares of the company in his own name or in the name of the firm of which he was a proprietor or partner may be elected a director of the company. By article 51, until otherwise fixed, the quorum in the meetings of directors was to be four.
In the years 1949 and 1950 the company was carrying on business principally in "futures" in gur. The method of carrying on business in "futures" was explained as follows, by the parties to the dispute in an agreed statement submitted before the Company Judge: The transactions for sale and purchase of gur have to be in the units called 'Bijaks' of 100 maunds. The buyer and the seller who are members of the company negotiate transactions of sale and purchase in gur through their respective brokers and then approach the company. The company enters into two independent contracts whereby the company is the puchaser from one and is the seller to the other at rates agreed upon between the seller and the buyer. The seller has therefore to sell to the company a specified quantity and the buyer agrees to purchase the same quantity from the company under an independent contract. For the due performance of their contracts, the buyer and the seller deposit with the company rupee one per maund as Sai and annas eight per maund as Chook—"margin". If there is a rise in the price, the company calls upon the seller to pay the difference, and if he fails to deposit the difference demanded, the company enters into a reverse transaction with a purchaser at the current rate of the day and squares up the transaction of sale. The purchaser is also entitled to withdraw from the company the profits he has made consequent on the rise in price. If the seller is adjudged an insolvent or for any other reason is incapable of performing his obligations, the buyer remains unaffected. Even if the company is unable to recover anything from the seller, it has still to pay to the buyer the profits earned by him. Similarly if there is a fall in the price, the buyer has to make good the difference. If on the day fixed for delivery of goods the parties intend to settle the transaction by paying and receiving the difference, the company fixes the rate at which the transaction is to be settled and the transaction is to settled at the rate fixed by the company. Both the buyer and the seller send bills known as "dailies" setting out the amounts paid and received according to the rates fixed.
On March 14, 1949, the board of directors of the company passed a resolution sanctioning transaction of business in "futures" in gur for Phagun Sudi 15 Samvat 2006 (March 4, 1950) settlement. On August 9, 1949, Seth Mohanlal and company purchased one share of the company and qualified for membership. They commenced dealing with the company in "futures" in gur. By December, 1949, Seth Mohan Lal and company—who will hereinafter be called "the appellants"—had entered into transactions with the company which aggregated to 1,136 Bijaks of sale of gur for Paush Sudi 15, 2006, delivery. The appellants also claimed that they had entered into sals transactions in 2,137 Bijaks in the benami names of five other members. In January, 1950, there were large fluctuations in the prices of gur, and in order to stabilise the prices, the directors of the company passed a resolution in a meeting held on January 7, 1950, declaring that the company will not accept any settlement of transaction in excess of Rs. 17-8-0 per maund. The sellers were required to deposit margin money between the prices prevailing on that date and the maximum rate fixed by the company. The appellants deposited in respect of their transactions Rs. 5,26,996-14-0 as margin money. They claimed also to have deposited amounts totalling Rs. 7 lakhs odd in respect of their benami transactions.
In exercise of the powers conferred by section 3 of the Essential Supplies (Temporary Powers) Act, 1946 (24 of 1946), the Government of India issued a notification on February 15, 1950, amending the Sugar (Futures & Options) Prohibition Order, 1949, and made it applicable to “futures” and options in gur. By that Order entry into transactions in “futures“ after the appointed day was prohibited. On the same day the board of directors of the company held a meeting and resolved that the rates of gur which prevailed at the close of the market on February 14, 1950, viz., Rs. 17-6-0 per maund, be fixed for settlement of the contracts of Phagun delivery. It was recited in the resolution that five persons including Lala Mohan Lal, partner of the appellants, were present at the meeting on special invitation. In clause 2 of the resolution it was recited that as the Government had banned all forward contracts in gur it was resolved to take the prevailing market rate on the closing day of February 14, 1950, which was Rs. 17-6-0 per maund for Pha-gun delivery, and to have all outstanding transactions of Phagun delivery settled at that rate.
Entries were posted in the books of account of the company on the footing that all outstanding transactions in futures in gur were settled on February 15, 1950. In the account of Mohanlal & Company an amount of Rs. 5,26,996-14-0 stood to the credit of the appellants. Against that amount Rs. 5,15,769-5-0 were debited as "loss adjusted", and on February 15, 1950, an amount of Rs. 11,227-9-0 stood to their credit. Similar entries were posted in the accounts of other persons who had outstanding transactions in gur.
On February 22,
1950, the appellants and their partner, Mohan Lal, filed a petition in the High
Court of Judicature at
On February 23, 1951, another petition was filed by the appellants and their partner, Mohan Lal, for an order winding up the company. It purported to raise certain grounds which, it was submitted, had not been raised in the first petition and which had arisen since the first petition was instituted. In the second petition it was averred that by virtue of the notification issued by the Government, the forward contracts in gur had become void and the appellants were entitled to be repaid all the amounts deposited by them, that the outstanding contracts stood rescinded, and the company having paid out large sums to its directors and other shareholders was not in a position to meet its liability to the appellants.
Brij Mohan Lal J. held that the company was not unable to pay its debts and that it was not just and equitable to wind up the company on the grounds set out in the petition. Orders passed by Brij Mohan Lal J. dismissing the petitions were confirmed by the High Court of Allahabad in its appellate jurisdiction. With certificates granted by the High Court, these two appeals have been preferred by the appellants and their partner, Mohan Lal.
The High Court held that by the notification dated February 15, 1950, the outstanding transactions of “futures“ in gur did not become void; that in fixing the rate of settlement by resolution dated February 15, 1950, and settling the transactions with the other contracting parties at that rate the directors acted prudently and in the interests of the company and of the shareholders, and in making payments to the parties on the basis of a settlement at that rate the directors did not commit any fraudulent act or misapply the funds of the company; that the case of the appellants that apart from the transactions entered into by them in their firm name, they had entered into other transactions benami in the names of other firms, and that the company had mala fide settled those transactions with those other firms was not proved ; and that the board of directors was and remained properly constituted at all material times and no provision of the Companies Act was violated by the directors trading with the company.
Counsel for the appellants contended (a) that by virtue of the notification issued by the Central Government on February 15, 1950, all outstanding “futures“ in gur became void; (b) that the resolution dated March 14, 1949, was void because there was no quorum at the meeting of the company; (c) that the resolution dated February 15, 1950, by the board of directors was not passed in the interest of the company but to serve private interests of the directors; (d) that the company having repudiated the outstanding contracts, it was bound to refund the deposits received from the members; and (e) that in any event, the substratum of the company ceased to exist, and the company could not after the Government notification carry on business in gur.
In support of his contention that by the order issued by the Central Government on February 15, 1950, the outstanding transactions in futures in gur became void, counsel for the appellants relied upon a press note issued by the Government of India relating to the amendments made in the Sugar (Futures and Options) Prohibition Order, 1949. In the press note apparantly it was stated that all transactions in "futures" in sugar, gur, gurshakkar and rab made before the commencement of the order or remaining to be fulfilled shall be void and not enforceable by law. The interpretation of the Order depends not upon how the draftsman of the press note understood the notification, but upon the words used therein. The relevant clauses of the Order, after the amendment, read as follows:
"2 (d) 'Futures in sugar and gur' mean any agreement relating to the purchuse or sale of sugar or gur on a forward basis and providing for delivery at some future date and payment of margin on such date or dates, as may be expressly or impliedly agreed upon by the parties.
2 (e) 'margin' means the difference between the price specified in an agreement relating to the purchase of or sale of sugar and gur and the prevailing market price for the same quality and quantity of sugar or gur on a particular day.
2 (f) 'Option in sugar or gur' means an agreement for the purchase or sale of a right to buy or a right to sell or a right to buy and sell, any sugar or gur in future and includes a teji-mandi and teji-mandi in any sugar.
3. On or after the appointed day no person shall—
(a) save with the
permission of the Central Government in this behalf or of an officer authorised
by the Central Government in this behalf, enter into any futures in sugar or
gur, or pay or receive or agree to pay or receive any margin in connection with
any such futures;
(b) enter into any option in sugar or gur ;
4. Any option in sugar or gur entered into before the tappointed day and remaining to be performed whether wholly or in part shall be void within the meaning of the Indian Contract Act, 1872, and shall not be enforceable by law".
By clause 3(a) all persons are prohibited, save with the permission of the Central Government in that behalf from entering into futures in sugar or gur: the clause also prohibits receipt or payment of, or agreement to pay or receive any margin in connection with any such futures. The clause in terms operates prospectively. Clause 3(b) prohibits options in gur and sugar, and clause 4 expressly invalidates options in sugar and gur entered into before the appointed day and remaining to be performed whether wholly or in part. The contrast between the provisions relating to ”futures” and "options" is striking. While imposing a prohibition on options, the Central Government has also expressly provided that all outstanding options shall be void. No such provision is made in respect of outstanding “futures“. Counsel for the appellants however contended that when the Central Government imposed a prohibition against payment or receipt, or agreement to pay or receive, any margin in connection with the outstanding “futures”, the “futures“ were also prohibited. But the prohibition imposed against payment or receipt, or agreement to pay or receive, margin is made in connection with such futures, and the expression "such futures" means “futures“ of the like or similar kind previously mentioned, i.e., transactions in “futures“ to be entered into on or after February 15, 1950. If it was intended by the Central Government to declare void outstanding transactions in “futures“, the Central Government would specifically have imposed a prohibition against payment or receipt of, or agreement to pay or receive, margin in connection with all "futures". A transaction in "future" in gur may be settled by payment of margin or by actual delivery, and the Order does not prohibit the settlement of the transaction by specific delivery of goods. If the plea for the appellants be accepted, the Central Government may be attributed a somewhat singular intention of permitting outstanding futures in gur to be carried out by giving and taking actual delivery of goods contracted for, but not by payment and receipt of margin. If it was intended to invalidate transactions in futures which were outstanding on February 15, 1950, an express provision to that effect could have been made. No such provision has been made, and there are clear indications in the terms of the notification which show a contrary intention. Prohibition against payment or receipt of margin money under transactions entered into after February 15, 1950, is not redundant: it was enacted presumably with a view to maintain control over the transactions made with the sanction of the Central Government.
But, said counsel for the appellants, the resolution dated March 14, 1949, which permitted the company to enter into transactions in "futures" in gur was invalid, because the directors who took part in the meeting were disqualified under sections 86-I(1)(h) and 91B of the Indian Companies Act, 1913, and the company could not retain money paid in pursuance of unauthorised transactions. It was resolved unanimously in the meeting of the board of directors convened on March 14, 1949, that forward transactions in gur for Phagun Sudi 15, Samvat 2006, i.e., March 4, 1950, "may be started according to the rules" laid down therein. It was said that the resolution which authorised transactions of “futures“ in gur in the manner in which the company was carrying on its business entailed disqualification of the directors and as the directors were disqualified there was no quorum and no proper resolution and therefore all transactions entered into and any payments made pursuant to that resolution were invalid and the company was bound to refund the amounts paid by the appellants from time to time. The company had 11 directors : out of these 9 directors were carrying on business with the company. It appears that at the meeting dated March 14, 1949, all the directors present were those who carried on business in "futures" in gur with the company, and did after March 14, 1949, carry on that business. Under the Indian Companies Act, 1913, as originally enacted, there was no prohibition against a director entering into transactions with the company, and on that footing the scheme of the company's business was devised. Under the articles of association no person could remain a member of the company who was found not to be doing any transaction or business through the company continuously for six months, and a person could be elected a director if he held 10 shares in his own name or in the name of the firm of which he was a proprietor or a partner. A director of the company had therefore to hold ten shares and had to carry on business with the company. If he ceased to do business for a period of six months he ceased to be a member of the company, and on that account ceased also to be a director of the company. The articles of association prescribed diverse contingencies in which a director was to vacate his office, but carrying on business with the company was not made a ground of disqualification.
The company had started business in the year 1931. In 1936, several important amendments were made in the Indian Companies Act, 1913. By section 86F which was incorporated by Act 22 of 1936, it was provided:
"Except with the 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 a member or director, shall not enter into
any contracts for the sale, purchase or supply of goods and materials with the
company,..".
Section 86-I enumerated the conditions or situations in which the
office of director was vacated. In so far as the section is material, it
provides :
"(1) The office of a director shall be vacated if—...
(h) he acts in contravention of section 86F..".
Section 91B which was inserted by Act 11 of 1914 as modified by Act 22 of 1936 by the first sub-section provided:
"No director shall, as a director, vote on any contract or
arrangement in which he is either directly or indirectly concerned or
interested nor shall his presence count for the purpose of forming a quorum at
the time of any such vote; and if he does so vote, his vote shall not be
counted:"
After the amendment of the Indian Companies Act by Act 22 of 1936, the rules of the company were not modified and the company apparently carried on business in the same manner in which it was originally carrying on its business. It appears that the directors were oblivious of the requirements of section 86F and of the provisions of section 86-I and section 91B, and the modus operandi of the business continued to remain the same as it was previously. On the terms of section 86F (1) all directors of the company were prohibited, unless the directors consented thereto, from entering into contracts for the sale, purchase or supply of goods and materials with the company. On behalf of the company it was urged that by the resolution dated March 14, 1949, the directors resolved generally to sanction all transactions of the directors for the sale and purchase in commodities in which the company carried on business, and on that account, notwithstanding the prohibition contained in section 86F, the directors did not vacate their office. Counsel for the appellants urged that the consent of the directors contemplated by section 86F is consent in respect of each specific contract to be entered into and no general consent can be given by the directors authorising a director or directors of the company to sell, purchase or supply goods and materials to the company. Such a general resolution without considering the merits of each individual contract would, it was urged, amount to repealing the provisions of section 86F. Strong reliance was placed upon the judgment of the Bombay High Court in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw.
It is not necessary for the purpose of this case
to decide whether in any given set of circumstances a general consent may be given
by the board of directors, to a director or directors to enter into contracts
for sale or purchase or supply of goods and materials with the company so as to
avoid the prohibition contained in section 86F of the Indian Companies Act,
for, in our view, the resolution dated March 14, 1949, cannot be challenged in
view of regulation 94 of Table A which for reasons to be presently mentioned
must be deemed to be incorporated in the articles of association of the
company.
Regulation 94 of Table A in the First Schedule is not one of the obligatory regulations which is to be deemed by section 17(2) of the Indian Companies Act, 1913, to be incorporated in the articles of association. Section 18 provides:
"In the case of a company limited by shares and registered after
the commencement of this Act, if articles are not registered, or, if articles
are registered, in so far as the articles do not exclude or modify the
regulations in Table A, in the First Schedule those regulations shall, so far
as applicable, be the regulations of the company in the same manner and to the
same extent as if they were contained in duly registered articles".
The respondent company is limited by shares and was registered after the commencement of the Indian Companies Act, 1913: the company has adopted special articles of association, but there is no article which excludes or modifies regulation 94 of Table A, and by the operation of section 18 of the Act that regulation must be deemed to apply in the same manner and to the same extent as if it was contained in the registered articles of the company. We are unable to hold that; because the company has not incorporated regulation 94 of Table A in its articles of association, an intention to exclude the applicability of the regulation to the company may be inferred. Regulation 94 of Table A is not expressly excluded by the articles of the company: that is common ground. It is not excluded by implication: for it is not inconsistent with any other express provision in the memorandum or the articles of association. It, therefore, follows that regulation 94 must be deemed to be incorporated in the articles of association of the company. That regulation provided:
"All acts done by
any meeting of the directors or of a committee of directors, or by any person
acting as a director, shall, notwithstanding that it be afterwards discovered
that there was some defect in the appointment of any such directors or persons
acting as aforesaid or that they or any of them were disqualified, be as valid
as if every such person had been duly appointed and was qualified to be a
director".
There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the company without the express sanction of the directors. By the subsequent discovery that they had incurred disqualification, because they had entered into contract with the company for sale or purchase or supply of goods, the resolution passed by them is not rendered invalid. It is, in the view we have taken, unnecessary to decide whether section 86 of the Indian Companies Act, 1913, also grants protection to the acts done by directors who are subsequently discovered to be disqualified.
Section 91B imposes a prohibition against a director voting on any contract or arrangement in which he is either directly or indirectly concerned or interested. But the directors of the company are not shown to have voted on any existing contract or arrangement. At the meeting dated March 14, 1949, they resolved that the company shall commence business in "futures" in gur according to the rules set forth in the resolution. Thereby the directors were not voting on a contract or arrangement in which they were directly or indirectly concerned or interested.
It must then be considered whether the resolution of February 15, 1950, was passed by the board of directors with a view dishonestly to make profit for themselves and for others who were purchasers, and to cause loss to the appellants. In the light of the situation prevailing on February 15, 1950, in our judgment, the board of directors acted, in passing the resolution, as prudent businessmen for the protection of the interests of the company and the members. Since the promulgation of the Sugar and Gur (Futures and Options) Prohibition Order, 1949, if any member of the company failed to pay the margin, the company could not enter into a reverse transaction. That was prohibited. Whereas the outstanding transactions were valid, a very important sanction which the company could impose against the member who failed to pay the margin became ineffective. It was therefore necessary in the interest of the company to devise an effective scheme for settlement of those transactions. Again in view of the imposition of severe restrictions by the Government on transport of gur by rail or by mechanised transport, it was well-nigh impossible for the members to give or take delivery of gur. It was therefore resolved that all outstanding contracts shall be settled at the rate prevailing on the evening of February 14, 1950. It may be recalled that on January 7, 1950, the board of directors had resolved, because the prices of gur were spiralling that all outstanding transactions in gur will be settled at the rate of Rs. 17-8-0 per maund whatever may be the price ruling at the date of settlement. The appellants had sold 1,123 Bijaks of gur at an average rate of Rs. 12-13-9 per maund, and those transactions in “futures“ were not invalidated by the notification issued by the Government. But since no reverse transaction to protect the company against loss, if a member failed to pay margin, was possible, the only practical way out was to provide for settling the outstanding transactions. This the board of directors did by taking the rate which was prevailing in the evening of February 14, 1950, as the rate of settlement of all the outstanding transactions. The resolution, however, did not put an end to the outstanding contracts as on February 15, 1950: the resolution merely fixed the rate at which the transactions were to be settled on the due date, the possibility of any fresh transactions in futures so long as the Order remained in force being completely ruled out. It may be noticed that the appellants' representative was present at the meeting, and he was apparently heard. Whether or not he agreed to the passing of the resolution is immaterial. But we are unable to hold that the resolution was passed with a view to benefit the directors: it appears that the resolution was passed with a view to protect the interests of the company and its members.
But it was urged that simultaneously large amounts were intended to be paid to the members who had purchased contracts outstanding, and for that purpose it was resolved to borrow money from the Allahabad Bank and the Central Bank of India Ltd. This, it was urged, disclosed anxiety on the part of the directors to appropriate to themselves the liquid funds and to deprive the appellants of the benefit of any fall in the prices after February 15, 1950. It is true that in the books of account of the company the transactions were shown to have been settled as on February 14, 1950. But we agree with the High Court that the entries in the books of account of the company were not in accordance with the resolution, and no intimation was given to any of the members of the company that the transactions were so closed. There is no clear evidence about the dates on which payments were made to the purchasers in respect of their outstanding transactions. But that in our judgment is not material. It appears from the agreed statement filed before the company judge that if the seller made a deposit to cover the rise in prices, the purchaser was entitled to withdraw from the company the profit which he had made under his cross transaction, even before the date of settlement. It was clearly contemplated that when a seller deposited the difference between the price at which he had agreed to sell gur for future delivery, the ruling rate being higher than the rate at which he had agreed to sell, it was open to the purchaser to approach the company and to call upon it to pay him the profit. Whether or not this right was strictly enforced is irrelevant. It appears from exhibit D-10 that as many as 133 persons having sale transactions had made deposits of diverse amounts with the company aggregating to Rs. 36,38,932-2-9. The purchasers under the corresponding transactions were entitled to withdraw the profits earned by them out of the deposits so made. By allowing the purchasers to withdraw the amounts which they were entitled to under the business rules of the company after the contracts were frozen, the directors of the company acted according to the rules and not contrary thereto.
The attitude of the appellants in respect of the outstanding contracts since February 15, 1950, has also an important bearing. On February 23, 1950, the management of the company addressed a letter informing the appellants that in the interests and for the benefit of the trade, the board of directors has passed a resolution on February 15, 1950, to settle the outstanding transactions at the rate prevailing in the market on February 14, 1950. That resolution, it was stated, was for the benefit of the appellants, but if the appellants wanted to deliver the goods, they should intimate the date and place on which they were prepared to give delivery of goods according to the outstanding contracts on Phagun Sudi 15, Samwat 2006, in terms of the rules and bye-laws of the company. The appellants denied having received this letter. But we are unable to accept that denial. On March 1, 1950, the appellants wrote a letter stating that because of the notification issued by the Central Government the performance of the contracts had become impossible, and that the company was liable to refund all the amounts deposited with interest thereon, and that the illegal settlement dated February 15, 1950, amounted to repudiation of the contracts by the company and those contracts stood rescinded. The appellants apparently insisted that the transactions became impossible of performance in view of the prohibition contained in the notification published by the Central Government, and contended that the resolution amounted to repudiation of the contracts by the company. But by the resolution, in our judgment, there was no repudiation of the contracts by the company. The contracts, if they were to be settled by payment of differences, could be settled on the due date at the rates fixed : it was however open to the appellants to deliver goods under the contracts if they desired to do so.
The plea that there was frustration of the contracts, and on that account the company was liable to refund all the amounts which it had received, has no substance. As we have already held, the outstanding contracts were not at all affected by the Government Order. Imposition by the Central Government of a prohibition by its notification dated March 1, 1950, restraining persons from offering and the Railway administration from accepting for transportation by rail any gur, except with the permit of the Central Government from any station outside the State of Uttar Pradesh which was situated within a radius of thirty miles from the border of Uttar Pradesh does not lead to frustration of the contracts. Fresh contracts were prohibited: but settlement of the outstanding contracts by payment of differences was not prohibited, nor was delivery of gur in pursuance of the contract and acceptance thereof at the due date by the company prohibited. The difficulty arising by the Government orders in transporting the goods needed to meet the contract was not an impossibility contemplated by section 56 of the Contract Act leading to frustration of the contracts.
Finally, it was urged that by reason of the notification issued by the Central Government, the substratum of the company was destroyed and no business could be carried on by the company thereafter. It was said that all the liquid assets of the company were disposed of and there was no reasonable prospect of the company commencing or carrying on business thereafter.
The company was carrying on extensive business in "futures" in gur, but the company was formed not with the object of carrying on business in “futures“ in gur alone, but in several other commodities as well. The company had immovable property and liquid assets of the total value of Rs. 2,54,000. There is no evidence that the company was unable to pay its debts. Under section 162 of the Indian Companies Act, the court may make an order for winding up a company if the court is of the opinion that it is just and equitable that the company be wound up. In making an order for winding up on the ground that it is just and equitable that a company should be wound up, the court will consider the interests of the shareholders as well as of the creditors. Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In the present case the object for which the company was incorporated has not substantially failed, and it cannot be said that the company could not carry on its business except at a loss, nor that its assets were insufficient to meet its liabilities. On the view we have taken, there were no creditors to whom debts were payable by the company. The appellants had, it is true, filed suits against the company in respect of certain gur transactions on the footing that they had entered into transactions in the names of other persons. But those suits were dismissed. The business organisation of the company cannot be said to have been destroyed, merely because the brokers who were acting as mediators in carrying out the business between the members had been discharged and their accounts settled. The services of the brokers could again be secured. The company could always restart the business with the assets it possessed, and prosecute the objects for which it was incorporated. It is true that because of this long drawn out litigation, the company's business has come to a standstill. But we cannot on that ground direct that the company be wound up. Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the company should be wound up, and we agree with the High Court that no such case is made out.
The appeals fail and are dismissed with costs. One hearing fee.
Appeals dismissed.
[1950] 20 COMP CAS 296 (ALL.)
HIGH COURT OF
v.
Debi Prasad
MUSHTAQ AHMAD AND DESAI, JJ.
CIVIL REVISIONS NOS. 121 TO
154 OF 1945
FEBRUARY 20, 1950
G.S. Pathak, for the Petitioner.
Mansur Alam and L. Chandra for the Opposite Party.
Desai, J.—This and Civil Revisions Nos. 122 to 154 of 1945 are applications in revision under Section 25 of the Small Cause Courts Act, against judgments passed by the Small Cause Court Judge, Gorakhpur, in suits filed by the Official Liquidator of the Shiromani Sugar Mills Ltd., Khalilabad, against a number of ex-shareholders of the Shiromani Sugar Mills Ltd., for allotment, first call and second call moneys. There were as many suits as there are revisions; they were all of similar nature and the same disputes were involved in all. They were consolidated by the learned Small Cause Court Judge and tried together. He delivered one judgment dismissing all the suits.
The company, which was a public limited company, was formed with a large number of objects, the first and most important object being "to manufacture in India or abroad all kinds of sugar by up-to-date and latest scientific methods and machinery, and for this purpose to erect and construct a factory or factories at one or several places in or outside India." It was incorporated on 7th November, 1933, on which date the Memorandum of Association and the Articles of Association were registered with the Registrar of Joint Stock Companies. The prospectus was published on 16th October, 1933, and was registered with the Registrar on 26th February, 1934. On 24th November, 1933, a meeting of the promoters of the company unanimously elected the following persons as first directors: (1) Pandit D. P. Pandey, (2) Pandit P. P. Pandey, (3) Pandit S.K. Pandey, (4) Chaudhri Bhagwati Prasad, (5) Mahant Vishwanath Bharthi, (6) Pandit Ganga Narain Tewari, (7) Thakur Saran Singh, (8) Dr. P. C. Bhattacharjee, (9) Mukut Behari Lal, (10) Pandit Tirath Raj Pandey, (11) Sahu Baldeo Prasad, (12) Abdul Qadir Khan, (13) R. D. Sharma, ex officio, and (14) N. K. Varma.
The authorised capital of the Company was fixed at Rs. 20,00,000 dividend into Rs. 15,000 preferred shares of Rs. 100 each and Rs. 50,000 ordinary shares of Rs. 10 each. The earned capital according to the prospectus was Rs. 16,00,000 divided into Rs. 12,000 preference shares and Rs. 40,000 ordinary shares. In most of these revisions we are concerned with only preference shares and I shall deal only with them. Out of Rs. 100, the price of a preference share, Rs. 20 were payable on application for the share, Rs. 30 were payable on the share being allotted and the balance of Rs. 50 were payable in such call or calls as might be decided by the directors from time to time. Under Article 32 of the Articles of Association a share became liable to forfeiture if the call or instalment or allotment money was not paid by the shareholder within the fixed time. The business of the company was to be conducted by managing agents, subject to the control of the directors and Messrs. Sharma, Varma and Company were the first managing agents. The maximum number of directors fixed under Article 172 are 17. The qualification of a director as fixed under Article 156 was "the holding of shares of Rs. 5,000 at least in the capital of the company in his own name and right."
Article 157 provided that "A Director may act as Director before acquiring his qualification but shall in any case acquire the same within two months from his appointment and unless he shall do so he shall be deemed to have agreed to take the said share from the Company and the same shall be forthwith allotted to him accordingly."
The office of a director was vacated under Article 165 on his ceasing to hold the required number of shares or stock to qualify him for office, or on his accepting any other office or place of profit under the company. One-fourth of the number of directors were to retire every year by rotation though they were eligible for re-election. Four directors formed a quorum for a meeting of the directors.
Article 131 laid down that: "All acts done by any committee of Directors or by any person acting as a Director shall, notwithstanding that it be afterwards discovered that there are some defects in appointments of any such directors or persons acting as aforesaid or that they or any of them are disqualified, be as valid as if every such person has been duly appointed and was qualified to be a Director."
The defendants opposite parties were all shareholders of the company. Some of them did not pay even the allotment money and others did not pay the first and second call moneys. Consequently their shares were forfeited through resolutions passed by the directors in three meetings held on 14th June, 1939, 23rd July, 1939, and 16th October, 1939. An order for the winding up of the company was passed on 7th December, 1941. The official liquidator then instituted the suits to recover the balance of the allotment and first and second call moneys.
The suits were contested by the opposite parties. The grounds with which we are concerned in these applications were (1) that the original contract for the purchase of the shares was procured by the promoters of the company by fraudulent misrepresentation, (2) that the promises held out to the opposite parties at the time of the purchase were not carried out by the company and consequently the opposite parties were justified in not making further payment, (3) that the resolutions passed by the directors allotting the shares to the opposite parties were invalid because the directors voting for the resolutions had ceased to be directors and (4) that the resolutions forfeiting the shares also were invalid for the same reason. The learned Judge upheld all these contentions of the opposite parties and dismissed the suits. In these applications the official liquidator challenges the learned Judge's findings on these four points.
As stated by Baggallay, L.J., in In re Scottish Petroleum Co.: "To constitute a binding contract to take shares in a company when such contract is based upon application and allotment, it is necessary that there should be an application by the intending shareholder, an allotment by the directors of the company of the shares applied for, and a communication by the directors to the applicant of the fact of such allotment having been made." The purchase of shares is governed by the same law as the purchase of goods. Every person who has agreed to become a shareholder of a company is liable to pay the price of the share in accordance with the Articles of Association. This proposition, "is subject to the application of the well-recognised rule in equity that a person who has been induced to enter into a contract by the fraudulent conduct of those with whom he has contracted is entitled to rescind such contract provided he does so within a reasonable time after his discovery of the fraud." (Baggallay, L.J., in In re Scottish Petroleum Co.)
Sir G.J. Turner, L.J., observed in In re Reese River Silver Mining Co.: "If it can be shown that a material representation which is not true is contained in the prospectus, or in any document forming the foundation of the contract between the company and the shareholder, and the shareholder comes within a reasonable time, and under proper circumstances, to be released from that contract, the Courts are bound to relieve him from it, and to take his name off any list of shareholders."
The misrepresentation must be of a material fact, the shareholder must have been induced by it and he must plead and prove so.
James, L.J., observed in Eaglesfield v. Marquis of Londonderry that the misrepresentation "must be a misrepresentation of a matter of fact." A shareholder cannot" obtain relief without distinctly alleging and proving that the particular statement was a material inducement to his purchasing his shares ;........the precise misrepresentation must be distinctly stated and also that it formed a material inducement to the plaintiff to take shares in the company." (See Hallows v. Fernie). In that case the plaintiff did not allege and prove that he "read the prospectus in a sense which involved an untruth, that it led him into an erroneous belief of the existence of a certain state of facts, and that this belief was a material inducement to him to become a purchaser of shares in the company," and the Lord Chancellor dismissed his suit. To adopt his Lordship's language, "whatever may be the fair meaning of the prospectus, and even if the plaintiff's construction of it is correct, he can only be entitled to succeed secundum allegata et probata" (page 478).
The learned Judge has relied mainly upon one misrepresentation in the prospectus. It is the sentence, "the managing agents with their friends, promoters and directors have already promised to subscribe shares worth Rs. 6,00,000", printed in red on the cover of the prospectus. The opposite parties did not specifically plead that it is a misrepresentation and that they were induced by it to purchase the shares. There is no proof, and of course there is no finding of the learned Judge, that the managing agents with their friends, promoters and directors had not promised to subscribe to shares worth Rs. 6,00,000. I do not know how this statement could be assailed as a misrepresentation of fact. The only fact asserted was of the existence of promise. Unless it were false, there was no misrepresentation of fact. It was not asserted that the managing agents etc. had subscribed to shares worth Rs. 6,00,000. When it was said that they had only promised, it means that they had not carried out their promise, otherwise the statement would have been that they had already subscribed to shares worth Rs. 6,00,000. Nobody should have been misled by this statement and nobody should have understood it to mean that shares worth six lacs of rupees had already been subscribed to. If the opposite parties misunderstood this statement to mean that the shares had already been subscribed to, and applied for shares under that misapprehension, they are to blame themselves and not the promoters of the company.
In In re Reese River Silver Mining Co., Smith's case the prospectus contained the statement that the property which the company had contracted for consisted of 50 acres of land "containing several very valuable claims, some of which are in full operation, and making large daily returns." No claims were in full operation and the statement to the contrary was false. But it was based on a report received and honestly believed by the directors. Sir G.J. Turner, L.J., held that it was a misrepresentation of fact and observed at page 611: "If the company had confined themselves to saying 'we have received reports from which we believe and have reason to believe, that these mines are in full operation, and are making daily large returns' it might, and no doubt would, have been very difficult for Mr. Smith to be relieved from the contract, but the company, instead of thus referring to the information received, stated the circumstances as facts."
What the directors could have said in that case to avoid their liability was stated by the directors in the present case.
In Hallows v. Fernie the prospectus contained statements that the company would commence operations with six screw steamships of 20,000 tons and 300 h. p., each, and having capacity of 2,000 tons of cargo and that the steamers were guaranteed to steam 10 knots and being full rigged as clipper sailing ships were calculated to perform the voyage regularly from F to R in 25 days. Actually no steamships were in possession of the company when the prospectus was issued and it had not even entered into any contract for obtaining them. So it was contended that the statements were misrepresentations of fact, but the contention was overruled. Lord Chelmsford, L.C. held that the prospectus did not announce to the public in clear and unequivocal language that the promoters of the company actually possessed, or had contracted for the possession of six ships of the description mentioned. His Lordship observed at page 475: "There is a material distinction between the employment of words in a prospectus which can bear only one meaning and of those which are equivocal, and which different persons may interpret differently. In the latter case no prudent person would act upon his own construction without some inquiry. In construing a prospectus, the preliminary character of the document must always be taken into consideration. Every one knows that it is intended to usher a company into existence, and not to describe its actual formation; no one is surprised to find that a future sense must be given to words in the past or present tense which it contains". His Lordship further observed at page 476: "After the elaborate examination of this first part of the prospectus in the argument before me, its meaning cannot be regarded as so entirely free from doubt, that a person has a right, wiihout inquiry, and acting entirely upon his own views of its proper construction, to purchase shares in the company, and then complain that he has been deceived. Because, if the words are susceptible of different meanings, he is deceived not by the words, but by his construction of them."
When there is absence of proof that the managing agents etc. had not made the promise the existence of the promise is not falsified by the breaking of it. The managing agents etc. might not have kept their promise, but the opposite parties are not entitled to say that they were misled by their promising. Every document, as against its author, must be read in the sense which it was intended to convey. As observed by Lord Chelmsford in Peek v. Gurney, a prospectus may contain statements, which are perhaps literally true, yet really false in the sense in which the promoters should know they would be understood by the public. The promoters in the present case could not possibly have intended the impugned statement in the prospectus to mean that shares worth Rs. 6,00,000 had already been subscribed to. Even if it amounted to misrepresentation, there is no proof that it induced the opposite parties to buy the shares. The learned Judge has mentioned that the directors had not paid the application money for the qualification shares. This is immaterial. The directors had two months within which to acquire the qualification shares. If their names were mentioned in the prospectus without their having acquired the qualification shares, it does not mean that it contained a misrepresentation of fact. Even if the directors did not acquire the qualification shares within two months Article 157 of the Articles of Association forced the shares upon them.
It is stated in the prospectus that "our shareholders will be highly and satisfactorily benefited by way of dividend." There is also the evidence of a director to the effect the shareholders were told that the company would start its work of producing sugar very soon. These are not representations of fact. Some amount of puffing must be allowed in a prospectus; it must not amount to a misrepresentation of fact. It is stated in Palmer's Company Law, 19th Edition, page 347: "The statement that something will be done is not a statement of an existing fact so much as a contract or promise. It may, however, imply the existence of facts which are non-existent, or it may be material term in the contract." The statements in question do not imply the existence of facts which were really non-existent and there is no evidence that they formed a material term in the contract.
The learned Special Judge has taken notice of certain nondisclosures in the prospectus. Under Section 93 of the Companies Act a prospectus must state the number of shares fixed by the articles as the qualification of a director, the names and addresses of the vendors of any property purchased or acquired by the company, and the debts of, and parties to, every material contract. The prospectus does not contain this information. But there is no penalty prescribed in the Act for non-compliance with the provisions of Section 93. When the non-compliance involves misstatement of a material fact, there will, of course, be a right of rescission under the general law. But otherwise the omission of any of the particulars will not per se entitle a shareholder to rescission of his contract to take shares. It will not do for the promoters of a company to plead that everything which is stated in the prospectus is literally true; they must be able to meet the objection, "not that it does not state the truth as far as it goes, but that it conceals most material facts with which the public ought to have been made acquainted, the very concealment of which give to the truth which is told the character of falsehood": See Oakes v. Turquand. "Half a truth is no better than a downright falsehood": Gluckstein v. Barnes.
According to Peek v. Gurney, if there is such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false, it would form ground for an action for misrepresentation. In Rex v. Kylsant, Avdry, J., held the prospectus to be false because, "the falsehood in this case consisted in putting before intending investors, as material on which they could exercise their judgment as to the position of the company, figures which apparently disclosed the existing position, but in fact hid it."
Judged according to these authorities, the omissions in the present case do not amount to a misrepresentation; what is left out does not make what is stated false.
The learned Judge has gone out of his way in taking into consideration the various acts of breach of rules; if the managing directors and other directors committed any breach of rules, the shareholders may have other remedy against them but not that of rescinding the contract of purchase of shares. They might have acted dishonestly and inefficiently and filed false declarations before the Registrar, but even that would not entitle the shareholders to rescind their contract. The learned Judge has observed that on account of these breaches and acts of dishonesty and inefficiency, the shareholders were justified in withholding further payment of their allotment and call moneys. He has not quoted any authority in support of his view. So long as the contract of purchase of shares is not rescinded, the liability of a shareholder to pay their price remains. Apart from the right to rescind the contract of purchase of shares, a shareholder has no right to withhold payment of the price.
A shareholder's contract to purchase shares is only voidable, and not void on account of misrepresentation in the prospectus: Oakes v. Turquand, In re Scottish Petroleum Co., and Tennent v. The City of Glasgow Bank. This means that the contract is valid till rescinded. But a shareholder has not unlimited time within which to rescind the contract; he must rescind it promptly, that is within reasonable time of his becoming aware of the fraud giving him the right to rescind. In In re Russian Iron Works Co., Kincaid's case, Lord Cairns, L.J., considered delay of three months as fatal to a claim for rescission. The reason, as given in the connected Lawrence's case at page 424, is: "No attempt at repudiation took place for upwards of four months, and during this time Mr. Lawrence must be taken, in my opinion, to have known, not merely that his name was on the register, and that he was so held out to the world as a shareholder in and member of the company but also..."
In Smith's case, he had notice on 13th December, 1865, that the property which the company had contracted to purchase was almost valueless, he received detailed information about it on 19th January, 1866, he filed his bill to rescind the contract on 6th February, 1866, and Sir C.J. Turner, L.J., held that he had come with promptitude, observing that "if time were to be taken as running against him from 30th December, 1865, he possibly might be considered to have come too late."
In In re Scottish Petroleum Co., eighteen months' delay was held to be fatal. The reason why a shareholder must be prompt in rescinding the contract is that the register of shareholders is to be the creditors' guarantee, showing them to whom and to what they have to trust. A shareholder knowing that he was induced by fraud to enter into the contract of purchase of shares, cannot lie by, let his name remain in the register and let third parties enter into contracts with the company on the faith of the register. In In re New Zealand Banking Corporation, Sewell's case. Lord Cairns, L.J., said: "It appears to me that not having done so, and being aware that he was held out to the public as the holder of twenty-three shares, it is too late for him months or years afterwards to enter into that question."
Even repudiation of shares, without taking active steps, is insufficient because the contract to take shares stands on a different footing from another contract. Fry, L.J., stated in In re Scottish Petroleum Co.: "As regards such contracts the Legislature has interposed, and has provided that they shall be made known in a particular way to shareholders and creditors; notice of them is given to the world. Now the general principle is that no contract can be rescinded so as to affect rights required bona fide by third parties under it. It is true that the creditors and the other shareholders have not acquired direct interest under the contract, but they have acquired an indirect interest." The case of a joint stock company is slightly different because there "while the company is a going concern, no creditor has any specific right to retain the individual liability of any particular shareholders."
It is laid dow in Tennent v. City of
In the present case, the shares were allotted to the opposite parties in 1934 and they have allowed their names to remain in the register of shareholders. They have taken absolutely no active steps to avoid the contract. They gave no indication of their intention to avoid the contract at any time; the earliest intention that they gave is through their written statements in the suit. It has been found by the learned Civil Judge that the assets of the company were in a very bad state from the very beginning. Sugar industry was a prosperous industry and this company could not start any business for five years. The directors and managing directors were inefficient and guilty of breaches of rules. Managing directors had to be changed repeatedly and a stage arrived when nobody was prepared to become the managing director and the office had to be thrust upon a person who had already proved himself unfit. No dividends were at all granted and general and statutory meetings were not held as frequently as required under the articles. All this state of affairs could not have remained unknown to the shareholders and we are not dealing with one or two shareholders but a very large number of them. Even when calls were made in 1936 and 1937 they did not repudiate the shares. I have, therefore, no doubt that they have lost their rights to rescind the contract by their laches.
In addition to the laches, the winding up of the company raises another bar in the way of the opposite parties to repudiate their shares. The law is that a shareholder cannot be relieved from his shares after a winding up application: Kent v. Freehold Land and Brickmaking Co., In re Scottish Petroleum Co., Tennent v. City of Glasgow Bank and Hirji Khetsey v. Indian Specie Bank Ltd. Some time must be allowed to a shareholder when an investigation in necessary as laid down in Smith's case and In re Scottish Petroleum Co. If a shareholder has started active proceedings to be relieved of his shares, the passing of a winding up order during their pendency would not prevent his getting the relief. The reason why a shareholder cannot throw back his shares upon the company after winding up is that rights of third parties have intervened and, to adopt the language of Baggallay, L.J., in In re Scottish Petroleum Co.: "Equities which would be sufficient as between the shareholder and the company cannot be set up as against the creditors or co-contributories."
When the Legislature has provided the shareholders' register as the means of enabling persons dealing with the company to know to whom and to what they had to trust, it would be no answer to a creditor that the shareholder sought to be charged had been induced by fraud to become a shareholder just as it would be no answer to a creditor that a partner to be charged had been induced by fraud to become one: See Oakes v. Turquand.
"The liability of the shareholders is not under a contract with the creditors, but it is a statutable liability under which the creditors have a right which attaches upon the shareholders to compel them to contribute to the extent of their shares towards the payment of the debts of the company"; this is what Lord Chelmsford, L.C., said in the same case at page 350. Lord Cranworth, agreeing with the Lord Chancellor, said at page 363 that: "The winding up is but a mode of enforcing payment. It closely resembles a bankruptcy, and a bankruptcy has been called, not improperly, a statutable execution for the benefit of all creditors."
Certain dicta of Lord Cairns, L.J., in Smith's case may suggest that his Lordship did not consider winding up as a bar to granting relief to a shareholder. His Lordship was of the view that if the shareholder went to the Court with promptitude to have the fraud redressed, the fact that the interest of creditors was involved in the winding up did not alter the matter and, "the question must be disposed of as if it were to be disposed of upon the bill at the time when the bill was filed and before any winding up, in which case the plaintiff would be entitled to the relief prayed by the bill." There the shareholder had gone to the court with promptitude and before the winding up application was filed. What his Lordship said cannot be said to apply even when a shareholder comes to Court after a winding up application has been filed. Smith's case went up before the House of Lords. There the question was decided merely on the ground that there was no delay and that the subsequent filing of the winding up application did not disentitle him to the relief sought. Their Lordships did not say anything about Lord Cairns' dicta.
In Hansraj Gupta v. N.P. Asthana, the Judicial Committee laid down that if a person is on the shareholders' register with his knowledge and consent at the commencement of the winding up, the invalidity under Section 105 of the Companies Act, 1913, of the contract in pursuance of which he applied for, and was allotted, shares is not a ground for removing his name from the list of contributories because after the winding up his liability in respect of the shares arises ex lege and not ex contractu. Therefore, I hold that the right of the opposite parties to avoid the contract of the purchase of shares is barred not only by the enormous delay that has taken place but also by the winding up of the company.
But the case of the opposite parties does not rest only upon avoiding the contract of purchase of shares; they have another string to their bow which is that there was no valid contract at all. The argument is that the directors who voted for the allotment of the shares to them were disqualified to act as directors, that the allotment was ultra vires and that consequently no contract to purchase the shares came into being at all. I have given the names of the original directors; they were appointed as such on 24th November, 1933. Under the Articles of Association, they were bound to acquire shares of the minimum value of Rs. 5,000 within two months that is by 24th January, 1934. If they failed to acquire the shares they were to be deemed to have acquired them. They were, therefore, bound to pay the application and allotment moneys by 24th January, 1934, and the first and the second call moneys. Directors Nos. 2, 4, 5, also and 8 did not pay even the application money in full by 24th January, 1934; director No. 4, as a matter of fact, did not pay any application money. Directors Nos. 1 to 9 and 11 and 12 did not pay the full allotment money in time; directors Nos. 4 and 12 did not pay any allotment money. The resolution for the first call was passed on 26th November, 1936, and the call money was to be paid within six months, that is by 26th May, 1937. Directors Nos. 4, 5, 8 and 11 to 14 did not pay the first call money at all and director No. 7 did not pay it in time. The resolution for the second call-money was passed on 5th July, 1937; though the prescribed period of time was six months, the resolution allowed a longer period which was illegal. Still directors Nos. 4, 5, 8 and 11 to 14 did not pay the call money at all and directors Nos. 1, 2 and 7 did not pay it within time. Thus all the directors except directors Nos. 10, 13 and 14 ceased to be directors under Section 85 of the Companies Act, on 24th January, 1934, and directors Nos. 13 and 14 ceased to be directors on 26th May, 1937. In 1934 only three persons were qualified to act as directors whereas the quorum for a meeting was four. Consequently the resolutions allotting the shares and making calls for the money were passed in meetings in which there was no quorum. The Official Liquidator relied upon Article 181 which is couched in the same words as Section 86 of the Companies Act, 1913, by which we are governed in these applications. This article, widely worded as it is, supports his contention that in spite of the disqualifications of the directors the resolutions passed by them are valid.
In Hallows v. Fernie, the
objection to the allotment of shares on the ground that the directors who made
the allotment did not possess the requisite share qualification, was overruled
on the basis of a provision in the English Companies Act similar to that
contained in Section 86 of the Indian Companies Act. In
In the present case, the directors certainly knew that they had not paid the allotment and call moneys, but there is nothing to indicate that the fact that they had thereby disqualified themselves was present to their minds at the time when they allotted the shares and made the calls. There was no defect in their appointment as directors; the only defect is that they continued to act as directors even after their disqualification. There is no suggestion that they acted dishonestly in passing the resolutions of allotment and making the calls. It seems that they acted bona fide, oblivious of the fact of their disqualification. There is no evidence of the fact of their disqualification having ever been brought to their minds. The language of Article 181 fully protects their actions. Had it been a case of only one or two directors continuing to act as such despite the disqualification, I would have had no hesitation in forming the conclusion that I have. Here we have to deal with a large number of directors acting as such despite the disqualification. But there is no other circumstance from which it can be said that they were conscious of the fact of their disqualification and yet continued to act as directors. So I come to the conclusion, though not without some hesitation, that the acts of allotting the shares to the opposite parties and making the first and second calls were valid.
For the same reason the act of forfeiting the opposite parties' shares also must be held to be valid. The liability of the opposite parties to pay the moneys that are being demanded of them by the Official Liquidator arose before, and is not wiped off by, the forfeiture. The only effect of the forfeiture is that the shares pass out of their hands, the liability incurred previously to pay the allotment and call moneys remains.
Some of the opposite, parties purchased only ordinary shares. This only affects the amounts due from them: otherwise there is no difference between their cases and those of preferred shareholders.
No other dispute was raised before us.
I would, therefore, allow all these applications and decree the suits; but I would not allow any costs to the Official Liquidator. The company must bear its costs of both Courts itself because it has not come out clean from this litigation and though justice lies on its side as regards the subject-matter of this litigation there is much for which its directors and managing directors had to account to the opposite parties.
Mushtaq Ahmad, J.—I agree.
By the Court.—We allow this application, set aside the decree of the lower appellate Court and decree the plaintiff-applicant's suit. We make no order about the costs in all the three Courts.
[1931] 1 COMP. CAS. 98 (
HIGH
COURT OF
v.
United
Refineries (
CUNLIFFE AND CARR, JJ.
FIRST APPEAL NO. 204 OF
1929
FEBRUARY 12, 1930
Cowasjee, for the Appellant.
Foucar, for the Respondent.
Cunliffe J.—This appeal raises a preliminary
point of law, which is not without importance or difficulty. The question before us may be stated thus: Was the learned trial Judge
right in cutting short the cross-examination of one of the appellants'
witnesses named Sukhdial Behal by reason of the provisions of s. 86, Companies
Act?
That section runs as follows:
"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."
The action in the Court below was dealt with in its
perliminary stages by one Judge who was then transferred, and the rest of the
case was taken up by his successor. There is no doubt that the second Judge was
legally influenced in the view he took of the preliminary point by the opinion
expressed by his predecessor. In an order dated 9th April, 1929, the matter was
finally dealt with. It recites, inter alia, that by O. XXIX, r. 1, Civil
Procedure Code, in suits by or against a corporation, a pleading may be signed
and verified by a director, secretary, or other principal officer of the
corporation. The learned Judge then went on to express an opinion that as s.
86, Companies Act, had been embodied in the articles of association of the
United Refineries Co. Ltd., any bona fide act of a de facto director would be
valid, not only between the company and outsiders, but also between the company
and its members. He went on to hold that the signing and the verifying of the
plaint was an act contemplated by s. 86 and, therefore, the action of the
director in signing and verifying the plaint must be regarded as a valid act, whether
he was properly appointed as a director or not. In these circumstances, he
finally held that the defendants (who are appellants here) could not be allowed
to cross-examine the director Mr. Behal with regard to his qualifications as a
director of the respondent company.
Relainace was placed by the learned Judge upon a number of
Indian and English rulings, which are well-known as laying down the principles
of law which guide the Courts in ratifying irregular actions on the parts of
the officials of a limited liability company, provided they are bona fide and
come within the purview either of s. 86 of the Indian Act, or s. 74 of the
English Statute.
It appears to me, however, that this attitude towards the
appellant's contention does not really do justice to the true position. There
is no doubt that counsel was stopped in his cross-examination, and 1 am
extremely doubtful whether under s. 86 this was a proper thing to do. It is to
be noted that s. 86 is a much stronger section than s. 74, English Companies
Act. The words "provided 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" do not appear in the English section at all.
There is no doubt that this proviso was inserted in the Indian Act of 1913,
because of two English decisions Bridport Old Brewery Company, In re and
Harlan v. Phillip. These
cases, as far as I know, have never been overruled, and the principle laid down
in them is correctly stated in the proviso to the Indian section.
It seems to me, therefore, that the appellants here were prevented
from ascertaining by means of cross-examination whether the signing of the
plaint in this action was not executed after Mr. Behal's appointment as a
director, either de jure or de facto, had been shown to be invalid. There is no
evidence on the record to show the circumstances of his appointment as a
director or his conduct of his directorship, and in my opinion the appellants
may well have been prejudiced by not being able to put his material evidence
before the Court. I say "may have been prejudiced" because I have a
suspicion that there is not a great deal of substance in this point, but I do
not think that a Judge should be permitted to preclude a party to an action
before him from putting all the available evidence in the case, to render the whole of the
meaning of s. 86, Companies Act, nugatory.
In these circumstances, I am of
the opinion, that the case should be returned to the trial Court so that this
supplementary evidence, if it is forthcoming, may be placed before the trial
Judge. It is probably unfortunate that the present trying Judge will be neither
of the two Judges who have already turned their attention to this somewhat
complicated action.
Carr, J.—I agree with the view taken my
by learned brother Cunliffe on this preliminary question. I note that the
question arose out of a petition filed by the defendents appellants on 6th
March, 1929, whereby they made an addition to their written statement. In para.
4 of that petition they alleged that Sukhdial Behal who had signed the plaint,
is not and was not entitled to institute the suit on behalf of the plaintiffs.
On this certain further issues
were framed of which the first two were:
(A) Are there any directors at all who
have power to act for the plaintiff company?
(B) Was Sukhdial validly appointed to
sign and verify the plaint?
In his judgment in the case the
District Judge dealt with these issues merely by saying that they were disposed
of by his order now under consideration. That order, in my opinion, simply begs
the question raised in issue No. 2 quoted above. It involves an assumption that
Mr. Behal was a director whose actions would be validated by s. 86, Companies
Act, an assumption which seems to me unjustifiable. The defendents had raised
the question of Behal's competency, and I consider that they were entitled so
to cross-examine him as to expose all the facts bearing on that question. It is
only when all those facts are before it that the Court can properly come to a
finding as to whether the section quoted covers the case or not.
We, therefore, return the case to
the District Court with a direction that the defendants be permitted to
cross-examine S. Behal on the question of his appointment as a director of the plaintiff company, and that both parties be permitted to
call such further evidence on that question as they may desire, and that the
case be then returned to this Court with findings of the District Court on
issue Nos. A, B and C, framed by the District Court on 7th March, 1929.
[1932] 2 COMP. CAS. 359 (
HIGH COURT OF
v.
United
Refineries (
CARR, J. AND CUNLIFFE, J.
CIVIL REGULAR NO. 11 OF 1928.
SEPTEMBER 10, 1930.
N.M. Cowasjee and J.C. Ray, for the Appellant.
Foucar, for the Respondent.
Carr, J.—On the 15th December, 1924, the
plaintiff company, The United Refineries (Burma), Ltd., entered into the
agreement, Ex. 1, with the firm of Kashi Visvanath & Co. of Calcutta, the
partners in which were the 1st, 2nd and 5th defendant appellants. The plaintiff
agreed to sell and the defendants to buy a complete oil refinery for a total
price of 5˝ lacs. Earnest was paid in the form
of Ł6,000 worth of debentures of the Indo-Burma Oilfields [1920], Ltd., and the
manner in which the balance of the price was to be paid was set out in detail
in the agreement. This agreement was carried into effect by the execution on
the 15th January, 1925, of the conveyance, Ex. A, by the plaintiff company in
favour of the 3rd defendant, who was a nominee of Kashi Visvanath & Co.,
and who accepted the terms of purchase as set out in the agreement.
One of those terms was that the last two lacs of the
consideration was to be paid three months after registration of the conveyance,
and in pursuance of this Kashi Visvanath & Co., and the purchaser, the 3rd
defendant, executed on the 15th January, 1925, a promissory note or hundi,
payable in 90 days for the sum of two lacs of rupees. This fact is set out in
the conveyance itself. Possession of the refinery was given to the purchaser but
the conveyance itself and the other title deeds of the property were left in
the custody of the plaintiff company.
In March, 1927, a company styled The Thilwa Refineries (
On the 22nd September, 1927, this company entered into the
agreement Ex. 54, to purchase the refinery from the 3rd defendant-appellant for
a price of nine lacs of rupees. Rupees 80,000 was paid then and the balance was
payable by instalments. The conveyance was to be executed when the full price,
had been paid, but in the meantime the purchasing company was, allowed the use
of the property. We understand that a considerable sum has been paid under this
agreement, but a balance still remains payable and no conveyance has as yet
been executed. This company—The Thilwa Refineries (
The sum of two lacs of rupees due to the plaintiff company
has not been paid and on the 20th March, 1928, this suit was instituted for its
recovery. In the first plaint the 5th defendant was not joined and it was only
in an amended plaint dated the 5th June, 1928, that he was added as a
defendant.
The plaint in its first three paragraphs sets out briefly
the facts as to the sale agreement and the conveyance. Paragraph 4 sets out
that in pursuance of the terms of those deeds the pro-note for two lacs was
executed. Paragraph 5 stated that the conveyance and other title deeds of the
property were deposited with the plaintiff and claims that this was done with
the intention of creating an equitable mortgage over the property.
Paragraph 5 A was added by an amendment of the plaint on
the 7th March, 1929, and runs as follows:—
"Plaintiffs submit that in any event they are entitled
to claim a vendor's lien in respect of the said property."
Paragraphs 6 and 7 claim that when entering into its
agreement to purchase the property from the 3rd defendant, the 4th defendant
company had notice of the mortgage.
In para. 9 the plaintiff claims to be entitled to interest
on the sum claimed, at the "statutory" rate of 6 per cent. per annum.
Paragraph 11 sets out that the cause of action arose on the
15th January, 1925, when the promissory note was executed and the title-deeds
were deposited with the plaintiff.
The written statement of the first three defendants and that
of the 5th defendant, filed at a later date, claim that the pro-note was not
duly stamped and, therefore, is inadmissible in evidence and of no effect; that
this pro-note was executed as full payment of the consideration for the
conveyance. They then set out a long story of previous dealings between the
plaintiff company and Kashi Visvanath & Co. (which seems to me almost
entirely irrelevant) and of previous suits in
With regard to this contention it may be said now that the
defendants entirley failed to establish it, and that it has not been urged
again in this appeal.
Effectively the defence of the 4th defendant company was
that it had no notice of the equitable mortgage claimed by the plaintiff.
The written statements were not amended after the addition
of para. 5-A to the plaint, but in fact the defence here of the 4th defendant
was that it had no notice of this lien, and the defence of the other defendants
was that the plaintiff company had abandoned its right to its vendor's charge.
The plaint had been signed by one S.D. Behal, as a director
of the plaintiff company. In March, 1929, the defence raised a further
contention that Behal was not competent to sign the plaint.
On this contention the District Judge found that any defect
in Behal's appointment as a director was cured by s. 86 of the Indian Companies
Act. He found also that the pro-note was in fact insufficiently stamped, and,
therefore, inadmissible in evidence. But he found that the plaintiff company
was entitled to its charge as an unpaid vendor and he concluded his judgment
with the following somewhat ambiguous order:—"There will be a decree in
favour of this plaintiffs with costs declaring that they have a vendor's lien over
the property in suit for sum of Rs. 2,35,000 which still remains due to
them."
The prayers in the plaint had been for a decree for—
(i) Rs. 2,35,000;
(ii) in default of payment, the sale of
the Refinery;
(iii) for a
personal decree against defendants Nos. 1, 2, 3 and 5 for any balance left
after crediting the sale proceeds of the Refinery.
It is not, I think, altogether surprising that the parties
are not quite sure what the decree means. They have taken precautions to
safeguard themselves. The defendants claim in their appeal that a personal
decree against them is time-barred and in another appeal, arising out of an
order for sale of the Refinery, which is now pending, they are claiming that in
fact the decree is merely declaratory and is not executable.
The plaintiff company, on the other hand, asks in its cross
objection, as amended, that if the decree is held to be merely declaratory it
should be amended, and claims that it is entitled to a personal decree against
the defendants (except No. 4).
Coming now to the questions arising on the appeal and the
cross objection I will deal with them seriatim.
1. It is claimed by the appellants that Behal was not duly
appointed as a director of the plaintiff company and had, therefore, no
authority to sign the plaint or to carry on the suit and that the suit was,
therefore, incompetent.
When this appeal first came before us this was argued as a
preliminary question. We were of opinion that the learned District Judge had
wrongly shut out cross-examination as to facts relevant to this question, and
for that reason, by our order of the 12th February, 1930, we remitted the case
to the District Court for further evidence and for findings on certain issues.
(Vide; [1931] Comp. Cas. 98).
The present District Judge has gone into the question very
thoroughly and, without committing myself to entire agreement with everything
he has said, I think that his conclusions are correct. There can, I think, be
no doubt that Behal's appointment as a director was from the outset irregular,
and that the fact that Lenton, who appointed him as his substitute,
subsequently ceased to be a director, added to the irregularity of Behal's
position. But I have no doubt that Behal was in fact appointed, and has ever
since continued to act, as a director. I see no reason to question his good
faith in so acting and in signing the plaint in this suit. He was, therefore, a
de facto director, and in my opinion, his act in signing the plaint is
validated by s. 86 of the Indian Companies Act.
It has, however, been urged for the appellants that under
the proviso to the section Behal's acts since they first raised the question of
his competence are not validated, and that therefore, his acts in the further
prosecution of the suit are invalid. In this connection Mr. Foucar, Advocate
for the plaintiff company, has stated that he is appearing not for Behal alone,
and under his sole instructions, but for the company itself. This strikes me as
hardly in itself a sufficient statement, but I do not think it necessary
further to consider it. In my view it cannot be said that the mere raising of a
doubt as to Behal's position is enough to "show" (in the words of the
proviso) that his appointment was invalid. The question having been raised in
proceedings before a Court, I do not think the appointment can be considered to
be shown to be invalid until the Court has come to a definite decision on the
subject. I do not regard the District Judge's finding on the remitted questions
as a decision in this sense; It is merely an expression of this opinion for the
assistance of this Court, which now has seizin of the case. The result is that
this judgment is the first definite decision as to the invalidity of the
appointment. The District Court, in its original judgment, did not decide the
question, the view taken by the Judge being that in view of s. 86 it was
immaterial whether the appointment was valid or not.
I hold, therefore, that this objection fails. (The
remaining portion of the judgment is not material for the purposes of this
report).
[1961] 31 COMP. CAS. 193 (
U. C. LAW, J.
INSOLVENCY NO. 4 OF 1949
JULY 8, 1960
LAW, J. - The hearing of this application under sections
397, 398, 399 and 402 of the Companies Act, 1956, has taken considerable time
and the arguments were only concluded on June 14, 1960, when I reserved my
judgment; but I directed the matter to appear on the list on June 16, 1960,
marked “to be mentioned” as I wanted certain information regarding the cash
balance in the current banking accounts of the company. It may be mentioned
here that prior to this the respondents had given an undertaking to court
(which still subsists) not to withdraw or deal with the compensation money
amounting to over Rs.35,00,000 and the accrued interest thereon lying invested
in short deposit accounts in different banks in the company’s account. On June
16, 1960, Mr. R.C. Deb appearing on behalf of P.N. Talukdar informed me that
the amount lying in current accounts of the company with serveral banks
amounted to over Rs.1,67,000. Besides, there was also some cash in hand. This
undoubtedly is a considerable amount and in as much as I had by then made up my
mind as to the order I was going to pass in this application, except that I had
not finally decided as to the form the order should take, I asked Mr.Deb
whether the respondents were prepared to give an undertaking not to withdraw
the amount lying in the current accounts of the company pending my judgment.
Mr.Deb, however, was not inclined to do so when it was submitted on behalf of
the applicants that I should in the circumstances, issue an injunction
restraining the respondents from withdrawing any money from the current accounts
of the company with different banks. Having regard to the fact that I had
already by then come to a conclusion, I thought it proper that no money
belonging to the company should any longer be left under the control of the
respondents and accordingly I issued an interim injunction restraining the
respondents from withdrawing or dealing with the moneys of the company lying in
its current accounts in different banks.
Now I proceed
to deal with this application. Hindustan Co-operative Insurance Society Ltd.
(hereinafter referred to as the company) is a public company incorporated under
the Companies Act and has its registered office at No. 4,
The main
objects for which the company was incorporated was to carry on all forms of
insurance and guarantee and indemnity business and all business and work in
connection therewith or incidental thereto as mentioned in the memorandum of
the company and to employ the share capital of the company in any trading,
commercial or financial business whatever for gain or other benefit in the
interest of the shareholders and policyholders. The company, however,
admittedly at all material times carried on life insurance business only.
The applicants
are shareholders of the company holding amongst themselves 1,295 shares and
they have obtained consent in writing (which is an annexure to their petition)
of other shareholders who hold 3,853 shares, to move this application on behalf
and for the benefit of all of them. The total number of shares in support of
this application is, therefore, 5,148 which is more than 1/10th of the issued
and subscribed share capital of the company as is required under section 399 of
the Companies Act. All calls and other sums due on these shares have also been
fully paid up.
Since this
petition was taken out the following persons have been added as parties to this
proceeding and are supporting the petition :
(2) Surya Kumar Basu, Mouses
Sasson Elias and Profulla Ranjan Roy being registered holders in all of 67
shares as detailed in the petition. They are also being supported by a number
of shareholders holding in the aggregate more than 1,200 shares of the said
company as mentioned in the said application;
(3) Jagannath Roy, registered holder of 750
shares; and
(4) S.M. Monoram Paul,
Nirmalabala Poddar, Kalyani Paul and Anupama Kundu each holding 50 shares
aggregating 200 shares.
The applicants
have applied under sections 397, 398, 402 and 403 of the Companies Act, 1956,
for the reliefs mentioned in the petition with notice to Central Government as
required.
It is
significant that none of the director-respondents have affirmed any affidavit
in support of their case except P.N. Talukdar whose affidavit, in my opinion,
is not worth the paper it is written on. M.M. Chakravartty has not appeared.
The other respondents have appeared through counsel. The main affidavit in
opposition is by a person called Bibhuti Bhusan Roy who is not stated to be a
principal office of the company. In paragraph 23 of his affidavit is stated
when and how he came to join the company. Towards the end of the paragraph is
stated that after he retired from the Life Insurance Corporation in October,
1956, he again joint the company in July,1957.
I must at once
say, that if there be a case where the remedies under sections 397, 398 and 402
of the companies Act should be justly available it is before me now. As I
relate the facts and the circumstances of this case it would be clearly
manifest that not only there has been oppression of the minority shareholders
of the company but also the affairs of the company have been conducted in an
oppressive manner and further that the affairs of the company have also been conducted
in a manner prejudicial to the interest of the company. It will be convenient
here to refer to the sections :
“ 397.
Application to Court for relief in cases of oppression. -
(1) Any members of a
company who complain that the affairs of the company are being conducted in a
manner oppressive to any member or members (including any one or more of
themselves) may apply to the court for an order under this section, provided
such members have a right so to apply in virtue of section 399.
(2) If, on any application
under sub-section (1), the Court is of opinion-
(a) that the company’s
affairs are being conducted in a manner oppressive to any member or members;
and
(b) that to wind up the company
would unfairly prejudice such member or members, but that otherwise the facts
would justify the making of a winding-up order on the ground that it was just
and equitable that the company should be wound up; the court may, with a view
to bringing to an end the matters complained of make such order as it thinks
fit.
398.
Application to Court for relief in cases of mismanagement -
(1) Any members of a company who complain -
(a) hat the affairs of the company are being
conducted in a manner prejudicial to the interests of the company; or
(b) that a material change
( not being a change brought about by, or in the interests of , any creditors
including debenture holders, or any class of shareholders of the company has
taken place in the management or control of the company, whether by an
alteration in its board of directors, or of its managing agent or secretaries
and treasurers, or in the constitution or control of the firm or body corporate
acting as its managing agent or secretaries and treasurers, or in the ownership
of the company’s shares, or if it has no share capital, in its membership or in
any other manner whatsoever, and that by reason of such change, it is likely
that the affairs of the company will be conducted in a manner prejudicial to the
interests of the company;
may apply to
the court for an order under this section, provided such members have a right
so to apply in virtue of section 399.
(2) If on any application
under sub-section (1), the Court is of opinion that the affairs of the company
are being conducted as aforesaid or that by reason of any material change as
aforesaid in the management or control of the company, it is likely that the
affairs of the company will be conducted as aforesaid, the court may, with a
view to bringing to an end or preventing the matters complained of or
apprehended, make such order as it thinks fit.”
On 21st
December, 1955, the 48th ordinary annual general meeting of the company was
held and the constitution of the board of directors was (1) Dr.N.N. Law, (2)
Kumar P.N. Roy (3)S.C. Law, (4) P.N. Talukdar, (5) Dr. M.M. Chakraborty, (6)
P.K. Bose, (7) J.N. Sen Gupta (8) B.K. Roy Choudhury (9) Sir Dhiren Mitter and
(10) B.C. Sinha. Of the above Nos. 1 to 5 were members-directors, Nos. 6 to 8
were policyholders-directors and Nos. 9 and 10 were directors appointed by the
Government. Of the members-directors it is admitted that Dr. M.M. Chakraborty
was disqualified for not holding the qualification shares thus reducing the
number of members-directors to four, namely, Dr. N.N. Law, Kumar P.N. Roy,
S.C.Law and P.N. Talukdar.
On January
19,1956 the Life Insurance (Emergency Provisions) Ordinance of 1956 came into
force and since its promulgation it is admitted that the directors appointed by
the policyholders and the Government became functus officio.
Under section
3, sub-section (1), of the said Ordinance the management of the controlled
business of the company (which was its only business) vested in the Central
Government on and from the “appointed day”, namely, January 19,1956, and the
persons in charge of the management of such business immediately before the
“appointed day” took charge of the management of the business for and on behalf
of the Central Government.
Under section
7, sub-section (2), of the Ordinance it was provided that “the compensation
payable under section 6 shall be distributed among the persons entitled thereto
by the Central Government in such manner as may be prescribed by rules made in
that behalf :
Provided that
in the case of an insurer who is a company the Central Government shall have
due regard to the wishes of the members expressed by them at any general
meeting convened for the purpose.”
Pursuant to
the powers vested in it by section 4 of the Ordinance, the Central Government soon
thereafter appointed a custodian who took over the management of the controlled
business and thereupon all persons in charge of the management of the
controlled business of the company ceased to be in charge of such management.
On March 21,
1956 the Life Insurance (Emergency Provisions) Act of 1956 was passed.
On July 1,1956
the Life Insurance Corporation Act of 1956 came into force and under the said
Act the Life Insurance Corporation of
Section 16 of
the said Act provides that where the controlled business of an insurer has been
transferred to and vested in the Corporation under this Act, compensation shall
be given by the Corporation to that insurer in accordance with the principles
contained in the First Schedule.
Section 39 of
the act provides :
“Special
provisions for winding up of certain insurers. - Where any insurer being a
company (other than a composite insurer) whose controlled business has been
transferred to and vested in the Corporation under this Act has in accordance
with the provisions of this Act collected and distributed any moneys paid to
him by the Corporation by way of compensation or otherwise and has also
complied with any direction given to him by the Corporation for the purpose of
securing that the ownership of any property or any right is effectively
transferred to the corporation, the Central Government may on application being
made to it in this behalf by such insurer, grant a certificate to the insurer
that there is no reason for the continued existence of the insurer and where
such a certificate has been granted shall cause the certificate to the
published in the Official Gazette and upon the publication thereof the insurer
shall be dissolved.”
On November
1,1957, the Life Insurance Corporation paid to the company a compensation
amounting to Rs. 33,09,855 and a further compensation amounting to Rs. 2,30,553
was paid by the Corporation to the company on January 7,1958.
The
compensation money has not yet been distributed by the company to its
shareholders who are entitled thereto and is being retained by the respondents.
Besides the
above two sums the corporation has also paid a sum of Rs. 61,613 to the company
for loss of management of its controlled business on December 7,1957.
I shall go
back for a moment to January 19,1956, “the appointed day”, when the management
of the controlled business of the company vested in the Central Government and
give in broad outline the course of events which led to the petition.
It appears
that since January 19, 1956 the directors of the company did not call any
general meeting of the company nor did they make any effort or gesture to place
before the shareholders the balance-sheet of the year ending December 31,1955.
As a matter of fact that the shareholders of the company were not thought of by
the directors at all and were kept completely in the dark as to what was being
done with regard to the company’s affairs. It cannot be said that the directors
were not cognizant of their obligations or duties under the law, because it
appears that the chairman of the company Dr. N.N. Law for the first time on
April 5,1956, wrote to the custodian as follows :
“Dear Sir,
With a view to
enabling the directors of H.C.I.S. Ltd., to discharge their duties to the
shareholders I intend to hold a board meeting inter alia for drawing up the
balance-sheet of the society for the year ended December 31,1955 and for taking
action about matters of concern to the shareholders in the interest of the
latter.
A copy of the
notice calling the meeting at 96,
I shall be
glad if you issue instructions to the secretary and the chief accountant of the
society to be present at the meeting......”
To this letter
a reply was sent on behalf of the custodian by the solicitor to the Central
Government at
“The board of
directors have been legally advised that as the board have not ceased to exist
they are quite within their rights to confirm the proceedings of the previous board
meetings and the committee meetings and it is their responsibility to prepare
the balance-sheet for the year 1955 as contemplated under the Companies Act. It
is stated in the solicitor’s letter under reference that you have already
received instructions from the Central Government for the preparation of the
balance-sheet for the year ending 31st December, 1955, and that you are taking
necessary steps in that behalf . As this absolves the board from its
responsibility for the preparation of the said balance-sheet we are referring
this matter to the Government of India for confirmation.”
At the foot of
this letter it was stated that a copy was being forwarded to the Secretary,
Ministry of Finance, Department of Company Law Administration, for information
and with a request for advice as to the steps to be taken by the board in the
circumstances.
There is
nothing in the affidavits of the respondents, however, to show that any copy of
this letter was in fact sent as stated or as to whether any advice was received
from the Secretary, Ministry of Finance, Department of Company Law
Administration, in reply thereto.
Since the
board meeting of April 7,1956 several purported board meetings of the company
were held but it is curious that although the board knew about its duties under
the Companies Act regarding holding of general meetings and passing of the
balance-sheet for the year ending December 31,1955 this question was never
revived or even discussed until 1959, when only the balance-sheets for the
years ending 1956, 1957 and 1958 were considered.
It is now
contended on behalf of the respondents that “as the entire management of the
controlled business had vested in the Central Government on January 19,1956 by
virtue of the Life Insurance (Emergency Provisions) Ordinance, 1956, the
insurer was divested of its rights of management under provisions of both the
said Ordinance and the Life Insurance (Emergency Provisions) Act of 1956.The
board of directors ceased to manage or to have any right of management. All the
books of account and other papers and documents relating to the controlled
business were under the law made over to the custodian and the custodian in
fact took over every stitch of document on January 19, 1956. The result was
that the custodian replaced the directors of the company. Preparation of the
balance-sheet was one of the ordinary duties of the directors as part of the
management of the company’s affairs but as the directors no longer had any
power over the property, assets, staff, books and records it was physically
impossible for them to prepare the balance-sheet. Besides, the company had no
money, no staff or office and to call a meeting, expenses had to be incurred.
It was further contended that having regard to the provisions of the Life Insurance
(Emergency Provisions) ordinance, 1956, and the Life Insurance (Emergency
Provisions) Act (IX of 1956) the powers of the directors with reference to the
preparation, signing and placing of the balance sheet before the general
meeting ceased and still remain in that position because the balance-sheet
relates to the controlled business (that is the entire business of the company)
with reference to which the powers of the directors had been taken away.” That
in substances is the entire argument on behalf of the respondents on this
point.
I am unable to
accept this contention. Under section 3 of Ordinance No. 1 of 1956, only the
management of the controlled business of the company vested in the Central
Government. It is true that the controlled business was the only business of
the company at the time but the company as a separate legal entity remained as
before (and was asserted by the directors of the company also) with all its
rights and obligations and the directors remained still bound to call the annual
general meeting of the company in terms of section 166 of the Companies Act and
lay before the meeting the balance-sheet for the year ending 1955.
Article 132 of
the articles of association of the company provides “that the company shall at
the expiration of each year prepare with reference to that year a
balance-sheet, profit and loss account, revenue account or accounts..... in
compliance with the provisions of the Act and the Insurance Act. The directors
shall at the ordinary general meeting in each year lay before the company the
said balance-sheet, profit and loss account and revenue account make up to a
date not more than nine months before the meeting or such other date as
permissible in law. The balance-sheet profit and loss account, revenue account
and profit and loss appropriation account shall be audited by the auditors of
the company and the auditors’ report shall be attached thereto or......”
Article 133
provides that the directors shall make out and attach to every balance-sheet a
report with respect to the state of the company’s affairs, the amount if any,
which they recommend should be paid by way of dividend and the amount, if any,
which they propose to carry to the reserve or any other funds and as to the
state and conditions of the company.
Section 210 of
the Companies Act, 1956, provides that the board of directors shall lay before
the company at every annual general meeting a balance-sheet and a profit and
loss account for that period.
It appears
that the company did prepare a balance-sheet which was signed by the secretary
of the company and also audited by the company’s auditors except that it was so
prepared at the instance of the custodian to which the directors must be deemed
to have consented by their letter dated May 3,1956. This balance-sheet so
prepared by the custodian was duly filed with the Registrar and also made over
to the company and never objected to , but instead, was relied on by the
directors in the compensation case before the Tribunal. In my view there was nothing
to prevent the directors from placing the said balance-sheet before the board
of directors for approval and signature if they were so minded and, thereafter,
lay it before the annual general meeting of the company as required under
section 210 of the Companies Act, 1956. By not doing that the directors
deprived the shareholders of their right to scrutinies the accounts.
It is no
answer to say that as all the books of account and other papers and documents
were under the law made over to the custodian and as there were no fund, no
staff and no office it was not possible to call a general meeting. Under
Ordinance No. 1 of 1956, the documents to be delivered were enumerated in
section 3, sub-section (6) thereof, and all of them appertained to the controlled
business. The share register and other documents which did not apparition to
the controlled business and which were necessary for the purpose of calling a
meeting of the shareholders were not required under Ordinance No. 1 of 1956 to
be delivered to the Central Government. mr. Advocate-General on behalf of the
company submitted that making over by the directors of the share register and
other documents not appertaining to the controlled business and not required
under the Ordinance of 1956 to the Central Government, at best, can be held to
be a bona fide mistake on the part of the directors and cannot amount to
oppression or mismanagement. I cannot accept this contention that it was a bona
fide mistake of the directors because of their subsequent conduct in the
affairs of the company as reflected in various resolutions passed by them. I
have already referred to the minutes of the board meeting held on April 7,1956,
when the consideration of the steps to be taken for preparation of
balance-sheet for the year ending 1955 was postponed. The next board meeting
was held on July 9,1956 when P.N. Talukdar was appointed representative of the
company to attend the conference in
Before I
relate what happened thereafter it would be convenient here to set out the
following articles from the articles of association of the company.
Article 102 -
At the ordinary general meeting of the company to be held every year one-third
of the members’ directors for the time being or if their number is not three or
multiple of three then the number nearest to one-third shall retire from
office.
Article 103 -
The members’ directors to retire in every year shall be those (other than
special director or managing director) who have been longest in office since
their last election, but as between persons who became directors on the same
day those to retire shall (unless they otherwise agree among themselves) be
determined by lot. A retiring members’ director shall retain office till the
dissolution of the general meeting.
Article 104. -
A retiring members’ directors shall be eligible for re- election.
Article 110(i)
_ The directors may meet together for the dispatch of business, adjourn or
otherwise regulate their meeting and proceedings as they deem fit and may
determine the quorum necessary for the transaction of business. Until otherwise
determined, three members’ directors shall from a quorum.
It may be
recalled that after the 48th ordinary general meeting Only Dr. N.N. Law, S.C.
Law, Kumar P.N. Roy and P.N. Talukdar remained as members’ directors, Mr. M.M.
Chakraborty having been disqualified for not holding the qualification shares.
Of the above
four S.C. Law was longest in office since his last election and was, therefore,
due to retire at the 49th ordinary general annual meeting to be held towards
the end of 1956. Thus for the year 1957 the directors would be Dr. N.N. Law,
Kumar P.N. Roy and P.N. Talukdar. At the 50th ordinary general annual meeting
to be held towards the end of 1957, one of either N.N. Law or P.N. Talukdar
would be due to retire they being longer in office than Kumar P.N. Roy since
their last election. Therefore, for the year 1958 there would only the two
directors, namely, Kumar P.N. ROy and one of either N.N. Law or P.N. Talukdar.
Kumar P.N. Roy died on August 22,1958, and this was not denied at the hearing.
Therefore, at the 51st general meeting to be held towards the end of 1958 the
only remaining director left would be due to retire and thus there would be no
director in 1959.
My above
conclusion as to the number of directors for the years 1956, 1957 and 1958 is
founded on the rule laid down in the following cases : Krishnaprasad Jwaladutt
Pilani v. Colaba Land and Mills Co. Ltd., Morris v. Kanssen, In re Consolidated
Nickel Mines Ltd.; where it was held that a director who was due to retire by
rotation at the annual general meeting vacated his office at the latest on the
last date on which that annual general meeting could have been called as
required by section 166 of the Companies Act, 1956, and cannot continue in
office thereafter on the ground that the meeting has not in fact been called.
The
respondents’ case is that they are validly appointed directors and not they are
protected under section 290 of the Companies Act. Yet at the hearing the
learned counsel for the respondents sought protection under section 290 of the
Companies Act. In my opinion, on the facts and circumstances of this case, the
acts of the directors cannot be validated under section 290 of the Companies
Act. This is not a case where there was a defective appointment but one where
there was no appointment of them as directors at all.
The directors
were fully aware of their position and there is ample evidence on record for
that also. Section 290 is not applicable to the facts and circumstances of this
case.
Now I shall
return to the last board meeting of July 9,1956, to which I referred before and
as I continue to outline the facts it would be clear that not only that the
affairs of the company were being conducted in a manner oppressive to the
company and other members of the company but were also being conducted in a
manner prejudicial to the interest of the company. After July 9,1956 the board
held its next meeting on March 6,1957. It appears from the minutes of the
proceedings that there was no quorum because by then S.C. Law was no longer a
director and had not right to sit at the meeting, yet the remaining two
directors purported wrongfully to conduct the affairs of the company. Kumar
P.N. Roy who was then a director did not attend.
At the next
meeting held on March 18,1957, S.C. Law who was not a director again wrongfully
took part in the meeting. Here again there was no quorum present. Kumar P.N. Roy
did not attend the meeting. The minutes clearly show that the directors without
quorum were attempting to augment their number by co-opting J.N. Sen Gupta and
P.K. Bose as directors which was invalid in law. Further they appointed B.B.
Roy as secretary of the company at a monthly remuneration of Rs. 750 which
undoubtedly was invalid, wrongful and also prejudicial to the interest of the
company, in that expenses were being wrongfully incurred at the costs of the
company and its shareholders. It appears that no further board meeting was held
in 1957. Towards the end of 1957, either N.N. Law or P.N. Talukdar was due to
retire. Therefore, there would be only two directors in 1958, namely, Kumar
P.N. Roy and either of Dr. N.N. Law or P.N. Talukdar. On November 1,1957,
either N.N.Law or P.N. Talukdar. On November 1,1957, the company received Rs.
33,09,855 as compensation and on January 7,1958, a further compensation of
Rs.2,03,553 was received by the company as hereinbefore stated. After receipt
of these moneys the next board meeting was held on March 1,1958, when it
appears that P.K. Bose and S.C.Law who were not directors again took part in
the proceedings. At this point of time it is to be noted that either N.N. Law
or P.N. Talukdar had ceased to be a director as one of them had to retire at
the end of September,1957. This meeting was held without a quorum and several
resolutions were passed authorising opening of bank accounts of the company
with the Central Bank of India Ltd. and the PUnjab National Bank Ltd. with
power to them to honour the cheques, bills of exchange and promissory notes
drawn, accepted or made on behalf of the company by any two directors jointly
and to act on any instructions so given relating to the account whether the
same be overdrawn or not or relating to the account whether the same be
overdrawn or not or relating to the transactions of the company. This meeting
also sanctioned payment of Rs. 8,142 for legal expenses incurred in connection
with the hearing before the Tribunal. A further sum of Rs. 600 was also
sanctioned for purchase of the office furniture by the secretary, who was
authorised to appoint office staff at a total monthly remuneration of Rs. 750.
A further sum of Rs. 580 for travelling expenses and costs of stamps in connection
with the Tribunal case was also sanctioned and indeed it is strange that lastly
it was resolved “that the payment of directors’ fee outstanding from January
1956, and payment of the secretary’s outstanding from July 15,1957 be made.” It
is still more strange that up till then no attempt or even a gesture was made
to call a meeting of the shareholders or any attempt made to inform the members
of these material changes that were being made in the management or control of
the company by alteration of its board of directors. No returns were filed with
the Registrar of Assurances and the result was , the shareholders were left
completely in the dark with no information regarding the manner in which the
affairs of the company were being conducted, while these men who purported to
act as directors dealt with the company’s money in any fashion they liked and
to the prejudicial interest of the company. These acts of the respondents who
had the majority backing no doubt amounted to oppression by them of the minority
shareholders and also, I consider, oppression in the conduct of the affairs of
the company. These were to the detriment of both the company and its members.
After the last
board meeting to which I have referred a latter was addressed by the chairman
of the company to the Life Insurance Corporation on March 6,1958 expressing
surprise that the common seal and certain documents, a list whereof was
appended below, were not returned yet and demanded return of them at the
earliest. In the appended list it appears that for the first time the share
register and index of members were demanded back and curiously enough the
chairman also asked for copies of the balance-sheet up to 31st of August, 1956,
that is, up to the date previous to vesting of the assets of the company in the
Life Insurance Corporation. I have failed to appreciate the cause of surprise
because never before this, did the chairman or anybody on behalf of the company
demand the return of the share register from the corporation. On May 23,1958 the
Corporation offered to return the register of members and most of the other
documents demanded by the chairman, but no immediate effort was made by the
directors to take delivery of them. On June 6, 1958, the Divisional Manager of
the Life Insurance Corporation again wrote to the company to take delivery of
the documents but the company on frivolous excuse deferred taking delivery till
about August 18,1958. All these actions and inactions on the part of the
directors, in my opinion, clearly indicate that they did not want to hold any
general meeting and pass the balance-sheet for the year 1955 and this is
confirmed by the fact that even at the hearing it was contended that the
directors had no duty to have the balance-sheet for the year ending 1955 passed
at a general meeting.
During 1958,
two further board meetings were held and in neither of them it appears the
quorum was present but, instead, persons who were not directors were wrongfully
allowed to take part in the proceedings.
This brings us
to the end of 1958 when the last of the directors had retired by rotation. With
the close of the year 1958, the company thus did not have any directors at all.
Yet it appears that on January 21,1959, a board meeting was purported to have
been held and business transacted concerning the affairs of the company. At the
said meeting opening of the deposit account with the United Bank of India Ltd.
was sanctioned and it was resolved that the account would be operated by two of
the directors although none of them was director any more. Auditors were
appointed. Sir S.S.M. Faroqui was co-opted as additional director of the
company. The minutes record that a letter dated December 24,1958, from Regional
Director, Eastern Region, Company Law Administration, in connection with the
annual general meeting of the company was read out and noted. This letter of
December 24,1958, is a reply to the letter dated December 22,1958, written by
B.B. Roy as a secretary of the company. It is significant that no reference was
made or advice sought by the secretary in this letter about holding of general
meeting and passing of the balance- sheet of the year ending 1955, which the
company had received from the Life Insurance Corporation, nor was any reference
made or advice asked regarding the balance-sheet, made up to August 31,1956.
The Regional Director’s letter dated December 24,1958, is also silent about
these balance-sheets. It is not correct to say that no business was done by the
company in 1956, as was stated by the secretary in his letter dated December
22,1958, as the assets of the company only vested in the Life Insurance
Corporation on September 1,1956. Therefore whatever business was done by the
company up to August 31,1956, was the business of the company, the management
of which had merely vested in the Central Government. The directors of the
company were fully aware of it as is manifest from the fact that all balance
sheet up to August 31,1956, was demanded by the chairman of the company in his
letter dated March 6,1958, from the Life Insurance Corporation. Further the
letter of December 22,1958, did not mention that under article 102 of the
articles of association of the company one-third of the directors for the time
being must retire from office at the annual general meeting every year. So I
hold that whatever advice was received in the letter dated December 24,1958,
was of no consequence and no valid advice at all as the proper materials were
not placed before the Regional Director and as such it cannot be accepted or
relied upon for any purpose nor can it in any way protect the respondents as
contended on their behalf. I have expressed this view only on the assumption
that the Regional Director had authority to give advice without deciding the
question.
It appears
that on January 2,1959, some of the shareholders of the company (numbering
about 28) addressed a letter to the Minister of Finance, Government of India
complaining that since the last annual general meeting held on December 21,1955
no further general meeting had been held and that persons who were no longer
directors were still wrongfully functioning as such and that the compensation
money paid by the Life Insurance Corporation to the company had not been
distributed amongst the shareholders of the company who were entitled thereto
and further they were afraid that the so- called directors may fritter away the
funds and asked for action to be taken in the matter immediately. It seems,
soon after this letter to the Finance Minister, the so-called directors
suddenly woke up and became intensely active and set about obtaining opinion
from Mr. N.K. Petigara, a solicitor of
“Having regard
to the fact that the company cannot after coming into effect of the Life
Insurance Act, XXXI of 1956, accept life insurance business and issue policies,
resolved that the company do continue its corporate existence and carry on all
or any of the business authorised by its memorandum of association and in
particular to do guarantee and indemnity business as set out in sub-clause (a)
of clause 3 as also....... and the company hereby authorise its board of
directors to carry on and continue to carry on business as described in all or
any one or more of the aforesaid clauses as it in its opinion considers to be
in the interest of the company.”
This
resolution and the persistent conduct of the respondents in the affairs of the
company since January 19,1956 clearly establish that they never intended to
distribute the compensation money amongst the shareholders who are entitled
thereto but to hold it in their hands and at their disposal and benefit by the
strength of their majority or controlling voting power. This conduct of the
respondents was no doubt oppressive to the company and to the applicant’s minority
shareholdings in the company. Section 39 of the Life Insurance Corporation Act
clearly envisages distribution of the compensation money amongst the
shareholders of the (insurer) company whose controlled business has been
transferred to and vested in the Corporation. The directors of the company in
all fairness to the shareholders should have done so as the very substratum of
the company was gone. Section 39 also provides the procedure for dissolution of
the company after such distribution. But the directors did not choose to do so.
From their conduct thus described it is impossible to suppose that that was no
part of the deliberate policy of the directors.
The next
meeting of the so-called board was held on April 25,1959, when the
balance-sheets for years ending December 31,1956, December 31,1957 and December
31,1958 were approved and signed and the board recommended declaration of a
dividend for 1958 at 5 per cent. per annum free of income- tax. No reference
was made to the balance-sheet for the year ending 1955. At the meeting held on
July 22,1959, the date of the annual general meeting was fixed on the August
24, 1959, and by resolution No. 7 the notice of the annual general meeting to
be held on the August 24,1959 with explanatory statement as required by section
173 of the Companies Act, 1956, was approved and signed. It is important to
note here that in the printed consolidated balance-sheet item No. 7 of the
notice of the meeting, the resolution as set out, is somewhat different from
the resolution approved of at the meeting of January 21,1959, as it appears to
have been altered by adding at the end the words “and to utilise the
compensation money for the aforesaid purpose.” When this alteration was
resolved I have not been told nor is there any resolution before me authorising
addition of these words which had been added to the resolution set out in the
notice dated July 22,1959, except that the minutes of the meeting of July
22,1959, recorded that the notice was approved and signed.
These
so-called board meetings of 1959 were no doubt not valid meetings at all
because the persons who held the meetings were not directors nor could
constitute any valid board and thus the notice issued on July 22,1959 was not
valid also.
The next fact
I shall refer to is the consolidated balance-sheets for years ending 1956,1957
and 1958 prepared by the company which the so-called directors in control of
the affairs of the company intended to place before the annual general meeting
of the company fixed for August 24,1959, for adoption. These balance-sheets
obviously are not in accordance with law. Under section 210, sub-section (3)(B)
the balance-sheet must relate “ to the period beginning with the day
immediately after the period for which the account was last submitted and
ending with a day which shall not precede the day of the meeting by more than
nine months........” That has not been done here. The account which was last
submitted was for the year ending December 31,1954. Therefore, the
balance-sheet must commence from January 1,1955 to keep up continuity of the
account. Here the balance-sheet for year ending 1955 is deliberately left out.
Balance-sheet for 1956 as prepared does not give a true and fair view of the
state of affairs of the company during the year 1955, and thereafter from
January 1, to August 31, 1956. It was only on September 1,1956 that the
controlled business of the company vested in the Corporation. The conduct of
the affairs of the company remained with the company as before. The
shareholders were entitled to be apprised of the affairs of the company for the
year 1955 and also for the period from January 1,1956 to August 31,1956. The
so-called directors in charge simply suppressed the said accounts from the
shareholders.
The
consolidated balance-sheets make no reference to 1955 accounts. The report of
the board of directors at page 18 of the printed consolidated balance-sheets
for years 1956,1957 and 1958 (being annexure “H” to Bighuti Bhusan Roy’s
affidavit dated August 11,1959), is not at all a fair and honest report. At
page 18 under the heading Nationalisation of Life Insurance it has been stated
“accordingly since January 19,1956, the directors of the company had no access
to any books and records, documents and funds of the company and it was not
possible for them to discharge their duties as entrusted to them under the
Companies Act or under the articles of association of the company.” From these
words it would be reasonable to infer that the directors knew that they had a
duty to perform but could not do so for reasons stated (which I have not
accepted). But the report does not mention that the balance-sheet for the year
1955 as prepared by the custodian was forwarded to the company and that the
company relied on that before the Tribunal in the compensation case. Nor does
it say as to why the said balance sheet of 1955 was not being placed before
them for adoption. In my opinion it was a part of the policy of these directors
not to apprise the shareholders of the affairs of the company during year
ending 1955, and thereafter the period from January 1,1956, to August 31,1956.
I cannot see any other reason to justify this conduct of these directors who
had the control of the affairs of the company by their superior voting power.
This superior
voting power it may be mentioned here is entirely due to 2,920 shares belonging
to N.R. Sarkar Trust, voting rights whereof is in Dr.N.N. Law who has, however,
no beneficial interest in the shares. The beneficial interest lies in some of
the applicants. It is by use of these votes against persons who have the
beneficial interest therein that these directors have maintained control over
the affairs of the company. There is ample evidence on record, namely, the
affidavits of Bibhuti Bhusan Roy dated March 4,1960 and Santi Ranjan Sarkar
dated March 12,1960, to establish this fact. It is with these votes which gave
the directors their voting strength that they attempt now to force these
accounts for periods 1956,1957 and 1958 on the minority shareholders and change
the principal object of the company. The consolidated balance-sheets further
show that the company did no business since January 19,1956 and yet a sum of
well over Rs. 30,000 was wrongly spent or withdrawn as directors’ fees and
other expenses during the years 1957 and 1958 by these so-called directors out
of the funds of the company. The original minute book which was produced at the
hearing showed that Rs. 16,000 was sanctioned to be spent subsequently in law
charges and it further appears, and it was not denied at the hearing, that a
sum of over Rs. 8,50,000 out of the compensation money was kept uninvested for
well over ten months when it could earn at least 4 per cent. interest in short
deposit account like the rest of the compensation money.
As a result
whereof no doubt the company and the shareholders suffered considerable loss.
The minority shareholders were absolutely powerless to do anything in the
matter against these so-called directors with their majority voting strength
and was thus oppressed by them.
Soon after
this meeting of July 22,1959, this application under sections 397, 398 and 402
of the Companies Act, 1956 was filed by the applicants on August 3,1959 for
reliefs mentioned in the petition.
The learned
counsel for the applicants contended not only that the company’s affairs are
being conducted in a manner oppressive to the members (including themselves)
but also that the affairs of the company are being conducted in a manner
prejudicial to the interest of the company. Further that to wind up the company
would unfairly prejudice them, but otherwise the facts would justify the making
of a winding-up order on just and equitable rule; and also that a material
change has taken place in the management or control of the company by alteration
in its board of directors and thus it is a fit and proper case where the powers
given under section 397,398 and 402 of the Companies Act should be justly
invoked and relief granted to the petitioners. It was further contended that by
reason of section 7 of the Life Insurance Corporation Act of 1956 the entire
assets of the “controlled business” of the company vested in the Corporation
and the “controlled business” was the principal and the only business of the
company; and as by reason of the Life Insurance Corporation Act, 1956 it could
not longer carry on life insurance business and issue policies the very
substratum of the company was gone and that fact alone would justify winding up
of the company on the just and equitable rule thus satisfying the last condition
in section 397 of the Companies Act. The learned counsel relied on In re Haven
Gold Mining Co. and In re German Date Coffee Co. I accept this contention. Mr.
R.C. Deb on behalf of his client, however, contended that the present case is
distinguishable from the facts of the cases cited above and drew my attention
to the object clause in the memorandum of association of the company which runs
as follows :
“(a) To carry
on all forms of insurance and guarantee and indemnity business and all business
and work connected therewith...”
He argued that
insurance, guarantee and indemnity are to be treated as separate businesses
authorised under the object clause of the memorandum of association. I am not
inclined to accept this contention which in my opinion has no merit. The
language is “all forms of insurance and guarantee and indemnity business.” They
must be taken together. The word “business” is in singular. The inclusion of
the word “insurance” in the name of the company is in this respect significant
also and is a pointer to its principal object. Taking the memorandum and the
articles of association together as a whole, in my opinion the principal object
of the company was insurance and all other were ancillary to it. The principal
business is the business which is actually carried on by the company. Here the
only business carried on by the company was life insurance business which was
therefore the principal business of the company. So I hold that the principal
business having gone, the very substratum of the company also disappeared and
that alone would justify winding up of the company under the just and equitable
rule. Apart from this aspect of the matter there is ample evidence on record
which will also justify winding up of the company on the just and equitable
principle following the rule laid down in Lock v. John Blackwood. If the
applicants at the date of this application lodged a petition for winding up of
the company compulsorily it would undoubtedly have been granted and it can
hardly be denied that such an order would unfairly prejudice the applicants. SO
they now seek to invoke the new remedy given by sections 397, 398 and 402 of
the Companies Act, 1956.
Upon the facts
as I have outlined them, I consider that the acts complained of all refer to
the continuous conduct of the affairs of the company and it cannot be denied
that the affairs of the company have been conducted in a manner which can
justly be described as oppressive to the minority shareholders. I further
consider that the affairs of the company have also been conducted in a manner
prejudicial to the interest of the company and, lastly, I find that a material
change has taken place in the management or control of the company by
alteration in its board of directors (which in fact is now non-existent) with
the result that the affairs of the company are being conducted in a manner
prejudicial to the interest of the company.
VISCOUNT
SIMONDS in the House of Lords case of Meyer v. Scottish Co- operative Wholesale
Society Ltd. adopted the meaning of oppression as “burdensome, harsh and
wrongful” taking the dictionary meaning of the word. Adopting the same meaning
it appears to me that the directors-in control who had the majority voting
power exercised their authority wrongfully in a manner burdensome, harsh and
wrongful. All the so-called board meetings held between 1957 and 1959 and the
resolutions passed were no doubt oppressive and also prejudicial to the
interest of the company. By the resolutions passed at the meetings held on
January 21,1959 and July 22,1959 the so-called directors who had the majority
voting power attempted to force the applicants and the minority shareholders to
invest their money in a different kind of business against their will. The
applicants and its supporters who constitute the minority shareholders invested
their money in a life insurance business with all its safeguard and statutory
protection. But they were being forced to invest where there would be no such
protection or safeguard. Further, it must not be overlooked that the shares of
the company are only partly paid to the extent of Rs. 25 per share value of Rs.
100 each and in case the company is to continue and carry on a different
business as the so-called directors are attempting to do with their superior
voting power the applicants may in future be forced to pay the un called
balance of Rs. 75 per share in a business which they do not wish to carry on
and that would undoubtedly be “burdensome, harsh and wrongful” to the
applicants.
By adopting
such attitude the directors-respondent is failed to behave with scrupulous
fairness to the minority shareholders as was inclubent on them as holding a
position of trust. They further failed to maintain the utmost good faith
between themselves and the minority shareholders by their unlawful conduct of
the affairs of the company so that the minority shareholders were driven to
apply under these sections for an order inter alia for appointment of a special
officer and also for an order that the company do purchase to purchase the
shares including theirs at a valuation. Such a remedy is permissible under
section 402 of the Companies Act, 1956. I have no doubt that this is a case
where the powers under sections 397, 398 and 402 of the companies Act should be
justly invoked.
It is said
that the object of section 397 is to save the company so that it may be allowed
to operate instead of being wound up. It may be that there is such a suggestion
in the words of section 397, but it would be wrong to infer therefrom that the
remedy under section 397 is limited to cases where the company is still in
active business. The object of the remedy is to bring to an end the matters
complained of, that is, “ oppression”, and this can be done even though the
business of the company has been brought to a standstill. The same reasoning
apply also to cases falling under section 398. I have no hesitation in holding
that the facts and circumstances of this case have fully established that the
relief under this section should be justly available to the applicants.
In the
circumstances, I make the following order :
(1) Sir
Dhirendra Nath Mitter, failing Mr. A. B. Gupta, the chartered accountant, is
appointed special officer of the company at a remuneration of 1,000 per month
inclusive of all his travelling and other incidental expenses. He is directed
forthwith to take over the management and affairs of the company including the
compensation money with all accrued interest thereon lying in the following
banks in the account of the company without any right to operate or withdraw
any amount therefrom and subject to this that he will have power to renew the
short deposit account for further periods from time to time.
(1) F.D.R. / 533385/30/60
dated 2nd February, 1960 for Rs. 8 lakhs of the Punjab National Bank Ltd., New
Market,
(2) S.D.R. 164396 and 45/627 dated 22nd
March, 1960, for Rs. 12 lakhs of the Central Bank of
(3) S.D.R. 164481 and 45/696 dated 4th April,
1960 for Rs. 2 lakhs of the Central Bank of India Ltd.,
(4) receipt No. 75510 re :
75339 dated 23rd March, 1960, for Rs. 15 lakhs and Account No. F. 126/17 for
Rs.15 lakhs of the United Bank of
(5) Amounts lying in the
current account of the Central Bank of India, 33 Netaji Subhas road and the
Punjab National Bank, New Market Branch, Calcutta.
The special
officer is not to withdraw or operate on any of the aforesaid banking accounts
and the short deposit accounts and the current accounts of the company without
further order of this court. The said accounts are to remain standing in the
name of the company as they now stand and the respective banks are not to allow
any withdrawal without further order from this court. Let the Registrar, O.S.
of this court immediately inform the respective banks of this entire order and
after such information is given make a report to the court that such
information has been sent and received by the banks.
(2) the special officer is
directed to take immediate possession of the registered office of the company
and also to take possession of all books of account, share registers and all
the other papers, documents, records, whatsoever belonging to the company now
lying with and under the control of the respondents. The respondents do
forthwith make over such possession to the special officer and also make over
the cash in their hands belonging to the company.
(3) Immediately upon
obtaining possession of the registered office of the company and the share
registers and other records mentioned above, the special officer is directed to
prepare a list of the names of the applicants and their supporters as mentioned
annexure “Auto the petition and including the added parties to this application
who have supported this application and ascertain the number of shares held by
each of them and recorded in the register of the company.
(4) The special officer is directed
thereafter to make a valuation of the shares in the following manner :
(a) Ascertain the total sum
available in respect of the compensation money paid by the Life Insurance
corporation to the company including the said sum paid as compensation for
vesting the management under the Life Insurance (emergency Provisions) Act, 1956.
(b) Ascertain the total sum
received and/or receivable for interest due on the said sum lying in short
deposit accounts in the name of the company in different banks mentioned up to
this date.
(c) Deduct income-tax payable on
the interest paid or payable and ascertain the net interest available.
(d) Add the net interest to the
compensation money and also the money paid as compensation for vesting the
management as aforesaid.
(e) Divide the total with the
total number of shares issued by the company , namely, 28,695 shares. The
quotation will be the value of one share.
I
consider this is the simplest way to value the shares on the facts and
circumstances of this case.
(5) The company, thorough
the special officer, is directed to purchase and pay for the shares standing in
the names of the applicants and their supporters whose names appear in annexure
“A” to the petition, including the added parties to this application as in
paragraph 3 above at the valuation so arrived at out of the funds of the
company. Such payment is to be made by the special officer upon obtaining
directions from the court and make consequent reduction of the share capital of
the company.
(6) After such purchase by
the company the special officer is directed to convene an extraordinary general
meeting of the remaining shareholders of the company to consider and if though
fit to pass either of the following resolutions with or without modifications :
(i) Resolved that the company do
distribute the compensation money received by the company from the Life
Insurance Corporation of
or
(ii) Resolved that the company do
carry on any other business authorised by its memorandum of association and
utilise the compensation money for the aforesaid objects.
Such meeting
is to be called in accordance with law by sending 21 days’ notice along with
the usual forms of proxy for general meting as per schedule 9 of the Companies
Act, 1956. Notices together with the forms of proxy be sent to each and every
shareholder at their respective address as recorded in the books of the
company. The said meeting will be presided over by the special officer and to
be held at such place as the special officer may think fit and proper. Such
meeting will be presided over by the special officer and to be held at such
place as the special officer may think fit and proper. Such meeting is also to
be held upon proper advertisement in the Calcutta Gazette, statesman, Amrita
Bazar Patrika, Ananda Bazar Patrika, Times of India,
(7) The respondents Nos. 1 to 4 are removed
from the board of directors of the company.
(8) Prasanta Kumar Bose and
Nawab K.G.M. Faroqui were not elected as directors and they are not to act or
represent themselves as such directors any more.
(9) B. B. Roy was not
validly appointed as the secretary of the company and he is not to act as such.
He is removed from the officer of the secretary.
(10) Let there be an
injunction restraining the respondents Nos. 1 to 4 from acting or representing
themselves as directors of the company and/or dealing with the assets of the
company including the compensation money, the accrued interest thereon and also
the money lying in the current account of the company. They are also restrained
by an injunction from operating on any of the banks mentioned above.
(11) The special officer upon
purchase of the shares as aforesaid is directed to submit a report to the court
for obtaining further directions.
(12) There will be liberty to the special
officer to apply and also to apply for funds.
(13) The special officer is
also to make a report to the court after holding the meeting as directed above
and apply for further orders.
(14) Costs of and incidental
to this application is to be paid by the respondents Nos. 1 to 3 to the
applicants. Costs of the Central Government will be paid out of the funds of
the company.
(15) Certified that this is a fit case of
engaging two counsels.
(16) All parties and the banks are to act on the
signed copy of this minute.
[1960]
30 COMP. CAS. 582 (
V.
P
C MALLICK, J.
SUIT
NO. 487 OF 1956
MARCH
3, 1958
P.C.MALLICK,
J. - This is a suit in which
he plaintiff seeks to establish his title to a bunch of 26,752 ordinary shares
in the defendant company. The company and one Ramapada Gupta in whose name the
shares are registered in the books of the Company have been impleaded as
defendants.
The Plaintiff
who was born in
At the
beginning the company used to deal with imported medicines. In 1939, the
plaintiff conceived the idea of manufacturing medicine and with that object the
plaintiff appointed Dr. Mukherjee a very able chemist and put him in charge of
the manufacturing side. Dr.Mukherjee was given full scope and every facility to
manufacture medicine. Dr. Mukherjee in his turn proved his worth.
Dr.Mukherjee's services to the company were RECOGNISED and he was made a
director of the company in July, 1940. In a formal resolution passed in a
meeting of the board of directors held on May, 4, 1943, the plaintiff as
managing director recorded that, the success achieved by the company was
chiefly due to the quality products prepared by Dr.Mukherjee. The phenomenal
success of the company will appear from the sale of its products which rose to
over Rs.50 lakhs from 1952 onward. Dr.Mukherjee's position in the company
steadily improved and while the plaintiff was the No.1 in the Company,
Dr.Mukherjee became No.2. Dr.Mukherjee's remuneration was increased with the
passage of time and when the dispute started Dr.Mukherjee was getting as his
remuneration 1 per cent of the total sale, i.e. more than Rs.55,000 per annum.
This was much more than what the plaintiff was getting as Managing Director. In
1948, Dr.Neogy was appointed as a propaganda officer on a salary of Rs.500 per
month. Shortly, there after Dr.Neogy was made a director.
In January,
1949, Dr.Mukherjee went to
It appears
that feelings between the parties were strained in the middle of 1954.
Dr.Mukherjee stated in his evidence that he apprehended that he would be thrown
out from the company. The plaintiff denied that he had any such intention . Be
that as it may , whatever the motive of Dr.Mukherjee might have been i.e. to
prevent the plaintiff from ousting him as a measure of self protection or to
himself get supreme control of the company by ousting the plaintiff
Dr.Mukherjee acted and acted with vigour. There was a general meeting of the
company on the morning of September, 10, 1954, to increase the share capital.
The meeting was held in which the plaintiff, Dr.Mukherjee, and Dr.Neogy amongst
others were present. The plaintiff wanted the increase of share capital by the
issue of preference shares only because this carried no voting right.
Dr.Mukherjee's party wanted the increase of share capital by the issue of
ordinary shares. According to the plaintiff, the meeting ended without passing
any resolution, while according to Dr.Mukherjee the meeting unanimously agreed
to increase the share capital by the issue of 60,000 additional ordinary
shares. There is a minute of the company to this effect. The plaintiff contends
that it is a false minute. Be that as it may, it is clear that there was open
hostility between the plaintiff one one side and Dr.Mukherjee, with whom
Dr.Neogy sided, on the other. Events began to move rapidly thereafter. A
meeting of the board of directors was alleged to have been held at 4.00 P.M. in
the office in which Dr.Mukherjee and Neogy were alleged to have been present.
No notice of the meeting was given to the plaintiff because Dr.Mukherjee was
proceeding on the basis that the plaintiff had ipso facto vacated his office as
director. In this meeting a number of important resolutions were passed.
Services of seven employees who, apparently , were loyal to the plaintiff were
terminated. The plaintiff was deprived of the power of operating on company's
account. Messrs and Biswas were appointed solicitor of the company and lastly
the company was declared to have a lien on all the shares registered in the
name of the plaintiff for the sum of Rs.4,00,887-14-8 alleged to be a debt due
by the plaintiff to the company on the said date. At or about the same time,
all the plaintiff's men including his son-in-law were physically ejected from
the factory premises and the plaintiff himself was refused access either in the
factory or in the office. It is clear that Dr.Mukherjee acted with vigour and
succeeded in his coup and got complete possession of the company,. Mr.Subimal
Roy learned counsel appearing for the plaintiff characterised this coup as the
first stage in the conspiracy to deprive the plaintiff of his interest in the
company.
To continue
the narrative. On September, 16, 1954, the plaintiff intimated Drs. Mukherjee
and Neogy that they had ceased to be directors as no meeting of the company was
held since December, 7, 1950. On September, 18, 1954, the plaintiff's then
solicitors Messrs. Sandersons and Morgans wrote to Drs. Mukherjee and Neogy to
the same effect. On September, 23, the directors resolved to enforce the lien
against the plaintiff's shares and Dr.Mukherjee was authorised to serve notice
of demand for payment of the debt and also to serve notice of sale in default
of payment. This notice was served on the plaintiff on the following day. This
notice was replied to by the plaintiff's then solicitors on the 27th in which
the indebtedness was denied , the right to sell the shares was disputed and the
company was warned that any action taken on the basis of this notice would be
illegal and would be contested. In October, 1954, the parties came to Court.
The Plaintiff
filed a suit seeking a number of declarations, [1] to protect his right to act
as managing director,[2] challenging the validity of the issue of new shares
and allotment thereof and a number of other reliefs. In this Suit Dr.Mukherjee
, Dr.Neogy and the company were impleaded as defendants. This is Suit No.3112
of 1954. On November, 15, 1954, another suit was filed by Mrs.Judah and
Nagendra Nath Ghose on behalf of all the shareholders against Dr.Mukherjee,
Dr.Neogy and Debendranath Bhattacharji in their capacity as representative of
the newly issued shares for a declaration that the plaintiff was still the
managing director, for injunction restraining the defendants from interfering
with the management of the company and for other reliefs. This is Suit No.3117
of 1954. There were some interlocutory proceedings in these suits. In Suit
No.3117 of 1954 on the application of the plaintiff a receiver was appointed by
P.B.MUKHERJEA J. against which an appeal was preferred. This is Appeal No.56 of
1955. An injunction was issued on the plaintiff's application in Suit No.3112
of 1954 restraining the sale of the same shares, as in the instant Suit.
Ultimately the suits were settled and withdrawn, and on January, 24, 1956, the
receiver made over posession of the Company to Dr.Mukherjee pursuant to the
order of the
The suit is
instituted for a declaration that the plaintiff is the holder of 26,752
ordinary shares and as such is alone entitled to the rights and privileges
attached to the shares, that the transfer of shares in the name of the
defendant Ramapada Gupta is illegal, void and inoperative , that the defendant
Ramapada Gupta be restrained by an injunction from exercising any right or
privilege attached to these shares, that the share register be rectified and
other reliefs, such as damages against Ramapada Gupta. It must be admitted that
the drafting of the plaint is not very happy. There are, however, averments
which do disclose a sufficient cause of action against both the defendants. The
plaint does contain, inter alia , the following averments. No general meeting
having been held for years, there were no properly appointed directors from
January, 1951, onwards and that Drs. Mukherjee and Neogy had discovered before
September, 23, 1954, that they had vacated their office and were not entitled
to act as directors and that they nevertheless persisted in acting as
directors, that the general meetings that were held after 1950 were al illegal;
that no debt was due by the plaintiff as alleged or at all for which the
company can claim any lien and that in any event it was was not an ascertained
amount or presently payable. The sale was purported to be held by
Dr.S.L.Mukherjee and Dr.B.P.Neogy who masqueraded themselves as the board of
directors, in other words, it is alleged that they acted as directors though
they were not in fact directors. The sale has been characterised as fraudulent
in consequence. There is a clear averment that the defendant Ramapada Gupta had
full knowledge of the illegal nature of the transaction and that the sale was
fictitious. These allegations, in my judgment , do amount to an averment of
absence of bona fides on the part of Ramapada Gupta in respect of his purchase
if there was a purchase at all.
The company in
its written statement disputed each of the allegations made in the plaint. It
is pleaded that, the various meetings of the company were properly held, that
Dr.Mukherjee and Dr.Neogy were properly appointed as directors and were
entitled to act as such, that the plaintiff was liable to pay to the company
the sum referred to in the letter dated September, 24,m 1954, that the same was
presently payable and that the company had a lien on the shares of the
plaintiff for the said sum, that the sale was properly effected in enforcement
of the lien. It is alleged that the plaintiff is not entitled to challenge
Ramapada's title as purchaser. It is denied that the sale was fraudulent or
fictitious as alleged in the plaint. In paragraph 22 the point is taken that
the suit is bad for non -joinder of necessary parties. In paragraph 23 it is
pleaded that the suit is barred by the provisions of Order II rule 2 and Order
XXIII rule 1[3] of the Code of Civil Procedure by reason of the withdrawal of
suits Nos.3112 and 3117 of 1954 without permission to institute a fresh suit.
The defendant Ramapada Gupta in his written statement made out substantially
the same defence. In paragraph 1 of the written statement he sets out the
informations he had when he purchased the shares. The only information he had
was that the shares belonged to the plaintiff, that the plaintiff was indebted
to the company for Rs.4,00,887-14-8 for which the company had a lien, that due
notice to enforce the lien was given, that the plaintiff instituted a suit
challenging his indebtedness to the company , that in the said suit, an
injunction was issued against Dr.Mukherjee and Dr.Neogy restraining them from
selling the shares in enforcement of the lien and that the suit was withdrawn
without any liberity to institute a fresh suit on the same subject matter. He
had further information that by an order of the court of the appeal the
receiver was directed to make over possession to a nominee of the board of
directors consisting of Dr.Mukherjee and Dr.Neogy and D.N.Bhattacharji and that
on January, 24, 1956, when Ramapada Gupta purchased the shares, no suit was
pending with respect to the shares and that the plaintiff had not paid off his
dues to the company. Fully relying on these information the defendant Ramapada
Gupta bona fide purchased the said shares at par.
On these
pleadings the following issues were settled :
" 1. Is
this suit barred by Order II, rule 2[3] and/or Order XXXIII, rule 1[3] of the
Code of Civil Procedure ?
2. Were any
annual general meetings of the company held on January, 6, 1955? Were the
elections of directors in the said meetings invalid as alleged in the plaint ?
3.(a) Were
there no directors or sufficient directors of the company as alleged in the
paragraph 14 of the plaint?
(b) Did five members
of the company convene an extraordinary general meeting as alleged in the said
paragraph? If so, was it duly convened?
(c) Was there
any extraordinary general meeting of the company as alleged in the said
paragraph? If so, was a new board of directors elected in the said meeting as
alleged in the said paragraph? Was such election lawful?
4.(a) Was
there any money due by the plaintiff to the defendant company for debts or
liabilities? If so, how much?
(b) How much
of the said amount is covered by the notice dated September, 24, 1954?
(c) For what
sum the company had a lien on the plaintiff's shares?
(d) Was the
defendant company entitled to sell the shares in enforcement of such lien?
5. Was the
sale of 26,752 ordinary shares of the company belonging to the plaintiff to the
defendant No.1 bad, illegal or void as alleged in paragraph 21 of the plaint?
6. Did
defendant No.1 connive and/or otherwise conspire with Dr.Mukherjee and Dr.Neogy
in effecting the sale of the said shares to defendant No.1 and in entering the
name of defendant No.1 in the share register of the company?
7. Is the
plaintiff entitled to rectification of the share register?
8. Did the
plaintiff continue to be the owner of the shares in suit after the date of
alleged sale ?
9. Did Dr.S.L.Mukherjee
or Dr.Neogy vacate their office of directors or cease to be directors of the
company as alleged in paragraph 9 read with paragraphs 7 and 8 of the plaint?
10. Is the
suit bad for non -joinder of Dr.S.L.Mukherjee and Dr.Neogy?
11. To what
relief or reliefs, if any, is the plaintiff entitled?
In support of
his case plaintiff tendered his own evidence. The defendant company tendered
the evidence of Dr.S.L.Mukherjee, its present managing director, Sri Vimal
Mitra, the accountant in 1954, and a number of other employees of the company
and one Dr.Das Gupta. Defendant Ramapada Gupta did not tendered his own
evidence nor call any witness to tender evidence on his behalf. Over and above
this oral evidence a large mass of documentary evidence has been tendered. To
prove the plaintiff's liability, ,entries in the ledger books of the company
for various years, a number of statements compiled by the officers of the
company, the balance sheets of the company with auditor's report, a large
number of vouchers and correspondence have been tendered. The proceedings in
the minute books of the general meetings and directors' meetings have also been
tendered by either side. As none of the documents were admitted and formal
proof was not dispensed with, considerable time was spent in formally proving
the entries in the vouchers and the minutes and records of the company.
Witnesses who came to prove these documents were elaborately cross examined .
Certain court proceedings and correspondence have also been tendered in evidence.
[His Lordship
considered the evidence and then held that the withdrawal of suits Nos.3112 and
3117 of 1954 did not operate as a bar to the institution of this suit ]
The shares in
suit were sold to liquidate the plaintiff's indebtedness to the defendant
company amounting to Rs.4,00,887-14-8. According to the defendant company this
total liability of the plaintiff consists of :
(a)
Plaintiffs
debit balance in the personal account amounting to rs.81,002.
(b)
Unrealised
debit balance –
(i)
Albert
David [G.B.] Ltd. amounting to Rs.57,918-3-9
(ii)
Albert
David [Pak.] Ltd. amounting to Rs.1,608-2-0 and
(iii)
Albert
David [Cey.] Ltd. amounting to Rs.54,654-4-6 and[c] Unusual discount given to
(i)
Albert
David [Cey.] Ltd. amounting to Rs.76,392-4-0 and
(ii)
Albert
David [Pak.] Ltd. amounting to Rs.1,29,313-0-1.
The plaintiff
is held liable for the unrealised debit balance against the three said foreign
companies,. He is also made liable for the unusual discount alleged to have
been given by the plaintiff the
Taking the
unrealised debit balance of the
It is argued
that this liability of the plaintiff as director arises because of the
provisions of section 86F of the Indian Companies Act and because the plaintiff
as the managing director was in the position of trustee. Section 86F of the
Companies Act reads as follows :
"Except
with the consent of the directors, a director of the company, or the firm of
which he is a partner or any partner of such firm of the private company of
which he is a member or director shall not enter into any contracts for the
sale, purchase or supply of goods and materials with the company , provided
that nothing herein contained shall affect any such contract or agreement for
such sale, purchase or supply entered into before the commencement of the
Indian Companies [Amendment] Act, 1936."
In order that
the section may apply, it must be proved that the plaintiff is a member or
director of Great Britain, Ceylon and Pakistan Companies, that these companies
are private companies, that contracts for sale, purchase or supply of goods
between the defendant company and the other companies were effected by the
plaintiff without the consent of the other directors of the defendant company.
If there is no proof of any one of the above facts, the section would not
apply. It is proved from the plaintiff admission contained in his letter to the
company dated July, 7, 1954, that he was interested as a Member and or director
of the three companies though there is no evidence as to when the plaintiff became
interested so as to enable the court to ascertain whether at the time of each
contract for sale or purchase the plaintiff was interested as such. There is no
evidence that the
Even assuming
that section 86F does apply to the case, I do not think the section imposes on
the offending director the liability of the private companies. It is argued by
Mr.Das that these contracts for sale of goods to the private companies must be
held to be illegal in the absence of previous consent of the directors and
hence there must be restitution of the benefit to the defendant company under
section 65 of the Indian Contract Act In the first place, the language of the
section does not indicate that such a contract effected by a director without
the consent of the other directors is illegal. The prohibition is against the
director and there is a penalty for any violation of the provisions of the
section. This does not mean that the contract is void . In the second place,
the party liable to restitution under section 65 of the Indian Contract Act is
the private company and even if the plaintiff is a member or director of the
private company he is in law different from the company. It is to be noted,
however, that the claim is made on the footing that the private companies are
liable on account of the balance of price under a contract for sale. The claim
was never made de hors the contract. It is interesting to note that the
defendant company, up to the date of the suit , never repudiated the contracts,
never called upon the private companies to return back the medicines sold by
itself and never offered to return back whatever money it received on account
of price. I am unable to hold that the plaintiff as the managing director of
the defendant company can be liable for the balance of price due and payable by
the foreign companies.
Mr. Das
further argued that even assuming that section 86F does not cover the case, the
plaintiff is, nevertheless. liable on general principles. The plaintiff as a
director was occupying a fiduciary position vis-a-vis the company. Occupying as
he did a fiduciary position the plaintiff as a director of the defendant
company could not in law enter into any dealings with the
The position
of the directors has been laid down in a number of authoritative decisions. In
"Directors
are persons selected to manage the affairs of the company for the benefit of
the shareholders. It is an office of trust, which if they undertake it is their
duty to perform fully and entirely."
This two fold
character of the directors has been well expressed by LORD SELBOURNE in Great
Eastern Railway Company v. Turner (2) (1872) 8
"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
observations of SIR GEORGE JESSEL in the case of In re Forest of Dean Coal
Mining Co. (3) (1878) IO
It is clear
that the directors are trustees in a very limited sense. They are liable as
trustees for breach of trust, if they misapplied the funds or committed breach
of bye-laws. their position differs considerably from ordinary trustees and it
is futile to apply the entire law of the trust and the whole body of rules
enunciated by the court of equity defining the rights and liabilities of the
trustees, to determine the rights and liabilities of a director. The conduct of
the directors is to be measured with reference to the character of the
undertaking which they are appointed to manage and conduct. In the case of an
ordinary commercial company, a director does not commit a breach of trust when
he, in the usual course of business, sells or purchases goods from another
company in which the director had interest. He is only liable for breach of
trust when he misapplies the fund and misappropriates any assets. In the
instant case, the plaintiff as managing director has neither misappropritated the
funds or the assets of the company nor he is alleged to have committed any
breach of bye-laws. How then can the plaintiff to be held liable ? I do not
understand the argument of Mr. Das that section 23 of the Indian Contract Act
applies to the case of a contract entered into by the managing director of a
public company with another private company in which the said director has
interest. Mr. Das has cited certain cases in which the court of equity refused
specific performance of contract. The fact that a contract is not enforced by a
court of equity on equitable grounds does not make the contract illegal within
section 23 of the Indian Contract Act. There may be a perfectly good contract,
but nevertheless a court of equity would not enforce it on equitable
consideration. There is no statute prohibiting contracts between two companies,
one private and another public, with some common shareholders and common
directors. The two companies in law are two different persons, even though they
have some common shareholders or directors. Section 86 F of the Companies Act
does not, in my judgement, contain any such prohibition. On the contrary, it
expressly states that a director, with the consent of the other directors, can
enter into a contract with a partnership or private company in which he is
partner or shareholder or director. The section does not seem to recognise any
public policy prohibiting a contract between a private and public company with
some common shareholders or directors. Not a single decision has been cited in
which any court, either in
For reasons
stated above, I hold that the plaintiff was not indebted to the defendant
company on account of its transactions with the Great Britain Company, the
I have now to
examine the liability of the plaintiff as representing the debit balance in the
plaintiff's personal accounts. This debt is proved by the entire in the
company's general ledger and control ledger of the personal account of the
plaintiff and by vouchers. I have held that it is not open to the plaintiff to
contend that the account books of the company up to October, 1953, are not
correct. His admission contained in the circular letter dated August 16, 1954,
is binding on him. On the basis of entries in the general ledger book, the
plaintiff's liability to the company as an October, 31, 1953, must be held to
be Rs. 57,797. Subsequent liability has to be strictly proved. I am not,
satisfied that the entries in the general ledger from November, I, 1953, to
September IO, 1954, were made before the plaintiff was ejected from office on
September 10, 1954. Nor am I satisfied with the entires made in the control
ledger. The probabilities are that these entries were made after the plaintiff
was ejected and made under the direction of Dr. S.L. Mukherjee, who was ruling
over the destinies of this company since then. Dr. Mukherjee was over-anxious
to build up as much liability of the plaintiff as possible. The entries in the
general ledger and control ledger cannot be taken as sufficient to make the
plaintiff liable. The other evidence is the vouchers. To the extent the
vouchers are signed by the plaintiff and such of the vouchers as have been
proved to represent payment made to the bank on account of the plaintiff's
relations or plaintiff's such relations as wife and daughter, they will
constitute the liability of the plaintiff. But control vouchers from which many
of the entire in the control ledger have been made represent money spent on
other accounts for which the plaintiff has been made liable. These payments
were made on other accounts and Bimal Mitra had no personal knowledge of it. They
must have been debited against the plaintiff personal account by Bimal Mitra
under instructions of the man controlling the company- most probably Dr.
Mukherjee or Dr. Negate. I would not hold the plaintiff's liable on these
entires based on these control ledger vouchers. Many of the other entries in
the control ledger were made by way of transfer of entries from the personal
account of other people to the plaintiff's account. The correctness of the
entires in the other accounts has not been satisfactorily proved.
For reasons
given above, I am unable to hold that on September 10, 1954, the plaintiff in
his personal account was indebted to the defendant company in the sum of Rs.
81,002. The plaintiff has been proved to have been liable on October 31, 1953, for
Rs. 57,797, but for the subsequent period the proof of liability is
insufficient. I believe, however, on the evidence on record that on September
10, 1954, the plaintiff was liable, but not to the extent of Rs. 81,002 as
claimed by the defendant company. It is not necessary for me to determine the
exact indebtedness of the plaintiff in this suit. To appreciate the arguments
advanced by the parties and to be considered later, it is necessary to decide
weather the plaintiff's indebtedness on September 10, 1954, was Rs.
4,00,887-14-6 or whether the plaintiff was at all indebted or if so, whether
the indebtedness was nominal. I hold, on the evidence before me, that the
plaintiff was not indebted to the extent of Rs. 4,00,887-14-6, but that the
plaintiff was indebted for a lower amount and that such amount, though less
than Rs. 81,002-0-4 can not be certainly characterized as nominal I believe
that the in debtness would amount to near about say Rs. 50,000 just to indicate
that the indebtedness was not nominal. I hold further, that on September, 10,
1954, the exact liability of the plaintiff was not ascertained, nor were the
people controlling the company since September 1954, anxious honestly to find
out the plaintiff's liability. Dr. Mukherjee and Dr. Negate, I am satisfied,
were anxious to cook up a liability of the plaintiff to the company as much as
possible, so as to give them a pretext to sell the entire ordinary shares of
the plaintiff. Dr. Mukherjee and Dr. Negate knew that so long as the plaintiff
had this large block of ordinary shares which carried the voting right, their
position in the company was extremely insecure.
The shares in
suit were sold in exercise of the power of sale given to the directors by the
articles of the company to enforce the lien. It has been argued that in the
instant case there was no power of sale in any event, the resolutions imposing
lien and enforcing the lien by sale were passed by men who were not directors
of the company. This leads us to consider the articles under which the sale
took place. The relevant articles are articles 16, 17, 18, and 19, and are set
out below :
" 16. The
company shall have a first and paramount lien and charge available at law and
in equity upon all shares ( whether fully paid or not 0 registered in the name
of any member either alone or jointly with any other persons for his debts,
liabilities and engagements whether solely or jointly with any other person to
or with the company whether the period for the payment, fulfilment or discharge
thereof shall have actually arrived or not and such lien shall extend to all
dividends from time to time declared in respect of such shares. But the
directors may at the any time declare any such share to be exempt, wholly or
partially, from the provisions of this article.
17. The
directors may sell the shares subject to any such lien at such time or times
and in such manner as they think fit, but no sale shall be made until such time
as the money in respect of which such lien exists or some part thereof are or is
presently payable or the liability or engagement in respect of which such lien
exists is liable to be presently fulfilled or discharged and until a demand and
notice in writing stating the amount due or specifying the liability or
engagement and demanding payment or fulfilment or discharge thereof and giving
notice of intention to sell in default shall have been served on such member or
the persons (if any) entitled by transmission to the shares and default in
payment, fulfilment or discharge shall have been made by him or them for seven
days after such notice.
18. The nett
proceeds of any such sale shall be applied in or towards satisfaction of the
amount due to the company or of the liability or engagement as the case may be
and the balance (if any) shall be paid to the member or the persons (if any)
entitled by transmission to the shares so sold.
19. Upon any
such sale as aforesaid the directors may enter the purchaser's name in the
register as holder of the shares and the purchaser shall not be bound to see to
the application of the purchase money nor shall his title to the shares be
affected by any irregularity or invalidity in the proceedings in reference to
the sale."
It is to be
noted that these are not compulsory articles, that is, the company law does not
require that every company must adopt these articles. The articles, therefore,
constitute nothing more and nothing less than an agreement arrived at between
the company and its shareholders. It has to be considered, therefore, what
power the parties intended the company should have to sell the shares in
enforcement of the lien or charge.
Article 16
provides that the company " shall have a first and paramount lien and
charge available at law and in equity upon all shares ... registered in the name
of any member." Article 17 provides that " the directors may sell the
shares subject to any such lien " and does not mention " any
charge." Mr. Chaudhuri contended that on construction of these two
articles it must be held though for the debts and liabilities to it the company
shall have under article 16 a lien at law and charge in equity, yet it is only
in those cases where the company has a lien at law that the directors were
authorised to sell under article 17. The directors have no authority to sell shares
with respect to which the company had no lien at law, but merely an equitable
charge. There would be lien only in those case where the company had the
share-scrips in its possession, that is, the word "lien" has been
used in the sense of possessory of share scrips with respect to the shares, the
scrips of which are not in possession of the company but of the members, there
would be equitable charge and shares subject to such equitable charge were not
intended by the parties to be sold by the company under article 17. The only
way in which such equitable charge could be enforced is by way of a regular
suit in a civil court.
It has been
argued, on the other hand, by the learned counsel for the defendants that the
word "lien" has a more comprehensive connotation. It not merely means
possessor lien but equitable charge as well and the word "lien" has
been used in the articles in the comprehensive sense. That the word
"lien" has a more comprehensive meaning to include "equitable charge"
as well cannot and indeed has not been disputed. ( See the cases of Everitt v.
Automatic Weighing Machine Co. (1) [1892] 3
The reason
given by the learned Additional Solicitor-General is that "shares are to
be regarded as the interest of the shareholders in the company,, measured for
the purpose of liability and dividend by a sum of money, but consisting of a
series of mutual covenants entered into by all the shareholders inter se.........
and made up of various rights and liabilities contained in the contract,
including the right to a certain sum of money." ( See Borland's Trustee v.
Steel Brothers and Co. Ltd. [1901] I. Ch. 279 Shares are different from share
scrips. Share scrips are not documents of title but only evidence of title. it
is the share register and not the share scrips which is the document of title.
(See Commissioners of Inland Revenue v.
There is
another reason why it appears to me that the parties intended that only in
those case in which the company had possession of the share scrips and having
possessory lien, that the shares could be sold by the company under article 17
and not in the other case in which the company had no possession of the share
scrips but only an equitable charge on the share. in selling the shares the
company will be under an obligation to make over to the purchaser the share
scrips. How can this be done if the share scrips are not in the possession of
the company ? The Companies Act provides for the issue of duplicate scrips only
in cases when the share scrips are lost.
It seems to me
that the company had no. power to sell the shares under article 17 in the
instant case,because the shares were only subject to equitable charge and the
share scrips were not in the possession of the company. Article 17 gives no
authority to the directors to sell shares which are subject to equitable charge
only and the only way to enforce the equitable charge was ny instituting a
suit.
Assuming ,
however, that the lien could be enforced by sale of shares, it has to be
considered whether in the instant case the shares could be sold in terms of
article 17 of the articles. In this case the resolutions declaring lien and to
sell the shares in enforcement of the lien were passed by two directors - Dr.
Mukherjee and Dr. Neogy. So also the resolution to sell the shares to the
defendant Ramapada was passed by the same Dr. Mukherjee and Dr. Neogy. It is
argued by Mr. Chaudhury that all steps to enforce the lien by sale must be held
by directors properly and lawfully appointed, and if at the material time Dr.,
Mukherjee and Dr. Neogy were not directors then there has been a non-compliance
with the articles and the sale must be held to be invalid.
The Companies
Act and the articles provide for the appointment of directors by election in
the general meetings and by co-option. Except the plaintiff, who is the ex
officio managing director, every other director must either be elected in
general meeting of the shareholders or appointed in a board meeting. Dr.
Mukherjee and Dr. Neogy purported to act, at all material times, as elected
directors. It is very strongly urged that there has been no proper meetings of
the company and no proper appointment of directors. Dr. Mukherjee and Dr. Neogy
were not directors of the company at all. They were mere unurpers. Such
usurpers had no authority under article 17 to pass resolutions declaring lien,
determining the debt due by the plaintiff to the company, to take any steps in
enforcement of the lien by sale of shares. All proceedings beginning from the
determination of indebtedness and ending with the sale are tainted with
illegality done by and at the instance of two usurpers who were not directors
of the company at all.
To appreciate
the point made by Mr. Chaudhuri it is necessary to consider the provisions of
the Companies Act regarding meetings of the company. Section 76 of the
Companies Act provides that " a general meeting shall be held within
eighteen months from the date of incorporation and, thereafter, once at least
in every calendar year and not more than fifteen months after the holding of
the last preceding general meeting ." In default, the manager or director,
who is a willful party to the default, shall be liable to a fine sub-section
(3) provides that in default, the court may, on the application of the member
of the company, call or direct the calling of a general meeting by the company.
Section 78 provides for the calling of extraordinary general meeting on the
requisition of members. Section 79(2) provides that the following provisions
shall have effect in so far as the articles of the company do not make other
provisions in that behalf namely :
" two or
more members holding not less than one-tenth of share capital..... may call a
meeting ." In the instant case, there is article 64 of the articles of
association which provides for the calling of such an extraordinary general
meeting by five shareholders, if there are no directors capable of acting or if
there be no director.
It is
contended by Mr. Chaudhuri that in the instant case no annual general meeting
has been held for three years after December 7, 1950, till April 6, 1953.
Therefore, the annual general meeting of 1953 was bad in law and the
re-election of all the directors, namely, Dr. S.L. Mukherjee, B.P. Neogy,
S.Shangloo and Dr. Tapas Bose, was bad in law. The annual general meeting was
purported to be held in violation of the express provisions of section 76 of
the Companies Act, not to speak of the illegalities in convening the meeting by
a board of directors, which in law, did not exist on that date. The direction
elected in the annual general meeting held on december 7, 1950, in law vacated
their office fifteen months after that date, within which the next annual
general meeting should have been held. Hence all the acts of these directors
including the act of convening the annual general meeting of 1953, holding the
meeting, re-electing directors without proper nomination as provided by the
articles are invalid. Again, assuming that these directors appointed by the
general meeting held on April 6, 1953, could act as such, they in their turn
continued to be directors for fifteen months, and if no general meeting is held
thereafter, they vacated their office on July 6, 1954. After that date, the
company had no directors entitled to act as such. Thereafter, these directors
whose office had expired, cannot act as the board of directors of the company.
Such a board cannot give any order for convening any meeting of the company,
recommend for re-election of directors whose office long expired and secure
their re-election as directors without proper nomination by members by the
articles. On these grounds, it was strongly urged by Mr. Chaudhuri that the
12th, 13th, 14th, and 15th annual general meetings held on December 30, 1954,
and adjourned and held on January 6, 1955, were illegal and the election of all
the directors in the said meeting, including that of Dr. Mukherjee and Dr.
Neogy, must be held to be illegal. It is not a case of mere defect in the
appointment, but a case of no appointment at all. It is urged that in any event
from July 6, 1954 to January 6, 1955, there were no directors of the company
entitled to function and it is during this period, that is in September, 1954,
that the first essential step to enforce the lien by sale was taken by certain
usurpers pretending themselves to be directors. It is again emphasised, that it
is not a case of defective appointment but a case of no appointment at all.
The learned
Advocate-general contended that even though the annual general meeting might
not have been held as required by section 76 of the Companies Act, the company
does not cease to exist. In law, the company still exists and functions. The
mere fact that no annual general meeting is held within the period prescribed
by section 76 of the Companies Act, is not even a ground for winding up of the
company. Sub-section (3) of section 76 enables the court to direct the calling
of an annual general meeting after the period and there is no period of
limitation it follows that the court has the power of convening the annual
general meeting of 1950 in 1953 and the court normally will pass such an order
on the application of a shareholder and will not penalise the company for the
delinquencies of the directors who ceased to hold office. If such a meeting is
held pursuant to an order of the court, such an annual general meeting has the
power, amongst others, to pass the account of the years long passed and to
appoint directors for years long over. It may appear somewhat paradoxical to
appoint for persons as directors retrospectively with respect to a period long
gone by. Nevertheless, there is no reason why it cannot be done under the
Companies Act. It is clear that the persons who could be appointed as directors
are persons who actually acted as such without any legal warrant during a
period long gone and the effect of appointment would be to ratify all acts done
by these so-called directors without authority; in other words to validate all
the acts done by these directors which otherwise would have been invalid. The
learned Advocate-General has pointed out that unless this contention is
accepted, all acts done after the expiry of the period when the meeting, was
required to be convened, that is, 15 months after the last meeting all acts and
transactions of the company would be illegal; and void and the position would
be intolerable. Surely this could not have been the intention of the
Legislature.
It is not
correct to say that once the period stated in section 76 of the Act is over, no
annual general meeting can be convened without the order of the court. Section
76(3) is an enabling section. But apart from it, there is no reason why the
requisite number of shareholders under section 78 or 79(2) would not be
entitled to convene an annual general meeting, which is overdue and which the
directors have defaulted in convening within the prescribed period. If certain
technicalities stand in the way, those technicalities should be brushed aside
and provided proper notice is given to all entitled to notice, the court should
uphold such a meeting and recognise as valid all acts done in that meeting,
including the appointment of directors and passing of the accounts, even though
the meeting is held without an order of the court. Even if the meeting was not
properly convened, it is nothing more than a mere irregularity and the
appointment of the directors more than a mere irregularity and the appointment
of the directors in such a meeting is nothing more than defective appointment.
Such acts of the directors must be held valid under section 86 of the Companies
Act, notwithstanding that this appointment is subsequently discovered to be
invalid because of the irregularity of the meeting in which the directors have
been appointed. In the submission of the learned Advocate-General, the law
recognises de facto director who is not a de jure director. Such de facto
director has all the powers of a de jure director and a sale of hares by such
de facto directors in exercise of the lien under the articles gives good title
to the purchaser. If the policy of law is that the company which does not hold
its annual general meeting in proper time would continue to exist and carry on
business and if there are people who, though not properly appointed directors,
nevertheless carried on the business of the company as directors the court
recognises them as de facto directors and upholds their acts as if they were
properly appointed directors.This is expressly provided for in section 86 of the
Indian Companies Act which reads as follows :
" 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."
The cases
cited may now be considered. In In re County Life Assurance Co. (1870) 5 Ch.
App. 288 the promoter of a life assurance company who was also named as
managing director in the articles, continued to carry on business in spite of
the fact that three nominated directors in the articles expressly prohibited
the managing director to carry on the business and themselves refused to act as
directors. The managing director thereupon proceeded to choose fresh directors
in place of those who declined to act. The company issued a number of policies
and the policies ex facie were in order and were consistent with the articles,
having been signed by three directors. The company was weaponed up and in the
winding up proceedings the question arose whether the policy was binding on the
company. The court held that it was binding.
GIFFARD L.J.,
held that an outsider was not expected to know the indoor management of the
company and could not be and was not aware that anything irregular had taken
place. The learned Lord Justice upheld the claim under the policy with the
following observation :
"The
company is bound by what takes place in the usual course of business in the
party where the party deals bona fide with persons who may be termed de facto
directors, and who might, so far as he could tell, have been directors de
jure."
It is to be
noticed that this case is one of defective or irregular appointment. The original
directors named in the articles having refused to act, the managing director
co-opted directors in their place. In the case of Mahony v. East Holyford
Mining Co. Ltd. {(1875 ) L. R. 7 H. L. Cas. 869. }, the official liquidator of
a company in liquidation sought to recover from the banker amount paid on
cheques drawn by the directors who were not directors properly appointed. In
this case also the court held that an outsider was not expected to know the
indoor management of a company so as to ascertain wheather the director who
signed the cheques in the usual way were properly appointed directors or not.
The Lord Chancellor in his speech observed as followed at page 888 :
" I have
no hesitation in advising your Lordships, in accordance with the opinion of the
learned judges who have the attended the hearing of this case and have advised
your Lordships, that you should now hold that there having been de facto
directors of the company, who were suffered and permitted by majority of those
who signed the articles of association to occupy the position of and act as a
directors, and the bankers having in the full belief that these persons were
directors, as they were represented to be, honored the cheques drawn by them,
the payment of these cheques is an answer to the action of the liquidator of
the company, and that the judgment in the action ought to be entered for the
defendant, the public officer of the bank, and the present appeal
allowed."
LORD
CHELMSFORD at page 892 makes the following observation :
" The first
finding of the jury is that no four of the seven persons who signed the
articles of association ever agreed to the appointment of directors, or
assented to Wadge, Hoare, or Mcnally acting as such. If it is now open to the
bankers to question this finding, it may be said, that although there was no
evidence of four of the persons who signed the articles of association formally
meeting and agreeing together to such appointment, yet there was ample proof
that not four of the seven merely, but all the seven, had assented to the three
persons named acting as directors."
LORD
HEATHERLEY at page 896 bases his opinion on two grounds : (i) that the 85th
clause in the articles of association, analogous to section 86 of our Act
covers any defect that might have been in the appointment. The second ground on
which LORD HEATHERLEY found in favour of the bank is the broad equitable
principle that of the two innocent persons to suffer loss, that party must
suffer who was bound to do, or avoid any act by which the loss has been
sustained. The learned Lord Justice held that the shareholders could have taken
steps to see that things were properly done, and the bank as an outside could
have no knowledge of the indoor management and its impropriety. At page 898
LORD HEATHERLEY makes the following observation :
" Now
whose business was it to see that that was all properly done ? It was the
business of the shareholders to see that it was done, and properly done, and if
they allowed this duty to be assumed by persons who had no title to it, in
their offfice at 12 Grafton Street, the place where the office of the company
was described in the prospectus as being - if the allowed persons who were not
entitled to do it to carry on all the business of the company there- to act as directors
and as secretary there ; especially if they allowed them to perform the most
important business of drawing cheques (for they must have known their own deed
which says that that can only be done by a draft of three directors, and they
must have known that money must be had for the purposes of the company), if
there is a fault on the one side or the other, it is on the side of those who
allowed all those transactions to take place, when they were not conducted by
persons legitimately appointed on the part of the company.
On the other
hand, on the part of the bankers, I see no possible mode by which they might
have pursued their inquiries in the manner contended for at the Bar without
requiring all the minute books of the company to be produced to them, and
without conducting a detailed investigation into all the transactions of the
company as to the appointment of directors and the like - a duty were not
called upon to perform and a duty which, if it was objected to, they could not
have insisted upon performing ."
LORD PENZANCE
found in favour of the bank by applying what is known as the rule in Royal
British Bank v. Turquand (1) (1856) 6 E. and B. 327. as the following
observation in page 902 indicates :
"My
Lords, the question is a very broad one whether a bank under such circumstances
having a written authority of a de facto secretary is bound, before is acts
upon that authority to ascertain whether he is the properly constituted
secretary of the company or not, and not only that, but whether any resolutions
of which he forwards a copy was properly passed by the directors. Now, my
Lords, the case of Royal British Bank v. Turquand (1) (1856) 6 E. and B. 327,
distinctly lays down the proposition that the bank is not bound to make any
such inquiry, but that it is justified in acting upon a letter such as the one
to which reference has been made provided that the transaction which appears
upon that letter is one which might legally have taken place and been legally
consummated under the articles of association. Upon this simple ground, my
Lords, it seems to me that your lordships would be perfectly justified in
directing the judgment in this case to be entered for the defendant ".
In the
penultimate paragraph of his speech the Law Lord considered the case to be a
case of defective appointment and the act of the directors not properly
appointed is validated by the 85th clause of the articles (same as section 86
of our Act).
In this case,
no doubt, they were nor properly appointed; they appear to have had either the
formal, or the informal assent of three out of the four reasons who would have
constituted the majority necessary tom make a proper appointment; but ,
nevertheless, although not properly appointed, they would seem to have their
acts validated under the 85th clause.
In the case of
York Tramways Co. Ltd. v. Willows (1) (1882) 8 Q.B.D. 685, the company
instituted a suit against a shareholder for the recovery of the share money. At
the date of the application for allotment of shares, there were two directors
and with respect to a third director, there was a letter of resignation which
was accepted in the same meeting of the board in which allotment of shares were
made to the defendant and the defendant was co-opted as a director in the
vacancy created. According to the articles the number of the board should not
be less then three. The articles provided that the board of directors shall
regulate their meeting and determine the quorum necessary for transaction of
business. There was an article like section 86 of the Indian Companies Act. The
defendant, after being elected director took part in the meetings wherein
shares were allotted to different applicants. The defendant joined the other
two directors in writing a letter to the bank manager as to what cheques were
to be signed and honoured.After doing all these acts, the defendant withdrew
his application for shares. The company instituted a suit to recover the share
money on the footing that the defendant was a shareholder and was liable for
the share money. It was held that the defendant was liable. LORD COLERIDGE C.J.
based his decision on three points - The directors were entitled under the
articles to act by a majority. " If there were three directors the two
acted as the majority of the board. " If there were the two directors
only, the two were acting in a casual vacancy . The board does not come to an
end because a casual vacancy occurs... until Fry's resignation was accepted the
board did act by a majority allot these shares to the defendant. These
considerations are sufficient to dispose of the case and to show that the
defendant must pay the amount of the call upon these shares ." It was also
held that the defendant subsequently accepted the allotment, that the case at
best was a case of defective appointment and that the defendant was completely
estopped from stating that he was not a shareholder. The other Lords Justices
(including BRETT C.J.) took the same view and decided mainly on estoppel. This
as noted before is also a case of defective appointment.
In the case of
Newhaven Local Board v. Newhaven School Board (1) (1885) 30 Ch. D. 350, the
court held that under the Public Health Act the board does not cease to exist
because of the lack of quorum occasioned by the resignation of members of the
board and that filling up of casual vacancies was "business" within
the meaning of Schedule I, rule 2, of the Act. At page 363 COTTON L. J.
observed :
" In my
opinion, therefore, as regards the validity of the acts done by the board, rule
9 cures the defect arising from the fact that the persons elected or selected
to fill up the vacancies were chosen by two persons who, not being a quorum,
were not competent to fill up the vacancies. Therefore, in my opinion, we
cannot consider what had been done by the board, although irregularity
constituted, as being ineffectual. "
LINDLEY
L>J. was of the same opinion. He observed at page 370 :
``I was very
much struck by the argument of Mr. cozens- Hardy, that the object of this rule
was to protect people dealing bona fide with the local board without notice of
irregularity. Of course it was intended to provide for such a case but the
question is whether it is confined to such cases. I do not think that it is;
appears to me to rendered the acts of a board valid notwithstanding any defect
in the election of any of its members. I think, therefore, that whatever
irregularity there was in the constitution of the board in May, 1884, this rule
would make the election of the three who were elected in 1885 perfectly valid.
It appears to me to extend not only to protect people dealing bona fide with
the board without knowledge of the disqualification, but also to protect the
rate payers, whose guardians and trustees the local board are. I therefore come
to the conclusion that fixing the building line was a proceeding which is
rendered valid by rule 9.''
The argument
of COZENS- HARDY referred to by LINDLEY L. J., is to be found in page 357 :
`` The cases
under the Companies Act, 1862, section 67, furnish an analogy; they shew that
an outsider who knows nothing of the irregularity is safe in dealing with a
board of directors however irregularity appointed but that the case is
different where the irregularly elected board seeks to impose a liability on
others, as,e.g., by forfeiting shares. So here a contractor would have a good
claim against the board, but the case of seeking to impose a liability on
outsiders apart from contract is quite another matter."
BOWEN L.J. the
third member of the board took the same view as the other two.
In Dawson v.
African Consolidated Land and Trading Co. 1, a shareholder resisted the claim
of the company to recover share money on the ground that there were defects and
irregularities in the appointment of directors, i.e., the directors were not de
jure directors. One of the most important irregularities alleged against a
director was that he parted with all his shares and in consequence under the
articles he was not qualified to be a director. This director, however,
acquired the qualification shares six days later. When the director sold his
shares, he ipso facto vacated office under the articles. In the vacancy so
created the other directors could very well appoint him director six days after
when the director in question again acquired the qualification shares. In fact
the other directors did treat him as a director but there was no formal
appointment by passing resolution to fill up a casual vacancy. It was held that
articles 114 (same as our section 86 of the Act) covers the case and the
irregularities were trivial. LINDLEY M.R. negative the contention that the
scope of the article was restricted to transactions between the company and
outsiders and not between the company and its shareholders so that the
forfeiture of shares by the directors not properly appointed the was protected
by the articles. COTTON L.J. considered the case as nothing more than defective
appointment and as covered by the article 114.
The case of
British Asbestos Co. Ltd.v. Boyd [1903] 2 Ch. 439, is also a case of defective
appointment and the court held that the irregularities in the appointed and
subsequent acts of the directors irregularly the appointed were validated by
articles 108 and section 67 of the Companies Act. In this case, articles 89 of
the articles provided the circumstances in which the office of a directors
shall be vacated. One of the directors, Boyd, had vacated office and the
contingent irregularities were not brought to the notice of the defendant
company. The irregularities complained of consisted in acting as director,
convening meetings of the company, ordinary and extraordinary, signing
balance-sheets, recommending directors for re-election amongst others. On the
finding that there was no evidence that the directors including Boyd and Reed
had not acted in good faith in all they did, the court held that the
irregularities were condoned by section 67 of the Act and article 108 of the
Companies Act (same as our section 86).
Channel
Colliery Trust Ltd.v. Dover, St. Margaret's and Martin Mill Light Ry. Co.
[1914]2 Ch. 506, ia also a case in which the appointment of the two directors
was held to be irregular on the ground that at the time of their appointment
they had not acquired qualification shares which were subsequently allotted to
them by a board consisting amongst others of the same directors who had not yet
the qualification shares. It was held that the irregular allotment was not by
the de facto directors which validated by the Companies Act as the directors
acted bona fide which was not disputed. It was held that the provisions of
section 99of the Companies Act should be construed boradly as between the
company and its members as well as between the company and outsiders. Reliance
was placed on the observations made at page 515 and set out below. These
observations were made after pointing out that the appointed persons were not
at the moment of their appointment qualified and a slip was made. Nevertheless
acting in good faith they accepted the shares and acted and continued to act as
directors.
" The
question is whether their acts as de facto directors are protected by section
99 of the Companies Clauses Act, 1845. It has been said that in substance the
law is stated in a very short passage in Buckley on the Companies Acts, 9th
Ed., p. 169, where it is summed up in these words : it is the note to section
74 of the new Act : ' Endangering accuracy for the sake of brevity, it may be
said that the effect of this section is that, as between the company and
persons having no notice to the contrary,directors & c. de facto are as
good as directors & c. de jure'. That is the note to section 74 of the
companies (consolidation) Act, 1908, but it is equally applicable to section
99, which applies to companies governed by the companies clauses Act, 1845 .It
is now settled that this section protects acts both with regard to insiders and
outsiders, and having regard to the law as laid down by the Court of Appeal in
Dawson v. African Consolidated Land and Trading Co.,[1898] 1 Ch. 6, and to the
view subsequently of FAREWELL J., with which I must say I entirely concur, I
think that it is a beneficial construction to put upon the section. Common
sense really requires that the there shall be some provision giving legal
effect to acts in respect of the which there is a technical informality because
some slip has been made, where the acts have been done in good faith and where
the slip has occurred because the parties have not had present to their minds
the legal difficulties in the way of doing what they honestly think they are
entitled to do. "
The following
observation of COZENS HARDY M.R. at the page 512 is also to be noted :
" If
there is good faith, and I emphasize that the mere fact that the persons
claiming the benefit of the section has notice o the existence of the fact
which led to the disability is not sufficient to disentitles him to to rely
upon it if he can honestly say, ' I was not aware of the defect and the
consequences of the facts I knew, I was not aware of the disqualifaction which
now exists.' That , I think, is really the point of the case."
In the case of
Boschok Proprietary Co. Ltd. v. Fuke [1906] 1 Ch. 148, it was held that the
resolutions passed in a meeting of the company convened by a board of directors
not properly appointed were not invalid because of the irregularity in
convening the meeting. So also in the case of Browne v. La Trinidad (1887) 37
Ch.D.I., the court refused to grant an injunction restraining the company from
confirming the resolution of the board of directors removing a director. The
ground on which the court was asked to grant an injunction was that only ten
minutes before the meeting of the board the petitioner being the directors
removed was served with the notice of removal. He,however, did not object on
the ground of insufficiency of notice nor did he require another meeting to be
summoned to consider the question.
In the case of
the In re Consolidated Nickel Mines Ltd. [1914] 1
At page 888
SERGEANT J. makes the following observation :
" A
direct on his appointment does not ordinarily step into an office which is
perpetual unless terminated by some act, but into an office the holding of
which is limited of by the terms of the articles........ The duty of the
directors was to call a meeting in 1906 and 1907, and they cannot take
advantage of their own default in that respect and say that they still remained
directors. "
In the case of
Morris v. Kanssen [1946] 16 Comp. Cas. 186 decided by the House of Lords, it
was held that section 143 of the companies Act and Table A, article 88 ( the
same as section 86 of the Indian Statute) applied only to acts done by persons
acting as directors whose appointment or qualification 7was afterwards found to
be defective. They did not cover a case where there has been a total absence of
appointment of a fraudulent usurpation of authority. The rule in Turquand's
case (1856) 6E.&B. 327, was held not to be applicable because it can only
be invoked by an outsider and not by one who was purporting to act on behalf of
the company in the unauthorized transaction. In other words, a director who
himself was a party to the irregular transaction cannot invoke the rule in
Turquand case (1956) 6E.&B. 327 in his favour. In the this case all the
cases have been reviewed and it is the last decision on the point in the
A decision of
this court has been cited where an opinion has been expressed that a director
continues in office even after the expiry of the period during which the new
annual general meeting is ac tually held. It is the case of Kailash Chandra v.
Jogesh Chandra (1928) 32 C.W.N. 1084, A.I.R. 1928 Cal. 868, decided by a
Division Bench of this court. This was a suit under section 42 of the Specific
Relief Act for a declaration that the defendants were no longer directors of
the company and that all acts done by them were illegal and void. In the this
case the annual general meeting came to an end without electing the directors
whose term of effaced expired. The court held that the suit must fail because
the plaintiff did not claim to be entitled to any legal character or any right
as to property which had been denied by the defendants and, secondly, because
in the circumstances of the case the court should not exercise its discretion
in granting specific performance. After disposing of the appeal on the above ground
the court made the following observation at the penultimate paragraph of the
judgment :
" With
regard to the matter, the articles of association provided that the directors
should be elected annually at a general meeting. It follows,therefore, that so
long as the general meeting is not held in which the directors are to be
elected the directors elected at the previous general meeting would continue in
office. It is contended by the learned advocate for the respondent that
according to the true interpretation of the articles the directors would hold
office only for one year form the date of their appointment, and if no general
meeting is held at the lapse of one year the directors would automatically
vacate their office and the company would go on without any directors at all .
I am unable to accept this contention of the learned advocate as it seems to me
that it would be unreasonable to hold that this is the true meaning of the
articles of association. "
In the case of
Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp.Cas.
324 , decided by a Division Bench of the Madras High Court has been held that
" the directors who were due to retire at the annual meeting next to that
held on the previous occasion should be held to have vacated office on the last
date on which the annual meeting should have been held and in consequence they
ceased to be directors after such last date." This is a decision of a very
strong Bench of the Madras High Court consisting of RAJAMANAR C.J. and VENKATARAMA
AIYAR J. and is a well considered judgment. Kanssen's case [1946] 16 Comp.Cas.
186, has been cited by the Madras High Court with approval.
The case of
Changamul v.Provinicial Bank (1914) I.L.R. 36 All 412; A.I.R. 1914 All 471,
decided by the Division Bench of the Allahabad High Court is a case in which
the liquidator claimed the balance of the share money from three shareholders.
The defence was that of the three directors who were present in the meeting of
the board, not all were properly appointed and if those not properly appointed
are left out, the meeting of the board had no quorum. It was held that this
irregularity in the allotment by reason of the fact that some of the directors
in the board meeting which made the allotment were not directors properly
appointed is condoned because of the articles as will appear in the following
observation: "But if the articles of association validate an act done by
de facto director in a bona fide manner, the court will uphold the act. "
On
consideration of the arguments advanced and the authorities cited I think that
the learned Advocate-General was right in his submission that the company
continued to exist and function even thought the annual general meeting of the
company is not held in time, that section 76 (3) of the Indian Companies Act is
an enabling section and that the shareholder has the right apart from an order
of the court under section 78 and 79(2) of the companies Act to hold a general
meeting, which may not strictly be chracterised as the annual general meeting
but is nevertheless a meeting in which all that can be done in annual general
meeting can be done including the passing of the balance-sheet and appointment
of the directors. When such a meeting is held when the year for which the
meeting is held is over, clearly no directors properly can be appointed. But if
such an appointment is made its effect would be to ratify the acts of those who
purported to act as director without being lawfully appointed. Only those acts
of the directors, however,would be deemed to be ratified by such retrospective
appointment as can be ratified in law and it should not be forgotten that
ratification only binds the principal and the act done by an agent without
authority will become binding on the principal after ratification. It has
nothing to do and cannot affect the party other than the principal on whose
behalf the agent purported to act without authority. In the instant case by the
retrospective appointment of Dr. Mukherjee and Dr.Neogy as the directors, the company
might be deemed to have ratified all the acts of Dr.Mukherjee and Dr. Neogy
leading up to the sale of the plaintiff's shares and as such the sale may be
binding on the company. Before retrospective appointments the acts of Dr.
Mukherjee and Dr. Neogy were unauthorised and hence not binding on the company.
But after appointment retrospectively those acts may become binding on the
company. But dose it become binding on the plaintiff? Dose this retification
take away the right of the plaintiff to repudiate the sale which was effected
by unauthorised persons? The plaintiff only gave authority to the directors to
sell after taking necessary steps as provided in the articles and if the sale
was effected not by directors but by some unauthorised persons the plaintiff's
right to repudiate cannot be affected by the company's ratifying the
unauthorised acts of persons who purported to act as directors, though in fact
they were not.
Again, the law
recognises that the appointment of directors may be defective in that they may
not have the qualifications as required by the articles or the provisions of
the articles of association have not strictly been complied with in the matter
of the appointment. Many acts might be done by these directors bona fide on the
behalf of the company, before this defect in the appointment is detected and
shown to the directors or company. Section 86 of the Companies Act protects
these acts of directors not properly appointed. But section 86 does not protect
the acts of directors whose office expired after the termination of office.
Kanssen's case [1946] 16 Comp. Cas. 186, and the Madras case, Ananthalakshmi
Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp. Cas.324, are clear
authorities in the support of this proposition with which 1 respectfully agree.
With respect, I am unable to subscribe to the obiter dicta of the Division
Bench of this court in Kailash Chandra v. Jogesh Chandra (1928) 32 C.W.N. 1084;
A.I.R. 1928 Cal. 868. , and noticed before.
Apart from the
acts of directors whose appointment is defective which are protected by section
86 of the Companies Act are there other acts by persons who are not directors
de jure but directors de facto protected? It has been argued that law
recognises de facto directors and as stated by Buckley and Palmer, two
recognised authorities on company law, the directors de facto are practically
the same as directors de jure and both have the same powers. In all the
authorities, however, cited before me and noticed before, the term de facto directors
has been restricted to directors with defective appointment. No case has been
cited in which the court has upheld the act of a pretended director without any
appointment. In other words in no case the terms de facto director has been
applied to a mere usurper without any appointment whatsoever. The court has
upheld the acts done by a director whose appointment is defective but in no
case it has gone further to uphold acts of one purporting to act as director
without any appointment or whose office has expired. In this state of the law I
am not prepared to accept the broad proposition of the learned
Advocate-General, that the de facto director is one who actually acts as such,
that he has the same power as a director de jure and that all acts of such a de
facto director whether appointed or not should be upheld by the court. If such
be the policy of law why enact section 86 of the companies act giving only
qualified validity to some acts not of all de facto directors but of those only
who have been appointment but whose appointment is found to be defective ? It
is to be noted that in all cases in which the court upheld the act of a
"de facto director " in which the outsider has dealt with such "
de facto director " bona fide the court did not uphold the act because it
was valid. They were held to be invalid , but the company was precluded form
raising the question of the invalidity of the acts, on the principles akin to
estoppel and holding out, only to protect the bona fide third party. I have
kept out of a consideration for the present, the acts of a " de facto
director " with whom an innocent third party deals bona fide. This aspect
of the question will be considered later.
In the instant
case I hold that on 20th and 24th September, 1954, Dr. Mukherjee and Dr. Neogy
had vacated their office as directors as fifteen months had expired after the
last annual general meeting held on April 6, 1953. The resolution determining
the liability of the plaintiff at over Rs. 4 lakhs passed on the September 10,
1954 , and the resolution passed on the September 23, 1954, to enforce the lien
and making demand of the payment and giving notice under articles 17, and the
notice served on the plaintiff in terms of the resolution dated September 24,
1954 -all these acts are not warranted by law and must be held to be illegal.
The annual general meeting held on April 6, 1953, and on January 6, 1955, were
not in compliance with the provisions of the Companies Act and the articles.
The directors whose office had expired were not competent to convene a general
meeting in such a case it would be quite competent for five members of the
company to convene a meeting under article 64 of the articles of association.
This is provided for in section 79(2) of the Companies Act. The only other way
to convene a general meeting is to hold a meeting under section 76 (3) by and
under an order of the court. In the instant case, the 12th,13th,14th and 15th
annual general meetings were convened by a defunct board of directors whose
office had long expired. They had not been convened by five members in terms of
articles 64 of the articles. These meetings, therefore, were not in accordance
with law and the appointment of directors at these meetings must be held to be
invalid. Having regard to the fact that there has been an appointment in
general meetings of the company which were not properly convened, I am prepared
to stretch a point in the favour of the defendant and hold it to be a case of
defective appointment and the acts of the directors with such defective
oppointment can be validated by section 86 of the Companies Act . In the
instant case, however, Dr. Mukherjee and Dr. Neogy are hit by the proviso,
because the invalidity of their appointment was not shown to the them before
they took steps in the matter of sale and when the sale actually took place. In
the instant case I told that Dr. Mukherjee and Dr. Neogy were not directors and
if after their a so-called election on January 6, 1955, they can be called
directors at all they were in any event directors with defective appointment
and further the defect in their appointment was shown to them. I am unable to
accept the argument of the learned Additional Solicitor-General that an usurper
of the office without any appointment or a director whose office had expired is
a director within the meaning of the Companies Act and the articles, because he
acts as such even thought he does it without any lawful authority.
Assuming again
that the 12th,13th,14th and 15th meeting were valid and good, the resolution
appointing directors for periods passed retrospectively cannot be anything more
than the ratification of acts done by those who purported to acts as directors,
provided those acts can be ratified. In my judgment Dr. Mukherjee and Dr. Neogy
were not directors at any event from July, 1954, onward having vacated their
office , and they had no authority under article 17 to declare and/or impose
and/or enforce the lien on shares and/or sell them. These are wholly
unauthorised acts and ratification of such unauthorised acts by the company
cannot take away the right of the shareholder to repudiate such unauthorised
acts.
It is next
contended by Mr. Chaudhury that assuming Dr. Mukherjee and Dr. Neogy were
directors, they as directors had no authorised to sell the shares because the
condition for the exercise of that power are lacking in the instant case. The
conditions precedent to the exercise of the powers are : (1) money must be
precedent payable (2) until a demand is made and notice given in writing
stating the amount due and (3) giving notice of intention to sell the shares in
default. But in the instant case the amount of the debt for which the shares
were sold was at its highest a claim on account and claim does not become
presently payable till a demand for payment is made. Secondly, the notice of
demand that is required to be served in writing must state the exact amount due
and payable, for which the lien is sought to the be imposed. In the instant
case even though the company may have some claim, it is nothing near the amount
demanded and for which the shares were sold. The amount stated in the notice is
over Rs. 4 lakhs whereas the liability of the plaintiff on the date would be
far less, near about Rs. 50,000. in any event not more than Rs. 81,000. It must
be held, therefore,that the conditions laid down in article 17 for the exercise
of the power of sale were absent in the instant case and therefore the same was
bad.
I am unable to
agree with Mr. Chaudhury that the debt due by the plaintiff was not "presently
payable." Holding as I do that the amount taken from the company by the
plaintiff on account from time to time represents a loan, the debt was
"presently payable " even before demanded. The other indebtedness
which I held to the be fictitious and unreal was not a debt due by the
plaintiff and as such cannot be a debt "presently payable "for which
the company can claim to have any lien. The company sought to sell the shares
for the recovery of a debt which was far in excess of what was actually due by
the plaintiff and to that extent the notice demanding payment and threatening
sale is not the compliance with article 17 of the articles and to that extent
it was wrongful. There is substance in the contetion of Mr. Chaudhury that the
language of article 17 makes it clear that non- compliance of the conditions
laid down affects the validity of the sale.
Lastly, it is
argued that the motive behind the acts of Dr. Mukherjee and Dr. Neogy was not
to realise a just debt due to the company by the plaintiff but to deprive the
plaintiff of his shares. There can be no reasonable doubt that this was the
notice that led Dr. Mukherjee and Dr. Neogy to act in the way they did, namely,
fixing the debt at a fantastic figure, declaring the shares to be subject to lien
for the payment of such debt,demanding payment immediately after Dr. Mukherjee
had occupied the saddle after ousting the plaintiff and selling the shares with
the greatest possible expedition. The motive behind these acts on the part of
Dr. Mukherjee and Dr. Neogy is clear and palpable. Mr. Chaudhury has argued
that when the motive of the directors is not to benefit the company but to
promote their own interest by driving away plaintiff from the company such acts
of the directors would not be upheld the court. In support of this argument Mr.
Chaudhury has cited the case of Nanalal v. Bombay Life Insurance Co., [1950] 20
Comp. Cas.179 decided by the Supreme Court. In this case the directors
increased the share capital of the company with two objects in view: (1)
company needed additional capital, (2) to prevent cornering of shares by one
group, group of outsiders , namely, the Singhania group. This act of the
directors in passing a resolution to issue additionals shares was challenged on
the ground that the directors did it to protect their own position. The court
upheld the action of the directors. There was a concurrent finding of fact by
the courts below that the resolution was passed because the company needed
additional funds and that the issue of the shares was not due solely to the
desire on the part of the directors to keep themselves in the saddle. In the
opinion of Das J., " the motive to prevent the Singhania group , who were
outsiders, from acquiring control over the company cannot, as between the directors
and the company and the existing share holders, be stigmatised as mala
fide." Mr. Chaudhury relies on the following observations of Das j. :
"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 prevents the directors from doing so. The very basis of the court's
interference is in such a case is the existence of the relationship of the a
trustee and of cestui que trust as between the directors and the company.”
And the following
observation of MAHAJAN J. :
“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 the power by the directors to
achieve this object by the issue of further shares was an exercise of power for
the purposes for which it was not conferred. This argument would have had force
if this was the main purposes of the directors in issuing the further shares
but this is not the case here."
Mr. Chaudhury
contended that applying the principles set out above in the instant case, it
must be held that inasmuch as the sole motive of Dr. Mukherjee and Dr. Neogy in
the matter of sale of the share was to drive the plaintiff out of the company
and makes their own position safe, the sale of shares in the instant case should
not be upheld by the court. It has been contended on the behalf of the
defendants that if has been proved that at the material time the plaintiff was
indebted to the company and the shares were subject to a lien and as such
liable to be sold in exercise of the lien. The company was entitled to enforce
its legal right to enforce the lien by selling the shares. However improper the
motive of the directors might,be, the legal right of the company to sell the
shares to enforce the lien cannot be affected and the motive of the directors
has no bearing on the question . The company had a legal right and the company
enforced it . The court has no power to question the right of the company to
exercise its legal right to sell the shares in exercise of lien for a debt due
from the plaintiff as shareholder. The second point urged on behalf of the
defendant is that the motive of sale immediately on getting possession of the
company on January 24, 1956, was that the directors needed cash money to meet
heavy disbursements in the first week of the following month. Possession was
given to Dr. Mukherjee on the January 24,1956,and the company needed cash money
to the extent of a bout Rs. 1 lakh to meet heavy expenses in the first week of
February next. It is in evidence that at the time when possession was made over
to Dr. Mukherjee by the official receiver, Dr. Mukherjee got Rd. 10,000,in cash
on the same date and the company had over Rs. 7 lakhs lying in the bank in the
account of the official receiver . Dr. Mukherjee explained that he apprehended
that the official receiver would not make over the money to him and he would be
in difficulty in meeting the expected disbursement inthe first week of
February. Hence in order to get ready cash the plaintiff's shares were sold. I
have no hesitation in rejecting this evidence of Dr. Mukherjee . He had no
reason to apprehend that the official receiver would not make over the money to
him. It was the duty of the official receiver to make over the money and if the
official receiver dilly- dallied , he could have been compelled to do his duty.
The court was open and the official receiver could have been compelled to make
over the money to the company. It is further in evidence that the company was a
running concern and was doing very good business. The sale of the company's
products as stated before was Rs. 55 lakhs annually. In other words, more than
a lakh of rupees was coming to the offers of the company per week . It is
therefore impossible for me to hold that the objects of selling the plaintiff's
shares in such a hurried manner was to get cash money to run the company. There
cannot be any doubt that the sole motive of Dr. Mukherjee and Dr. Neogy who
were ruining the company was to drive away the plaintiff from the membership of
the company and deprive him of his voting right. At the date of sale of the
plaintiff and D.N. Bhattacharji had controlling shares and it was only by
depriving the plaintiff of his shares that the position of Dr. Neogy and Dr.
Mukherjee could become secure. It is significant that the preference shares of
the plaintiff were not sold. The ordinary shares of the plaintiff which carried
the voting right were sold. The motive of Dr. Mukherjee and Dr. Neogy in
selling the plaintiff's shares was not what is stated to be by Dr. Mukherjee.
The motive is clearly to deprive the plaintiff of his voting right so that he
may not have the control of the company. If, however, the directors were
entitled in law to sell the shares in enforcement of lien for a debt due to the
company by the plaintiff , the sale cannot be challenged on the ground of bad
motive directors. Every body, including a most scheming person, is entitled to
enforce his legal right and motive of the plaintiff is no defence in an action
to enforce that legal right .
If the
directors were lawfully appointed by the company in the instant case then I
doubt whether the Supreme Court decision would be assistance to Mr. Chaudhury.
No doubt, the directors were acting in a fiduciary capacity and they must act
for the benefit of the companies . But the act of recovering a debt due to the
company by a director must necessarily be of the benefit to the company and in
such a case improper motive of the directors would be immaterial and the
principles laid down in the Supreme Court case would be hardly applicable. But
in this case, the acts were not of directors de jure but only of the directors
de facto and the acts of the de facto directors are only upheld if the acts are
done bona fide in the interest of the company. If, however, the sole motive was
not to benefit the company but to promote the private interst of the de facto
directors, then the principles in the Supreme Court case would apply and the
acts of the de facto directors would not be upheld by the court.
Mr. Chaudhury
has urged that the sale in the instant case is not merely irregular but
illegal. The conditions laid down in the article 17 for the exercise of the
power of sale not having been fully satisfied, the directors had no power to
sell the shares, and the sale was illegal as being beyond the power of the
directors. It is contended in answer to this argument that they were not really
conditions restricting the power of sale given to the directors but merely an
indication as to how the power of sale was to be exercised. Hence,when the sale
takes places without complying with the "conditions " laid down the
sale is only irregular but not illegal. The power of sale was there, thought
that power was irregularly exercised, that is all .
The languages
of the articles clearly indicates that the power of sale can only be exercised
on satisfying three conditions laid down in the article 17. The language is
clear. The power given to the directors is conditional and restricted. It
follows that if the sale is effected in the breach of the conditions laid down
in the article, the directors have acted in excess of their power and therefore
the sale is invalid.
It is argued
on the behalf of the defence that this construction of article 17, namely, that
it can only be exercised after the conditions have been satisfied, will make
the power of sale illusory. The indebtedness can always be challenged by the
shareholder and simply by the challenging the indebtedness, the shareholder can
prevent the directors from exercising the power of sale . It is strongly urged
that full authority is given by the articles to the directors to sell the
shares in liquidation is of the liability of a shareholder to the company and
the directors have been given authority to determine that liability. For the
purpose of exercising the power of sale, the parties by mutual covenant have
empowered the directors to determine the indebtedness,then make demand for
payment within a week , and in default of payment within a week to sell the
shares. The parties having agreed to a summary way of recovery by the directors
of the shareholder's indebtedness to the company , this power should be
liberally construed in favour of the company . The parties are bound by their
own covenant and if it can be said on a fair reading of the articles , that
there is a covenant whereby the share holders have agreed that for the purpose
of the sale the directors would be the sole authority to determine the amount
of a shareholder's indebtedness, then certainly the shareholders are bound by
such covenant. If, however, no such covenant is to be found in either article
16 or article 17 of the articles of the company, why should the court presume
that such a wide power has been given by the share-holders to the directors. I
am not impressed by the argument that the articles should be construed
beneficially in favour of the company and hold that the shareholders have given
full authority to the directors to determine the quantum of indebtedness and to
sell the share to liquidate the indebtedness. In the absence of a clear
covenant to that effect, I will not assume that such wide power has been given
to the directors. Neither article 16 nor article 17 contains any covenant
whereby it can be said that the shareholders have agreed that the for the
purposes of sale under articles 17, whatever amount the directors choose to
decide would be the liability of the shareholder. If the construction called
for by the defendants is correct, then it follows that even though the
indebtedness of the a shareholder is far less than what is determined by the
directors the shareholder is powerless to prevent the sale and the court is
equally powerless to prevent the sale, oven if the court is satisfied that the
indebtedness is far less than what is determined by the directors. If the
amount of indebtedness as fixed by the directors cannot be challenged in court,
then a suit for injunction prior to sale must fail as a suit challenging sale
after the sale has taken place on the same ground, namely, that the directors
are the sole authority to determine the amount, and the court had no say in the
matter. This runs counter to the opinion of Palmer that the shareholder can
apply for an injunction before sale as stated in his Company Precedents 16th
Edition, page 502, " when the company threatens to sell without
justification, the existence of this clause renders it expedient for the
shareholder to apply for an injunction before the sale is effected; for, after
sale it will be difficult, if not impossible, to recover the share".
The article
referred to by Palmer is article 33 which corresponds to article 19 of our
articles of association. The relevant article in Palmer's book corresponding to
our article 17 is article 31. In the opinion of Palmer, therefore, even though
the directors have the same power of sale as is contained in our article 17,
when the sale is threatened without justification th e court can issue an
injuction. I am unable to agree that if the condition set out in article 17 is
construed to limit the power of sale, then the power of the directors to sell
in a summary way would prove to be illusory. It is argued that all that the
shareholder need do is to write to the directors in answer to the notice of
demand that the shareholder disputed the debt and then the directors, under
this construction, would be powerless to act. If the dispute raised by the
shareholder is sham and illusory, the directors may nevertheless proceed with
the sale and in the proceeding initiated by the shareholder if it is found that
the directors were right and the shareholder was wrong, nobody need bother. If
however it is found in such proceeding that there was a serious dispute and the
contention of the shareholder was ultimately upheld by the court, in such a
case the court cannot but hold that the directors had no power to sell and were
selling wrongfully. This does not mean that the power of sale given subject to
conditions is illusory. This argument advanced by the defendant seems to
suggest that power in order to be real must be absolute and that restricted and
qualified power is wholly unreal and illusory.
The terms of
the article make it abundantly clear that the power of sale was not intended to
be absolute.
The points
discussed above would have been conclusive if the dispute involved in this
action was a dispute between the plaintiff and the company. But in the instant
case the plaintiff to succeed must displace the title of Ramapada Gupta the
purchaser of the shares. THe defendant primarily interested is Ramapada Gupta
and the real point in the suit is whether Ramapada has acquired a good title in
the shares as purchaser, that is, even if it is held that the shares were sold
by the directors improperly in excess of their power, whether this impropriety
affects Ramapada's title to the shares in any way. The company defendant is
only interested in the consequential relief of rectification of the share
register. Therefore, the most important point still remains to be considered,
namely, whether on the facts of this case and in law, the defendant Ramapada's
title has been displaced.
It is
contended that Ramapada's title is completely protected by article 19 of the
articles and section 86 of the Companies Act and even if it is held that
article 19 of the articles and section 86 of the Companies Act do not cover the
case, Ramapada is entitled to invoke the rule in Turquand's case {[1856] 6 E.
& B. 327}, in defence of his title. The argument is that however irregular
and invalid the sale may be, Ramapada is a stranger who purchased the shares
bona fide for over Rs. 2,60,000 out of which Rs. 1,30,000 was paid and on such
payment his name was entered in the share register. Ramapada, a stranger, had
nothing to do with the indoor management of the company. He cannot be expected
to know that the de facto directors who purported to sell the shares were in
fact not de jure directors and as such had no right to sell, that the debt for
which the lien was imposed and in enforcement of which the shares were sold was
not as much as was claimed by the company and that the conditions laid down in
article 17 had not been complied with. These are matters of indoor management
which are beyond the knowledge of Ramapada and he was not expected to know of
it. He as a stranger was entitled to presume that the directors who acted in
the matter were de jure directors, that all things were properly done in the
matter of determination of liability, imposition of lien and enforcement of the
lien by sale of shares. If anything irregular was done by the directors that
cannot affect the title of Ramapada Gupta as purchaser.
The case of
the defendant Ramapada Gupta has been argued with rare forensic ability and I
may state at once that no litigant got better legal assistance that what the
defendant Ramapada Gupta got in this case. I need hardly say that the arguments
advanced on behalf of the defendant Ramapada Gupta deserve very careful and
serious consideration and to the best of my ability I have tried to appreciate
them.
Assuming that
the transaction resulting in the sale of shares is illegal in the sense that
the directors under the articles had no power to sell or that the sale had been
effected by directors with defective appointment or that the sale was effected
without satisfying the conditions laid down in article 17 or that one important
step in the transaction, namely, the determination of the liability and
decision to enforce the lien by sale of the shares and giving notice required,
was taken by those who at the time had ceased to be directors, then the
defendant Ramapada can only protect his title as purchaser at such sale either
under section 86 of the companies Act, or article 19 of the articles or by
invoking the rule in Turquand's case {[1856] 6 E. & B. 327}. In each of
these cases, however, the sale will not be upheld by the court unless the party
seeking the assistance of the court acts bona fide. An innocent purchaser will
be protected. But the court will never come to the assistance of a purchaser
who purchases the share without good faith, that is, with notice that the sale
was wrongful. No case has been cited wherein the court upheld a wrongful or
illegal sale in which the purchaser had notice of its illegal character. On the
other hand, in all the cases cited on analogous sections and articles of the
English Act the English courts have held that the person seeking protection of
the court must act bona fide. So also acting bona fide is considered to be
essential to uphold a transaction in all cases cited in which the rule in
Turquand's case {[1856] 6 E. & B. 327} has been invoked to protect an
unauthorised act.
The first
point to be considered with reference to the case of defendant Ramapada Gupta
is - has Ramapada been proved to be an innocent purchaser ? If it is held
otherwise, Ramapada's defence totally collapses. Ramapada does not not,
however, come to the box and pledge his oath that he is an innocent purchaser.
Throughout this long drawn litigation, which is bitterly fought on every point
and the most important question, if not the only one being whether the
defendant Ramapada had acquired title in the shares, Ramapada is conspicuous by
his absence. His battle is fought in court by Dr. S.L. Mukherjee, and I must
say, ably fought with his back to the wall. Mr. Subimal Roy in his opening of
the case commented that Dr. S.L. Mukherjee, who was brought in the company by
the plaintiff and was given such a high position in the company with an
employment that is to be envied by all, did not prove loyal to the plaintiff.
That cannot be said of Dr. S.L. Mukherjee with reference to the defendant
Ramapada Gupta. Nobody could have done more to Ramapada Gupta in this
litigation than what Dr. Mukherjee did for him. Nevertheless, the fact cannot
be ignored that Ramapada Gupta gave this court a wide berth and did not step
into the witness box to protest his innocence. It looks as if we are having the
drama of Hamlet played in court, with Hamlet's part left out. The importance of
this fact was properly appreciated by the legal advisers of Ramapada. It must
have been realised that unless satisfactory explanation for not calling
Ramapada as a witness is given, which is acceptable to the court, the
consequence would be serious. No shelter has been taken by the learned counsel
behind the conventional ground of sudden illness or being called away suddenly
on urgent piece of business, often taken and seldom accepted by the court. A
very bold stand is taken that Ramapada has been advisedly withheld from the
court, because Ramapada has been advised that his evidence is not necessary.
The reasons given for taking this attitude have now to be very carefully
considered.
It is urged,
in the first place, that on the plaint Ramapada Gupta has no case to meet. The
suit as against Ramapada Gupta must be dismissed in limine. This argument is an
argument on pleadings. I have gone through the plaint very carefully. The
drafting of the plaint may not be artistic and leaves considerable scope for
improvement. But I am unable to hold that the plaint does not disclose a cause
of action against the defendant Ramapada, so that I should dismiss the suit in
limine as against Ramapada. The plaint does state the various acts leading up
to the sale of the shares and the rectification of the share register by
substituting the name of Ramapada in place of the plaintiff as the holder of
these shares. It is then alleged that the defendant Ramapada "connived and
/ or otherwise conspired with Drs. S.L. Mukherjee and B.P. Neogy in effecting
the said purported sale and in entering his name in the books of the
company". Then in paragraph 20 it is alleged "despite having
knowledge of the fraudulent character of the transaction of the said purported
sale of shares by the said Dr. S.L. Mukherjee and Dr. B.P. Neogy to him"
the defendant was about to exercise his right as the holder of the shares. Then
in paragraph 21 is set out the various grounds why the sale is illegal and void.
Amongst the grounds taken are (i) that the sale is fictitious, that is, it is a
colourable transaction and not a real transaction;b and and (ii) the defendant
had all along knowledge of the wrongful character of the transaction. These
are, in my judgment , sufficient to base a cause of action against the
defendant Ramapada. The allegations amount to this that Ramapada did not act
bona fide in the matter and that he is not an innocent purchaser. Further, the
sale is a colourable transaction. Such allegations are enough to dispute
Ramapada's title to the shares. It is urged that the words "fraud",
:conspiracy" and :connivance: have been used against Ramapada, but no
particulars have been given. I do not agree. Sufficient particulars have been
given to found a case of fraud and conspiracy against Ramapada; the fraud
consists in this that Ramapada has been a party to an illegal and wrongful
sale, inasmuch as he purchased the shares with full knowledge that the
transaction was wrongful. No further particular was necessary or possible to be
given beyond what is alleged in the plaint. It has been argued that no doubt it
has been alleged that the defendant Ramapada had knowledge of the wrongful
character of the transaction, but that he acquired this knowledge after the sale
and not before. If Ramapada came to know the wrongful character of the
transaction, after purchasing the shares, then this knowledge would not affect
his bona fides in the matter of purchase. But to me the allegations in the
plaint clearly amount to knowledge from prior to sale. After fully setting out
the facts tin support of the case that the sale was wrongful and without
authority, it is alleged that the defendant Ramapada "connived and/or
otherwise conspired with Mukherjee and Neogy in effecting the said purported
sale". This amounts to an averment of knowledge prior to the transaction.
Without knowledge prior to the sale, there can be no connivance, no collusion
and no conspiracy. If cannot, therefore, be held that the plaint does not
disclose any cause of action against the defendant Ramapada Gupta and that in
consequence the defendant Ramapada Gupta had no case to meet.
It is next
argued that assuming that the plaint does disclose a cause of action against
defendant Ramapada Gupta, nothing has been proved against him in the
proceedings. The plaintiff who is the only witness on his behalf stated that he
never knew Ramapada nor does he know him now. There being no evidence led by
the plaintiff to prove that Ramapada had prior knowledge of the wrongful
character of the sale there was no occasion for Ramapada to give rebutting
evidence. The argument is that the presumption of law is in favour of the
defendant, Ramapada, namely, that he acted in good faith in the transaction.
That presumption has to be rebutted by the plaintiff in the first place by
leading evidence to prove that there was bad faith on the part of ramapada. The
plaintiff has tendered no such evidence to rebut the presumption. Hence the
presumption in favour of defendant Ramapada to the effect that he acted in good
faith has not been displaced and still remains. It follows that the defendant
need not tender evidence to prove his bona fides, legal presumption being in
his favour, and this presumption has not been rebutted by any evidence tendered
by the plaintiff.
It is argued
with great force that the plaintiff is to make out his title to the shares. The
entry in the share register that the defendant Ramapada is the owner of these
shares established Ramapada's prima facie title this. The plaintiff, in order
to establish his title, must displace Ramapada's title. The plaintiff, can
prove by establishing that he was the prior holder of these shares, that the
sale effected by the company was unauthorised and wrongful and that the
defendant Ramapada did not act in good faith in the transaction. In order to
make out his title, therefore, the plaintiff has to prove, inter alia, that the
defendant Ramapada did not act bona fide in good faith. Even though this is a
negative fact, nevertheless, the plaintiff must prove it to establish his
title. In support, the following observation of BOWEN L.J. in the case of
Abrath v. North East Railway Co. {[1883] 11 Q.B.D. 440}. was relied on. The
observation was made in a case of malicious prosecution and reads as follows :
"Now in
an action for malicious prosecution the plaintiff has the burden throughout of
establishing that the circumstances of the prosecution were such that a judge
can see on reasonable or probable cause for instituting it. In one sense that is
the assertion of a negative, and we have been pressed with the proposition that
when a negative is to be made out the onus of proof shifts. That is not so. If
the assertion of a negative is an essential part of the plaintiff's case, the
proof of the assertion still rests upon the plaintiff. The terms `negative' and
`affirmative' are after all relative and not absolute. In dealing with a
question of negligence, that term may be considered either as negative or
affirmative according to the definition adopted in measuring the duty which is
neglected.”
The point
emphasised is that the plaintiff has not discharged this onus, even though it
is the onus of proving the negative. Hence there was no necessity for the
defendant Ramapada to give evidence in this case. On the basis of the evidence
tendered, if the plaintiff has failed to prove that the defendant Ramapada did
not act bona fide in good faith, and this being one of the essential facts to
be proved in support of the case of the plaintiff, the observation of BOWEN
L.J. above referred to applies with full force to the facts of this case.
In the instant
case the want of bona fides on the part of Ramapada consists in his knowledge
that the act of the directors in selling the shares was unauthorised and
wrongful. That knowledge can be proved by tendering positive evidence. For
instance, it may be proved that Ramapada made an admission that he had
knowledge prior to sale that the sale was unauthorised and wrongful. That would
be direct evidence on the point, though it must be considered that rarely such
evidence of the state of mind is available. In any event, no direct proof of
Ramapada's knowledge has been tendered in this case. The evidence is that the
plaintiff did not even know the defendant Ramapada. It must be held, therefore,
that there is no direct evidence to prove that the defendant Ramapada had
knowledge of the wrongful and illegal character of the transaction. The other
way of proving knowledge is to establish facts and circumstances from which an
inference can be drawn that the defendant Ramapada had such knowledge. In other
words, the fact of Ramapada's knowledge can be established by circumstantial
evidence. This proposition is not disputed. It has, however, been strenuously
argued that the circumstantial evidence must be such as to lead to one and the
one conclusion namely, that Ramapada had knowledge,. If the evidence is equally
consistent with knowledge had knowledge. If the evidence is equally consistent
with knowledge and want of knowledge, then the circumstantial evidence tendered
must not be held to be sufficient to establish Ramapada's knowledge of the
wrongful or illegal character of the transaction. Certain decisions on criminal
cases of fraud and conspiracy have been cited in support of the proposition
that to prove fraud and conspiracy by circumstantial evidence, the
circumstances must point to one and the one conclusion namely, that the accused
is guilty. IT is argued that in all cases of fraud the same rule will apply, it
matters not whether the case is civil or criminal. It should not be forgotten,
however, that in a criminal action, the accused is not required to depose in
this favour and if he does not, no inference against him can be drawn, while in
a civil action a defendant charged with fraud is entitled to give evidence and
indeed required to give evidence, more particularly, when the fraud consists in
the knowledge of a wrongful act in which he is alleged to be a party, and if
the defendant withholds his own evidence the court is required to draw an
adverse inference.
In the instant
case, what are the facts admitted and proved. It is admitted in the written
statement that the defendant had knowledge of certain facts relating to the
shares prior to his purchase. He had knowledge of the proceedings in this court
in suit No. 3112 of 1954 and the proceedings in appeal No. 56 of 1956 from the
order of injuction passed by P.B. MUKHERJI J. in suit No. 3117 of 1954. He had
knowledge of the termination of the suits by withdrawal and also of the appeal.
He had also knowledge that under an order of the court of appeal the official
receiver made over possession of the company to the board of directors
consisting of Dr. Mukherjee, Dr. Neogy and D.N. Bhattacharjee. This order was
passed in appeal No. 56of 1955, which was an appeal from an interlocutory order
in suit No. 3117 of 1954. Apart from this admission, other facts have been
proved in court by Dr. Mukherjee. The defendant Ramapada on 10th January came
and saw Dr. Mukherjee and intimated his desire to purchase the shares of the
plaintiff. Defendant Ramapada was not interested in purchasing other ordinary
shares that were clearly available on that date. The defendant Ramapada took
away the papers in connection with he litigation and on the following day made
an offer in writing to purchase the shares. The letter containing the offer
dated January 11, 1956, was not originally disclosed and the genuineness of the
letter was questioned by the plaintiff in court. On the 24th, shares were sold
to the defendant Ramapada and in the evening a part of the purchaser price
amounting to Rs. 1,30,000 was paid in cash. The cash money thus paid was never
proved to have been deposited in bank. The name of the defendant was
immediately entered on the share register as the owner of this big bunch of
shares in place of the plaintiff and there was no transfer deed. The defendant
Ramapada was appointed a director even before he had paid the price of shares.
Dr. Mukherjee has not been cross-examined by Ramapada Gupta and it must be
taken that he has accepted this evidence of Dr. Mukherjee. These facts do
suggest that the defendant Ramapada was well known to Dr. Mukherjee, had
knowledge of facts resulting in the sale of shares and that that knowledge he
had acquired before the actual sale took place. The extent of this knowledge of
facts can only be ascertained by the court from the evidence of the defendant
himself. The court can only determine whether he was an innocent purchaser
after hearing his testimony. I do not understand how else can the court hold
that the defendant is an innocent purchaser. The very fact that the defendant
Ramapada refused to give evidence of his innocence in court is itself a very
important fact and the court is bound to infer from this fact that defendant
Ramapada had guilty knowledge. Certain presumptions are no doubt available in
favour of the defendant Ramapada. Certain presumptions are also available
against him and one of such presumptions resumptions is that the court must
draw adverse inference against him from the fact of his refusal to swear his
innocence in court. In my judgment, it is fatal to the case of Ramapada.
In the instant
case the fact to be ascertained or proved is that state of mind of the
defendant Ramapada, that is, whether prior to the sale, he had knowledge of the
wrongful character of the transaction. This was within the special knowledge of
the defendant Ramapada and the burden of proving the innocent state of his own
mind is within the special knowledge of him alone. It was for him to prove it.
Assuming that the initial onus is on the plaintiff to lead some evidence, the
burden of proof is shifted to the defendant Ramapada, having regard to the
admission in the written statement of Ramapada that he had some knowledge anterior
to the sale and having regard to the evidence already tendered. In determining
whether the onus has shifted to Ramapada, the evidence to be taken into account
is the entire evidence tendered and not the evidence tendered on behalf of the
plaintiff alone. Very slight evidence, if at all, is necessary to shift the
burden on Ramapada and I hold that such evidence was tendered. It was
imperative for the defendant Ramapada to tender his evidence as to the quantum
of his knowledge of the transaction resulting in the sale of shares and to
prove that he was an innocent purchaser. On ramapada's failure to tender
evidence in support of his own innocence, it must be held that Ramapada had
full knowledge of the entire transaction resulting in the sale of shares and on
my finding that the transaction was wrongful I am bound to hold that the
defendant Ramapada did not act bona fide in the impunged transaction. This
finding negatives the argument made on behalf of Ramapada that his purchase is
protected by section 86 of the Companies Act and/or by article 19 of the
articles of the company or by the rule in Turquand's case {[1856] 6 E. & B.
327}.
Let me,
nevertheless, consider how far the sale is protected on the basis of this
argument. I have held that at the time when the resolution to enforce the lien
by sale of the shares was passed on September 23, 1954, and the notice in terms
of article 17 was served on the plaintiff pursuant to that resolution on
September 24, 1954, the directors who purported to act in the matter, that is,
Dr. Mukherjee and Dr. neogy, were no longer directors, their office having
expired in July, 1954, that is fifteen months after the last annual general
meeting held in April, 1953. This resolution and notice sent thereunder is,
therefore, not protected by section 86 of the companies Act, because in law the
section validates only the acts of directors with defective appointment but not
of those with no appointment or whose office had expired. Even if the section
applied, the defendant Ramapada must be deemed to have discovered the defective
nature of the appointment of Dr. Mukherjee and Dr. Neogy having regard to the
letter of the plaintiff and his solicitor served previously to the effect that
Dr. Mukherjee and Dr. Neogy had vacated their office, which letters are
included in the records of this suit in the various proceedings in this court.
The shares were sold on January 24, 1956. Previously in the annual general
meeting held on January 6, 1955, Dr. Mukherjee and Dr. Neogy were appointed
directors. Even if if is held that at the time when the sale took place Dr.
Mukherjee and Dr. Neogy were properly appointed directors and even if at that
particular date they had not discovered that their appointment was invalid,
even then the sale cannot stand, The reason is that the actual sale on January
24, 1956, is only a part of the whole transaction. The transactions ultimately
resulting in the sale consist of three steps; one, resolutions to enforce the
lien by sale passed by the board of directors; second, notice of sale under
article 17, and then the actual sale on January 24, 1956. THe resolution and
the notice are essential steps in the matter and, as stated before, these acts
of the directors are nor protected. It follows that even though the sale was held
by directors properly appointed, the case is not covered by section 86 of the
Act, because the two essential preliminary steps were taken by people
pretending to act as directors, but who were no longer directors, they having
vacated their office. In my judgment article 19 of the articles does not
protect the sale. The purchaser can only invoke article 19, if he acts bona
fide and is an innocent purchaser. I have held further, that the shares liable
to be sold under article 17 are only shares subject to lien, that is, with
respect to which the defendant company were in possession of share scrips. In
the instant case, the shares were only subject to equitable charge and the way
of enforcing the equitable charge is not by sale under article 17 of the articles.
Further conditions laid down in article 17 were conditions precedent to the
exercise of the power of sale and, in the instant case, the conditions have not
been fully complied with. I am in doubt whether this only amounts to
"irregularity or invalidity in the proceedings in reference to the
sale" within the meaning of article 19.
The rule in
Turquand's case {[1856] 6 E. & B. 327}, as stated in Halsbury's Laws of
England, Hailsham Edition, Volume V, page 423 and quoted in Kanssen's case
{[1946] 16 Comp. Cas. 186}, is in the following terms:
"But
persons contracting with a company and dealing in good faith may assume that
acts within its constitution and powers have been properly and duly performed and
are not bound to enquire whether acts of internal management have been
regular".
This
presumption of regularity in the internal management of the company in favour
of an outsider dealing with the company is due to the fact that an outsider has
no right to look at the indoor management of the company. This rule has been
followed in a number of decisions some of which have been already noticed. THis
rule of indoor management was also applied by a Division Bench of the Bombay
High COurt in the case of Pudumjee and Co. v. N.H. Moos {A.I.R. 1926 Bom. 28},
with the following observation:
"Persons
contracting with the company are bound to know, or are precluded from denying
that they know, the constitution of the company and its powers as given by
statute and memorandum and articles but they are not affected with notice of
all that is contained in the register of directors kept as required by section
87 of the Act . Notwithstanding the provisions of section 87, the appointment
of directors still remains part of `the indoor management' of the company and
it would hardly conduce to the facility of business if outsider were compelled
to search the register and find for themselves whether a person who was
permitted to act as director of the company for some length of time was also
its director de jure".
The learned
Additional Solicitor-General argued with force that this rule of indoor
management is a salutary rule and however irregular the indoor management might
have been, a total outsider is protected even if the acts of persons who were
permitted to act as directors for some length of time were not de jure
directors and even if such acts were not authorised. The outsider who acted on
the faith of apparent state of affairs which were all in order was entitled to assume
that they were the real stated of facts. Therefore, the acts of de facto
directors, who were not regularly appointed, even though they acted as
directors and had acted in a manner not regular, will be binding on the company
in favour of an outsider in his dealings with the company. A shareholder who
took no steps to prevent a de facto directors, though not properly appointed,
from acting on behalf of the company will not be entitled to challenge the
unauthorised act of a de facto director who was not a de jure director as is
clear from the speech of LORD HEATHERLEY in Mahony's case {[1875] L.R. 7 H.L.
869}, and noticed before. It is also argued that the outsider will not lose the
protection unless he is aware not merely of the fact but their legal consequence,
as is clearly indicated by LORE COZENS HARDY M.R. in the Channel Colliery Trust
case {[1914] 2 Ch. 506, 512}.
"It has
been argued for the appellants with great force that this is a clause which
ought not to be relied upon by persons who were aware of the facts, although
not aware of the legal conclusions resulting from those facts, because such
persons must be taken to know the law, and it would be wrong that they should
take the benefit of section 99. I am quite unable to accept that view. It seems
to me that the questions may be put very shortly: Aye or no, were the parties
in the transaction acting in good faith? If they were, section 99 ought to be
available for all parties including the directors themselves. IF there is a
lack of good faith, then of course the court will not allow those who are
lacking in good faith to take the benefit of it".
The test,
therefore, is the presence or absence of good faith.
The reasons in
support of the rule in Turquand's case {[1856] 6 E. & B. 327} have been stated
by LORD SIMONDS in Kanssen's case {[1946] A.C. 459; 16 Comp. Cas. 186, 186} :
"One of
the fundamental maxims of the law is the maxim omnia praesumuntur rite esse
acta. It has many applications. In the law of agency it is illustrated by the
doctrine of ostensible authority. In the law relating to corporations its
application is very similar. The wheels of business will not go smoothly round
unless it may be assumed that that is in order which appears to be in order.
But the maxim has its proper limits. An ostensible agent cannot bind his
principal to that which the principal cannot lawfully do. The directors or
acting directors or other officers of a company cannot bind it to a transaction
which is ultra vires. Nor is the only limit its application. It is a rule
designed for the protection of those who are entitled to assume, just because
they cannot know, that the person with whom they deal has the authority which
he claims. This is clearly shown by the fact that the rule cannot be invoked if
the condition is no longer satisfied, that is, if he who would invoke it is put
upon his inquiry. He cannot presume in his own favour that things are rightly
done if inquiry that he ought to make might tell him that they were wrongful
done".
This being the
rule in Turquand's case {[1856] 6 E. & B. 327} the party seeking to invoke
the rule has to prove that he dealt with the company bona fide in relation to
the offending transaction. In the instant case, the defendant Ramapada Gupta,
in order to invoke the rule in Turquand's case {[1856] 6 E. & B. 327}, has
to prove that he purchased the shares without knowing the wrongful nature of
the transaction. In other words, he has to establish the allegation made in his
written statement that "fully relying on the facts set out in the earlier
part of paragraph I" of his written statement, defendant Ramapada
"bona fide purchased the shares at par". This is a positive defence
and it is for the defendant Ramapada to substantiate it. Defendant Ramapada
cannot substantiate it without entering the witness box. Not having done it, he
has not laid the foundation for invoking the rule in Turquand's case {[1856] 6
E. & B. 327}. Again, as stated by LORD SIMONDS, there are limits to the
application of this rule and this rule is designed for the protection of those
who are entitled to assume, just because they cannot know facts happening
"indoor of a company". But in the instant case, the facts happening
indoor of the company are no longer confined indoor. They have been brought out
in court. The defendant Ramapada admits some knowledge of the court proceedings
and, therefore, what has happened indoor from those court proceedings. Where is
the room for assumption in such a case when what was happening indoor can be
known and is admitted to be known to the party to a certain extent. Knowledge
is admitted by Ramapada. The only question is, how much he knew or could have
known.
Another point
has been raised and has to be considered and that is this : Does the rule in
Turquand's case {[1856] 6 E. & B. 327} apply to a case in which the dispute
is in the title to shares between two rival claimants, even though the dispute
has arisen because of the act of the company ? The rule applies in the case of
a dispute between an outsider and the company. But the instant dispute is not a
dispute between the company and Ramapada, but a dispute between the defendant
Ramapada and the plaintiff. The rule in Turquand's case {[1856] 6 E. & B.
327} may prevent the company from disputing the title of Ramapada to the shares.
But can it be invoked by Ramapada to defeat the plaintiff's title to the
shares? The question is certainly not free from difficulty. The shareholder in
law is distinct from the company and the shares are his property. The articles
which crete a lien and charge constitute nothing more than covenants between
the company and its shareholders. If the shares are sold in breach of the
covenants the shareholders may yet covenant, as he has done in the instant
case, that the sale will not be set aside, because of any irregularity or
invalidity in connection with the sale. This is article 19 of the articles of
association of the company. If the shares are wrongly sold, the plaintiff may
be debarred from questioning the purchaser's title by reason of the covenant
contained in article 19. But if the case is not covered by article 19, can the
title of the shareholder in the shares sold in breach of the covenant be
defeated by the purchaser by invoking the rule in Turquand's case {[1856] 6 E.
& B. 327} ? In none of the cases cited the private right of property in the
shares of a particular shareholders was involved. In Turquand's case {[1856] 6
E. & B. 327} the dispute was between the outsider and the company. So also
in Mahony's case {[1875] L.R. 7 H.L. Cas. 869}. The case of Channel Colliery
Trust {[1914] 2
It has been
strenuously urged that the defendant Ramapada had no doubt knowledge of the
allegations made by the plaintiff inthe various suits disputing the right of
Dr. S.L. Mukherjee and Dr. Neogy to sell the shares in suit No. 3112 of 1954.
But the suit was withdrawn without leave to instituted another suit and with
the withdrawal of the suit the challenge thrown out in the suit was withdrawn.
In such circumstances, the defendant Ramapada was entitled to think that the
objection of the plaintiff questioning the right of th directors to sell the
shares in enforcement of the lien was wholly unsubstantial and if on that
belief the defendant Ramapada purchased the shares, he purchased the shares
bona fide and there was no absence of good faith on his part. This is a defence
in the nature of estoppel - the defendant Ramapada was misled by the conduct of
the plaintiff in withdrawing the suit to believe that the allegations made by
the plaintiff in the suit were without any substance and on the faith of that
purchased the share. This argument would have been of great force if the case
was substantiated by evidence. If Ramapada gave evidence to that effect, I
might very well have accepted it and held that the defendant Ramapada purchased
the shares bona fide. In the absence of Ramapada's evidence, this argument
becomes wholly unreal and is of no avail to him.
The reason of
the plaintiff not persisting in the suit filed and withdrawing the same will
appear from the petition of withdrawal of the defendant company in suit No.
3117 of 1954. In suit No. 3117 of 1954 the company was one of the plaintiffs.
This petition is signed by the company in this manner: "Albert David Ltd.,
by the pen of Albert Judah Judah, Managing Director". In this petition the
reason of withdrawing the suit is stated to be this :
"An
amicable settlement has been effected between the plaintiff in the present suit
and D.N. Bhattacharjee and these two together hold the controlling shares. In
consequence even though the allotment of new shares are recognised, the
interest of the plaintiff would be protected. Hence to put an end to the
litigation the suit is being withdrawn".
No separate
petition was filed to withdraw the suit no. 3112 of 1954. But the two suits
were withdrawn together at the same date. The defendant Ramapada, who admits to
have some knowledge of the proceedings in court, might or might not have
knowledge of the proceedings in suit No. 3117 of 1954. There is no evidence to
this effect, but the probabilities are that he had knowledge and if he had
looked into the petition, he could have known the real reason of withdrawal of
the suit. Further, in the petition before the appeal court for delivery of the
company to the plaintiff's party it was clearly stated that they were the
proper party to whom possession was to be made over by the official receiver
and not to Dr. Mukherjee and Dr. Neogy. The court, however, held that
possession was to be made over to the party from whom possession was taken.
This conduct of the plaintiff cannot be construed to mean that he gave up the
claim that he had made and has made up till now. In any event, Ramapada, as the
intending purchaser, was put upon enquiry and if he refused to make enquiry and
deliberately shut his eyes to the true state of affairs, he did it at his own
risk, he is not entitled to complain that he did not know the real state of
affairs. In the light of these facts the defendant Ramapada Gupta might or
might not have been justified in thinking that the fact of withdrawal of the
suit amounted to the plaintiff's giving up the charges against Dr. Mukherjee
and Dr. Neogy. But the point is, what in fact was the state of mind of
Ramapada, what was the knowledge with which he purchased the shares ? That is
the real point. On the point, the withdrawal of the suits and the records and
proceedings are no doubt relevant materials but certainly not conclusive. In
that view of the matter, it was imperative for the defendant Ramapada to come
to court and state his knowledge of facts on the basis of which he purchased
shares. Not having chosen to give evidence, it is not open to him to argue that
the withdrawal of the suits led him to believe that the plaintiff's contention
raised in suit No. 3112 of 1954 to be of no substance from the fact that the
plaintiff withdrew the suit without liberty to institute another suit and on
that belief purchased the shares. This may or may not be true, and whether it
is so or not can only be ascertained from the evidence of the defendant
Ramapada, if it was tendered. As I stated before the refusal of the defendant
Ramapada Gupta to tender his evidence in this case is fatal to his case.
Another point
taken by Mr. Chaudhury is that in the instant case, there is no instrument of
transfer, i.e., no deed transferring the shares to the defendant Ramapada
Gupta. The plaintiff the registered holder of the shares did not execute any
such deed. Nor does it appear that the company did execute any such deed for
and on behalf of the plaintiff. No need of transfer has been proved in court on
behalf of any of the defendants. It is contended that section 34(3) of the
Indian Companies Act provides that it shall not be lawful for the company to
register a transfer of shares unless the proper instrument of transfer duly
executed by the transferor and transferee has been delivered to the company
along with the scrip. No transfer deed having been executed and no scrip having
been made over to the company in the instant case as required by section 34(3),
it was not lawful for the company to register the transfer and record the
defendant Ramapada Gupta as the holder of these shares. It follows that even if
there has been a sale in favour of the defendant of the shares in suit, in the absence
of a deed of transfer duly executed and deposited with the company the company
had no power to register Ramapada as the holder to these shares. It is,
therefore, urged by Mr. Chaudhury that there must be rectification of the share
register by restoring the plaintiff's name as the holder of these shares. It is
to be remembered that in the instant case, the shares have not been forfeited
and the company was not selling its own shares, in which case no transfer deed
would be necessary. The company in the present case was selling the shares of
the plaintiff and hence in law a deed of a transfer becomes imperative to
enable the directors of the company to register Ramapada as the transferee of
these shares. This is the argument of Mr. Chaudhury.
In answer to
this argument it is contended on behalf of the defendants that article 19
provides for registration of shares sold by the company in enforcement of lien
even without a deed of transfer. I do not think that article 19 does provide
for registration without a deed of transfer. It only provides that upon any
such sale as aforesaid, the directors may enter the purchaser's name in the
register as the holder of these shares. It does not follow that the article
enables registration without a deed of transfer. To hold that it does makes it
inconsistent with the provisions of section 34 of the Act. The articles of the
company should be so construed as to harmonise and be consistent with the
provisions of the Indian Companies Act. THat is the proper rule of construction.
To construe otherwise, article 19 would run counter to section 34 of the
Companies Act and would be ultra vires to that extent.
It is next
argued that on a true construction, the sale of shares by the company in
enforcement of lien is excluded from the operation of section 34 of the Act.
The section does not apply to cases of sale when the company itself is selling
the shares. THe company being itself the seller is bound to register the shares
and if the company does not, the purchaser can compel the company to register
the shares. I agree that the section does not contemplate cases of transfer by
the company of its own shares. Just as allotment by the company of its own
share cannot be characterised as a transfer within the meaning of the section, similarly
the sale of its own share by the company after forfeiture also cannot be
characterised as a "transfer", within the meaning of section 34 of
the Indian Companies Act. But shares belonging to other people which the
company is selling in enforcement of lien or equitable charge cannot be treated
on the same footing. They are not shares in which the company has
"property" and the sale does not result in transfer of property from
the company to the purchaser. The sale in enforcement of lien results in the
transfer of property from one registered owner to the purchaser and is not
different from ordinary transfer from one shareholder to another. The fact that
the company acts as the seller being authorised by the articles to sell, does
not alter the character of the transaction. It is a case of transfer just like
any other transfer and is covered by section 34 of the Act. I do not think that
sale of shares by the company in enforcement of lien is excluded from the
operation of section 34 of the Act.
Two authorities
have been cited in support of the contention that even without the transfer
deed, registration may be effected by the directors, which may now be
considered. The first case is the case of Mohideen Pichai v. Tinnevelly Mills
Co. {A.I.R. 1928
"To begin
with, it must be pointed out that the expression `transfer' by itself is not
altogether appropriate to indicate a sale in invitum by the court. No doubt the
expression `transfer' has been used in such collocations as `transfer by
operation of law', but at the same time the expression `transfer' is
undoubtedly more appropriate to indicate what is effected or brought about by
the will of the person in whom the property is vested, as in the Transfer of
Property Act".
It is argued
from the above observation that the "transfer" in section 34 is to be
construed in the sense of voluntary transfer and not transfer under compulsion.
In the instant case, the transfer has not been effected voluntarily by the plaintiff,
the registered holder, but by the directors against the wishes of the
registered holder. Hence it is argued by the learned Additional
Solicitor-General that the observation set out above will apply not only to
cases of court sale but also to involuntary sale effected by the directors to
enforce lien.
The second
case relied on is the case of Mahadeolal v. New Darjeeling Union Tea Co. {55
C.W.N. 408}, decided by a Division Bench of this court. In this case also the
same question arose, namely, whether a purchaser in a court sale is entitled to
have his name registered on the basis of being the auction purchaser in a court
sale. The Division Bench cited with approval the above observation in the
There being
this specific provision in the statute with respect to shares transferred or
sold in execution of a decree, the general provisions in section 34 of the
Companies Act as to transfer of shares is held not be applicable in the case of
shares sold in execution. The reason of non- applicability of section 34 of the
Companies Act in the case of court sale is not the involuntary nature of the
transaction but the express provision in the Code which provides for another
mode of transfer of share in the case of share in the case of court sale.
For the
reasons stated, it was not lawful for the defendant company to register the
transfer of shares in the name of Ramapada Gupta in the absence of a proper
instrument of transfer having been deposited with the company.
This disposes
of all the points argued before me. I should record that no serious attempt was
made to prove the case made by the plaintiff in paragraph 14 of the plaint to
the effect that a new board of directors consisting of Dr. S.P. Bhattacharji,
Gunabantrai Ojha, D.N. Bhattacharji and the plaintiff was elected in a meeting
convened by five members under articles 64 and 65 of the articles and duly
held. Similarly, no serious argument was advanced that the suit was bad for
non-joinder of Dr. Mukherjee and Dr. Neogy as parties.
For reasons
given above the plaintiff succeeds and I pass a decree in terms of prayers (a),
(b), (c), (d), (e), (f), (g) and costs. Certified for three counsel.
I would be
failing in my duty if I do not record the great assistance rendered to the
court by all the learned counsel - seniors and juniors alike. The case is very
heavy and the learned cousel did not spare themselves. No judge got the
assistance that I received from the Bar in this case and I wish to record my
gratitude to each one of them.
[1946] 16 COMP CAS
186 (HL)
IN THE HOUSE OF
LORDS
v.
Kanssen
VISCOUNT SIMON, LORD
THANKERTON, LORD PORTER, LORD SIMONDS,
LORD UTHWATT.
FEB. 11, 12, 13, 14, 18, 20, 21, 22, AND MARCH 22, 1946
Christie, K.C., and Hillaby, for the Appellant.
Richmount,
for the Respondent,
The
arguments are sufficiently dealt with in Lord Simonds' judgment.
Lord Simonds. —This appeal occupied many days in this House, but the facts relevant to the issues which your Lordships think it necessary to determine can be stated at no great length.
In two consolidated actions, in which this appeal is brought, the respondent Kanssen, a Dutchman, the plaintiff in both actions, in which the respondent company, Rialto (West End) Ltd., and the appellant Morris and two other persons, Robert Cromie and Eric Paul Strelitz, were defendants, sought to have it determined who were the directors and who were the shareholders and what shares they held of the respondent company.
The
company (as I will call the respondent company) was incorporated on December
27, 1939, with the primary purpose of taking up a lease of the Rialto
Cinematograph Theatre in
The company in due course embarked on the business for which it was incorporated. It entered into possession of the Rialto Theatre and acquired a lease of it. Soon disputes arose between Cromie and Kanssen, into the merits of which I need not enter. Cromie made an alliance with Strelitz, and together they concocted a scheme for getting rid of Kanssen. It was an essential part of this scheme that Strelitz should be appointed a director, so that Cromie and he could, under article 8 (7) of the company's articles, call upon Kanssen to resign. They claimed, but falsely claimed, that at a meeting of directors held on February 1, 1940, at which Cromie and Kanssen were present, Strelitz was duly appointed a director, and they concocted a minute to this effect, which was entered in the company's minute book and in due course signed by Cromie. Strelitz assumed to act as director, and on April 9, 1940, Cromie and he in purported exercise of their power under the articles requested Kaussen to resign his office of director. The request was a nullity and Kanssen remained a director. On April 12, 1940, Cromie and Strelitz purported to hold a meeting of directors, and thereat issued one share to Strelitz and seven more shares to Cromie. The issue was invalid and of no effect. On April 26, 1940, an extraordinary general meeting of the company was held. Cromie was there; so were Kanssen and Strelitz, but the latter had no right to be there. At that meeting Cromie moved and Strelitz seconded a resolution to confirm the appointment of Strelitz as a director. It appears to have been carried by the votes of Cromie and Strelitz against the opposition of Kanssen. There was no appointment to confirm. Strelitz had no right to second a resolution or to vote for it; Cromie could lawfully use one vote only. No resolution was effectively passed and no valid appointment emerged from these proceedings. Kanssen withdrew protesting, and continued to protest. Nevertheless, from that time onward throughout 1940 and 1941 Strelitz acted as a director with Cromie. There was, in fact, little to be done as the cinema was closed as the result of enemy action. No general meeting of the company was held in 1941.
It is not disputed, therefore, that at the end of 1941 both Cromie and Strelitz (if he was a director) ceased to be directors under article 73 of Table A as varied by article 22 of the company's articles. From January 1, 1942, there were no directors of the company. Early in 1942 it appeared that the cinema might be able to reopen. Further finance was needed; and for that purpose Cromie got into touch with Morris and made an arrangement with him under which, inter alia, he was to become a director of the company and certain shares were to be allotted to him. In pursuance of this arrangement, on March 30, 1942, Cromie and Strelitz held a meeting of directors, at which first Morris was appointed a director, then, Morris having joined the board, they three allotted thirty-four shares to Morris, thirty-two shares to Strelitz and twenty-four shares to Cromie. I will later in this opinion discuss this meeting in greater detail. On or about April 20, 1942, Strelitz transferred seventeen of his shares to Morris. If all the shares were validly issued, the position then was that Kanssen held one share, Morris fifty-one shares, Cromie thirty-two shares and Strelitz sixteen shares In the meantime, on March 30, 1942, and April 13, 1942, Kanssen issued his writs in the two actions, which were afterwards consolidated. It is sufficient for the present purpose to say that in effect he claimed that the only shares validly issued were the two shares issued to the subscribers arid by them transferred to Cromie and to him, and the register of the company should be rectified by altering Cormie's holding to one share and removing the names of all other persons except himself therefrom. He also claimed a declaration that he and Cromie were the only directors of the company and that Strelitz and Morris were not directors.
I will dispose at once and in a few words of the question of directorship. Though it appears not 1.0 have been realised until then, it was in the course of the trial appreciated what was the effect of at article 73 of Table A as varied by the company's article 22, and it was admitted then and at the bar of the House that neither Cromie nor Strelitz has in any view been a director since the end of 1941. The same consideration applies to Kanssen. Whether or not he ceased to be a director at an earlier date, at any rate he did so at the end of 1941. Morris rests his churn upon his appointment by Cromie and Strelitz at the meeting of March 30, 1942. But, apart, from the consideration which apply equally to the allotment of shares and to this appointment, it is, I think, char that neither the section of the Companies Act and the article, which 1 shall have to consider, nor the general law can avail to establish him in his office of director when he was not in fact appointed a director. To Cohen, J., and to the Court of Appeal this seemed too plain for argument.
I turn then to the more difficult question of the shares. From the short narrative that 1 have given it is clear that no shares were in fact validly issued except the one share each held by Cromie and Kanssen, and Cohen, J., accordingly, having decided the long and hotly contested question of fact in favour of Kanssen, ordered the register to be rectified by striking out the name of Cromie as the holder of any but one share and the name of Strelitz altogether. It remained to consider the case of Morris.
Morris, faced with the fact that the shares were not validly issued, relied on defences arguable by him but not open to Cromie or Strelitz. He claimed the benefit of Section 143 of the Companies Act, 1929, and of article 88 of Table A. I do not pause here to set them out; I will do so later. He further claimed under the general law that, even if the shares were not validly issued, yet he was entitled to treat them as validly issued, a claim that must have been faintly pursued in the Courts below, since it finds no mention in any judgment. He further claimed that Kanssen was debarred by his laches from alleging the invalidity of the issue of shares. This last claim has no justification. I observe that neither Cohen, J., nor the Court of Appeal deal with it, presumably because to them, as to me, it appeared upon the facts to be incapable of serious argument. At the hearing before Cohen, J., and in the Court of Appeal she major argument was upon the section and article to which 1 have referred, the defence upon which Morris relied being met by the plea that in the circumstances of the case neither section nor article was relevant and even if they were they would not avail him since he was put upon his inquiry and might, if he had made proper inquiries, have discovered the truth. Several questions of difficulty seem to be here involved; first whether either section or article has any application to the present case; second, what amounts to discovery of a defect for the purpose of either section or article and whether any party is debarred from its benefit unless and until he has himself discovered the defect; third (an elaboration perhaps of the second question) whether, if a party is put upon his inquiry and he might if he made inquiry discover the defect, he can still say that he has not discovered it; and fourthly, in the circumstances of the present case whether Morris was in fact put upon his inquiry and, being so put, made the proper inquiry.
It seems that in both Courts below it was on the first question assumed (not. indeed by counsel for Kanssen but in the judgments of the Court) that the section and article were relevant. In both Courts, too, on the second question it was decided that Morris could rely on them unless he discovered the defect; it was immaterial that Cromie and Strelitz were at all times well aware of it. On the third question both Courts decided that Morris was put on his inquiry, holding that, if he relied on the section or article, he must be subject to the same obligation as if he was relying on the general law as stated in Turquand's case', to which I refer later. It was upon the fourth question that the Courts diverged, Cohen, J., holding that, being put upon his inquiry, he made the inquiries that the circumstances demanded, the Court of Appeal holding that he had not made such inquiries and therefore could not be allowed to say that he had not discovered this defect. I have ventured to state in this compendious form judgments which covered a wide field. I have done so because the conclusion to which I understand that your Lordships have unanimously come upon the first question, makes it unnecessary to consider the other questions. They arise only if the circumstances of the present case bring it within the scope of section or article.
Before I consider this first question I may dispose of two other matters. First, I agree with the Court of Appeal that in any view of the case Morris cannot maintain that the seventeen shares allotted to Strelitz and by him transferred to Morris were validly allotted. Strelitz at all times knew of the defect and Morris could get no better title. Secondly, I observe that the Master of the Rolls dismissed Morris's plea on the additional ground that either Cromie was a principal as between himself and the company (in which case Morris was merely a nominee between whom and the company there was no privity) or that he was acting as agent for Morris in applying for the shares allotted to him. I do not think that the first alternative is on the facts a tenable view. But the Master of the Rolls goes on to say that if the latter view is right the knowledge of the defect which the agent had must be imputed to the principal, Morris thus being affected with Cromie's knowledge. I would not be taken as assenting to this view, which appears to ignore both the capacity in which Cromie acquired the relevant knowledge and the fact that Cromie was acting fraudulently as well towards Morris as to other parties.
The first question to which I return is whether (a) Section 143 of the Companies Act, 1929, or (b) article 88 of Table A which was adopted by the company has any relevance to the circumstances of the present case. Section 143 of the Companies Act, 1929, which is in the same terms as corresponding sections in previous Acts, provides that "the acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification." Article 88 of Table A, which does not materially differ from similar articles in earlier tables, provides that "all acts done by any meeting of the directors or of a committee of directors or by any person acting as a director shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid or that they or any of them were disqualified be as valid as if every such person had been duly appointed and was qualified to be a director." The section can be invoked only where there is a defect afterwards discovered in the appointment or qualification of a director; in the article the condition is that it is afterwards discovered that there was some defect in the appointment of a director or person acting as a director or that he was disqualified to act as a director. Though the language of the section differs in some respects from that of the article, it does not appear that the difference is material for the purpose of the present case.
The facts relevant to the question now under consideration have already been stated. I will very briefly tabulate them: (1) On February 1, 1940, Cromie and Kanssen were the only directors and the only shareholders holding one share each. (2) On or about that date the fraudulent assumption of office by Strelitz and a minute concocted to record an appointment which did not take place. (3) On April 9, 1840, an ineffective attempt to expel Kanssen from his office. (4) On April 12, 1940, the ineffective allotment of one share to Strelitz and seven shares to Cromie at a purported meeting of directors. (5) On April 26, 1940, an extraordinary general meeting of the company at which, as I have pointed out, nothing was effectively done. (6) At the end of 1941 the determination of the term of office of Cromie and Kanssen and of Strelitz, if he was a director, and from that date no directors of the company.
It is in these circumstances that the question arises whether the section or article can be called in aid by Morris in order to validate the transactions of March 30, 1942, namely, the allotment to him of shares or the appointment of him as a director. Do the facts that I have stated establish a defect in the appointment or qualification of Cromie or Strelitz? There is, as it appears to me, a vital distinction between (a) an appointment in which there is a defect or, in other words, a defective appointment, and (b) no appointment at all. In the first case it is implied that some act is done which purports to be an appointment but is by reason of some defect inadequate for the purpose; in the second case there is not a defect; there is no act at all. The section does not say that the acts of a person acting as director shall be valid notwithstanding that it is afterwards discovered that he was not appointed a director. Even if it did, it might well be contended that at least a purported appointment was postulated. But it does not do so, and it would, I think, be doing violence to plain language to construe the section as covering a case in which there has been no genuine attempt to appoint at all. These observations apply equally where the term of office of a director has expired, but he nevertheless continues to act as a director, and where the office has been from the outset usurped without the colour of authority. Cromie's acts after the end of 1941 were not validated by the section; Strelitz's acts were at no time validated.
I have so far dealt with defect in "appointment", and what I have said in regard to the section covers the article also where the same words are repeated. Some argument was founded by counsel for the appellant upon the words in the section "or qualification" and in the article "disqualified." This argument is not easy to follow. So far as both Cromie and Strelitz were concerned, there was no defect in their qualification after the end of 1941. They were not disqualified. They were, so far as I know, qualified to act, but they had not been appointed. I do not suggest that qualification refers only to the holding of qualification shares. But whatever extended meaning may be given to "qualification" or "disqualified" I find it impossible to say that it covers the case of Cromie or of Strelitz. The point may be summed up by saying that the section and the article being designed as machinery to avoid questions being raised as to the validity of transactions where there has been a slip in the appointment of a director, cannot be utilised for the purpose of ignoring or overriding the substantive provisions relating to such appointment.
I have come to this conclusion unaided by authority, but I am glad to find that it is supported by Hear and cogent authority. In Tyne Mutual Steamship Insurance Association v. Brown the meaning of the corresponding section of the Companies Act then in force and of a strictly comparable article had to be considered, where the facts were that directors had continued to act after their term of office had expired, and Lord Russell of Killowen, L.C.J., having read the article, thus expressed himself: "What does this provide? It provides for the cure of defects in the appointment or qualification of directors. Here there has been no appointment at all." He held, therefore, that the article had no application to the case. This authority has stood unchallenged for fifty years, and, though on two occasions since its decision the whole law relating to limited companies has been reviewed by expert committees and amended by the Legislature, it has in this respect remained unaltered. This affords strong support for a construction which in any case appears to me to be the correct one. I would add that, though no other express authority has been called to the attention of the House, yet the language of Lord Lindley, M.R., and Chitty, L.J., in Dawson v. African Consolidated Land and Trading Co., of Farwell, J., in British Asbestos Co. v. Boyd, and of Lord Cozens-Hardy, M.R., and Swinfen Eady, L.J., in Channel Collieries Trusts, Ltd. v. St. Margaret's, Dover and Martin Mill Light Railway clearly indicate that in the opinion of those learned Judges the section and article alike deal with slips or irregularities in appointment, not with a total absence of appointment, and still less with a fraudulent usurpation of authority.
Coming to this conclusion, I do not find it necessary to express any opinion upon the question what is the meaning of the words "afterwards discovered" in the section. I would not be taken as either assenting to or dissenting from the proposition, which appears to have been accepted in the Courts below, that the section or article can be called in aid by a third party unless and until he has himself discovered the defect in the appointment or qualification of a director. Nor would I express any final view upon what for this purpose amounts to "discovery," and in particular whether the rule as to inquiry is to be imported into the consideration of it.
The appellant having failed, for the reason that I have indicated, to establish his case upon the section or the article, was allowed by the indulgence of the House, although he had not raised the point in his formal case, to contend that he was in any case entitled to succeed by virtue of the rule of law which is conveniently called the rule in Turquand's case (Royal British Bank v. Turquand). Upon this contention the House has not the benefit of the opinion either of Cohen, J., or the Court of Appeal, before whom the point, if taken at all, appears not to have been pressed. The claim under this head refers only to the allotment of the thirty-four shares which were allotted to Morris on March 30, 1942. Upon this contention two questions appear to arise: (1) whether Morris can in the circumstances invoke the rule, and (2) whether, if he can otherwise do so, he is nevertheless debarred from relief under it upon the ground that he was put upon his inquiry and might, if he had made proper inquiries, have learned the truth. The first question involves, first, a consideration of Morris's position when the shares were allotted to him, and secondly, an examination of the rule in order that it may be determined whether Morris comes within its scope. Though little credence could be attached to the uncorroborated testimony of Cromie or Strelitz, Morris was accepted by Cohen, J., as a witness of truth, and his evidence agreed with that of the recorded minute of March 30, 1942, which itself is made prima facie evidence by Section 120 (2) of the Companies Act, 1929. It appears then that the board meeting held on that day fell into two parts. There were first present as directors Cromie and Strelitz, with the campany's solicitor in attendance. Cromie "told the directors" (so runs the minute) "that he had received certain proposals from Mr. Lewis Morris which would enable the Rialto cinema to be reopened, and he, as a shareholder, proposed to write a letter to Mr. Morris setting out the terms of the arrangement. The letter was produced and read." Upon this it was resolved that Morris be appointed a director of the company and that he be made managing director of the company. Morris, it is recorded, then joined the board. What I must regard as the second part of the meeting with the new board then began, and the minute records that an application from Cromie for ninety shares of Ł 1 each in the capital of the company together with his cheque for Ł 90 was received and that at his request the application asked that the shares be allotted thirty-four to Morris, thirty-two to Strelitz and twenty-four to Cromie, and that it was resolved that the shares be so allotted (the numbers of the shares being given) and that it was further resolved that share certificates be issued for all the shares which had been allotted in the company. There were certain further proceedings to which I need not refer.
From this narrative it is clear that Morris himself acted as a director in the allotment and issue of the shares, including those allotted and issued to himself. It is, I think, an irrelevant consideration that he had only be come a director immediately before that event. Upon this I will say something later. He in fact acted as a director and was the officer and agent of the company in the allotment and issue of shares. That neither his act nor those of his colleagues were valid is for the purpose of this argument assumed. The question is whether he can nevertheless under the rule in Turquand's case claim that he is entitled as between himself and the company to treat that act as done with the authority of the company, which was in fact and in law done without its authority.
I think that this question admits of an easy answer. The so-called rule in Turquand's rase is, I think, correctly stated in Halsbury (2nd edition), Vol. V, at page 423: "But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular." It was competent for three directors of the company to allot its shares; three persons purporting to act as directors did allot its shares; therefore Morris, who acted in good faith, was entitled to treat the shares as validly allotted. Thus runs the argument. I leave aside the question what in the application of the rule is the meaning of "good faith" and whether Morris, according to the true meaning of those words, acted in good faith, and ask whether Morris, can in any event bring himself within the scope of the rule. I think it is clear upon principle that he cannot. In the transaction which he would sustain and Kanssen seeks to impeach, he was himself acting as a director. I asked learned counsel for the appellants whether there was any authority for the proposition that a director or de facto director could invoke the rule so as to validate a transaction which was in fact irregular and unauthorised. He could point to none. My own researches, though in such a matter they cannot easily be complete, have disclosed no case in which such a proposition has been affirmed. Nor have I met any case in which such a person has without discussion of the principle obtained such relief. Nor had I even heard the proposition put forward until I heard it at the bar of the House in this case. The reason is not far to seek.
One of the fundamental maxims of the law is the maxim "omnia praesumuntur rita esse acta." It has many applications. In the law of agency it is illustrated by the doctrine of ostensible authority. In the law relating to corporations its application is very similar. The wheels of business will not go smoothly round unless it may be assumed that that is in order which appears to be in order. But the maxim has its proper limits. An ostensible agent cannot bind his principal to that which the principal cannot lawfully do. The directors or acting directors or other officers of a company cannot bind it to a transaction which is ultra vires. Nor is this the only limit to its application. It is a rule designed for the protection of those who are entitled to assume, just because they cannot know, that the person with whom they deal has the authority which he claims. This is clearly shown by the fact that the rule cannot be invoked if the condition is no longer satisfied, that is, if he who would invoke it is put upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he ought to make might tell him that they were wrongly done. What then is the position of the director or acting director who claims to hold the company to a transaction which the company has not, though it might have, authorised? Your Lordships have not in this case to consider what the result might be if such a director had not himself purported to act on behalf of the company in the unauthorised transaction. For here Morris was himself purporting to act on behalf of the company in a transaction in which he had no authority. Can he then say that he was entitled to assume that all was in order?
The old question comes into my mind, "Quis custodiet ipsos custodes?" It is the duty of directors, and equally of those who purport to act as directors, to look after the affairs of the company, to see that it acts within its powers and that its transactions are regular and orderly. To admit in their favour a presumption that that is rightly done which they have themselves wrongly done is to encourage ignorance and condone dereliction from duty. It may be that in some cases, a director is not blameworthy in his unauthorised act. It may be that in such a case some other remedy is open to him, either against the company or against those by whose fraud he was led into this situation, but I cannot admit that there is open to him the remedy of invoking this rule and giving validity to an otherwise invalid transaction. His duty as a director is to know; his interest, when he invokes the rule, is to disclaim knowledge. Such a conflict can be resolved in only one way. It was urged upon your Lordships that the purported appointment of Morris as a director having taken place immediately before the unauthorised allotment of shares, he had in fact no opportunity of learning the true state of affairs, and it was pointed out that, had the proceedings at the meeting of March 30, 1942, been taken in the reverse order, first the allotment of shares, then the appointment of Morris as a director, the result would be different. And then it was said that it was so absurd that there should be a different result according to the order of proceedings, that the original conclusion could not be accepted. This argument has for me no weight or substance. Admit, as to my mind one must admit, that a director is not for the purpose of the rule in the same position as a stranger; then it is as immaterial how long he has been a director, as it is whether he is an idle or diligent director or a robust or sick director.
Concluding as I do that Morris is not a person who in respect of this transaction comes within the scope of the rule, I do not find it necessary to consider the further question whether in any case he would be deprived of its benefit by reason of the fact that even regarded as an outsider he was put upon his inquiry and did not make the inquiry that he should have made. This is a question of fact upon which different views have been, and may well be, entertained.
In my opinion the appeal should be dismissed.
Lord Uthwatt.—My Lords, I agree.
Viscount Simon.—The opinion which Lord Simonds has prepared in this appeal covers the whole ground, and I need say no more than that I concur in every respect with his conclusions. I move that the appeal be dismissed.
Lord Thankerton.—My Lords, I also have had an opportunity of considering the opinion by my noble and learned friend Lord Simonds, and I concur in it.
Lord Porter.— My Lords, I have had the like opportunity and like wise concur.
[1960]
30 COMP. CAS. 582 (
V.
P
C MALLICK, J.
SUIT
NO. 487 OF 1956
MARCH
3, 1958
P.C.MALLICK,
J. - This is a suit in which
he plaintiff seeks to establish his title to a bunch of 26,752 ordinary shares
in the defendant company. The company and one Ramapada Gupta in whose name the
shares are registered in the books of the Company have been impleaded as
defendants.
The Plaintiff
who was born in
At the
beginning the company used to deal with imported medicines. In 1939, the
plaintiff conceived the idea of manufacturing medicine and with that object the
plaintiff appointed Dr. Mukherjee a very able chemist and put him in charge of
the manufacturing side. Dr.Mukherjee was given full scope and every facility to
manufacture medicine. Dr. Mukherjee in his turn proved his worth. Dr.Mukherjee's
services to the company were RECOGNISED and he was made a director of the
company in July, 1940. In a formal resolution passed in a meeting of the board
of directors held on May, 4, 1943, the plaintiff as managing director recorded
that, the success achieved by the company was chiefly due to the quality
products prepared by Dr.Mukherjee. The phenomenal success of the company will
appear from the sale of its products which rose to over Rs.50 lakhs from 1952
onward. Dr.Mukherjee's position in the company steadily improved and while the
plaintiff was the No.1 in the Company, Dr.Mukherjee became No.2. Dr.Mukherjee's
remuneration was increased with the passage of time and when the dispute
started Dr.Mukherjee was getting as his remuneration 1 per cent of the total
sale, i.e. more than Rs.55,000 per annum. This was much more than what the
plaintiff was getting as Managing Director. In 1948, Dr.Neogy was appointed as
a propaganda officer on a salary of Rs.500 per month. Shortly, there after
Dr.Neogy was made a director.
In January,
1949, Dr.Mukherjee went to
It appears
that feelings between the parties were strained in the middle of 1954.
Dr.Mukherjee stated in his evidence that he apprehended that he would be thrown
out from the company. The plaintiff denied that he had any such intention . Be
that as it may , whatever the motive of Dr.Mukherjee might have been i.e. to
prevent the plaintiff from ousting him as a measure of self protection or to
himself get supreme control of the company by ousting the plaintiff
Dr.Mukherjee acted and acted with vigour. There was a general meeting of the
company on the morning of September, 10, 1954, to increase the share capital.
The meeting was held in which the plaintiff, Dr.Mukherjee, and Dr.Neogy amongst
others were present. The plaintiff wanted the increase of share capital by the
issue of preference shares only because this carried no voting right.
Dr.Mukherjee's party wanted the increase of share capital by the issue of
ordinary shares. According to the plaintiff, the meeting ended without passing
any resolution, while according to Dr.Mukherjee the meeting unanimously agreed
to increase the share capital by the issue of 60,000 additional ordinary
shares. There is a minute of the company to this effect. The plaintiff contends
that it is a false minute. Be that as it may, it is clear that there was open
hostility between the plaintiff one one side and Dr.Mukherjee, with whom
Dr.Neogy sided, on the other. Events began to move rapidly thereafter. A
meeting of the board of directors was alleged to have been held at 4.00 P.M. in
the office in which Dr.Mukherjee and Neogy were alleged to have been present.
No notice of the meeting was given to the plaintiff because Dr.Mukherjee was
proceeding on the basis that the plaintiff had ipso facto vacated his office as
director. In this meeting a number of important resolutions were passed.
Services of seven employees who, apparently , were loyal to the plaintiff were
terminated. The plaintiff was deprived of the power of operating on company's
account. Messrs and Biswas were appointed solicitor of the company and lastly
the company was declared to have a lien on all the shares registered in the
name of the plaintiff for the sum of Rs.4,00,887-14-8 alleged to be a debt due
by the plaintiff to the company on the said date. At or about the same time,
all the plaintiff's men including his son-in-law were physically ejected from
the factory premises and the plaintiff himself was refused access either in the
factory or in the office. It is clear that Dr.Mukherjee acted with vigour and
succeeded in his coup and got complete possession of the company,. Mr.Subimal
Roy learned counsel appearing for the plaintiff characterised this coup as the
first stage in the conspiracy to deprive the plaintiff of his interest in the
company.
To continue
the narrative. On September, 16, 1954, the plaintiff intimated Drs. Mukherjee
and Neogy that they had ceased to be directors as no meeting of the company was
held since December, 7, 1950. On September, 18, 1954, the plaintiff's then
solicitors Messrs. Sandersons and Morgans wrote to Drs. Mukherjee and Neogy to
the same effect. On September, 23, the directors resolved to enforce the lien
against the plaintiff's shares and Dr.Mukherjee was authorised to serve notice
of demand for payment of the debt and also to serve notice of sale in default
of payment. This notice was served on the plaintiff on the following day. This
notice was replied to by the plaintiff's then solicitors on the 27th in which
the indebtedness was denied , the right to sell the shares was disputed and the
company was warned that any action taken on the basis of this notice would be
illegal and would be contested. In October, 1954, the parties came to Court.
The Plaintiff
filed a suit seeking a number of declarations, [1] to protect his right to act
as managing director,[2] challenging the validity of the issue of new shares
and allotment thereof and a number of other reliefs. In this Suit Dr.Mukherjee
, Dr.Neogy and the company were impleaded as defendants. This is Suit No.3112
of 1954. On November, 15, 1954, another suit was filed by Mrs.Judah and
Nagendra Nath Ghose on behalf of all the shareholders against Dr.Mukherjee,
Dr.Neogy and Debendranath Bhattacharji in their capacity as representative of
the newly issued shares for a declaration that the plaintiff was still the
managing director, for injunction restraining the defendants from interfering
with the management of the company and for other reliefs. This is Suit No.3117
of 1954. There were some interlocutory proceedings in these suits. In Suit
No.3117 of 1954 on the application of the plaintiff a receiver was appointed by
P.B.MUKHERJEA J. against which an appeal was preferred. This is Appeal No.56 of
1955. An injunction was issued on the plaintiff's application in Suit No.3112
of 1954 restraining the sale of the same shares, as in the instant Suit.
Ultimately the suits were settled and withdrawn, and on January, 24, 1956, the
receiver made over posession of the Company to Dr.Mukherjee pursuant to the
order of the
The suit is
instituted for a declaration that the plaintiff is the holder of 26,752
ordinary shares and as such is alone entitled to the rights and privileges attached
to the shares, that the transfer of shares in the name of the defendant
Ramapada Gupta is illegal, void and inoperative , that the defendant Ramapada
Gupta be restrained by an injunction from exercising any right or privilege
attached to these shares, that the share register be rectified and other
reliefs, such as damages against Ramapada Gupta. It must be admitted that the
drafting of the plaint is not very happy. There are, however, averments which
do disclose a sufficient cause of action against both the defendants. The
plaint does contain, inter alia , the following averments. No general meeting
having been held for years, there were no properly appointed directors from
January, 1951, onwards and that Drs. Mukherjee and Neogy had discovered before
September, 23, 1954, that they had vacated their office and were not entitled
to act as directors and that they nevertheless persisted in acting as
directors, that the general meetings that were held after 1950 were al illegal;
that no debt was due by the plaintiff as alleged or at all for which the
company can claim any lien and that in any event it was was not an ascertained
amount or presently payable. The sale was purported to be held by
Dr.S.L.Mukherjee and Dr.B.P.Neogy who masqueraded themselves as the board of
directors, in other words, it is alleged that they acted as directors though
they were not in fact directors. The sale has been characterised as fraudulent
in consequence. There is a clear averment that the defendant Ramapada Gupta had
full knowledge of the illegal nature of the transaction and that the sale was
fictitious. These allegations, in my judgment , do amount to an averment of
absence of bona fides on the part of Ramapada Gupta in respect of his purchase
if there was a purchase at all.
The company in
its written statement disputed each of the allegations made in the plaint. It
is pleaded that, the various meetings of the company were properly held, that
Dr.Mukherjee and Dr.Neogy were properly appointed as directors and were
entitled to act as such, that the plaintiff was liable to pay to the company
the sum referred to in the letter dated September, 24,m 1954, that the same was
presently payable and that the company had a lien on the shares of the
plaintiff for the said sum, that the sale was properly effected in enforcement
of the lien. It is alleged that the plaintiff is not entitled to challenge
Ramapada's title as purchaser. It is denied that the sale was fraudulent or
fictitious as alleged in the plaint. In paragraph 22 the point is taken that
the suit is bad for non -joinder of necessary parties. In paragraph 23 it is
pleaded that the suit is barred by the provisions of Order II rule 2 and Order
XXIII rule 1[3] of the Code of Civil Procedure by reason of the withdrawal of
suits Nos.3112 and 3117 of 1954 without permission to institute a fresh suit.
The defendant Ramapada Gupta in his written statement made out substantially
the same defence. In paragraph 1 of the written statement he sets out the
informations he had when he purchased the shares. The only information he had
was that the shares belonged to the plaintiff, that the plaintiff was indebted
to the company for Rs.4,00,887-14-8 for which the company had a lien, that due
notice to enforce the lien was given, that the plaintiff instituted a suit
challenging his indebtedness to the company , that in the said suit, an
injunction was issued against Dr.Mukherjee and Dr.Neogy restraining them from
selling the shares in enforcement of the lien and that the suit was withdrawn
without any liberity to institute a fresh suit on the same subject matter. He
had further information that by an order of the court of the appeal the
receiver was directed to make over possession to a nominee of the board of
directors consisting of Dr.Mukherjee and Dr.Neogy and D.N.Bhattacharji and that
on January, 24, 1956, when Ramapada Gupta purchased the shares, no suit was
pending with respect to the shares and that the plaintiff had not paid off his
dues to the company. Fully relying on these information the defendant Ramapada
Gupta bona fide purchased the said shares at par.
On these
pleadings the following issues were settled :
" 1. Is this suit barred by Order II, rule 2[3]
and/or Order XXXIII, rule 1[3] of the Code of Civil Procedure ?
2. Were any annual general
meetings of the company held on January, 6, 1955? Were the elections of
directors in the said meetings invalid as alleged in the plaint ?
3.(a) Were there no directors or sufficient
directors of the company as alleged in the paragraph 14 of the plaint?
(b) Did five members of the
company convene an extraordinary general meeting as alleged in the said
paragraph? If so, was it duly convened?
(c) Was there any
extraordinary general meeting of the company as alleged in the said paragraph?
If so, was a new board of directors elected in the said meeting as alleged in
the said paragraph? Was such election lawful?
4.(a) Was there any money due by the plaintiff to
the defendant company for debts or liabilities? If so, how much?
(b) How much of the said amount
is covered by the notice dated September, 24, 1954?
(c) For what sum the company
had a lien on the plaintiff's shares?
(d) Was the defendant company
entitled to sell the shares in enforcement of such lien?
5. Was the sale of 26,752 ordinary
shares of the company belonging to the plaintiff to the defendant No.1 bad,
illegal or void as alleged in paragraph 21 of the plaint?
6. Did defendant No.1
connive and/or otherwise conspire with Dr.Mukherjee and Dr.Neogy in effecting
the sale of the said shares to defendant No.1 and in entering the name of
defendant No.1 in the share register of the company?
7. Is the plaintiff entitled to
rectification of the share register?
8. Did the plaintiff continue to be the
owner of the shares in suit after the date of alleged sale ?
9. Did Dr.S.L.Mukherjee or
Dr.Neogy vacate their office of directors or cease to be directors of the
company as alleged in paragraph 9 read with paragraphs 7 and 8 of the plaint?
10. Is the suit bad for non -joinder of Dr.S.L.Mukherjee
and Dr.Neogy?
11. To what relief or reliefs, if any, is the
plaintiff entitled?
In support of
his case plaintiff tendered his own evidence. The defendant company tendered
the evidence of Dr.S.L.Mukherjee, its present managing director, Sri Vimal
Mitra, the accountant in 1954, and a number of other employees of the company
and one Dr.Das Gupta. Defendant Ramapada Gupta did not tendered his own
evidence nor call any witness to tender evidence on his behalf. Over and above
this oral evidence a large mass of documentary evidence has been tendered. To
prove the plaintiff's liability, ,entries in the ledger books of the company
for various years, a number of statements compiled by the officers of the
company, the balance sheets of the company with auditor's report, a large
number of vouchers and correspondence have been tendered. The proceedings in
the minute books of the general meetings and directors' meetings have also been
tendered by either side. As none of the documents were admitted and formal
proof was not dispensed with, considerable time was spent in formally proving
the entries in the vouchers and the minutes and records of the company.
Witnesses who came to prove these documents were elaborately cross examined .
Certain court proceedings and correspondence have also been tendered in
evidence.
[His Lordship
considered the evidence and then held that the withdrawal of suits Nos.3112 and
3117 of 1954 did not operate as a bar to the institution of this suit ]
The shares in
suit were sold to liquidate the plaintiff's indebtedness to the defendant
company amounting to Rs.4,00,887-14-8. According to the defendant company this
total liability of the plaintiff consists of :
(a) Plaintiffs debit balance in the personal
account amounting to rs.81,002.
(b) Unrealised debit balance –
(i) Albert David [G.B.] Ltd. amounting to
Rs.57,918-3-9
(ii) Albert David [Pak.] Ltd. amounting to
Rs.1,608-2-0 and
(iii) Albert David [Cey.] Ltd. amounting to
Rs.54,654-4-6 and[c] Unusual discount given to
(iv) Albert David [Cey.] Ltd. amounting to
Rs.76,392-4-0 and
(v) Albert David [Pak.] Ltd. amounting to
Rs.1,29,313-0-1.
The plaintiff
is held liable for the unrealised debit balance against the three said foreign companies,.
He is also made liable for the unusual discount alleged to have been given by
the plaintiff the
Taking the
unrealised debit balance of the
It is argued
that this liability of the plaintiff as director arises because of the provisions
of section 86F of the Indian Companies Act and because the plaintiff as the
managing director was in the position of trustee. Section 86F of the Companies
Act reads as follows :
"Except
with the consent of the directors, a director of the company, or the firm of
which he is a partner or any partner of such firm of the private company of
which he is a member or director shall not enter into any contracts for the
sale, purchase or supply of goods and materials with the company , provided
that nothing herein contained shall affect any such contract or agreement for
such sale, purchase or supply entered into before the commencement of the
Indian Companies [Amendment] Act, 1936."
In order that
the section may apply, it must be proved that the plaintiff is a member or
director of Great Britain, Ceylon and Pakistan Companies, that these companies
are private companies, that contracts for sale, purchase or supply of goods
between the defendant company and the other companies were effected by the
plaintiff without the consent of the other directors of the defendant company.
If there is no proof of any one of the above facts, the section would not
apply. It is proved from the plaintiff admission contained in his letter to the
company dated July, 7, 1954, that he was interested as a Member and or director
of the three companies though there is no evidence as to when the plaintiff
became interested so as to enable the court to ascertain whether at the time of
each contract for sale or purchase the plaintiff was interested as such. There
is no evidence that the
Even assuming
that section 86F does apply to the case, I do not think the section imposes on
the offending director the liability of the private companies. It is argued by
Mr.Das that these contracts for sale of goods to the private companies must be
held to be illegal in the absence of previous consent of the directors and
hence there must be restitution of the benefit to the defendant company under
section 65 of the Indian Contract Act In the first place, the language of the
section does not indicate that such a contract effected by a director without
the consent of the other directors is illegal. The prohibition is against the
director and there is a penalty for any violation of the provisions of the
section. This does not mean that the contract is void . In the second place,
the party liable to restitution under section 65 of the Indian Contract Act is
the private company and even if the plaintiff is a member or director of the private
company he is in law different from the company. It is to be noted, however,
that the claim is made on the footing that the private companies are liable on
account of the balance of price under a contract for sale. The claim was never
made de hors the contract. It is interesting to note that the defendant
company, up to the date of the suit , never repudiated the contracts, never
called upon the private companies to return back the medicines sold by itself
and never offered to return back whatever money it received on account of
price. I am unable to hold that the plaintiff as the managing director of the
defendant company can be liable for the balance of price due and payable by the
foreign companies.
Mr. Das
further argued that even assuming that section 86F does not cover the case, the
plaintiff is, nevertheless. liable on general principles. The plaintiff as a
director was occupying a fiduciary position vis-a-vis the company. Occupying as
he did a fiduciary position the plaintiff as a director of the defendant
company could not in law enter into any dealings with the
The position
of the directors has been laid down in a number of authoritative decisions. In
"Directors
are persons selected to manage the affairs of the company for the benefit of
the shareholders. It is an office of trust, which if they undertake it is their
duty to perform fully and entirely."
This two fold
character of the directors has been well expressed by LORD SELBOURNE in Great
Eastern Railway Company v. Turner (2) (1872) 8
"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
observations of SIR GEORGE JESSEL in the case of In re Forest of Dean Coal
Mining Co. (3) (1878) IO
It is clear
that the directors are trustees in a very limited sense. They are liable as
trustees for breach of trust, if they misapplied the funds or committed breach
of bye-laws. their position differs considerably from ordinary trustees and it
is futile to apply the entire law of the trust and the whole body of rules
enunciated by the court of equity defining the rights and liabilities of the
trustees, to determine the rights and liabilities of a director. The conduct of
the directors is to be measured with reference to the character of the
undertaking which they are appointed to manage and conduct. In the case of an
ordinary commercial company, a director does not commit a breach of trust when
he, in the usual course of business, sells or purchases goods from another
company in which the director had interest. He is only liable for breach of
trust when he misapplies the fund and misappropriates any assets. In the
instant case, the plaintiff as managing director has neither misappropritated
the funds or the assets of the company nor he is alleged to have committed any
breach of bye-laws. How then can the plaintiff to be held liable ? I do not
understand the argument of Mr. Das that section 23 of the Indian Contract Act
applies to the case of a contract entered into by the managing director of a
public company with another private company in which the said director has
interest. Mr. Das has cited certain cases in which the court of equity refused
specific performance of contract. The fact that a contract is not enforced by a
court of equity on equitable grounds does not make the contract illegal within
section 23 of the Indian Contract Act. There may be a perfectly good contract,
but nevertheless a court of equity would not enforce it on equitable
consideration. There is no statute prohibiting contracts between two companies,
one private and another public, with some common shareholders and common
directors. The two companies in law are two different persons, even though they
have some common shareholders or directors. Section 86 F of the Companies Act
does not, in my judgement, contain any such prohibition. On the contrary, it expressly
states that a director, with the consent of the other directors, can enter into
a contract with a partnership or private company in which he is partner or
shareholder or director. The section does not seem to recognise any public
policy prohibiting a contract between a private and public company with some
common shareholders or directors. Not a single decision has been cited in which
any court, either in
For reasons
stated above, I hold that the plaintiff was not indebted to the defendant
company on account of its transactions with the Great Britain Company, the
I have now to
examine the liability of the plaintiff as representing the debit balance in the
plaintiff's personal accounts. This debt is proved by the entire in the
company's general ledger and control ledger of the personal account of the
plaintiff and by vouchers. I have held that it is not open to the plaintiff to
contend that the account books of the company up to October, 1953, are not
correct. His admission contained in the circular letter dated August 16, 1954,
is binding on him. On the basis of entries in the general ledger book, the
plaintiff's liability to the company as an October, 31, 1953, must be held to
be Rs. 57,797. Subsequent liability has to be strictly proved. I am not,
satisfied that the entries in the general ledger from November, I, 1953, to
September IO, 1954, were made before the plaintiff was ejected from office on
September 10, 1954. Nor am I satisfied with the entires made in the control
ledger. The probabilities are that these entries were made after the plaintiff
was ejected and made under the direction of Dr. S.L. Mukherjee, who was ruling
over the destinies of this company since then. Dr. Mukherjee was over-anxious
to build up as much liability of the plaintiff as possible. The entries in the
general ledger and control ledger cannot be taken as sufficient to make the
plaintiff liable. The other evidence is the vouchers. To the extent the
vouchers are signed by the plaintiff and such of the vouchers as have been
proved to represent payment made to the bank on account of the plaintiff's
relations or plaintiff's such relations as wife and daughter, they will
constitute the liability of the plaintiff. But control vouchers from which many
of the entire in the control ledger have been made represent money spent on
other accounts for which the plaintiff has been made liable. These payments
were made on other accounts and Bimal Mitra had no personal knowledge of it.
They must have been debited against the plaintiff personal account by Bimal
Mitra under instructions of the man controlling the company- most probably Dr.
Mukherjee or Dr. Negate. I would not hold the plaintiff's liable on these
entires based on these control ledger vouchers. Many of the other entries in
the control ledger were made by way of transfer of entries from the personal
account of other people to the plaintiff's account. The correctness of the
entires in the other accounts has not been satisfactorily proved.
For reasons
given above, I am unable to hold that on September 10, 1954, the plaintiff in
his personal account was indebted to the defendant company in the sum of Rs.
81,002. The plaintiff has been proved to have been liable on October 31, 1953,
for Rs. 57,797, but for the subsequent period the proof of liability is
insufficient. I believe, however, on the evidence on record that on September
10, 1954, the plaintiff was liable, but not to the extent of Rs. 81,002 as
claimed by the defendant company. It is not necessary for me to determine the
exact indebtedness of the plaintiff in this suit. To appreciate the arguments
advanced by the parties and to be considered later, it is necessary to decide
weather the plaintiff's indebtedness on September 10, 1954, was Rs.
4,00,887-14-6 or whether the plaintiff was at all indebted or if so, whether
the indebtedness was nominal. I hold, on the evidence before me, that the
plaintiff was not indebted to the extent of Rs. 4,00,887-14-6, but that the
plaintiff was indebted for a lower amount and that such amount, though less
than Rs. 81,002-0-4 can not be certainly characterized as nominal I believe
that the in debtness would amount to near about say Rs. 50,000 just to indicate
that the indebtedness was not nominal. I hold further, that on September, 10,
1954, the exact liability of the plaintiff was not ascertained, nor were the
people controlling the company since September 1954, anxious honestly to find
out the plaintiff's liability. Dr. Mukherjee and Dr. Negate, I am satisfied,
were anxious to cook up a liability of the plaintiff to the company as much as
possible, so as to give them a pretext to sell the entire ordinary shares of
the plaintiff. Dr. Mukherjee and Dr. Negate knew that so long as the plaintiff
had this large block of ordinary shares which carried the voting right, their
position in the company was extremely insecure.
The shares in suit
were sold in exercise of the power of sale given to the directors by the
articles of the company to enforce the lien. It has been argued that in the
instant case there was no power of sale in any event, the resolutions imposing
lien and enforcing the lien by sale were passed by men who were not directors
of the company. This leads us to consider the articles under which the sale
took place. The relevant articles are articles 16, 17, 18, and 19, and are set
out below :
" 16. The
company shall have a first and paramount lien and charge available at law and
in equity upon all shares ( whether fully paid or not 0 registered in the name
of any member either alone or jointly with any other persons for his debts,
liabilities and engagements whether solely or jointly with any other person to
or with the company whether the period for the payment, fulfilment or discharge
thereof shall have actually arrived or not and such lien shall extend to all
dividends from time to time declared in respect of such shares. But the
directors may at the any time declare any such share to be exempt, wholly or
partially, from the provisions of this article.
17. The
directors may sell the shares subject to any such lien at such time or times
and in such manner as they think fit, but no sale shall be made until such time
as the money in respect of which such lien exists or some part thereof are or
is presently payable or the liability or engagement in respect of which such
lien exists is liable to be presently fulfilled or discharged and until a
demand and notice in writing stating the amount due or specifying the liability
or engagement and demanding payment or fulfilment or discharge thereof and
giving notice of intention to sell in default shall have been served on such
member or the persons (if any) entitled by transmission to the shares and
default in payment, fulfilment or discharge shall have been made by him or them
for seven days after such notice.
18. The nett
proceeds of any such sale shall be applied in or towards satisfaction of the
amount due to the company or of the liability or engagement as the case may be
and the balance (if any) shall be paid to the member or the persons (if any)
entitled by transmission to the shares so sold.
19. Upon any
such sale as aforesaid the directors may enter the purchaser's name in the
register as holder of the shares and the purchaser shall not be bound to see to
the application of the purchase money nor shall his title to the shares be
affected by any irregularity or invalidity in the proceedings in reference to
the sale."
It is to be
noted that these are not compulsory articles, that is, the company law does not
require that every company must adopt these articles. The articles, therefore,
constitute nothing more and nothing less than an agreement arrived at between
the company and its shareholders. It has to be considered, therefore, what
power the parties intended the company should have to sell the shares in
enforcement of the lien or charge.
Article 16
provides that the company " shall have a first and paramount lien and
charge available at law and in equity upon all shares ... registered in the
name of any member." Article 17 provides that " the directors may
sell the shares subject to any such lien " and does not mention " any
charge." Mr. Chaudhuri contended that on construction of these two
articles it must be held though for the debts and liabilities to it the company
shall have under article 16 a lien at law and charge in equity, yet it is only
in those cases where the company has a lien at law that the directors were
authorised to sell under article 17. The directors have no authority to sell
shares with respect to which the company had no lien at law, but merely an
equitable charge. There would be lien only in those case where the company had
the share-scrips in its possession, that is, the word "lien" has been
used in the sense of possessory of share scrips with respect to the shares, the
scrips of which are not in possession of the company but of the members, there
would be equitable charge and shares subject to such equitable charge were not
intended by the parties to be sold by the company under article 17. The only
way in which such equitable charge could be enforced is by way of a regular
suit in a civil court.
It has been
argued, on the other hand, by the learned counsel for the defendants that the
word "lien" has a more comprehensive connotation. It not merely means
possessor lien but equitable charge as well and the word "lien" has
been used in the articles in the comprehensive sense. That the word
"lien" has a more comprehensive meaning to include "equitable
charge" as well cannot and indeed has not been disputed. ( See the cases
of Everitt v. Automatic Weighing Machine Co. (1) [1892] 3
The reason
given by the learned Additional Solicitor-General is that "shares are to
be regarded as the interest of the shareholders in the company,, measured for
the purpose of liability and dividend by a sum of money, but consisting of a
series of mutual covenants entered into by all the shareholders inter
se......... and made up of various rights and liabilities contained in the
contract, including the right to a certain sum of money." ( See Borland's
Trustee v. Steel Brothers and Co. Ltd. [1901] I. Ch. 279 Shares are different
from share scrips. Share scrips are not documents of title but only evidence of
title. it is the share register and not the share scrips which is the document
of title. (See Commissioners of Inland Revenue v.
There is
another reason why it appears to me that the parties intended that only in
those case in which the company had possession of the share scrips and having
possessory lien, that the shares could be sold by the company under article 17
and not in the other case in which the company had no possession of the share
scrips but only an equitable charge on the share. in selling the shares the
company will be under an obligation to make over to the purchaser the share
scrips. How can this be done if the share scrips are not in the possession of
the company ? The Companies Act provides for the issue of duplicate scrips only
in cases when the share scrips are lost.
It seems to me
that the company had no. power to sell the shares under article 17 in the
instant case,because the shares were only subject to equitable charge and the
share scrips were not in the possession of the company. Article 17 gives no
authority to the directors to sell shares which are subject to equitable charge
only and the only way to enforce the equitable charge was ny instituting a
suit.
Assuming ,
however, that the lien could be enforced by sale of shares, it has to be
considered whether in the instant case the shares could be sold in terms of
article 17 of the articles. In this case the resolutions declaring lien and to
sell the shares in enforcement of the lien were passed by two directors - Dr.
Mukherjee and Dr. Neogy. So also the resolution to sell the shares to the
defendant Ramapada was passed by the same Dr. Mukherjee and Dr. Neogy. It is
argued by Mr. Chaudhury that all steps to enforce the lien by sale must be held
by directors properly and lawfully appointed, and if at the material time Dr.,
Mukherjee and Dr. Neogy were not directors then there has been a non-compliance
with the articles and the sale must be held to be invalid.
The Companies
Act and the articles provide for the appointment of directors by election in
the general meetings and by co-option. Except the plaintiff, who is the ex
officio managing director, every other director must either be elected in
general meeting of the shareholders or appointed in a board meeting. Dr.
Mukherjee and Dr. Neogy purported to act, at all material times, as elected
directors. It is very strongly urged that there has been no proper meetings of
the company and no proper appointment of directors. Dr. Mukherjee and Dr. Neogy
were not directors of the company at all. They were mere unurpers. Such
usurpers had no authority under article 17 to pass resolutions declaring lien,
determining the debt due by the plaintiff to the company, to take any steps in
enforcement of the lien by sale of shares. All proceedings beginning from the
determination of indebtedness and ending with the sale are tainted with
illegality done by and at the instance of two usurpers who were not directors
of the company at all.
To appreciate
the point made by Mr. Chaudhuri it is necessary to consider the provisions of
the Companies Act regarding meetings of the company. Section 76 of the
Companies Act provides that " a general meeting shall be held within
eighteen months from the date of incorporation and, thereafter, once at least
in every calendar year and not more than fifteen months after the holding of
the last preceding general meeting ." In default, the manager or director,
who is a willful party to the default, shall be liable to a fine sub-section
(3) provides that in default, the court may, on the application of the member
of the company, call or direct the calling of a general meeting by the company.
Section 78 provides for the calling of extraordinary general meeting on the
requisition of members. Section 79(2) provides that the following provisions
shall have effect in so far as the articles of the company do not make other
provisions in that behalf namely :
" two or
more members holding not less than one-tenth of share capital..... may call a
meeting ." In the instant case, there is article 64 of the articles of
association which provides for the calling of such an extraordinary general
meeting by five shareholders, if there are no directors capable of acting or if
there be no director.
It is
contended by Mr. Chaudhuri that in the instant case no annual general meeting
has been held for three years after December 7, 1950, till April 6, 1953.
Therefore, the annual general meeting of 1953 was bad in law and the
re-election of all the directors, namely, Dr. S.L. Mukherjee, B.P. Neogy,
S.Shangloo and Dr. Tapas Bose, was bad in law. The annual general meeting was
purported to be held in violation of the express provisions of section 76 of
the Companies Act, not to speak of the illegalities in convening the meeting by
a board of directors, which in law, did not exist on that date. The direction
elected in the annual general meeting held on december 7, 1950, in law vacated
their office fifteen months after that date, within which the next annual
general meeting should have been held. Hence all the acts of these directors
including the act of convening the annual general meeting of 1953, holding the
meeting, re-electing directors without proper nomination as provided by the
articles are invalid. Again, assuming that these directors appointed by the
general meeting held on April 6, 1953, could act as such, they in their turn
continued to be directors for fifteen months, and if no general meeting is held
thereafter, they vacated their office on July 6, 1954. After that date, the
company had no directors entitled to act as such. Thereafter, these directors
whose office had expired, cannot act as the board of directors of the company.
Such a board cannot give any order for convening any meeting of the company,
recommend for re-election of directors whose office long expired and secure
their re-election as directors without proper nomination by members by the
articles. On these grounds, it was strongly urged by Mr. Chaudhuri that the
12th, 13th, 14th, and 15th annual general meetings held on December 30, 1954,
and adjourned and held on January 6, 1955, were illegal and the election of all
the directors in the said meeting, including that of Dr. Mukherjee and Dr.
Neogy, must be held to be illegal. It is not a case of mere defect in the
appointment, but a case of no appointment at all. It is urged that in any event
from July 6, 1954 to January 6, 1955, there were no directors of the company
entitled to function and it is during this period, that is in September, 1954,
that the first essential step to enforce the lien by sale was taken by certain
usurpers pretending themselves to be directors. It is again emphasised, that it
is not a case of defective appointment but a case of no appointment at all.
The learned
Advocate-general contended that even though the annual general meeting might
not have been held as required by section 76 of the Companies Act, the company
does not cease to exist. In law, the company still exists and functions. The
mere fact that no annual general meeting is held within the period prescribed
by section 76 of the Companies Act, is not even a ground for winding up of the
company. Sub-section (3) of section 76 enables the court to direct the calling
of an annual general meeting after the period and there is no period of
limitation it follows that the court has the power of convening the annual
general meeting of 1950 in 1953 and the court normally will pass such an order
on the application of a shareholder and will not penalise the company for the
delinquencies of the directors who ceased to hold office. If such a meeting is
held pursuant to an order of the court, such an annual general meeting has the
power, amongst others, to pass the account of the years long passed and to
appoint directors for years long over. It may appear somewhat paradoxical to
appoint for persons as directors retrospectively with respect to a period long
gone by. Nevertheless, there is no reason why it cannot be done under the
Companies Act. It is clear that the persons who could be appointed as directors
are persons who actually acted as such without any legal warrant during a
period long gone and the effect of appointment would be to ratify all acts done
by these so-called directors without authority; in other words to validate all
the acts done by these directors which otherwise would have been invalid. The
learned Advocate-General has pointed out that unless this contention is
accepted, all acts done after the expiry of the period when the meeting, was
required to be convened, that is, 15 months after the last meeting all acts and
transactions of the company would be illegal; and void and the position would
be intolerable. Surely this could not have been the intention of the
Legislature.
It is not
correct to say that once the period stated in section 76 of the Act is over, no
annual general meeting can be convened without the order of the court. Section
76(3) is an enabling section. But apart from it, there is no reason why the
requisite number of shareholders under section 78 or 79(2) would not be
entitled to convene an annual general meeting, which is overdue and which the
directors have defaulted in convening within the prescribed period. If certain
technicalities stand in the way, those technicalities should be brushed aside
and provided proper notice is given to all entitled to notice, the court should
uphold such a meeting and recognise as valid all acts done in that meeting,
including the appointment of directors and passing of the accounts, even though
the meeting is held without an order of the court. Even if the meeting was not
properly convened, it is nothing more than a mere irregularity and the
appointment of the directors more than a mere irregularity and the appointment
of the directors in such a meeting is nothing more than defective appointment.
Such acts of the directors must be held valid under section 86 of the Companies
Act, notwithstanding that this appointment is subsequently discovered to be
invalid because of the irregularity of the meeting in which the directors have
been appointed. In the submission of the learned Advocate-General, the law recognises
de facto director who is not a de jure director. Such de facto director has all
the powers of a de jure director and a sale of hares by such de facto directors
in exercise of the lien under the articles gives good title to the purchaser.
If the policy of law is that the company which does not hold its annual general
meeting in proper time would continue to exist and carry on business and if
there are people who, though not properly appointed directors, nevertheless
carried on the business of the company as directors the court recognises them
as de facto directors and upholds their acts as if they were properly appointed
directors.This is expressly provided for in section 86 of the Indian Companies
Act which reads as follows :
" 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."
The cases
cited may now be considered. In In re County Life Assurance Co. (1870) 5 Ch.
App. 288 the promoter of a life assurance company who was also named as
managing director in the articles, continued to carry on business in spite of
the fact that three nominated directors in the articles expressly prohibited
the managing director to carry on the business and themselves refused to act as
directors. The managing director thereupon proceeded to choose fresh directors
in place of those who declined to act. The company issued a number of policies
and the policies ex facie were in order and were consistent with the articles,
having been signed by three directors. The company was weaponed up and in the
winding up proceedings the question arose whether the policy was binding on the
company. The court held that it was binding.
GIFFARD L.J.,
held that an outsider was not expected to know the indoor management of the
company and could not be and was not aware that anything irregular had taken
place. The learned Lord Justice upheld the claim under the policy with the
following observation :
"The
company is bound by what takes place in the usual course of business in the
party where the party deals bona fide with persons who may be termed de facto
directors, and who might, so far as he could tell, have been directors de
jure."
It is to be
noticed that this case is one of defective or irregular appointment. The
original directors named in the articles having refused to act, the managing director
co-opted directors in their place. In the case of Mahony v. East Holyford
Mining Co. Ltd. {(1875 ) L. R. 7 H. L. Cas. 869. }, the official liquidator of
a company in liquidation sought to recover from the banker amount paid on
cheques drawn by the directors who were not directors properly appointed. In
this case also the court held that an outsider was not expected to know the
indoor management of a company so as to ascertain wheather the director who
signed the cheques in the usual way were properly appointed directors or not.
The Lord Chancellor in his speech observed as followed at page 888 :
" I have
no hesitation in advising your Lordships, in accordance with the opinion of the
learned judges who have the attended the hearing of this case and have advised
your Lordships, that you should now hold that there having been de facto
directors of the company, who were suffered and permitted by majority of those
who signed the articles of association to occupy the position of and act as a
directors, and the bankers having in the full belief that these persons were
directors, as they were represented to be, honored the cheques drawn by them,
the payment of these cheques is an answer to the action of the liquidator of
the company, and that the judgment in the action ought to be entered for the
defendant, the public officer of the bank, and the present appeal
allowed."
LORD
CHELMSFORD at page 892 makes the following observation :
" The
first finding of the jury is that no four of the seven persons who signed the
articles of association ever agreed to the appointment of directors, or
assented to Wadge, Hoare, or Mcnally acting as such. If it is now open to the
bankers to question this finding, it may be said, that although there was no
evidence of four of the persons who signed the articles of association formally
meeting and agreeing together to such appointment, yet there was ample proof
that not four of the seven merely, but all the seven, had assented to the three
persons named acting as directors."
LORD HEATHERLEY
at page 896 bases his opinion on two grounds : (i) that the 85th clause in the
articles of association, analogous to section 86 of our Act covers any defect
that might have been in the appointment. The second ground on which LORD
HEATHERLEY found in favour of the bank is the broad equitable principle that of
the two innocent persons to suffer loss, that party must suffer who was bound
to do, or avoid any act by which the loss has been sustained. The learned Lord
Justice held that the shareholders could have taken steps to see that things
were properly done, and the bank as an outside could have no knowledge of the
indoor management and its impropriety. At page 898 LORD HEATHERLEY makes the
following observation :
" Now
whose business was it to see that that was all properly done ? It was the
business of the shareholders to see that it was done, and properly done, and if
they allowed this duty to be assumed by persons who had no title to it, in
their offfice at 12 Grafton Street, the place where the office of the company
was described in the prospectus as being - if the allowed persons who were not
entitled to do it to carry on all the business of the company there- to act as
directors and as secretary there ; especially if they allowed them to perform
the most important business of drawing cheques (for they must have known their
own deed which says that that can only be done by a draft of three directors,
and they must have known that money must be had for the purposes of the
company), if there is a fault on the one side or the other, it is on the side
of those who allowed all those transactions to take place, when they were not
conducted by persons legitimately appointed on the part of the company.
On the other
hand, on the part of the bankers, I see no possible mode by which they might
have pursued their inquiries in the manner contended for at the Bar without
requiring all the minute books of the company to be produced to them, and
without conducting a detailed investigation into all the transactions of the
company as to the appointment of directors and the like - a duty were not
called upon to perform and a duty which, if it was objected to, they could not
have insisted upon performing ."
LORD PENZANCE
found in favour of the bank by applying what is known as the rule in Royal
British Bank v. Turquand (1) (1856) 6 E. and B. 327. as the following
observation in page 902 indicates :
"My
Lords, the question is a very broad one whether a bank under such circumstances
having a written authority of a de facto secretary is bound, before is acts
upon that authority to ascertain whether he is the properly constituted
secretary of the company or not, and not only that, but whether any resolutions
of which he forwards a copy was properly passed by the directors. Now, my
Lords, the case of Royal British Bank v. Turquand (1) (1856) 6 E. and B. 327,
distinctly lays down the proposition that the bank is not bound to make any
such inquiry, but that it is justified in acting upon a letter such as the one
to which reference has been made provided that the transaction which appears
upon that letter is one which might legally have taken place and been legally
consummated under the articles of association. Upon this simple ground, my
Lords, it seems to me that your lordships would be perfectly justified in
directing the judgment in this case to be entered for the defendant ".
In the
penultimate paragraph of his speech the Law Lord considered the case to be a
case of defective appointment and the act of the directors not properly
appointed is validated by the 85th clause of the articles (same as section 86
of our Act).
In this case,
no doubt, they were nor properly appointed; they appear to have had either the
formal, or the informal assent of three out of the four reasons who would have
constituted the majority necessary tom make a proper appointment; but ,
nevertheless, although not properly appointed, they would seem to have their
acts validated under the 85th clause.
In the case of
York Tramways Co. Ltd. v. Willows (1) (1882) 8 Q.B.D. 685, the company
instituted a suit against a shareholder for the recovery of the share money. At
the date of the application for allotment of shares, there were two directors
and with respect to a third director, there was a letter of resignation which
was accepted in the same meeting of the board in which allotment of shares were
made to the defendant and the defendant was co-opted as a director in the
vacancy created. According to the articles the number of the board should not
be less then three. The articles provided that the board of directors shall
regulate their meeting and determine the quorum necessary for transaction of
business. There was an article like section 86 of the Indian Companies Act. The
defendant, after being elected director took part in the meetings wherein
shares were allotted to different applicants. The defendant joined the other
two directors in writing a letter to the bank manager as to what cheques were
to be signed and honoured.After doing all these acts, the defendant withdrew
his application for shares. The company instituted a suit to recover the share
money on the footing that the defendant was a shareholder and was liable for
the share money. It was held that the defendant was liable. LORD COLERIDGE C.J.
based his decision on three points - The directors were entitled under the
articles to act by a majority. " If there were three directors the two
acted as the majority of the board. " If there were the two directors
only, the two were acting in a casual vacancy . The board does not come to an
end because a casual vacancy occurs... until Fry's resignation was accepted the
board did act by a majority allot these shares to the defendant. These
considerations are sufficient to dispose of the case and to show that the
defendant must pay the amount of the call upon these shares ." It was also
held that the defendant subsequently accepted the allotment, that the case at
best was a case of defective appointment and that the defendant was completely
estopped from stating that he was not a shareholder. The other Lords Justices
(including BRETT C.J.) took the same view and decided mainly on estoppel. This
as noted before is also a case of defective appointment.
In the case of
Newhaven Local Board v. Newhaven School Board (1) (1885) 30 Ch. D. 350, the
court held that under the Public Health Act the board does not cease to exist
because of the lack of quorum occasioned by the resignation of members of the
board and that filling up of casual vacancies was "business" within the
meaning of Schedule I, rule 2, of the Act. At page 363 COTTON L. J. observed :
" In my
opinion, therefore, as regards the validity of the acts done by the board, rule
9 cures the defect arising from the fact that the persons elected or selected
to fill up the vacancies were chosen by two persons who, not being a quorum,
were not competent to fill up the vacancies. Therefore, in my opinion, we
cannot consider what had been done by the board, although irregularity
constituted, as being ineffectual. "
LINDLEY
L>J. was of the same opinion. He observed at page 370 :
``I was very
much struck by the argument of Mr. cozens- Hardy, that the object of this rule
was to protect people dealing bona fide with the local board without notice of irregularity.
Of course it was intended to provide for such a case but the question is
whether it is confined to such cases. I do not think that it is; appears to me
to rendered the acts of a board valid notwithstanding any defect in the
election of any of its members. I think, therefore, that whatever irregularity
there was in the constitution of the board in May, 1884, this rule would make
the election of the three who were elected in 1885 perfectly valid. It appears
to me to extend not only to protect people dealing bona fide with the board
without knowledge of the disqualification, but also to protect the rate payers,
whose guardians and trustees the local board are. I therefore come to the
conclusion that fixing the building line was a proceeding which is rendered
valid by rule 9.''
The argument
of COZENS- HARDY referred to by LINDLEY L. J., is to be found in page 357 :
`` The cases
under the Companies Act, 1862, section 67, furnish an analogy; they shew that
an outsider who knows nothing of the irregularity is safe in dealing with a
board of directors however irregularity appointed but that the case is
different where the irregularly elected board seeks to impose a liability on
others, as,e.g., by forfeiting shares. So here a contractor would have a good
claim against the board, but the case of seeking to impose a liability on
outsiders apart from contract is quite another matter."
BOWEN L.J. the
third member of the board took the same view as the other two.
In Dawson v.
African Consolidated Land and Trading Co. 1, a shareholder resisted the claim
of the company to recover share money on the ground that there were defects and
irregularities in the appointment of directors, i.e., the directors were not de
jure directors. One of the most important irregularities alleged against a
director was that he parted with all his shares and in consequence under the
articles he was not qualified to be a director. This director, however,
acquired the qualification shares six days later. When the director sold his shares,
he ipso facto vacated office under the articles. In the vacancy so created the
other directors could very well appoint him director six days after when the
director in question again acquired the qualification shares. In fact the other
directors did treat him as a director but there was no formal appointment by
passing resolution to fill up a casual vacancy. It was held that articles 114
(same as our section 86 of the Act) covers the case and the irregularities were
trivial. LINDLEY M.R. negative the contention that the scope of the article was
restricted to transactions between the company and outsiders and not between
the company and its shareholders so that the forfeiture of shares by the
directors not properly appointed the was protected by the articles. COTTON L.J.
considered the case as nothing more than defective appointment and as covered
by the article 114.
The case of
British Asbestos Co. Ltd.v. Boyd [1903] 2 Ch. 439, is also a case of defective
appointment and the court held that the irregularities in the appointed and
subsequent acts of the directors irregularly the appointed were validated by
articles 108 and section 67 of the Companies Act. In this case, articles 89 of
the articles provided the circumstances in which the office of a directors
shall be vacated. One of the directors, Boyd, had vacated office and the
contingent irregularities were not brought to the notice of the defendant
company. The irregularities complained of consisted in acting as director,
convening meetings of the company, ordinary and extraordinary, signing
balance-sheets, recommending directors for re-election amongst others. On the
finding that there was no evidence that the directors including Boyd and Reed
had not acted in good faith in all they did, the court held that the
irregularities were condoned by section 67 of the Act and article 108 of the
Companies Act (same as our section 86).
Channel
Colliery Trust Ltd.v. Dover, St. Margaret's and Martin Mill Light Ry. Co.
[1914]2 Ch. 506, ia also a case in which the appointment of the two directors
was held to be irregular on the ground that at the time of their appointment
they had not acquired qualification shares which were subsequently allotted to
them by a board consisting amongst others of the same directors who had not yet
the qualification shares. It was held that the irregular allotment was not by
the de facto directors which validated by the Companies Act as the directors
acted bona fide which was not disputed. It was held that the provisions of
section 99of the Companies Act should be construed boradly as between the
company and its members as well as between the company and outsiders. Reliance
was placed on the observations made at page 515 and set out below. These
observations were made after pointing out that the appointed persons were not
at the moment of their appointment qualified and a slip was made. Nevertheless
acting in good faith they accepted the shares and acted and continued to act as
directors.
" The
question is whether their acts as de facto directors are protected by section
99 of the Companies Clauses Act, 1845. It has been said that in substance the
law is stated in a very short passage in Buckley on the Companies Acts, 9th
Ed., p. 169, where it is summed up in these words : it is the note to section
74 of the new Act : ' Endangering accuracy for the sake of brevity, it may be
said that the effect of this section is that, as between the company and
persons having no notice to the contrary,directors & c. de facto are as
good as directors & c. de jure'. That is the note to section 74 of the
companies (consolidation) Act, 1908, but it is equally applicable to section
99, which applies to companies governed by the companies clauses Act, 1845 .It
is now settled that this section protects acts both with regard to insiders and
outsiders, and having regard to the law as laid down by the Court of Appeal in
Dawson v. African Consolidated Land and Trading Co.,[1898] 1 Ch. 6, and to the
view subsequently of FAREWELL J., with which I must say I entirely concur, I
think that it is a beneficial construction to put upon the section. Common
sense really requires that the there shall be some provision giving legal
effect to acts in respect of the which there is a technical informality because
some slip has been made, where the acts have been done in good faith and where
the slip has occurred because the parties have not had present to their minds
the legal difficulties in the way of doing what they honestly think they are
entitled to do. "
The following
observation of COZENS HARDY M.R. at the page 512 is also to be noted :
" If
there is good faith, and I emphasize that the mere fact that the persons
claiming the benefit of the section has notice o the existence of the fact
which led to the disability is not sufficient to disentitles him to to rely
upon it if he can honestly say, ' I was not aware of the defect and the
consequences of the facts I knew, I was not aware of the disqualifaction which
now exists.' That , I think, is really the point of the case."
In the case of
Boschok Proprietary Co. Ltd. v. Fuke [1906] 1 Ch. 148, it was held that the
resolutions passed in a meeting of the company convened by a board of directors
not properly appointed were not invalid because of the irregularity in
convening the meeting. So also in the case of Browne v. La Trinidad (1887) 37
Ch.D.I., the court refused to grant an injunction restraining the company from
confirming the resolution of the board of directors removing a director. The
ground on which the court was asked to grant an injunction was that only ten
minutes before the meeting of the board the petitioner being the directors
removed was served with the notice of removal. He,however, did not object on
the ground of insufficiency of notice nor did he require another meeting to be
summoned to consider the question.
In the case of
the In re Consolidated Nickel Mines Ltd. [1914] 1
At page 888
SERGEANT J. makes the following observation :
" A
direct on his appointment does not ordinarily step into an office which is
perpetual unless terminated by some act, but into an office the holding of
which is limited of by the terms of the articles........ The duty of the
directors was to call a meeting in 1906 and 1907, and they cannot take
advantage of their own default in that respect and say that they still remained
directors. "
In the case of
Morris v. Kanssen [1946] 16 Comp. Cas. 186 decided by the House of Lords, it
was held that section 143 of the companies Act and Table A, article 88 ( the
same as section 86 of the Indian Statute) applied only to acts done by persons
acting as directors whose appointment or qualification 7was afterwards found to
be defective. They did not cover a case where there has been a total absence of
appointment of a fraudulent usurpation of authority. The rule in Turquand's
case (1856) 6E.&B. 327, was held not to be applicable because it can only
be invoked by an outsider and not by one who was purporting to act on behalf of
the company in the unauthorized transaction. In other words, a director who
himself was a party to the irregular transaction cannot invoke the rule in
Turquand case (1956) 6E.&B. 327 in his favour. In the this case all the
cases have been reviewed and it is the last decision on the point in the
A decision of
this court has been cited where an opinion has been expressed that a director
continues in office even after the expiry of the period during which the new
annual general meeting is ac tually held. It is the case of Kailash Chandra v.
Jogesh Chandra (1928) 32 C.W.N. 1084, A.I.R. 1928 Cal. 868, decided by a
Division Bench of this court. This was a suit under section 42 of the Specific
Relief Act for a declaration that the defendants were no longer directors of
the company and that all acts done by them were illegal and void. In the this
case the annual general meeting came to an end without electing the directors
whose term of effaced expired. The court held that the suit must fail because
the plaintiff did not claim to be entitled to any legal character or any right
as to property which had been denied by the defendants and, secondly, because
in the circumstances of the case the court should not exercise its discretion
in granting specific performance. After disposing of the appeal on the above
ground the court made the following observation at the penultimate paragraph of
the judgment :
" With
regard to the matter, the articles of association provided that the directors
should be elected annually at a general meeting. It follows,therefore, that so
long as the general meeting is not held in which the directors are to be
elected the directors elected at the previous general meeting would continue in
office. It is contended by the learned advocate for the respondent that
according to the true interpretation of the articles the directors would hold
office only for one year form the date of their appointment, and if no general
meeting is held at the lapse of one year the directors would automatically
vacate their office and the company would go on without any directors at all .
I am unable to accept this contention of the learned advocate as it seems to me
that it would be unreasonable to hold that this is the true meaning of the
articles of association. "
In the case of
Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp.Cas.
324 , decided by a Division Bench of the Madras High Court has been held that
" the directors who were due to retire at the annual meeting next to that
held on the previous occasion should be held to have vacated office on the last
date on which the annual meeting should have been held and in consequence they
ceased to be directors after such last date." This is a decision of a very
strong Bench of the Madras High Court consisting of RAJAMANAR C.J. and
VENKATARAMA AIYAR J. and is a well considered judgment. Kanssen's case [1946]
16 Comp.Cas. 186, has been cited by the Madras High Court with approval.
The case of
Changamul v.Provinicial Bank (1914) I.L.R. 36 All 412; A.I.R. 1914 All 471,
decided by the Division Bench of the Allahabad High Court is a case in which
the liquidator claimed the balance of the share money from three shareholders.
The defence was that of the three directors who were present in the meeting of
the board, not all were properly appointed and if those not properly appointed
are left out, the meeting of the board had no quorum. It was held that this
irregularity in the allotment by reason of the fact that some of the directors
in the board meeting which made the allotment were not directors properly
appointed is condoned because of the articles as will appear in the following
observation: "But if the articles of association validate an act done by
de facto director in a bona fide manner, the court will uphold the act. "
On
consideration of the arguments advanced and the authorities cited I think that
the learned Advocate-General was right in his submission that the company
continued to exist and function even thought the annual general meeting of the
company is not held in time, that section 76 (3) of the Indian Companies Act is
an enabling section and that the shareholder has the right apart from an order
of the court under section 78 and 79(2) of the companies Act to hold a general
meeting, which may not strictly be chracterised as the annual general meeting
but is nevertheless a meeting in which all that can be done in annual general
meeting can be done including the passing of the balance-sheet and appointment
of the directors. When such a meeting is held when the year for which the
meeting is held is over, clearly no directors properly can be appointed. But if
such an appointment is made its effect would be to ratify the acts of those who
purported to act as director without being lawfully appointed. Only those acts
of the directors, however,would be deemed to be ratified by such retrospective
appointment as can be ratified in law and it should not be forgotten that
ratification only binds the principal and the act done by an agent without
authority will become binding on the principal after ratification. It has
nothing to do and cannot affect the party other than the principal on whose
behalf the agent purported to act without authority. In the instant case by the
retrospective appointment of Dr. Mukherjee and Dr.Neogy as the directors, the
company might be deemed to have ratified all the acts of Dr.Mukherjee and Dr.
Neogy leading up to the sale of the plaintiff's shares and as such the sale may
be binding on the company. Before retrospective appointments the acts of Dr.
Mukherjee and Dr. Neogy were unauthorised and hence not binding on the company.
But after appointment retrospectively those acts may become binding on the
company. But dose it become binding on the plaintiff? Dose this retification
take away the right of the plaintiff to repudiate the sale which was effected
by unauthorised persons? The plaintiff only gave authority to the directors to
sell after taking necessary steps as provided in the articles and if the sale
was effected not by directors but by some unauthorised persons the plaintiff's
right to repudiate cannot be affected by the company's ratifying the
unauthorised acts of persons who purported to act as directors, though in fact
they were not.
Again, the law
recognises that the appointment of directors may be defective in that they may
not have the qualifications as required by the articles or the provisions of
the articles of association have not strictly been complied with in the matter
of the appointment. Many acts might be done by these directors bona fide on the
behalf of the company, before this defect in the appointment is detected and
shown to the directors or company. Section 86 of the Companies Act protects
these acts of directors not properly appointed. But section 86 does not protect
the acts of directors whose office expired after the termination of office.
Kanssen's case [1946] 16 Comp. Cas. 186, and the Madras case, Ananthalakshmi
Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp. Cas.324, are clear
authorities in the support of this proposition with which 1 respectfully agree.
With respect, I am unable to subscribe to the obiter dicta of the Division
Bench of this court in Kailash Chandra v. Jogesh Chandra (1928) 32 C.W.N. 1084;
A.I.R. 1928 Cal. 868. , and noticed before.
Apart from the
acts of directors whose appointment is defective which are protected by section
86 of the Companies Act are there other acts by persons who are not directors
de jure but directors de facto protected? It has been argued that law
recognises de facto directors and as stated by Buckley and Palmer, two
recognised authorities on company law, the directors de facto are practically
the same as directors de jure and both have the same powers. In all the
authorities, however, cited before me and noticed before, the term de facto
directors has been restricted to directors with defective appointment. No case
has been cited in which the court has upheld the act of a pretended director
without any appointment. In other words in no case the terms de facto director
has been applied to a mere usurper without any appointment whatsoever. The
court has upheld the acts done by a director whose appointment is defective but
in no case it has gone further to uphold acts of one purporting to act as
director without any appointment or whose office has expired. In this state of
the law I am not prepared to accept the broad proposition of the learned
Advocate-General, that the de facto director is one who actually acts as such,
that he has the same power as a director de jure and that all acts of such a de
facto director whether appointed or not should be upheld by the court. If such
be the policy of law why enact section 86 of the companies act giving only
qualified validity to some acts not of all de facto directors but of those only
who have been appointment but whose appointment is found to be defective ? It is
to be noted that in all cases in which the court upheld the act of a "de
facto director " in which the outsider has dealt with such " de facto
director " bona fide the court did not uphold the act because it was
valid. They were held to be invalid , but the company was precluded form
raising the question of the invalidity of the acts, on the principles akin to
estoppel and holding out, only to protect the bona fide third party. I have
kept out of a consideration for the present, the acts of a " de facto director
" with whom an innocent third party deals bona fide. This aspect of the
question will be considered later.
In the instant
case I hold that on 20th and 24th September, 1954, Dr. Mukherjee and Dr. Neogy
had vacated their office as directors as fifteen months had expired after the
last annual general meeting held on April 6, 1953. The resolution determining
the liability of the plaintiff at over Rs. 4 lakhs passed on the September 10,
1954 , and the resolution passed on the September 23, 1954, to enforce the lien
and making demand of the payment and giving notice under articles 17, and the
notice served on the plaintiff in terms of the resolution dated September 24,
1954 -all these acts are not warranted by law and must be held to be illegal.
The annual general meeting held on April 6, 1953, and on January 6, 1955, were
not in compliance with the provisions of the Companies Act and the articles.
The directors whose office had expired were not competent to convene a general
meeting in such a case it would be quite competent for five members of the
company to convene a meeting under article 64 of the articles of association.
This is provided for in section 79(2) of the Companies Act. The only other way
to convene a general meeting is to hold a meeting under section 76 (3) by and
under an order of the court. In the instant case, the 12th,13th,14th and 15th
annual general meetings were convened by a defunct board of directors whose
office had long expired. They had not been convened by five members in terms of
articles 64 of the articles. These meetings, therefore, were not in accordance
with law and the appointment of directors at these meetings must be held to be
invalid. Having regard to the fact that there has been an appointment in
general meetings of the company which were not properly convened, I am prepared
to stretch a point in the favour of the defendant and hold it to be a case of
defective appointment and the acts of the directors with such defective
oppointment can be validated by section 86 of the Companies Act . In the
instant case, however, Dr. Mukherjee and Dr. Neogy are hit by the proviso,
because the invalidity of their appointment was not shown to the them before
they took steps in the matter of sale and when the sale actually took place. In
the instant case I told that Dr. Mukherjee and Dr. Neogy were not directors and
if after their a so-called election on January 6, 1955, they can be called
directors at all they were in any event directors with defective appointment
and further the defect in their appointment was shown to them. I am unable to
accept the argument of the learned Additional Solicitor-General that an usurper
of the office without any appointment or a director whose office had expired is
a director within the meaning of the Companies Act and the articles, because he
acts as such even thought he does it without any lawful authority.
Assuming again
that the 12th,13th,14th and 15th meeting were valid and good, the resolution
appointing directors for periods passed retrospectively cannot be anything more
than the ratification of acts done by those who purported to acts as directors,
provided those acts can be ratified. In my judgment Dr. Mukherjee and Dr. Neogy
were not directors at any event from July, 1954, onward having vacated their
office , and they had no authority under article 17 to declare and/or impose
and/or enforce the lien on shares and/or sell them. These are wholly
unauthorised acts and ratification of such unauthorised acts by the company
cannot take away the right of the shareholder to repudiate such unauthorised
acts.
It is next
contended by Mr. Chaudhury that assuming Dr. Mukherjee and Dr. Neogy were
directors, they as directors had no authorised to sell the shares because the
condition for the exercise of that power are lacking in the instant case. The
conditions precedent to the exercise of the powers are : (1) money must be
precedent payable (2) until a demand is made and notice given in writing
stating the amount due and (3) giving notice of intention to sell the shares in
default. But in the instant case the amount of the debt for which the shares
were sold was at its highest a claim on account and claim does not become
presently payable till a demand for payment is made. Secondly, the notice of
demand that is required to be served in writing must state the exact amount due
and payable, for which the lien is sought to the be imposed. In the instant
case even though the company may have some claim, it is nothing near the amount
demanded and for which the shares were sold. The amount stated in the notice is
over Rs. 4 lakhs whereas the liability of the plaintiff on the date would be
far less, near about Rs. 50,000. in any event not more than Rs. 81,000. It must
be held, therefore,that the conditions laid down in article 17 for the exercise
of the power of sale were absent in the instant case and therefore the same was
bad.
I am unable to
agree with Mr. Chaudhury that the debt due by the plaintiff was not
"presently payable." Holding as I do that the amount taken from the
company by the plaintiff on account from time to time represents a loan, the
debt was "presently payable " even before demanded. The other
indebtedness which I held to the be fictitious and unreal was not a debt due by
the plaintiff and as such cannot be a debt "presently payable "for
which the company can claim to have any lien. The company sought to sell the
shares for the recovery of a debt which was far in excess of what was actually
due by the plaintiff and to that extent the notice demanding payment and
threatening sale is not the compliance with article 17 of the articles and to
that extent it was wrongful. There is substance in the contetion of Mr.
Chaudhury that the language of article 17 makes it clear that non- compliance
of the conditions laid down affects the validity of the sale.
Lastly, it is
argued that the motive behind the acts of Dr. Mukherjee and Dr. Neogy was not
to realise a just debt due to the company by the plaintiff but to deprive the
plaintiff of his shares. There can be no reasonable doubt that this was the
notice that led Dr. Mukherjee and Dr. Neogy to act in the way they did, namely,
fixing the debt at a fantastic figure, declaring the shares to be subject to
lien for the payment of such debt,demanding payment immediately after Dr.
Mukherjee had occupied the saddle after ousting the plaintiff and selling the
shares with the greatest possible expedition. The motive behind these acts on
the part of Dr. Mukherjee and Dr. Neogy is clear and palpable. Mr. Chaudhury
has argued that when the motive of the directors is not to benefit the company
but to promote their own interest by driving away plaintiff from the company
such acts of the directors would not be upheld the court. In support of this
argument Mr. Chaudhury has cited the case of Nanalal v. Bombay Life Insurance
Co., [1950] 20 Comp. Cas.179 decided by the Supreme Court. In this case the
directors increased the share capital of the company with two objects in view:
(1) company needed additional capital, (2) to prevent cornering of shares by
one group, group of outsiders , namely, the Singhania group. This act of the
directors in passing a resolution to issue additionals shares was challenged on
the ground that the directors did it to protect their own position. The court
upheld the action of the directors. There was a concurrent finding of fact by
the courts below that the resolution was passed because the company needed
additional funds and that the issue of the shares was not due solely to the
desire on the part of the directors to keep themselves in the saddle. In the
opinion of Das J., " the motive to prevent the Singhania group , who were
outsiders, from acquiring control over the company cannot, as between the
directors and the company and the existing share holders, be stigmatised as
mala fide." Mr. Chaudhury relies on the following observations of Das j. :
"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 prevents the
directors from doing so. The very basis of the court's interference is in such
a case is the existence of the relationship of the a trustee and of cestui que
trust as between the directors and the company.”
And the
following observation of MAHAJAN J. :
“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 the power by the directors to achieve this
object by the issue of further shares was an exercise of power for the purposes
for which it was not conferred. This argument would have had force if this was
the main purposes of the directors in issuing the further shares but this is
not the case here."
Mr. Chaudhury
contended that applying the principles set out above in the instant case, it
must be held that inasmuch as the sole motive of Dr. Mukherjee and Dr. Neogy in
the matter of sale of the share was to drive the plaintiff out of the company
and makes their own position safe, the sale of shares in the instant case
should not be upheld by the court. It has been contended on the behalf of the
defendants that if has been proved that at the material time the plaintiff was
indebted to the company and the shares were subject to a lien and as such
liable to be sold in exercise of the lien. The company was entitled to enforce
its legal right to enforce the lien by selling the shares. However improper the
motive of the directors might,be, the legal right of the company to sell the
shares to enforce the lien cannot be affected and the motive of the directors
has no bearing on the question . The company had a legal right and the company
enforced it . The court has no power to question the right of the company to
exercise its legal right to sell the shares in exercise of lien for a debt due
from the plaintiff as shareholder. The second point urged on behalf of the
defendant is that the motive of sale immediately on getting possession of the
company on January 24, 1956, was that the directors needed cash money to meet
heavy disbursements in the first week of the following month. Possession was
given to Dr. Mukherjee on the January 24,1956,and the company needed cash money
to the extent of a bout Rs. 1 lakh to meet heavy expenses in the first week of
February next. It is in evidence that at the time when possession was made over
to Dr. Mukherjee by the official receiver, Dr. Mukherjee got Rd. 10,000,in cash
on the same date and the company had over Rs. 7 lakhs lying in the bank in the
account of the official receiver . Dr. Mukherjee explained that he apprehended
that the official receiver would not make over the money to him and he would be
in difficulty in meeting the expected disbursement inthe first week of
February. Hence in order to get ready cash the plaintiff's shares were sold. I
have no hesitation in rejecting this evidence of Dr. Mukherjee . He had no
reason to apprehend that the official receiver would not make over the money to
him. It was the duty of the official receiver to make over the money and if the
official receiver dilly- dallied , he could have been compelled to do his duty.
The court was open and the official receiver could have been compelled to make
over the money to the company. It is further in evidence that the company was a
running concern and was doing very good business. The sale of the company's
products as stated before was Rs. 55 lakhs annually. In other words, more than
a lakh of rupees was coming to the offers of the company per week . It is
therefore impossible for me to hold that the objects of selling the plaintiff's
shares in such a hurried manner was to get cash money to run the company. There
cannot be any doubt that the sole motive of Dr. Mukherjee and Dr. Neogy who
were ruining the company was to drive away the plaintiff from the membership of
the company and deprive him of his voting right. At the date of sale of the
plaintiff and D.N. Bhattacharji had controlling shares and it was only by
depriving the plaintiff of his shares that the position of Dr. Neogy and Dr.
Mukherjee could become secure. It is significant that the preference shares of
the plaintiff were not sold. The ordinary shares of the plaintiff which carried
the voting right were sold. The motive of Dr. Mukherjee and Dr. Neogy in
selling the plaintiff's shares was not what is stated to be by Dr. Mukherjee.
The motive is clearly to deprive the plaintiff of his voting right so that he
may not have the control of the company. If, however, the directors were
entitled in law to sell the shares in enforcement of lien for a debt due to the
company by the plaintiff , the sale cannot be challenged on the ground of bad
motive directors. Every body, including a most scheming person, is entitled to
enforce his legal right and motive of the plaintiff is no defence in an action
to enforce that legal right .
If the
directors were lawfully appointed by the company in the instant case then I
doubt whether the Supreme Court decision would be assistance to Mr. Chaudhury.
No doubt, the directors were acting in a fiduciary capacity and they must act
for the benefit of the companies . But the act of recovering a debt due to the
company by a director must necessarily be of the benefit to the company and in
such a case improper motive of the directors would be immaterial and the
principles laid down in the Supreme Court case would be hardly applicable. But
in this case, the acts were not of directors de jure but only of the directors
de facto and the acts of the de facto directors are only upheld if the acts are
done bona fide in the interest of the company. If, however, the sole motive was
not to benefit the company but to promote the private interst of the de facto
directors, then the principles in the Supreme Court case would apply and the
acts of the de facto directors would not be upheld by the court.
Mr. Chaudhury
has urged that the sale in the instant case is not merely irregular but
illegal. The conditions laid down in the article 17 for the exercise of the
power of sale not having been fully satisfied, the directors had no power to
sell the shares, and the sale was illegal as being beyond the power of the
directors. It is contended in answer to this argument that they were not really
conditions restricting the power of sale given to the directors but merely an
indication as to how the power of sale was to be exercised. Hence,when the sale
takes places without complying with the "conditions " laid down the
sale is only irregular but not illegal. The power of sale was there, thought
that power was irregularly exercised, that is all .
The languages
of the articles clearly indicates that the power of sale can only be exercised
on satisfying three conditions laid down in the article 17. The language is
clear. The power given to the directors is conditional and restricted. It
follows that if the sale is effected in the breach of the conditions laid down
in the article, the directors have acted in excess of their power and therefore
the sale is invalid.
It is argued
on the behalf of the defence that this construction of article 17, namely, that
it can only be exercised after the conditions have been satisfied, will make
the power of sale illusory. The indebtedness can always be challenged by the
shareholder and simply by the challenging the indebtedness, the shareholder can
prevent the directors from exercising the power of sale . It is strongly urged
that full authority is given by the articles to the directors to sell the
shares in liquidation is of the liability of a shareholder to the company and
the directors have been given authority to determine that liability. For the
purpose of exercising the power of sale, the parties by mutual covenant have
empowered the directors to determine the indebtedness,then make demand for
payment within a week , and in default of payment within a week to sell the
shares. The parties having agreed to a summary way of recovery by the directors
of the shareholder's indebtedness to the company , this power should be
liberally construed in favour of the company . The parties are bound by their
own covenant and if it can be said on a fair reading of the articles , that
there is a covenant whereby the share holders have agreed that for the purpose
of the sale the directors would be the sole authority to determine the amount
of a shareholder's indebtedness, then certainly the shareholders are bound by
such covenant. If, however, no such covenant is to be found in either article
16 or article 17 of the articles of the company, why should the court presume
that such a wide power has been given by the share-holders to the directors. I
am not impressed by the argument that the articles should be construed
beneficially in favour of the company and hold that the shareholders have given
full authority to the directors to determine the quantum of indebtedness and to
sell the share to liquidate the indebtedness. In the absence of a clear
covenant to that effect, I will not assume that such wide power has been given
to the directors. Neither article 16 nor article 17 contains any covenant
whereby it can be said that the shareholders have agreed that the for the
purposes of sale under articles 17, whatever amount the directors choose to
decide would be the liability of the shareholder. If the construction called
for by the defendants is correct, then it follows that even though the
indebtedness of the a shareholder is far less than what is determined by the
directors the shareholder is powerless to prevent the sale and the court is
equally powerless to prevent the sale, oven if the court is satisfied that the
indebtedness is far less than what is determined by the directors. If the
amount of indebtedness as fixed by the directors cannot be challenged in court,
then a suit for injunction prior to sale must fail as a suit challenging sale
after the sale has taken place on the same ground, namely, that the directors
are the sole authority to determine the amount, and the court had no say in the
matter. This runs counter to the opinion of Palmer that the shareholder can
apply for an injunction before sale as stated in his Company Precedents 16th
Edition, page 502, " when the company threatens to sell without justification,
the existence of this clause renders it expedient for the shareholder to apply
for an injunction before the sale is effected; for, after sale it will be
difficult, if not impossible, to recover the share".
The article
referred to by Palmer is article 33 which corresponds to article 19 of our
articles of association. The relevant article in Palmer's book corresponding to
our article 17 is article 31. In the opinion of Palmer, therefore, even though
the directors have the same power of sale as is contained in our article 17,
when the sale is threatened without justification th e court can issue an
injuction. I am unable to agree that if the condition set out in article 17 is
construed to limit the power of sale, then the power of the directors to sell
in a summary way would prove to be illusory. It is argued that all that the
shareholder need do is to write to the directors in answer to the notice of
demand that the shareholder disputed the debt and then the directors, under
this construction, would be powerless to act. If the dispute raised by the
shareholder is sham and illusory, the directors may nevertheless proceed with
the sale and in the proceeding initiated by the shareholder if it is found that
the directors were right and the shareholder was wrong, nobody need bother. If
however it is found in such proceeding that there was a serious dispute and the
contention of the shareholder was ultimately upheld by the court, in such a
case the court cannot but hold that the directors had no power to sell and were
selling wrongfully. This does not mean that the power of sale given subject to
conditions is illusory. This argument advanced by the defendant seems to
suggest that power in order to be real must be absolute and that restricted and
qualified power is wholly unreal and illusory.
The terms of
the article make it abundantly clear that the power of sale was not intended to
be absolute. Sale of shares in enforcement of a debt summarily was recognised
to be very serious from the standpoint of the shareholder. Hence it is provided
that no sale shall take place unless there is a demand for payment in writing
clearly stating the amount due and giving notice that in default of payment the
shares will be sold. That is, full opportunity must be given to the debtor
shareholder to pay his debt and it is only on his failure to liquidate his
indebtedness that the shares may be sole. IT cannot, therefore, be contended
that even if no proper notice is given stating correctly the amount of
liability, but the demand is for a fantastically large amount the debtor
shareholder is bound to comply with that illegal demand and pay or otherwise
his shares would be sold. Neither the debtor shareholder nor the creditor
company could have entered into such a covenant. Such a construction is
manifestly unjust. I am not compelled by the language of the article to
construe the article in the manner suggested, on the sole ground that otherwise
the company may be prevented from selling the share and the power of sale may
prove to be illusory.
The points
discussed above would have been conclusive if the dispute involved in this
action was a dispute between the plaintiff and the company. But in the instant
case the plaintiff to succeed must displace the title of Ramapada Gupta the purchaser
of the shares. THe defendant primarily interested is Ramapada Gupta and the
real point in the suit is whether Ramapada has acquired a good title in the
shares as purchaser, that is, even if it is held that the shares were sold by
the directors improperly in excess of their power, whether this impropriety
affects Ramapada's title to the shares in any way. The company defendant is
only interested in the consequential relief of rectification of the share
register. Therefore, the most important point still remains to be considered,
namely, whether on the facts of this case and in law, the defendant Ramapada's
title has been displaced.
It is
contended that Ramapada's title is completely protected by article 19 of the
articles and section 86 of the Companies Act and even if it is held that
article 19 of the articles and section 86 of the Companies Act do not cover the
case, Ramapada is entitled to invoke the rule in Turquand's case {[1856] 6 E.
& B. 327}, in defence of his title. The argument is that however irregular
and invalid the sale may be, Ramapada is a stranger who purchased the shares
bona fide for over Rs. 2,60,000 out of which Rs. 1,30,000 was paid and on such
payment his name was entered in the share register. Ramapada, a stranger, had
nothing to do with the indoor management of the company. He cannot be expected
to know that the de facto directors who purported to sell the shares were in
fact not de jure directors and as such had no right to sell, that the debt for
which the lien was imposed and in enforcement of which the shares were sold was
not as much as was claimed by the company and that the conditions laid down in
article 17 had not been complied with. These are matters of indoor management
which are beyond the knowledge of Ramapada and he was not expected to know of
it. He as a stranger was entitled to presume that the directors who acted in
the matter were de jure directors, that all things were properly done in the
matter of determination of liability, imposition of lien and enforcement of the
lien by sale of shares. If anything irregular was done by the directors that
cannot affect the title of Ramapada Gupta as purchaser.
The case of
the defendant Ramapada Gupta has been argued with rare forensic ability and I
may state at once that no litigant got better legal assistance that what the
defendant Ramapada Gupta got in this case. I need hardly say that the arguments
advanced on behalf of the defendant Ramapada Gupta deserve very careful and
serious consideration and to the best of my ability I have tried to appreciate
them.
Assuming that
the transaction resulting in the sale of shares is illegal in the sense that
the directors under the articles had no power to sell or that the sale had been
effected by directors with defective appointment or that the sale was effected
without satisfying the conditions laid down in article 17 or that one important
step in the transaction, namely, the determination of the liability and
decision to enforce the lien by sale of the shares and giving notice required,
was taken by those who at the time had ceased to be directors, then the
defendant Ramapada can only protect his title as purchaser at such sale either
under section 86 of the companies Act, or article 19 of the articles or by
invoking the rule in Turquand's case {[1856] 6 E. & B. 327}. In each of
these cases, however, the sale will not be upheld by the court unless the party
seeking the assistance of the court acts bona fide. An innocent purchaser will
be protected. But the court will never come to the assistance of a purchaser
who purchases the share without good faith, that is, with notice that the sale
was wrongful. No case has been cited wherein the court upheld a wrongful or
illegal sale in which the purchaser had notice of its illegal character. On the
other hand, in all the cases cited on analogous sections and articles of the
English Act the English courts have held that the person seeking protection of
the court must act bona fide. So also acting bona fide is considered to be
essential to uphold a transaction in all cases cited in which the rule in
Turquand's case {[1856] 6 E. & B. 327} has been invoked to protect an
unauthorised act.
The first
point to be considered with reference to the case of defendant Ramapada Gupta
is - has Ramapada been proved to be an innocent purchaser ? If it is held
otherwise, Ramapada's defence totally collapses. Ramapada does not not,
however, come to the box and pledge his oath that he is an innocent purchaser.
Throughout this long drawn litigation, which is bitterly fought on every point
and the most important question, if not the only one being whether the
defendant Ramapada had acquired title in the shares, Ramapada is conspicuous by
his absence. His battle is fought in court by Dr. S.L. Mukherjee, and I must say,
ably fought with his back to the wall. Mr. Subimal Roy in his opening of the
case commented that Dr. S.L. Mukherjee, who was brought in the company by the
plaintiff and was given such a high position in the company with an employment
that is to be envied by all, did not prove loyal to the plaintiff. That cannot
be said of Dr. S.L. Mukherjee with reference to the defendant Ramapada Gupta.
Nobody could have done more to Ramapada Gupta in this litigation than what Dr.
Mukherjee did for him. Nevertheless, the fact cannot be ignored that Ramapada
Gupta gave this court a wide berth and did not step into the witness box to
protest his innocence. It looks as if we are having the drama of Hamlet played
in court, with Hamlet's part left out. The importance of this fact was properly
appreciated by the legal advisers of Ramapada. It must have been realised that
unless satisfactory explanation for not calling Ramapada as a witness is given,
which is acceptable to the court, the consequence would be serious. No shelter has
been taken by the learned counsel behind the conventional ground of sudden
illness or being called away suddenly on urgent piece of business, often taken
and seldom accepted by the court. A very bold stand is taken that Ramapada has
been advisedly withheld from the court, because Ramapada has been advised that
his evidence is not necessary. The reasons given for taking this attitude have
now to be very carefully considered.
It is urged,
in the first place, that on the plaint Ramapada Gupta has no case to meet. The
suit as against Ramapada Gupta must be dismissed in limine. This argument is an
argument on pleadings. I have gone through the plaint very carefully. The
drafting of the plaint may not be artistic and leaves considerable scope for
improvement. But I am unable to hold that the plaint does not disclose a cause
of action against the defendant Ramapada, so that I should dismiss the suit in
limine as against Ramapada. The plaint does state the various acts leading up
to the sale of the shares and the rectification of the share register by
substituting the name of Ramapada in place of the plaintiff as the holder of
these shares. It is then alleged that the defendant Ramapada "connived and
/ or otherwise conspired with Drs. S.L. Mukherjee and B.P. Neogy in effecting
the said purported sale and in entering his name in the books of the
company". Then in paragraph 20 it is alleged "despite having
knowledge of the fraudulent character of the transaction of the said purported
sale of shares by the said Dr. S.L. Mukherjee and Dr. B.P. Neogy to him"
the defendant was about to exercise his right as the holder of the shares. Then
in paragraph 21 is set out the various grounds why the sale is illegal and
void. Amongst the grounds taken are (i) that the sale is fictitious, that is,
it is a colourable transaction and not a real transaction;b and and (ii) the
defendant had all along knowledge of the wrongful character of the transaction.
These are, in my judgment , sufficient to base a cause of action against the defendant
Ramapada. The allegations amount to this that Ramapada did not act bona fide in
the matter and that he is not an innocent purchaser. Further, the sale is a
colourable transaction. Such allegations are enough to dispute Ramapada's title
to the shares. It is urged that the words "fraud", :conspiracy"
and :connivance: have been used against Ramapada, but no particulars have been
given. I do not agree. Sufficient particulars have been given to found a case
of fraud and conspiracy against Ramapada; the fraud consists in this that
Ramapada has been a party to an illegal and wrongful sale, inasmuch as he
purchased the shares with full knowledge that the transaction was wrongful. No
further particular was necessary or possible to be given beyond what is alleged
in the plaint. It has been argued that no doubt it has been alleged that the
defendant Ramapada had knowledge of the wrongful character of the transaction,
but that he acquired this knowledge after the sale and not before. If Ramapada
came to know the wrongful character of the transaction, after purchasing the
shares, then this knowledge would not affect his bona fides in the matter of
purchase. But to me the allegations in the plaint clearly amount to knowledge
from prior to sale. After fully setting out the facts tin support of the case
that the sale was wrongful and without authority, it is alleged that the
defendant Ramapada "connived and/or otherwise conspired with Mukherjee and
Neogy in effecting the said purported sale". This amounts to an averment of
knowledge prior to the transaction. Without knowledge prior to the sale, there
can be no connivance, no collusion and no conspiracy. If cannot, therefore, be
held that the plaint does not disclose any cause of action against the
defendant Ramapada Gupta and that in consequence the defendant Ramapada Gupta
had no case to meet.
It is next
argued that assuming that the plaint does disclose a cause of action against
defendant Ramapada Gupta, nothing has been proved against him in the
proceedings. The plaintiff who is the only witness on his behalf stated that he
never knew Ramapada nor does he know him now. There being no evidence led by
the plaintiff to prove that Ramapada had prior knowledge of the wrongful
character of the sale there was no occasion for Ramapada to give rebutting
evidence. The argument is that the presumption of law is in favour of the
defendant, Ramapada, namely, that he acted in good faith in the transaction.
That presumption has to be rebutted by the plaintiff in the first place by leading
evidence to prove that there was bad faith on the part of ramapada. The
plaintiff has tendered no such evidence to rebut the presumption. Hence the
presumption in favour of defendant Ramapada to the effect that he acted in good
faith has not been displaced and still remains. It follows that the defendant
need not tender evidence to prove his bona fides, legal presumption being in
his favour, and this presumption has not been rebutted by any evidence tendered
by the plaintiff.
It is argued
with great force that the plaintiff is to make out his title to the shares. The
entry in the share register that the defendant Ramapada is the owner of these
shares established Ramapada's prima facie title this. The plaintiff, in order
to establish his title, must displace Ramapada's title. The plaintiff, can
prove by establishing that he was the prior holder of these shares, that the
sale effected by the company was unauthorised and wrongful and that the
defendant Ramapada did not act in good faith in the transaction. In order to
make out his title, therefore, the plaintiff has to prove, inter alia, that the
defendant Ramapada did not act bona fide in good faith. Even though this is a
negative fact, nevertheless, the plaintiff must prove it to establish his
title. In support, the following observation of BOWEN L.J. in the case of
Abrath v. North East Railway Co. {[1883] 11 Q.B.D. 440}. was relied on. The
observation was made in a case of malicious prosecution and reads as follows :
"Now in
an action for malicious prosecution the plaintiff has the burden throughout of
establishing that the circumstances of the prosecution were such that a judge
can see on reasonable or probable cause for instituting it. In one sense that
is the assertion of a negative, and we have been pressed with the proposition
that when a negative is to be made out the onus of proof shifts. That is not
so. If the assertion of a negative is an essential part of the plaintiff's
case, the proof of the assertion still rests upon the plaintiff. The terms `negative'
and `affirmative' are after all relative and not absolute. In dealing with a
question of negligence, that term may be considered either as negative or
affirmative according to the definition adopted in measuring the duty which is
neglected.”
The point
emphasised is that the plaintiff has not discharged this onus, even though it
is the onus of proving the negative. Hence there was no necessity for the
defendant Ramapada to give evidence in this case. On the basis of the evidence
tendered, if the plaintiff has failed to prove that the defendant Ramapada did
not act bona fide in good faith, and this being one of the essential facts to
be proved in support of the case of the plaintiff, the observation of BOWEN
L.J. above referred to applies with full force to the facts of this case.
In the instant
case the want of bona fides on the part of Ramapada consists in his knowledge
that the act of the directors in selling the shares was unauthorised and
wrongful. That knowledge can be proved by tendering positive evidence. For
instance, it may be proved that Ramapada made an admission that he had
knowledge prior to sale that the sale was unauthorised and wrongful. That would
be direct evidence on the point, though it must be considered that rarely such
evidence of the state of mind is available. In any event, no direct proof of
Ramapada's knowledge has been tendered in this case. The evidence is that the
plaintiff did not even know the defendant Ramapada. It must be held, therefore,
that there is no direct evidence to prove that the defendant Ramapada had
knowledge of the wrongful and illegal character of the transaction. The other
way of proving knowledge is to establish facts and circumstances from which an
inference can be drawn that the defendant Ramapada had such knowledge. In other
words, the fact of Ramapada's knowledge can be established by circumstantial
evidence. This proposition is not disputed. It has, however, been strenuously
argued that the circumstantial evidence must be such as to lead to one and the
one conclusion namely, that Ramapada had knowledge,. If the evidence is equally
consistent with knowledge had knowledge. If the evidence is equally consistent
with knowledge and want of knowledge, then the circumstantial evidence tendered
must not be held to be sufficient to establish Ramapada's knowledge of the
wrongful or illegal character of the transaction. Certain decisions on criminal
cases of fraud and conspiracy have been cited in support of the proposition
that to prove fraud and conspiracy by circumstantial evidence, the
circumstances must point to one and the one conclusion namely, that the accused
is guilty. IT is argued that in all cases of fraud the same rule will apply, it
matters not whether the case is civil or criminal. It should not be forgotten,
however, that in a criminal action, the accused is not required to depose in
this favour and if he does not, no inference against him can be drawn, while in
a civil action a defendant charged with fraud is entitled to give evidence and
indeed required to give evidence, more particularly, when the fraud consists in
the knowledge of a wrongful act in which he is alleged to be a party, and if
the defendant withholds his own evidence the court is required to draw an
adverse inference.
In the instant
case, what are the facts admitted and proved. It is admitted in the written
statement that the defendant had knowledge of certain facts relating to the
shares prior to his purchase. He had knowledge of the proceedings in this court
in suit No. 3112 of 1954 and the proceedings in appeal No. 56 of 1956 from the
order of injuction passed by P.B. MUKHERJI J. in suit No. 3117 of 1954. He had
knowledge of the termination of the suits by withdrawal and also of the appeal.
He had also knowledge that under an order of the court of appeal the official
receiver made over possession of the company to the board of directors
consisting of Dr. Mukherjee, Dr. Neogy and D.N. Bhattacharjee. This order was
passed in appeal No. 56of 1955, which was an appeal from an interlocutory order
in suit No. 3117 of 1954. Apart from this admission, other facts have been
proved in court by Dr. Mukherjee. The defendant Ramapada on 10th January came
and saw Dr. Mukherjee and intimated his desire to purchase the shares of the
plaintiff. Defendant Ramapada was not interested in purchasing other ordinary
shares that were clearly available on that date. The defendant Ramapada took
away the papers in connection with he litigation and on the following day made
an offer in writing to purchase the shares. The letter containing the offer
dated January 11, 1956, was not originally disclosed and the genuineness of the
letter was questioned by the plaintiff in court. On the 24th, shares were sold
to the defendant Ramapada and in the evening a part of the purchaser price
amounting to Rs. 1,30,000 was paid in cash. The cash money thus paid was never
proved to have been deposited in bank. The name of the defendant was
immediately entered on the share register as the owner of this big bunch of
shares in place of the plaintiff and there was no transfer deed. The defendant
Ramapada was appointed a director even before he had paid the price of shares.
Dr. Mukherjee has not been cross-examined by Ramapada Gupta and it must be
taken that he has accepted this evidence of Dr. Mukherjee. These facts do
suggest that the defendant Ramapada was well known to Dr. Mukherjee, had
knowledge of facts resulting in the sale of shares and that that knowledge he
had acquired before the actual sale took place. The extent of this knowledge of
facts can only be ascertained by the court from the evidence of the defendant
himself. The court can only determine whether he was an innocent purchaser
after hearing his testimony. I do not understand how else can the court hold
that the defendant is an innocent purchaser. The very fact that the defendant
Ramapada refused to give evidence of his innocence in court is itself a very
important fact and the court is bound to infer from this fact that defendant
Ramapada had guilty knowledge. Certain presumptions are no doubt available in
favour of the defendant Ramapada. Certain presumptions are also available
against him and one of such presumptions resumptions is that the court must
draw adverse inference against him from the fact of his refusal to swear his
innocence in court. In my judgment, it is fatal to the case of Ramapada.
In the instant
case the fact to be ascertained or proved is that state of mind of the
defendant Ramapada, that is, whether prior to the sale, he had knowledge of the
wrongful character of the transaction. This was within the special knowledge of
the defendant Ramapada and the burden of proving the innocent state of his own
mind is within the special knowledge of him alone. It was for him to prove it.
Assuming that the initial onus is on the plaintiff to lead some evidence, the
burden of proof is shifted to the defendant Ramapada, having regard to the
admission in the written statement of Ramapada that he had some knowledge
anterior to the sale and having regard to the evidence already tendered. In
determining whether the onus has shifted to Ramapada, the evidence to be taken
into account is the entire evidence tendered and not the evidence tendered on
behalf of the plaintiff alone. Very slight evidence, if at all, is necessary to
shift the burden on Ramapada and I hold that such evidence was tendered. It was
imperative for the defendant Ramapada to tender his evidence as to the quantum
of his knowledge of the transaction resulting in the sale of shares and to
prove that he was an innocent purchaser. On ramapada's failure to tender
evidence in support of his own innocence, it must be held that Ramapada had
full knowledge of the entire transaction resulting in the sale of shares and on
my finding that the transaction was wrongful I am bound to hold that the
defendant Ramapada did not act bona fide in the impunged transaction. This
finding negatives the argument made on behalf of Ramapada that his purchase is
protected by section 86 of the Companies Act and/or by article 19 of the articles
of the company or by the rule in Turquand's case {[1856] 6 E. & B. 327}.
Let me,
nevertheless, consider how far the sale is protected on the basis of this
argument. I have held that at the time when the resolution to enforce the lien
by sale of the shares was passed on September 23, 1954, and the notice in terms
of article 17 was served on the plaintiff pursuant to that resolution on
September 24, 1954, the directors who purported to act in the matter, that is,
Dr. Mukherjee and Dr. neogy, were no longer directors, their office having
expired in July, 1954, that is fifteen months after the last annual general
meeting held in April, 1953. This resolution and notice sent thereunder is,
therefore, not protected by section 86 of the companies Act, because in law the
section validates only the acts of directors with defective appointment but not
of those with no appointment or whose office had expired. Even if the section
applied, the defendant Ramapada must be deemed to have discovered the defective
nature of the appointment of Dr. Mukherjee and Dr. Neogy having regard to the
letter of the plaintiff and his solicitor served previously to the effect that
Dr. Mukherjee and Dr. Neogy had vacated their office, which letters are
included in the records of this suit in the various proceedings in this court.
The shares were sold on January 24, 1956. Previously in the annual general
meeting held on January 6, 1955, Dr. Mukherjee and Dr. Neogy were appointed
directors. Even if if is held that at the time when the sale took place Dr.
Mukherjee and Dr. Neogy were properly appointed directors and even if at that
particular date they had not discovered that their appointment was invalid,
even then the sale cannot stand, The reason is that the actual sale on January
24, 1956, is only a part of the whole transaction. The transactions ultimately
resulting in the sale consist of three steps; one, resolutions to enforce the
lien by sale passed by the board of directors; second, notice of sale under
article 17, and then the actual sale on January 24, 1956. THe resolution and
the notice are essential steps in the matter and, as stated before, these acts
of the directors are nor protected. It follows that even though the sale was
held by directors properly appointed, the case is not covered by section 86 of
the Act, because the two essential preliminary steps were taken by people
pretending to act as directors, but who were no longer directors, they having
vacated their office. In my judgment article 19 of the articles does not protect
the sale. The purchaser can only invoke article 19, if he acts bona fide and is
an innocent purchaser. I have held further, that the shares liable to be sold
under article 17 are only shares subject to lien, that is, with respect to
which the defendant company were in possession of share scrips. In the instant
case, the shares were only subject to equitable charge and the way of enforcing
the equitable charge is not by sale under article 17 of the articles. Further
conditions laid down in article 17 were conditions precedent to the exercise of
the power of sale and, in the instant case, the conditions have not been fully
complied with. I am in doubt whether this only amounts to "irregularity or
invalidity in the proceedings in reference to the sale" within the meaning
of article 19.
The rule in
Turquand's case {[1856] 6 E. & B. 327}, as stated in Halsbury's Laws of
England, Hailsham Edition, Volume V, page 423 and quoted in Kanssen's case
{[1946] 16 Comp. Cas. 186}, is in the following terms:
"But persons
contracting with a company and dealing in good faith may assume that acts
within its constitution and powers have been properly and duly performed and
are not bound to enquire whether acts of internal management have been
regular".
This
presumption of regularity in the internal management of the company in favour
of an outsider dealing with the company is due to the fact that an outsider has
no right to look at the indoor management of the company. This rule has been
followed in a number of decisions some of which have been already noticed. THis
rule of indoor management was also applied by a Division Bench of the Bombay
High COurt in the case of Pudumjee and Co. v. N.H. Moos {A.I.R. 1926 Bom. 28},
with the following observation:
"Persons contracting
with the company are bound to know, or are precluded from denying that they
know, the constitution of the company and its powers as given by statute and
memorandum and articles but they are not affected with notice of all that is
contained in the register of directors kept as required by section 87 of the
Act . Notwithstanding the provisions of section 87, the appointment of
directors still remains part of `the indoor management' of the company and it
would hardly conduce to the facility of business if outsider were compelled to
search the register and find for themselves whether a person who was permitted
to act as director of the company for some length of time was also its director
de jure".
The learned
Additional Solicitor-General argued with force that this rule of indoor
management is a salutary rule and however irregular the indoor management might
have been, a total outsider is protected even if the acts of persons who were
permitted to act as directors for some length of time were not de jure
directors and even if such acts were not authorised. The outsider who acted on
the faith of apparent state of affairs which were all in order was entitled to
assume that they were the real stated of facts. Therefore, the acts of de facto
directors, who were not regularly appointed, even though they acted as
directors and had acted in a manner not regular, will be binding on the company
in favour of an outsider in his dealings with the company. A shareholder who
took no steps to prevent a de facto directors, though not properly appointed,
from acting on behalf of the company will not be entitled to challenge the
unauthorised act of a de facto director who was not a de jure director as is
clear from the speech of LORD HEATHERLEY in Mahony's case {[1875] L.R. 7 H.L.
869}, and noticed before. It is also argued that the outsider will not lose the
protection unless he is aware not merely of the fact but their legal
consequence, as is clearly indicated by LORE COZENS HARDY M.R. in the Channel
Colliery Trust case {[1914] 2 Ch. 506, 512}.
"It has
been argued for the appellants with great force that this is a clause which
ought not to be relied upon by persons who were aware of the facts, although
not aware of the legal conclusions resulting from those facts, because such
persons must be taken to know the law, and it would be wrong that they should
take the benefit of section 99. I am quite unable to accept that view. It seems
to me that the questions may be put very shortly: Aye or no, were the parties
in the transaction acting in good faith? If they were, section 99 ought to be
available for all parties including the directors themselves. IF there is a
lack of good faith, then of course the court will not allow those who are
lacking in good faith to take the benefit of it".
The test,
therefore, is the presence or absence of good faith.
The reasons in
support of the rule in Turquand's case {[1856] 6 E. & B. 327} have been
stated by LORD SIMONDS in Kanssen's case {[1946] A.C. 459; 16 Comp. Cas. 186,
186} :
"One of
the fundamental maxims of the law is the maxim omnia praesumuntur rite esse
acta. It has many applications. In the law of agency it is illustrated by the
doctrine of ostensible authority. In the law relating to corporations its
application is very similar. The wheels of business will not go smoothly round
unless it may be assumed that that is in order which appears to be in order.
But the maxim has its proper limits. An ostensible agent cannot bind his
principal to that which the principal cannot lawfully do. The directors or
acting directors or other officers of a company cannot bind it to a transaction
which is ultra vires. Nor is the only limit its application. It is a rule
designed for the protection of those who are entitled to assume, just because they
cannot know, that the person with whom they deal has the authority which he
claims. This is clearly shown by the fact that the rule cannot be invoked if
the condition is no longer satisfied, that is, if he who would invoke it is put
upon his inquiry. He cannot presume in his own favour that things are rightly
done if inquiry that he ought to make might tell him that they were wrongful
done".
This being the
rule in Turquand's case {[1856] 6 E. & B. 327} the party seeking to invoke
the rule has to prove that he dealt with the company bona fide in relation to
the offending transaction. In the instant case, the defendant Ramapada Gupta,
in order to invoke the rule in Turquand's case {[1856] 6 E. & B. 327}, has
to prove that he purchased the shares without knowing the wrongful nature of
the transaction. In other words, he has to establish the allegation made in his
written statement that "fully relying on the facts set out in the earlier
part of paragraph I" of his written statement, defendant Ramapada
"bona fide purchased the shares at par". This is a positive defence
and it is for the defendant Ramapada to substantiate it. Defendant Ramapada
cannot substantiate it without entering the witness box. Not having done it, he
has not laid the foundation for invoking the rule in Turquand's case {[1856] 6
E. & B. 327}. Again, as stated by LORD SIMONDS, there are limits to the
application of this rule and this rule is designed for the protection of those
who are entitled to assume, just because they cannot know facts happening
"indoor of a company". But in the instant case, the facts happening
indoor of the company are no longer confined indoor. They have been brought out
in court. The defendant Ramapada admits some knowledge of the court proceedings
and, therefore, what has happened indoor from those court proceedings. Where is
the room for assumption in such a case when what was happening indoor can be
known and is admitted to be known to the party to a certain extent. Knowledge
is admitted by Ramapada. The only question is, how much he knew or could have
known.
Another point
has been raised and has to be considered and that is this : Does the rule in
Turquand's case {[1856] 6 E. & B. 327} apply to a case in which the dispute
is in the title to shares between two rival claimants, even though the dispute
has arisen because of the act of the company ? The rule applies in the case of
a dispute between an outsider and the company. But the instant dispute is not a
dispute between the company and Ramapada, but a dispute between the defendant
Ramapada and the plaintiff. The rule in Turquand's case {[1856] 6 E. & B.
327} may prevent the company from disputing the title of Ramapada to the
shares. But can it be invoked by Ramapada to defeat the plaintiff's title to
the shares? The question is certainly not free from difficulty. The shareholder
in law is distinct from the company and the shares are his property. The
articles which crete a lien and charge constitute nothing more than covenants
between the company and its shareholders. If the shares are sold in breach of
the covenants the shareholders may yet covenant, as he has done in the instant
case, that the sale will not be set aside, because of any irregularity or
invalidity in connection with the sale. This is article 19 of the articles of
association of the company. If the shares are wrongly sold, the plaintiff may
be debarred from questioning the purchaser's title by reason of the covenant
contained in article 19. But if the case is not covered by article 19, can the
title of the shareholder in the shares sold in breach of the covenant be
defeated by the purchaser by invoking the rule in Turquand's case {[1856] 6 E.
& B. 327} ? In none of the cases cited the private right of property in the
shares of a particular shareholders was involved. In Turquand's case {[1856] 6
E. & B. 327} the dispute was between the outsider and the company. So also
in Mahony's case {[1875] L.R. 7 H.L. Cas. 869}. The case of Channel Colliery
Trust {[1914] 2 Ch. 506}, is a case of allotment of shares by directors not
properly appointed and the dispute was between the company and the allottee,
that is, the company and outsiders. In the case of British Asbestos Co. {[1903]
2 Ch. 439}. the legality of a general meeting and the election of directors in
that meeting was the subject of controversy. In Dawson's case {[1898] 1 Ch. 6}
the legality of a call on shares made by directors not properly appointed was
the dispute. So also York Tramway Co. Ltd. {[1882] 8 Q.B.D. 685} was a case in
which the company sought to recover call money on shares and the defence was
that the call was made by a board of directors not properly appointed. The
Bombay case {A.I.R. 1926 Bom. 28} is also a case in which the right of a
creditor to rank as secured creditors in winding up was in issue. THe instant
case appears to be a case of first impression on the point. The point is that
if a company wrongfully sells a chattel deposited with it by one of its
shareholders, can the rule in Turquand's case {[1856] 6 E. & B. 327} be
invoked by the purchaser in a suit by the shareholder to recover from the
purchaser the chattel ? If not, why should the rule in Turquand's case {[1856]
6 E. & B. 327} be invoked by the purchaser, if the chattel happens to be
the share of the company ? I am not prepared to say that there is no substance
in this contention. On the other hand, the reasoning in some of the cited case
may be used in support of the contention that the rule in Turquand's case
{[1856] 6 E. & B. 327}, may apply in such a case. The point is important
and, as stated before, it is a point of first impression and need not be
decided in this case, having regard to the view I have taken otherwise.
Admitting the rule in Turquand's case {[1856] 6 E. & B. 327}, and applying
it to the facts of this case, what follows ? The rule in Turquand's case
{[1856] 6 E. & B. 327} fixes on the outsider dealing with the company
notice of the memorandum and articles of association. Ramapada, therefore, in
the instant case, is, in any event, fixed with the knowledge of article 17. I
have held that article 17 gave no power to the directors to sell the shares
with respect to which the company had no lien in terms of the articles. From
the letter of Ramapada to the company it is clear that Ramapada knew that the
shares scrips were not available at that point of time. Hence, even if under
the rule in Turquand's case {[1856] 6 E. & B. 327} the defendant Ramapada
as a total outsider may be entitled to assume that the directors were properly
appointed, that the directors properly determined the liability of the
plaintiff, that all steps were taken by the directors properly, that is, the
conditions laid down in article 17 have been complied with, he was not entitled
to assume that the directors had power to sell, Article 17 of which he must be
deemed to have notice, gave no power of sale of shares with respect to which
the company had no lien at law but only equitable charge. Hence the rule in
Turquand's case {[1856] 6 E. & B. 327} is of no avail to Ramapada.
It has been
strenuously urged that the defendant Ramapada had no doubt knowledge of the
allegations made by the plaintiff inthe various suits disputing the right of
Dr. S.L. Mukherjee and Dr. Neogy to sell the shares in suit No. 3112 of 1954.
But the suit was withdrawn without leave to instituted another suit and with
the withdrawal of the suit the challenge thrown out in the suit was withdrawn.
In such circumstances, the defendant Ramapada was entitled to think that the
objection of the plaintiff questioning the right of th directors to sell the
shares in enforcement of the lien was wholly unsubstantial and if on that
belief the defendant Ramapada purchased the shares, he purchased the shares
bona fide and there was no absence of good faith on his part. This is a defence
in the nature of estoppel - the defendant Ramapada was misled by the conduct of
the plaintiff in withdrawing the suit to believe that the allegations made by
the plaintiff in the suit were without any substance and on the faith of that
purchased the share. This argument would have been of great force if the case
was substantiated by evidence. If Ramapada gave evidence to that effect, I
might very well have accepted it and held that the defendant Ramapada purchased
the shares bona fide. In the absence of Ramapada's evidence, this argument
becomes wholly unreal and is of no avail to him.
The reason of
the plaintiff not persisting in the suit filed and withdrawing the same will
appear from the petition of withdrawal of the defendant company in suit No.
3117 of 1954. In suit No. 3117 of 1954 the company was one of the plaintiffs.
This petition is signed by the company in this manner: "Albert David Ltd.,
by the pen of Albert Judah Judah, Managing Director". In this petition the
reason of withdrawing the suit is stated to be this :
"An
amicable settlement has been effected between the plaintiff in the present suit
and D.N. Bhattacharjee and these two together hold the controlling shares. In
consequence even though the allotment of new shares are recognised, the
interest of the plaintiff would be protected. Hence to put an end to the
litigation the suit is being withdrawn".
No separate
petition was filed to withdraw the suit no. 3112 of 1954. But the two suits
were withdrawn together at the same date. The defendant Ramapada, who admits to
have some knowledge of the proceedings in court, might or might not have
knowledge of the proceedings in suit No. 3117 of 1954. There is no evidence to
this effect, but the probabilities are that he had knowledge and if he had
looked into the petition, he could have known the real reason of withdrawal of
the suit. Further, in the petition before the appeal court for delivery of the
company to the plaintiff's party it was clearly stated that they were the
proper party to whom possession was to be made over by the official receiver
and not to Dr. Mukherjee and Dr. Neogy. The court, however, held that
possession was to be made over to the party from whom possession was taken.
This conduct of the plaintiff cannot be construed to mean that he gave up the
claim that he had made and has made up till now. In any event, Ramapada, as the
intending purchaser, was put upon enquiry and if he refused to make enquiry and
deliberately shut his eyes to the true state of affairs, he did it at his own
risk, he is not entitled to complain that he did not know the real state of
affairs. In the light of these facts the defendant Ramapada Gupta might or
might not have been justified in thinking that the fact of withdrawal of the
suit amounted to the plaintiff's giving up the charges against Dr. Mukherjee
and Dr. Neogy. But the point is, what in fact was the state of mind of
Ramapada, what was the knowledge with which he purchased the shares ? That is
the real point. On the point, the withdrawal of the suits and the records and
proceedings are no doubt relevant materials but certainly not conclusive. In
that view of the matter, it was imperative for the defendant Ramapada to come
to court and state his knowledge of facts on the basis of which he purchased
shares. Not having chosen to give evidence, it is not open to him to argue that
the withdrawal of the suits led him to believe that the plaintiff's contention
raised in suit No. 3112 of 1954 to be of no substance from the fact that the
plaintiff withdrew the suit without liberty to institute another suit and on
that belief purchased the shares. This may or may not be true, and whether it
is so or not can only be ascertained from the evidence of the defendant
Ramapada, if it was tendered. As I stated before the refusal of the defendant
Ramapada Gupta to tender his evidence in this case is fatal to his case.
Another point
taken by Mr. Chaudhury is that in the instant case, there is no instrument of
transfer, i.e., no deed transferring the shares to the defendant Ramapada
Gupta. The plaintiff the registered holder of the shares did not execute any
such deed. Nor does it appear that the company did execute any such deed for
and on behalf of the plaintiff. No need of transfer has been proved in court on
behalf of any of the defendants. It is contended that section 34(3) of the
Indian Companies Act provides that it shall not be lawful for the company to
register a transfer of shares unless the proper instrument of transfer duly
executed by the transferor and transferee has been delivered to the company
along with the scrip. No transfer deed having been executed and no scrip having
been made over to the company in the instant case as required by section 34(3),
it was not lawful for the company to register the transfer and record the
defendant Ramapada Gupta as the holder of these shares. It follows that even if
there has been a sale in favour of the defendant of the shares in suit, in the
absence of a deed of transfer duly executed and deposited with the company the
company had no power to register Ramapada as the holder to these shares. It is,
therefore, urged by Mr. Chaudhury that there must be rectification of the share
register by restoring the plaintiff's name as the holder of these shares. It is
to be remembered that in the instant case, the shares have not been forfeited
and the company was not selling its own shares, in which case no transfer deed
would be necessary. The company in the present case was selling the shares of
the plaintiff and hence in law a deed of a transfer becomes imperative to
enable the directors of the company to register Ramapada as the transferee of
these shares. This is the argument of Mr. Chaudhury.
In answer to
this argument it is contended on behalf of the defendants that article 19
provides for registration of shares sold by the company in enforcement of lien
even without a deed of transfer. I do not think that article 19 does provide
for registration without a deed of transfer. It only provides that upon any
such sale as aforesaid, the directors may enter the purchaser's name in the
register as the holder of these shares. It does not follow that the article
enables registration without a deed of transfer. To hold that it does makes it
inconsistent with the provisions of section 34 of the Act. The articles of the
company should be so construed as to harmonise and be consistent with the
provisions of the Indian Companies Act. THat is the proper rule of
construction. To construe otherwise, article 19 would run counter to section 34
of the Companies Act and would be ultra vires to that extent.
It is next
argued that on a true construction, the sale of shares by the company in
enforcement of lien is excluded from the operation of section 34 of the Act.
The section does not apply to cases of sale when the company itself is selling
the shares. THe company being itself the seller is bound to register the shares
and if the company does not, the purchaser can compel the company to register
the shares. I agree that the section does not contemplate cases of transfer by
the company of its own shares. Just as allotment by the company of its own
share cannot be characterised as a transfer within the meaning of the section,
similarly the sale of its own share by the company after forfeiture also cannot
be characterised as a "transfer", within the meaning of section 34 of
the Indian Companies Act. But shares belonging to other people which the
company is selling in enforcement of lien or equitable charge cannot be treated
on the same footing. They are not shares in which the company has
"property" and the sale does not result in transfer of property from
the company to the purchaser. The sale in enforcement of lien results in the
transfer of property from one registered owner to the purchaser and is not different
from ordinary transfer from one shareholder to another. The fact that the
company acts as the seller being authorised by the articles to sell, does not
alter the character of the transaction. It is a case of transfer just like any
other transfer and is covered by section 34 of the Act. I do not think that
sale of shares by the company in enforcement of lien is excluded from the
operation of section 34 of the Act.
Two
authorities have been cited in support of the contention that even without the
transfer deed, registration may be effected by the directors, which may now be
considered. The first case is the case of Mohideen Pichai v. Tinnevelly Mills
Co. {A.I.R. 1928 Mad. 571}, decided by a very strong Division Bench of the
Madras High Court. The case before the Madras High Court was argued by the most
eminent counsel Mr. Varadachariar and Sir Alladi Krishnaswami Ayyar. THe point
considered was whether a purchaser of share in a court sale is entitled to
succeed in a suit for rectification of the share register by recording his name
on the strength of his purchase in a court sale. It was held that such a suit
is maintainable and must succeed. In his judgment SRINIVASA AYYANGER J. made
the following observation at page 574:
"To begin
with, it must be pointed out that the expression `transfer' by itself is not
altogether appropriate to indicate a sale in invitum by the court. No doubt the
expression `transfer' has been used in such collocations as `transfer by
operation of law', but at the same time the expression `transfer' is
undoubtedly more appropriate to indicate what is effected or brought about by
the will of the person in whom the property is vested, as in the Transfer of
Property Act".
It is argued
from the above observation that the "transfer" in section 34 is to be
construed in the sense of voluntary transfer and not transfer under compulsion.
In the instant case, the transfer has not been effected voluntarily by the
plaintiff, the registered holder, but by the directors against the wishes of
the registered holder. Hence it is argued by the learned Additional
Solicitor-General that the observation set out above will apply not only to
cases of court sale but also to involuntary sale effected by the directors to
enforce lien.
The second
case relied on is the case of Mahadeolal v. New Darjeeling Union Tea Co. {55
C.W.N. 408}, decided by a Division Bench of this court. In this case also the
same question arose, namely, whether a purchaser in a court sale is entitled to
have his name registered on the basis of being the auction purchaser in a court
sale. The Division Bench cited with approval the above observation in the
Madras case, and agreed with the view taken by the Madras Division Bench on the
point. It should be noted that the Madras case was decided prior to the
amendment of section 34 of the Companies Act, while the Calcutta case had been
decided after the amendment when section 34 is the same as it is now. It is
clear that none of the cases is a direct authority on the point. Both are cases
of court sale. Further, the Madras decision was prior to the amendment of the
companies Act and was decided on a construction of the articles of the company
and not upon a construction of section 34 of the Companies Act. Observations
made by the Madras High Court and approved by this court must be read in the
background of the facts of that case - and the fact considered in that case was
the acquisition of the shares in a court sale. Nevertheless it is perfectly
legitimate for the defendants to use the reasoning in the Madras case, as being
applicable not merely to a court sale but to all kinds of involuntary transfer.
This reasoning, therefore, implies that section 34 is restricted to a voluntary
transfer effected by a shareholder to a purchaser. It may include transfer effected
by an agent of the shareholder with the approval of the shareholder at the time
of transfer. But it cannot cover a case of sale of shares by a pledgee when
sale is effected in enforcement of the pledge by the pledgee, unless the
pledgor expressly consents to the sale. It is on the same reasoning that the
sale of shares by a director in enforcement of the pledge can be said to be
"transfer" within the meaning of section 34 on the ground that the
sale is involuntary. It has not been held in any case that in the case of sale
of shares by a pledgee to enforce the pledge - transfer deed is unnecessary. If
not, how can it be urged that it is unnecessary in the case of sale in
enforcement of a lien on the ground that the sale is involuntary. In either case
the authority to sell is derived from the owner of the shares, in the case of
pledge when the pledge was given and in the case of lien when the shares were
purchased. In both cases the sale is effected with the implied consent of the
owner - consent having been given before, though at the time of sale the owner
of the share has not only given no consent but positively objected to the sale.
Indeed unless there is consent though presumed in law on the part of the
shareholder, there cannot be any transfer to the property to the purchaser.
Such a sale, therefore, cannot be an involuntary sale in the same sense as a
court sale. A court sale is entirely different from such a sale. There is an
express provision in the Code of Civil Procedure, Order XXI, rule 80, to the
effect that where execution of a document is required to transfer shares then
the execution of that document by the court would be sufficient. In other
words, such document will effect the transfer.
There being
this specific provision in the statute with respect to shares transferred or
sold in execution of a decree, the general provisions in section 34 of the
Companies Act as to transfer of shares is held not be applicable in the case of
shares sold in execution. The reason of non- applicability of section 34 of the
Companies Act in the case of court sale is not the involuntary nature of the
transaction but the express provision in the Code which provides for another
mode of transfer of share in the case of share in the case of court sale.
For the reasons
stated, it was not lawful for the defendant company to register the transfer of
shares in the name of Ramapada Gupta in the absence of a proper instrument of
transfer having been deposited with the company.
This disposes
of all the points argued before me. I should record that no serious attempt was
made to prove the case made by the plaintiff in paragraph 14 of the plaint to
the effect that a new board of directors consisting of Dr. S.P. Bhattacharji,
Gunabantrai Ojha, D.N. Bhattacharji and the plaintiff was elected in a meeting
convened by five members under articles 64 and 65 of the articles and duly
held. Similarly, no serious argument was advanced that the suit was bad for
non-joinder of Dr. Mukherjee and Dr. Neogy as parties.
For reasons
given above the plaintiff succeeds and I pass a decree in terms of prayers (a),
(b), (c), (d), (e), (f), (g) and costs. Certified for three counsel.
I would be
failing in my duty if I do not record the great assistance rendered to the
court by all the learned counsel - seniors and juniors alike. The case is very
heavy and the learned cousel did not spare themselves. No judge got the
assistance that I received from the Bar in this case and I wish to record my
gratitude to each one of them.
[1984]
55 COMP. CAS. 462 (
HIGH COURT OF
v.
Dina
Nath Sodhi
RAJINDAR
SACHAR AND M.L. JAIN JJ.
Company Appeals Nos. 9, 11 and 30 of 1980
FEBRUARY
12, 1982
R.K. Talwar for the appellant.
A.N. Parekh for the respondent.
Sachar, J.—This is an appeal by the company against the order of the
learned single judge holding that it was just and equitable to wind up the
company and so ordering accordingly. Similar appeals
have also been filed by
It may be mentioned that
broadly the shareholders are divided into two groups known as
The company was
incorporated on May 14, 1949, with an authorised capital of Rs. 5 lakhs divided
into one thousand ordinary shares of Rs. 100 and 200 cumulative preference
shares of Rs. 2,000 each. The memorandum of association was signed by the
appellant,
The broad fact that
Sodhi stated as under:
"I and members of my
family own 21 cumulative preference shares in the company. If we are paid at
the rate of Rs. 7,500 per cumulative preference share, we are willing to
transfer those shares to
"I am willing to pay
at the rate of Rs. 7,500 per each cumulative preference share held by the
petitioner & members of his family subject to this court deciding the
number of shares so held by Shri Dina Nath Sodhi and the members of his family.
According to me, Sri Dina Nath Sodhi and the members of his family own 5 shares
and not 21 as contended by him. This question alone may be decided in this and
the concerned applications by this court. Till this question is decided, I
undertake not to alienate or in any manner subject the company to any
commitment or liability except for ordinary day-to-day transactions without
taking the express orders of the court".
On the same date the
learned judge passed the following order:
"The statements of
Shri Dina Nath Sodhi and Shri S.L. Bali are recorded. Shri Bali will file a
detailed affidavit concerning the returns stated to have been filed before the
Registrar for the years ending 1966, 1967 and 1968, mentioning the details of
the shares held by the petitioner and the members of his family. He will also
cover the points mentioned in the Government's report which has been filed
today by Shri Rishikesh for Shri Davinder K. Kapur. The petitioner will also
file a detailed affidavit of shares of himself and the members of his family
and how and when they were acquired".
The matter was then heard
and disposed of by P.N. Khanna J., by his order of May 23, 1972, as follows:
"In the result, I find
that Shri Bali is not the owner of the 8 shares which previously stood in the
names of Des Raj and Mulakh Raj and that the petitioner and the members of his
family, i.e., his wife, his deceased brother, his two sons, Ramesh Sodhi and
Suresh Sodhi, and his daughter, Savita Sodhi, are the owners of 21 shares as
claimed by the petitioner. The petitioner, respondent No. 1 and respondent No.
2 shall now take steps forthwith to have the said 21 cumulative preference
shares transferred to respondent No. 1 at the agreed price of Rs. 7,500 for
each such share. The petition shall stand disposed of accordingly".
It will be noticed that in
the order of P.N. Khanna J. the direction was given to have the shares
transferred to respondent No. 1. The reference to respondent No. 1 was an
inadvertent mistake because obviously the dispute was whether shares should be
transferred to
Thereafter, the matter was
tried by the company judge on merits who framed the following issues:
(1) Whether the issue of 1,000 equity
shares of Rs. 100 each by Sri Bali to himself, his wife, daughters and minor
children, Sood and Mehta Kartar Singh, was at the back and without the
knowledge and concurrence of the petitioner and amounted to an act of
oppression?
(2) Whether the annual general meetings
held in December, 1969, and April, 1970, were, invalid as they had been held
without notice to the petitioner and the members of his family?
(3) Whether the respondents ousted the
petitioner from the board of directors of the company and brought about a
material change in its management and control?
(4) Whether the company in the present
case was really in the nature of a partnership between two groups, one of the
petitioner and the other of
(5) Whether
it is just and equitable that the company should be wound up?
(6) Are
the majority of the shareholders opposed to the winding up, and if so, what is
its effect?
The
learned single judge, as already mentioned, has by his order of December 19,
1979, come to the conclusion that it was just and equitable to wind up the
company and has ordered accordingly. Against this order,
Issue No. 2:
This
issue relates to the validity of the meetings held in December, 1969, and
April, 1970, and the issues Nos. 1 & 3 really flow from the findings to be
given on this issue. That is why this issue is being discussed first. The
allegation is that the company is said to have held its annual general meetings
in December, 1969, and again in April, 1970, but without having sent the notice
of the meetings to Sodhi or his wife or his sons and daughters who are claimed
to be the holders of 21 shares; hence the meeting held was an invalid one. The
stand of the company and
Issue No. 1:
The
allotment of these 1,000 equity shares was purported to have been made in a
meeting of the board of directors held on November 12,1970. Prior to that date
the issued capital of the company was Rs. 1 lakh consisting of 50 preference
shares of Rs. 2,000 each and on the findings given earlier 21 shares of Rs.
2,000 each were held by Sodhi group; 21 shares of Rs. 2,000 each were held by
Bali group and 8 shares were held by Mehta and Kapoor. On November 12,1970, the
board of directors decided to allot one thousand equity shares of Rs. 100 each
to about 10 persons, which, apart from allotment of 20 shares each to one P.L.
Sood and K.S. Mehta, the rest were given to
A
meeting of directors is not duly convened unless due notice has been given to
all directors and the business put through at a meeting not duly convened is invalid and any business or resolution passed
at such an invalid meeting would itself be invalid. Vide Halsbury's Laws of
England, vol. 9, p. 46, and approved by the Supreme Court in Parmeshwari Prasad
Gupta v. Union of India [1974] 44 Comp Cas1. Reference in this connection may
also be made to the observations made in Needle Industries (India) Ltd. v.
Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743, 844 (SC),
which is as follows:
"The meeting of 2nd
May, 1977, was unquestionably illegal for reasons already stated. It must
follow that the decision taken by the board of directors in that meeting could
not, in the normal circumstances, create mutual rights and obligations between
the parties".
As the said allotment was
made by a director who was purported to have been elected at an invalid meeting,
the said action lacked in validity. Mr. Talwar, however, sought to invoke s.
290 of the Companies Act to say that any act done by or purported to be done by
a director is valid notwithstanding that it may afterwards be discovered that
his appointment was invalid by any reason of defect or disqualification. The
argument is that it is only subsequently during the present proceedings that it
has been found that the meeting of April, 1970, which elected Mrs. Bali as
director was invalid, and, therefore, the act of Mrs. Bali as a director
allotting these shares must be held to be valid in terms of this section. We
cannot agree. Now, s. 290 is based on the rule culled out from Turquand' s case
[1856] 25 LJ QB 317; 6 E & B 327, which, as reproduced in Morris v. Kanssen
[1946] 16 Comp Cas 186; [1946] 1 All ER Rep. 586; [1946] AC 459 (HL), is to the
effect that "persons contracting with a company and dealing in good faith
may assume that acts done within its constitution and powers have been properly
and duly performed, and are not bound to inquire whether acts of internal
management have been regular". But this rule is not applicable to the
present case. The reason is that this section which is equivalent to s.143 of
the English Companies Act, 1929, and s.180 of the Companies Act, 1948, cannot
apply to a transaction where a director or a de facto director invokes the rule
so as to validate a transaction which was in fact irregular and unauthorised.
The justification for this rule is that normally the wheels of business will
not go smoothly unless it may be assumed that all is in order which appears to
be in order. But the maxim has its proper limits as explained in Morris' case
[1946] 16 Comp Cas 186; [1946] 1 All ER Rep. 586 (HL), that it is a rule
designed for the protection of those who are entitled to assume, just because
they cannot know that the person with whom they deal has the authority which he
claims. This is clearly shown by the fact that the rule cannot be invoked if
the condition is no longer satisfied, i.e., if he who would invoke it is put
upon his inquiry. He cannot presume in his own favour that things are rightly done if inquiry that he
ought to make might tell him that they were wrongly done. What Mr. Talwar seems
to urge is that even though Mrs. Bali was elected at a meeting which was
invalid yet her acts should be held to be valid because it could not be assumed
that
"For
here Morris was himself proporting to act on behalf of the company in a
transaction in which he had no authority. Can he then say that he was entitled
to assume that all was in order? My Lords, the old question comes into my mind:
Quis custodiel ipsos custodes? It is the duty of directors and equally of those
who purport to act as directors, to look after the affairs of the company, to
see that it acts within its powers and that its transactions are regular and
orderly. To admit in their favour a presumption that that is rightly done which
they have themselves wrongly done is to encourage ignorance and condone
dereliction from duty. It may be that in some cases, it may be that in this
very case, a director is not blameworthy in his unauthorised act. It may be
that in such a case some other remedy is open to him, either against the
company or against those by whose fraud he was led into this situation, but I
cannot admit that there is open to him the remedy of invoking this rule and
giving validity to an otherwise invalid transaction. His duty as a director is
to know; his interest, when he invokes the rule, is to disclaim knowledge. Such
a conflict can be resolved in only one way".
As
explained in Morris' case [1946] 16 Comp Cas 186,194; [1946] 1 All ER Rep. 586,
591 this section clearly indicates that "this deals with slips or
irregularities in appointment, not with a total absence of appointment, and
still less with a fraudulent usurpation of authority". "It has been
held that, notwithstanding the provisions of s.180 if the directors are not
properly appointed, according to the articles of association, or if they
continue to act without re-election they cannot allot shares, make valid calls,
forfeit shares or appoint directors". See George Browne on Companies, 42nd
edition, page 720. The sale by a director with defective appointment cannot be
upheld unless the purchaser was held to have acted bona fide and the court
cannot come to the assistance of a purchaser who purchases a share without good
faith. Now, in the present case, on the findings it has been found that the
April 29, 1970, meeting at which
In
the present case, the motive was clearly to deprive Sodhi and his group of
parity with Bali and to openly facilitate the overwhelming control of
Issue
No. 3:
This
issue really stands concluded by our finding earlier that the meetings in
December, 1969, and April, 1970, were invalid. That they were called without
notice to Sodhi group and that 1,000 extra shares were issued without involving
Sodhi in this decision making is also established. It is apparent that all this
was done with the main, if not sole, purpose of excluding Sodhi from the
control and management of the company. That Sodhi was undoubtedly associated
right from the incorporation in 1949 to April, 1970, even on the showing of
Here the only motive was to
exclude Sodhi from the management with which he was associated, right from the
beginning. This was an oblique and extraneous purpose divorced from the
considerations of the benefit of the company. The issue of these shares for the
benefit of Bali and the ouster of Sodhi was an act of personal aggrandisement
by
Issues
Nos. 4 & 5:
Issues Nos. 4 and 5 should
be dealt with together because Mr. Parekh's contention that it is just and
equitable that the company should be wound up rests on the only ground that
this company is really in the nature of a partnership and the principles which
are applicable for dissolution of a partnership should also apply in the
present case. The facts found show that the company was started in 1949 with an
authorised capital of Rs. 5 lakhs divided into 100 ordinary shares of Rs. 100
each and 200 cumulative preference shares of Rs. 2,000 each. Originally both
Mr. Talwar had sought to
urge that it was not shown successfully that the conduct of
"They were equal
shareholders in a limited company; but the court considered that it would be
unduly fettered by matters of form if it did not deal with the situation as it
would have dealt with it had the parties been partners in form as well as in
substance": vide Ebrahimi's case (p. 1302 of [1972] 2 WLR).
Mr. Talwar's argument that
there were no outstanding liabilities against the company and that there were
good prospects of the company carrying on profitably is equally of no avail
because in a case like the present, where the company is in substance a
partnership, it is accepted that:
"...in a case like the
present we are bound to say that circumstances which would justify the
winding-up of a partnership...by action are circumstances which should induce
the court to exercise its jurisdiction under the 'just and equitable clause and
to wind up the company". Vide Yenidje's case [1916] 2Ch 426,432 (Ch D).
Nor would the consideration of present profits, much less consideration of
probable future profitability prevent the winding-up because again as said in
Yenidje's case (at p. 432 of [1916] 2 Ch), "whether there would be such
profits made in circumstances like this or not, it does not seem to me to
remove the difficulty which exists, which is contrary to the good faith and
essence of this, that the parties formed the scheme of a company managed by
these two directors which should be worked amicably, and it would not justify
the continuance of the state of things which we find here". Nor is it
necessary for claiming relief under 'just and equitable' clause that the
petitioner must prove oppression by majority, though in the present case there
is ample evidence of the serious devices adopted by Bali to exclude Sodhi,
because as Lord Cross said in Ebrahimi's case [1972] 2 All ER 492,505(e); [1972]
2 WLR 1289, 1303: "But the jurisdiction to wind up under section 222(f)
continues to exist as an independent remedy and I have no doubt that the Court
of Appeal was right in rejecting the submission of the respondents to the
effect that a petitioner cannot obtain an order under that sub-section any more
than under section 210 unless he can show that his position as a shareholder
has been worsened by the action of which he complains".
Of course, if the
petitioner who relies on "just and equitable" clause is the one
responsible for the breakdown of confidence between him and the other party, he
cannot invoke this clause. Nothing has been shown in the present case that
Sodhi had in any way acted as to justify the action of
In this connection we may
note that in Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976]
46 Comp Cas 91 (SC), the principles applied in Ebrahimi's case [1972] 2 All ER
492; [1972] 2 WLR 1289; [1973] AC 360 (HL), had been approved. Though on merits
it was found that it was not a case where winding-up could be ordered, the
Supreme Court in p. 100 specifically stated that the principles laid down in
Ebrahimi's case and Yenidje's case [1916] 2 Ch 426; [1916-17] All ER 1050 (Ch
D), are sound principles depending upon the nature, composition and character
of the company, though it cautioned that the principles, good as they are,
their application in a given case or in all cases, generally, creates problems
and difficulties. It recognised that, in a given case, principles of dissolution
of partnership may apply squarely if the apparent structure of the company is
not the real structure and on piercing the veil it is found that in reality it
is a partnership and that when shareholding is more or less equal and there is
a case of complete deadlock in the company on account of lack of probity in the
management of the company and there is no hope or possibility of smooth and
efficient continuance of the company as a commercial concern, there may arise a
case for winding-up on the 'just and equitable ' ground. (See Hind Overseas
case [1976] 46 Comp Cas 91,104, 105 (SC)). The principle of law is, therefore,
not in doubt.
In the present case, the
manner of functioning of
The conduct of
Now, why in the Supreme
Court case, winding up was not ordered was because it was found as a fact that
though the company was formed first with R.P.J. and A.C. Datta, yet the latter
was an employee of V.D.J. The entire finance was arranged by V.D.J. A.C. Datta
resigned soon thereafter and 19 shareholders came in (9 by R.P.J. and 10 by
V.D.J.) but R.P.J's shares were 1,875 and V.D.J's were 3,125. V.D.J's guarantee
to the bank for overdraft was over Rs. 40 lakhs and he had a stake of Rs. 53
lakhs as against the stake of Rs. 18 lakhs by R.P.J. It was also found that
R.P.J. served like an employee on a monthly salary and had been working
directly under the supervision and control of V.D.J. It was on this ground that
the Supreme Court refused to hold that the company was in substance a
partnership or in the image of a partnership. That case is obviously
distinguishable.
In a case where there were
only two shareholders each of whom was a director, one holding a single share
and the other, the remainder of issued capital, i.e., 1,501 shares, and the
latter having usurped the whole powers of the company, the former, though
holding one share, successfully petitioned for a winding-up order. (See
Gore-Browne on Companies, 42nd edition, page 908, footnote 87). Another ground
on which an order under this paragraph may be made is when there is complete
deadlock in the management of the company's affairs. The deadlock, must,
however, be one not capable of resolution under the articles, e.g., by the
company in general meeting. In certain circumstances, where a company is
virtually a partnership and disputes occur between the members, which, if they
were partners, would justify the dissolution of their partnership, the company
may be wound up under this paragraph. Where, for example, a company was in
substance a partnership, and one director had irregularly sought to acquire
control and exclude the other director, a winding-up order was made. (See Gore-Browne page 907, footnote. 80-83). All the circumstances
justifying the winding up of the present company, are present in this case and
we hold accordingly.
Mr. Talwar had sought to
urge that as the earlier petition under ss. 397 & 398 had been filed, i.e.,
C.P. No. 32/1971, but no relief for winding up had been claimed, the present
application for winding up is barred on the principles of res judicate or at
least on the principles of O.2, r.2, CPC. The argument being that before an
order can be passed under s. 397, the court has to come to a conclusion that
the company's affairs are being conducted in a manner prejudicial to public
interest and that to wind up the company would unfairly prejudice such members
but otherwise the facts would justify the winding-up order on the ground that
it was just and equitable that the company should be wound up. Therefore, so
runs the argument, that when the earlier application—C.P. No. 32/1971—was filed
under ss.397/398, grounds for asking for winding up under "just and
equitable" clause existed and since the winding up was not sought, the
respondents cannot now ask for winding up. This argument obviously assumes as
if reliefs under ss. 397 and 433 are the same and, therefore, an application
under s. 433 would be an abuse of the process of the court if winding-up was
not sought in an earlier application under s.397. The argument is
misconceived". The relief that could be granted under s. 397 and that
which could be granted under s. 433 are different. The proceedings are distinct
and separate, and one does not depend upon the other even though the ground
urged for winding up may be that it is just and equitable, which is no doubt a
ground which should be established to sustain the petition under s. 397 also.
The fact that such a ground is common is no bar for the prosecution of this
petition under s.397. (See [1973] 43 Comp Cas 244 (Mad), Official Liquidator v. N. Chandranarayanan).
It is not necessary that every time a
petitioner moves an application under s. 397/ 398, he must also ask for the
relief of winding up. It is possible and indeed in many cases it is not only
desirable but is also not in the interest of the petitioner and other members
that the relief of winding up may be asked because it may be out of proportion
to the relief that may satisfy the petitioner and give him full justice. The
confusion in Mr. Talwar's argument is that he makes the requirement of an
existing situation enabling a winding up order to be passed being necessary
condition when granting a relief under s. 397/398 as equivalent to the petitioner
having deliberately abstained from asking for such a relief which was
available. This is unacceptable because satisfying the condition required by s.
397 does not mean that if the relief of winding up was not sought earlier but
the petitioner subsequently feels that the circumstances justify the winding
up, he is debarred from asking for that relief. No principle or authority has
been cited in support of this extreme
contention urged by Mr. Talwar, which is repelled.
The next contention was
that the learned judge should have decided the matter only on the allegations
made in C.P. No. 39/1973 and it was not permissible to refer to the allegations
made in the earlier application—C.P. No. 32/1971. Apparently the suggestion was
that as in C.P. No. 39/1973, the grievance was made that Bali had created
difficulties in the payment of Rs. 1,57,500 for the alleged purchase of shares
from Sodhi in terms of order of P.N. Khanna J., this was the only ground
available to Sodhi, and that any controversy about the 21 shares belonging to
Sodhi could not be the subject-matter of decision in C.P. No. 39/1973 and could
not be relied upon for the purpose of deciding whether to order winding up or
not. The argument is misconceived. When the application is moved for winding up
on the ground that it is just and equitable to do so especially for the reason
that the company is in substance a partnership, it is inevitable that the other
details as to how many shares belong to each party and what has been the
history of the company must necessarily figure in any determination. Therefore,
the fact whether Sodhi has been ousted or not would very much form a part of
the necessary determination of C.P. No. 39/1973, even on the basis of
allegations as it stood in this very application alone. But that apart, this
plea that the matters which were not mentioned in the Company Petition No.
39/1973, alone must be considered and the matters referred to in C.P. No.
32/1971, cannot be relied upon in C.P. No. 39/1973, has already been rejected in
an earlier judgment in C.A. No. 8/1973, decided on March 8, 1977. In that case,
the Bench, though it accepted that the petitioner in a winding up is confined
to the complaint set forth in a petition and cannot be allowed to rely on
allegations not made therein, nevertheless observed that the petitioner had
expressly stated in paragraph 12 of C.P. No. 39/1973, that he craves a
reference to the various applications made by the respondents and the applicant
and further craves a reference to rely upon the record of C.P. No. 32/1971, at
the time of hearing of the application. The Bench interpreted this to mean that
the petitioner instead of stating the various facts and allegations again in
the present petition—C.P. No. 39/1973—asked for permission to refer to all the
facts and allegations which have already been set out in the earlier
applications and petition and further that all the parties were parties in the
earlier application and, therefore, there cannot be said to be any element of
surprise. It, therefore, overruled the objection that Rangarajan J. was not
justified in referring to the facts and circumstances mentioned in the earlier
petition, C.P. No. 32/ 1971. We, therefore, feel that this argument is
foreclosed to Mr. Talwar by the decision in C.A. No. 8/1973, apart from the
fact that as mentioned above we find no merit and substance in the same. The
argument is, therefore, rejected.
Mr. Talwar then made a
reference to s. 557 of the Act which provides that in all matters relating to
winding up of a company, the court may have regard to the wishes of the
creditors and/or contributories of the company and when ascertaining the wishes
of contributories, regard shall be had to the number of votes which may be cast
by each contributory. This argument is apparently with reference to the
application —C.A. No. 66/1979—dated January 25, 1979, moved by one Narinder
Bakshi during the pendency of C.P. No. 39/1973, before the single judge. In the
application it was claimed that the applicant was a shareholder holding one
cummulative preference share; of Rs. 2,000. A list of 50 cummulative preference
shareholders and 1,000 equity shareholders was attached along with the
application. It was stated that the majority of the shareholders were opposed
to the winding up and that the attitude of Sodhi in insisting upon winding up
was unreasonable. The application also mentioned that one Jaidev Chandok who
was said to be associated with the company in a joint venture in A-Block
Development Scheme had invested good part of money and was also interested that
the company should not be wound up, for otherwise, it may affect the venture in
which he was 1/3rd partner. On this basis, a suggestion was given based on s.
443(2) of the Companies Act which provides that where a petition is presented
on just and equitable grounds the court may refuse to make an order of winding
up if it is of the opinion that some other remedy is available to the
petitioner and that they are acting unreasonably in seeking to have the company
wound up instead of pursuing the other remedies. The remedy which was put forth
as an alternative remedy in para. 13 was to the effect that the applicant was
prepared to purchase the shares of all the dissenting shareholders at a proper
and reasonable price and that for this purpose a form of chartered accountants
of repute or a valuer may be appointed to work out the value of shares and
after hearing the parties the value of the shares be approved. This suggestion
was supported by one Mr. Dhera Singh, who elaborated it by his affidavit of
March 5, 1979. Thus after the valuer had determined the value of shares, the
court was also to determine the interest of Sodhi in the shares and payment for
that to be made by the company. But Sodhi and his family members were only in
the first instance to be allowed to withdraw the value of 9 shares by
completing the formalities which were listed as delivering the share scrips of
Sodhi or indemnification by Sodhi against the claim by Mehta, the legal heirs
of Sodhi's deceased brother, who all should state that they have no objection
to payment to Sodhi of the value of four shares. About eight shares presently
standing in the name of Shakuntala Bali the court may adjust the proportionate
value between the registered holders on the one hand and sons and daughter of
Sodhi on the other and the proportion can be withdrawn by Sodhi on giving an
undertaking from his sons, Des Raj and Mulak Raj, relinquishing these shares.
In similar manner, the value of shares between Chandok and Sodhi's daughter was
to be apportioned. No wonder these proposals were rejected out of hand by Sodhi
then; the time gap has not made them any the more attractive. The reason is
obvious. This proposal places a cloud and a serious one on the finding which
had already been obtained from P. N. Khanna J. (as upheld by a Division Bench)
that Sodhi and his wife had 9 shares and that his two sons and daughter were
the owners of 12 shares which at one time stood in the names of Des Raj, Mulak
Raj and Chandok in the books. This proposal which again seeks to put a cloud on
the title of the shares obviously could not have been made seriously and no
reasonable person could expect Sodhi to fall for it and his counsel, Mr.
Parekh, repeated the rejection, and we can hardly fault him for this attitude.
It should also be seen that this application—C.A. No. 66/1979—was moved by
Narinder Bakshi, holder of one cumulative preference share. But he was
allegedly allotted one preference share at a meeting of November 12, 1971, and
is supported by one Dhera Singh, who also was allotted 50 shares after the same
meeting. Now, these allotments were made in 1971, after Sodhi had been excluded
illegally by an invalid meeting called in April, 1970. We have already held
that the meeting which was called on April 29, 1970, was an invalid meeting;
the allotment of 1,000 shares on November 12, 1971, by an illegal board could
not confer any validity, and, thus, application by such shareholders can,
therefore, hardly be considered to be an application by the contributories
because the very claim of being a shareholder is not only in doubt but has been
held by us to be of no consequence. The emphasis by counsel, Mr. Talwar and Mr.
Veda Vyasa, of the interest of one Jaidev in a joint venture is hardly of any
consequence because he cannot claim to control the rights of the respondents by
the mere fact that he has a joint venture in the company. Whatever his rights
are, will be taken note of and his rights protected under law even if the
company is ordered to be wound up.
Section 557 of the Act is
equivalent to s. 346 of the English Companies Act. The argument that if the
majority of the creditors oppose the making of a winding-up order, that is an
end of the matter was negatived and it was emphasised that though the court may
and will have regard to the fact, it does not mean that the court has no
function to perform. Vide Re Vuma Ltd. [1960] 1 WLR 1283; [1960] 3 All ER 629.
Further, 'that even if the majority of the creditors opposed the winding up the
circumstances existed to the contrary, the court has full discretion in the
matter' was reiterated in Re P. & J. Macrae Ltd. [1961] 1 All ER 302;
[1961] 31 Comp Cas 424, where it was stated that if a majority of creditors
have given reasons to oppose a petition for winding up, then prima facie they
are entitled reasonably to expect that their wishes will prevail. However it
was emphasised that "But I am certainly not prepared to accept the view
that the bare fact of the opposing creditors being in a majority is of itself
sufficient, still less conclusive. So to hold would be to leave the court with
virtually no judicial function to perform, and to take away from it the
discretion which the words of the Act plainly confer.
In the present case, the
special circumstances against any such claim being considered on the basis of
C.A. No. 66/1979 are overwhelming. We have already mentioned that this
application is moved by persons who have become shareholders after 1971 on the
basis of an illegal meeting and invalidly elected board of directors. Their
claim, therefore, to interfere in the working of the company cannot have
weight. The averment of Jaidev Chandok having some interest by an alleged joint
venture in the company can hardly give him any right to control the right of
the applicant if law permits him to claim the winding up. The plea of Mr.
Talwar to treat this as an alternative remedy in terms of s. 557 or s. 443(2)
is, therefore, no bar to the order of winding up being passed.
Another objection raised by
Mr. Talwar was to the effect that C.A. No. 118/1973 was moved by Sodhi to
execute the order of P.N. Khanna J. for payment of Rs. 1,57,500 and that was an
alternative remedy available to Sodhi in terms of s. 443(2). Now, during the
course of hearing before the single judge, C.A. No. 118/1973 was withdrawn. Mr.
Parekh's contention being that as there is no such application on record, there
is no question of any alternative remedy of execution of P.N. Khanna J.'s order
standing in the way of the order of winding up being made. Mr. Talwar, however,
countered by saying that as the remedy was sought but as Sodhi withdrew C.A.
No. 118/1973 it means that the alternative remedy which was available was
deliberately wasted by him and he cannot now ask for winding up and take
advantage of his own fault. It is true that if we had come to the conclusion
that seeking execution of P.N. Khanna J.'s order in the circumstances is a
proper alternative remedy available to Sodhi which would have given him full
justice, we might decline the none too pleasant relief of winding up. But the
facts here do not support the claim of Mr. Talwar. In C.P. No. 32/1971, an
order had been passed by P.N. Khanna J. on May 31, 1972, holding that Sodhi and
his group had rights over 21 shares and directing
As a result of the above,
we affirm the judgment of the learned single judge and dismiss the appeals with
costs. One set of fee.
[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,
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
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
“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
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.
[1932]
2 Comp. Cas. 137 (
High Court of
Modal Bank of
v.
Janwi
Narain
Dalip Singh, J.
January 1, 1932
M.L. Puri, for the respondent.
Dalip Singh, J. —This is an appeal by the liquidator
of the Modal Bank of India Limited in liquidation under the supervision of the
court against the order of the District Judge holding that the respondent,
Chaudhri Janwai Narain, is not a shareholder in the bank and cannot be put on
the list of contributories, and called upon to pay the amount required by the
liquidator from him.
The facts, as stated before me and not seriously
challenged are that the business of the bank commenced on the 26th of March,
1924. On the 31st March, 1924, the respondent applied for shares and also
consented to act as a director. On the 1st May, 1925, a promissory note for Rs.
500, was executed by the respondent in favour of the bank. He was shown in the
register of the shareholders and he was credited with having paid Rs. 500
towards the application money. On the 7th May, 1925, according to the despatch
book, a notice of directors' meeting was sent to him and it is contended on
behalf of the liquidator that that meeting was held on the 8th May. 1925 and
the respondent attended the meeting which was that of the local board of
directors at Etawa and acted as chairman. On the 26th May, 1925, a resolution
was passed alloting shares to the respondent and confirming his appointment as
a director. On the 18th June, 1925, a letter was sent to him proposing that he
shall be the chairman of the head board of directors. On the 22nd June, 1925,
the proceedings of the directors' meeting of 18th June, 1925, were sent to the
respondent and on the 24th June, 1925, a notice of the meeting was sent to him.
On the 2nd July, 1925, a share certificate was sent and on the 4th July, 1925,
a copy of the resolution dated 26th May, 1925, namely, alloting him shares and
confirming him as director, was sent to him. On 5th July, 1925, in the minutes of
the meeting of directors of the head board it is stated that one of the
resolutions to be considered was a suggestion made by the Etawa, Local Board
through the respondent. On the 7th July, 1925, the agenda for the meeting of
the 10th July, 1929, was sent. On the 10th July, 1925, this resolution by the
head board delegating the powers of the head board to the respondent and
others, namely, Parnushari Dial and Abaid Hussain, was passed. On the 14th
July, 1925, these proceedings of the 10th July, 1925, were sent to him.
The liquidators contend that having applied for the
shares he should have known that his application was accepted and that he had
been put on the register of shareholders. On the 6th May, 1925, allotment money
was demanded from him. Further, it is contended that he acted as a shareholder
or director in the meeting of the 8th May, 1925, and therefore, he is estopped
from now urging that he is not a shareholder. It is contended further that as
no prospectus were over issued the request for being allotted shares must be
taken to be an acceptance by the respondent of a previous offer made to him and
this is further confirmed by fact that accompanying the application for shares
is the letter of consent to act as a director. It is therefore contended that
even if no allotment was ever made he had consented to act as a shareholder and
Motilal Chunilal v. Thakorlal and
Halsbury's Laws of England, Volume V, page 145, paragraph 30 are cited in
support. It is further contended that the onus was on the respondent to show
that he was not a member under sections 40 and 31 of the Companies Act and
Sadiq Hasan and others v. Mumtaz Bank, Ltd. was
cited. It is also contended that if allotment was necessary before the
respondent could be held to be a shareholder and the allotment was invalid by
reason of the director not having been validly appointed, section 86 of the
Companies Act covers all defects. It is also contended that the directors who
passed the resolution of the 26th May, 1925, were validly appointed As to two
of them, namely, Gaya Parshad and Abaid Hussain, Abaid Hussain was given
qualifying shares on the 13th April, 1925, and he acted as a local director on
8th May, 1925, and on 5th July, 1925, and other times. The onus lay on him,
therefore, to prove that he was not validly appointed a director. As regards
Gaya Parshad the finding is in favour of the liquidator. As the quorum for the
meeting was only two it is contended that the resolution alloting the shares is
good. It was also urged that the liquidator was never called on to reply to the
amended pleadings.
In reply the learned counsel for the respondent
contends that the meeting of 8th May, 1925, was not one of directors or of
shareholders at all and that the respondent did not become a shareholder till
26th May, 1925, at the earliest. No action was taken by him after that date and
hence there is no estoppel, and Piara Singh v. Peshawar Bank, Ltd. does not
apply. It is contended further that no special contract is either alleged or proved
and that the onus lay on the liquidator to prove and allege the special
contract. It is admitted that the onus lies on the respondent to prove that he
was not a shareholder. It is contended, however, that as he never paid the
share money in cash he could not be a shareholder, and that the finding to the
contrary by the learned District Judge is incorrect. Rai Lachman Singh v.
Liquidators of Industrial East Co., Ltd. is relied
on this connection. It is also contended that Gaya Parshad also never paid the
share money in cash and, therefore, the finding that he was a validly appointed
director is not correct. As regards Abaid Hussain it is contended that he never
was appointed a director in any meeting and the head board alone could allot
shares and the resolution giving him the powers of the head board was only
passed on the 10th July, 1925, and therefore his acting as a director on the
26th May, 1925, was ultra vires. Similar contentions are raised against
Parmeshari Dial and it is further contended that as the resolution allotted
shares to Parmeshari Dial himself he could not possibly vote on the resolution.
My findings are as follows. The minute book which
records the meeting of 8th May, 1925, is, in my opinion, that of the the local
board of directors. In this connection it is important to note resolution No. 6
of the head board of directors' meeting of 5th July, 1925. It is clear that the
reference there to resolution No. 7 of the meeting of 8th May, 1925, refers to
a meeting of the local board of directors of Etawa. The intrinsic evidence of
the resolutions passed at that meeting also shows that it was a meeting of the
local board of directors or of share-holders, and it cannot possibly be, as
contended by the learned counsel for the respondent, the meeting of an advisory
committee. I also consider that there is force in the liquidator's contention
that as no prospectus was issued, therefore, presumably the offer to allot shares
to the respondent was made originally by the company and by his application to
take shares and consent to act as director. The contract was completed, and
therefore, without any further allotment the respondent became a shareholder.
As regards the question of the cash payment for shares as no prospectus was
issued, sections 101 does not apply, and the mere fact that the promissory note
and the shares allotment were almost simultaneous may be a ground for suspicion
but is not absolutely proof of fraud. Further, if it is a fraud, it seems to me
extremely doubtful whether the respondent could be allowed to plead his own
fraud for he must have known what he was doing. I also consider that section 86
covers any defect in the appointment of the directors. So far as Gaya Parshad
is concerned he took a loan on the 10th and was credited with application money
on the 13th. The contention that the transaction is not a genuine transaction
is, I do not think, sufficiently proved, though there may be grounds for suspicion
on the point. I, therefore, uphold the finding that Gaya Parshad was a validly
appointed director.
As regards Abaid Hussain, he acted as a local board
director on the 8th May, 1925, and he acted as head board director on 26th May
1025, 5th July, 1925, and 10th July, 1925. He was, therefore, a de facto
director, if not a de jure director, and it appears to me that section 86
applies both to members of the company as well as to extraneous people dealing
with the company and that, therefore, the resolution was validly passed or, at
any rate, cannot now to. be objected by Chaudri Janwi Narain, respondent. It
may be, as contended by the learned counsel for the respondent, that Chaudhri
Janwi Narain was inveigled into this fraudulent affair, and never took any real
part into the business of the company. But there is nothing to show that he did
not receive the various notices of the meetings etc. sent to him nor the
letters appointing him director, etc. and it is too late in the day for him now
to contend that, though he never took any steps whatever to repudiate the
assignment of shares to him at that time, he could do so now when he is called
upon to pay his share money.
I, therefore, accept the appeal and hold that the
respondent is a contributory and the liquidator is entitled to call upon him
for the share money due. The respondent will pay the costs of the appellant
throughout.
[1983]
54 COMP. CAS. 77 (
HIGH COURT OF
v.
Pearl Cycle Industries Ltd.
H.L.
ANAND J.
AND
CONNECTED APPLICATIONS,
CAS. NOS. 134, 144 AND 406 OF 1980
FEBRUARY
18, 1981
B.N. Nayyar for the
Petitioner.
Nand Kishore, Shankar
Ghosh, H.K. Dutt, J.K. Mehra and AM Sharma, V.N. Kaura, P.N. Tiwari and A.P.
Vinod for the Respondent.
By this application, and
connected application being C. A. No. 144/80, under s. 446 of the Companies
Act, 1956, and C. As. Nos. 134 and 406/80, a former joint managing director of
a company in liquidation and two members of his family, seek to challenge the
validity of the consent decrees passed against the company in favour of a
banking institution as early as the year 1966 and thereafter, inter alia, with
a view to stall the sale of the assets of the company in execution of those
decrees. C. A. No. 441/79 is by Vivek Kumar s/o Surender Kumar, the former
joint managing director of the company. C; A. No. 144/80 is by Surender Kumar
himself. By C. A. No. 134/80, Kumud Kumar, respondent in C. A. No. 441/79, wife
of Surender Kumar, seeks to be transposed as a co-petitioner in that
application. By C. A. No. 406/80, Vivek Kumar seeks to transpose the company,
arrayed as a respondent in C. A. No. 441/79, as a co-petitioner. These
applications were made in the backdrop of the following facts and
circumstances.
Pearl Cycle Industries
Ltd., in liquidation, was incorporated as a private joint stock company in
1955, as an enterprise of Raghunath Prasad, father of Surender Kumar. In 1960;
the company, which had been incorporated with the object of manufacturing
bicycles and accessories, was converted into a public company. At all material
times, the family had controlling interest in the company. In the year 1966-67,
the company was faced with financial difficulties as a result of which,
Mercantile Bank Ltd., which had advanced large amounts of money to the company,
as well as the Industrial Credit and Investment Corporation, called up their
out-standings and a suit, being Suit No. 175/66, was filed jointly by the Bank
and the Corporation for the recovery of Rs. 40,50,000 in Delhi. The suit was
based on a mortgage of all the movable and immovable assets of the company.
Surender Kumar and his father were impleaded as defendants, in addition to the
company in their capacity as guarantors. A consent decree was passed in the suit
in the year 1966 itself apparently because the plaintiffs waived the claim to a
substantial amount due and payable on account of interest. In 1967, a
compulsory winding-up of the company was sought in the Circuit Bench of the
Punjab High Court at Delhi but the petition was eventually withdrawn as the
creditors had apparently been satisfied with the funds made available by the
bank to the company to enable it to tide over its difficulties. The company
was, however, unable to financially restore itself and the bank was compelled
to enforce another claim based on a mortgage and got another consent decree
against the company based on an arbitration award in Suit No. 373/70 for a sum
of Rs. l,13,84,588.42. The company was eventually ordered to be wound up by an
order of July 31, 1975, in Company Petition No. 94/73. The bank, being a
secured-creditor, is outside the winding-up and is apparently the only creditor
of the company. The bank sought the execution of the two decrees in the Court
of the District Judge, Gurgaon, within whose jurisdiction the land, building,
machinery, plant and other assets of the company were situated. At one stage
the assets were being auctioned for a bare 18 lakhs. The execution proceedings
were eventually transferred to this court in view of the winding-up of the
company. While settling the proclamation of sale, this court found that the
value of the land, building and machinery would be a little more than Rs. 60
lakhs and that amount was fixed as the "reserved price". The publication
of the proclamation elicited offers for the sale of the entire assets ranging
from Rs. 24 lakhs to Rs. 80 lakhs. In the open bidding in court, ordered by
this court, K. C. Nahar's bid was the highest at Rs. 60 lakhs. It appears that
during the pendency of the proceedings, possibilities were being explored by
Surender Kumar and his associates to arrange funds to pay off the bank or to
enter into an appropriate settlement with the bank so as to avoid the distress
sale of assets. It further appears that Surender Kumar was not successful in
the effort and the sale of the assets for Rs. 60 lakhs seemed to be imminent.
It is at this stage that C. A. No. 441/79 was filed by Vivek Kumar to annul the
two decrees and to stall the sale of the assets in execution thereof,
apparently to get a little more time to arrange the necessary funds to pay off
the bank, wholly or partly, and seek a restoration of the company to the
family. C. A. No. 144/80 was filed by Surender Kumar, during the pendency of
the other application, and CAs. Nos. 406/80 and 134/80 intended to transpose
the company (are by him) as well as by the wife of Surender Kumar as
co-petitioners. The company and the bank were impleaded as the respondents;
Vivek Kumar also impleaded Surender Kumar, his father and his mother as
respondents Surender Kumar in his application impleaded his wife and son as
respondents in addition to the company.
Vivek Kumar seeks to void
the two decrees and to have them declared inexecutable on the grounds that the
board of directors of the company, including the joint managing directors, had
not been duly constituted and were, therefore, incapable of giving consent to
the claims being decreed and his father, Surender Kumar, had been acting
against the interest of the members of the coparcenary in getting the aforesaid
decrees passed and was acting prejudicially to the interest of the members of
the family. Surender Kumar seeks to void the decrees on the ground that the
company had not given a valid consent for the decrees, as he was incompetent to
give such a consent for and on behalf of the company or to validly act for or
on behalf of the company and that, in any event, the consent to the decrees had
not been validly ratified by or on behalf of the company. Surender Kumar, Vivek
Kumar and Kumud Kumar support each other but the applications and the proposed
transpositions are opposed by the bank. The bank resists the two applications
on the preliminary grounds of locus standi, limitation and maintainability. The
official liquidator has been indifferent to the proceedings.
Before considering the
three preliminary questions in controversy, it must be pointed out that while
the bank contends, and not unjustifiably, that these belated attempts to assail
the validity of the decrees by Surender Kumar or his wife or son is a mala fide
attempt to frustrate the execution proceedings to stall the realisation of the
outstandings by the sale of the assets of the company, Surender Kumar and the
members of his family appear to have a genuine grievance and a reasonable
apprehension that valuable assets of the company, which may be reasonably
estimated to be of the value of Rs. 1 crore at the present market value could,
but for their effort, have been auctioned at the throw-away-price of Rs. 18
lakhs, and it may not even now be possible to realise their real worth.
Whatever may be the validity of the objections of Surender Kumar and the
members of his family to the validity of the decree and of their executability,
there is little doubt that in the course of execution proceedings in the
Ballabgarh Court, the highest bid was only Rs. 18 lakhs and the bank, being a
conservative banking institution, was not willing to run any further risks and
was ready to dispose of the property on that basis. The value for which the
assets are sold in execution of the decrees are equally important for Surender
Kumar and the members of the family because of the personal decree against him
of the corresponding amount as a guarantor and, they are, therefore, interested
in the maximum possible realisation from the assets by the bank in execution
proceedings so that their balance liability is correspondingly reduced. There
may also be some justification for the plea of Surender Kumar and the members
of the family that they wish to explore the possibility of a settlement with
the bank on the basis of a further scaling down of the liability and to
discharge the obligation so as to avoid the distress sale of the assets of the
company and try for the eventual restoration of the company. This court gave
enough time to Surender Kumar but, unfortunately, he has not been able to
either satisfy the bank or produce the necessary funds to pay more than the
highest offer made for the assets.
The first question for
consideration is as to the locus standi of Surender Kumar and Vivek Kumar to
assail the decrees passed against the company.
So far as Vivek Kumar is
concerned, he is neither a judgment-debtor, nor a shareholder of the company.
He has also no interest in the assets of the company, which are sought to be
proceeded against in execution. No movable or immovable property belonging to
him is sought to be either affected by the decrees or to be proceeded against
in execution thereof. The only right in which he claims to have the necessary
standing to assail the decrees and stall their execution is based on the
allegation that the controlling interest in the company consisted of shares or
included shares belonging to the HUF, of which he was a coparcener. Even if it
be assumed that part of the shareholding belonged to the HUF, a matter on which
there is considerable controversy between the parties, and that he was a member
of the coparcenary, that does not give him the necessary standing. No decree
has been passed against the HUF nor is any property of the family sought to be
proceeded against in execution. Joint-stock-company, it is well-settled, is a
corporate entity, which is distinct from its members. The share in a
joint-stock-company is the property of the registered holder but the assets of
the company are the assets of the joint stock entity. They are in no sense the
assets or property of a shareholder, much less a member of a coparcenary, which
may hold the shares in the name of the karta. If the karta of the family abused
his position, either as a shareholder or as a director of the company, the
remedy of the member of the coparcenary or of the shareholder of the company,
as the case may be, would lie elsewhere. Neither the decrees nor the course of
execution thereof could be challenged by a shareholder unless his rights as
such shareholder are sought to be affected. Vivek Kumar would, therefore, have
no locus standi to maintain the present application.
What has been said above
about Vivek Kumar would be equally true of his mother.
What is true of Vivek Kumar
and his mother would be equally true of Surender Kumar as well, except to the
extent that the decrees were passed not only against the company but also
against Surender Kumar by virtue of his being the guarantor. Even Surender
Kumar would not have the necessary locus standi to challenge the decree or its
execution in so far as they affect the company. Subject to various other
conditions, he may be entitled to challenge the personal decree passed against
him or against the company in which his property is sought to be proceeded
against. But short of these, he has no locus standi to challenge the decrees
passed against the company nor the course of execution so long as the execution
proceeds against the assets of the company. For the purpose of determining the
question of standing, I am, however, assuming that there is no bar to his
challenging the decrees on the basis that even though he gave the consent, he
did not have the necessary competence either to give the consent or to ratify
the consent already given. That is a separate facet of the matter which could
be decided if the proceedings survive this challenge.
I have, therefore, no
hesitation in holding that none of the applicants have the necessary locus
standi to challenge the two decrees or their execution.
Whether the applications
are maintainable under s. 446 of the Companies Act, is the next question that
requires consideration.
There are two facets of the
plea with regard to maintainability. One is that the applications are not
maintainable under s. 446 of the Act. Second is that the challenge to the
decrees in collateral proceedings of execution could be only on the ground of
nullity and on the allegations as laid down, they could not be said to be a
nullity, whatever else may be said about their validity.
This is how s. 446 reads:
"Suits stayed on
winding-up order :‑When a winding-up order has been made or the Official
Liquidator has been appointed as provisional liquidator, no suit or other legal
proceeding shall be commenced) or if pending at the date of the winding-up
order, shall be proceeded with, against the company, except by leave of the
court and subject to such terms as the court may impose.
(2) The court which is winding-up the company
shall, notwithstanding anything contained in any other law for the time being
in force, have jurisdiction to entertain, or dispose of—
(a) any suit or
proceeding by or against the company ;
(b) any
claim made by or against the company (including claims by or against any of its
branches in
(c) any
application made under section 391 by or in respect of the company ;
(d) any question of priorities or any other
question whatsoever, whether of law or fact, which may relate to or arise in
course of the winding-tip of the company ;
whether
such suit or proceeding has been instituted or is instituted, or such claim or
question has arisen or arises or such application has been made or is made
before or after the order for the winding-up of the company, or before or after
the commencement of the Companies (Amendment) Act, 1960-.
(3) Any suit or
proceeding by or against the company which is pending in any court other than
that in which the winding-up of the company is proceeding may, notwithstanding
anything contained in any other law for the time being in force, be transferred
to and disposed of by that court.
(4) Nothing in
sub-section (1) or sub-section (3) shall apply to any proceeding pending in
appeal before the Supreme Court or a High Court."
Mr.
Nayyar who argued a difficult case rather skillfully, sought to justify the
applications under s. 446(2)(a) and (b) of the Act, even though he conceded
that these applications could not be said to be a proceeding or any claim made
against the company, in that the company was only a pro-forma party and no
relief was sought against it. He, however, urged on the basis of the decision
of the Federal Court in the case of Dr. Satya Charan Law v. Rameshwar Prosad
Bajoria [1950] 20 Comp Cas 39 (FC) and certain other English and Indian decisions,
that an application may be treated as an application by the company, either by
transposing the company as a co-petitioner or on the principle recognised by
the Federal Court in the above case. The principle enunciated by the Federal
Court has no possible application to the situation in this case. The Federal
Court conceded the right of a majority shareholder to file proceedings for and
in the name of the company, where those in the management of the company were
themselves the wrongdoers and obviously, would not initiate such proceedings.
The company in the present case is in liquidation and the official liquidator
alone was competent to initiate appropriate proceedings by the company, and
there was no averment that the official liquidator was the wrongdoer or was
acting unreasonably in not initiating appropriate proceedings for the annulment
of the decrees. It would be interesting to point out in this context that the
bank is apparently the only creditor of the company and that is perhaps the
reason why the official liquidator has not taken any positive step to stall the
execution of the decrees by the bank as a
secured creditor, even though the official liquidator was naturally interested
in the assets fetching the highest possible price in execution proceedings. A
factor, which is not altogether irrelevant, is that whatever be the proceeds,
the claim of the bank, which according to the two decrees would be over a crore
and Rs. 50 lakhs and would have increased considerably on account of further
interest would be too large to leave any surplus that may fall into the hands
of the official liquidator. Another factor which may have influenced the
official liquidator is the patent fact that the two decrees were not only
consent decrees and were not challenged for a period of almost 20 years, and
the company, as indeed, the guarantors had obtained a considerable concession
from the bank by way of scaling down of interest. It is, therefore, not
possible to accept the contention that the applications could be treated as the
applications of the company by transposition or otherwise. There would be no
ground for transposition either.
Faced with this almost
insurmountable difficulty, Mr. Nayyar sought to justify the maintainability of the
applications with reference to s. 446(2)(d) of the Act on the ground that the
challenge to the decrees could be said to either "relate to or arise in
course of the winding-up of the company" within the meaning of cl. (d).
There is no substance in this contention either because the validity of the
decrees is not a question that relates to the winding-up of the company and it
could not be said to have arisen in the course of winding-up because it arose
during the proceedings in execution of the decrees. It is, however, not
possible to ignore the fact that even though the question as to the validity of
the decrees arose in execution proceedings, it could be said to have arisen in
the course of winding-up because the challenge has been incorporated in the proceedings
under s. 446 of the Act and if these proceedings are maintainable and there is
the necessary locus standi, there would be justification for the contention
that the company court should, in any event, entertain the question as to the
validity of the decree and decide it on the material available, irrespective of
the question of locus standi or maintainablility. But there is another
infirmity which is fatal, and that is what brings me to the other facet of
maintainability.
It is well settled that a collateral
challenge to a decree could be mounted only on the ground that the decree was a
nullity. It is equally well settled that a decree is not a nullity merely
because it is wrong, improper or even contrary to law. A decree may be a
nullity where there is a total lack of jurisdiction in the court which made it
or it was passed in proceedings of which the judgment-debtor had no notice. Any
challenge to a decree on other grounds must be in proper proceedings against a
decree and not in collateral proceedings. Execution proceedings are certainly
collateral proceedings and would be within the limitation of this principle. If
a suit or a claim under s. 446(2)(a) or (b) was maintainable, it would perhaps
not be a case of collateral proceedings because such proceedings would be in
the nature of a regular proceeding but the same is not true of the question
that may be raised under s. 446(2)(d) of the Act. If any question is raised
with regard to a decree under sub-s. 2(d), it would in its nature be a question
raised in collateral proceedings, that is, proceedings for the winding-up of
the company, at whose instance or against whom a decree has been passed. Any
such question, must, therefore, satisfy the requirement for a valid challenge
to a decree, i.e., that the decree is a nullity.
The challenge to the
decrees in the present case, ex facie, could not be said to be on the ground
that it is a nullity. Mere incompetence of the board of directors or a defect
in their constitution or any disqualification or any termination of their
status would be incapable of vitiating the decree or making it a nullity,
whatever else one may say with regard to the proceedings. Section 290 of the
Companies Act would be a complete answer to any such challenge because that
section clearly saves the action of the board and their act will be valid
notwithstanding that it may afterwards be discovered that the appointment or
their constitution was invalid by reason of any defect or disqualification by
virtue of any provision in the Act or the articles. The only exception is where
an action was done by a director or the board after the appointment had been
shown to be invalid. A mere doubt that may be cast with regard to the validity
of an appointment would be insufficient even to attract the proviso to s. 290.
In any event, in the present case, nothing was done by the board or any
director subsequent to the discovery of the so-called defect. The allegations
that Surender Kumar was acting in collusion with or in a manner that was
prejudicial to the interest of any member of the family would be incapable of
visiting the decrees with the vice of being a nullity. That being so, the
challenge would not be maintainable in the present proceedings.
Whether the applications
are barred by time, is the next question that falls for determination. The
first of the two decrees was passed in 1966 while the second was passed in
1971. Ordinarily, therefore, the challenge to the decrees would be barred by
time on any process of computation. The execution proceedings, however, were
capable in certain circumstances of giving a fresh cause of action and if the
challenge was brought within 3 years of the execution, it may still be within
time. The execution application was filed on October 26, 1976. C.A. No. 441 was
filed in August, 1979, and was, therefore, within time. C.A. No. 144 was,
however, filed on March 19, 1980 and was, therefore, out of time. C.A. No. 441
was also within time because Vivek Kumar admittedly attained majority on
January 27, 1979, and would be within his right to challenge the decrees
assuming that he had the necessary locus standi and the application was
otherwise maintainable. C.A. No. 144 would, therefore, be liable to be
dismissed on the ground of limitation.
Whether any of the
applicants could legitimately invoke s. 457 or s. 531 to void the decrees,
assuming the question of locus standi in their favour, is the next question
that falls for determination. Section 456 enumerates the powers of the
liquidator and whatever be the extent of the powers of the liquidator, and
there certainly is a power to institute claims with the sanction of the court,
none of these are able to sublimate the proceedings filed by the applicants.
This application is, therefore, of no avail to prop up the present proceedings.
Section 531 deals with fraudulent preference and declares that "any
transfer of property, movable or immovable, delivery of goods, payment,
execution or other act relating to property made, taken or done by or against a
company within six months before the commencement of its winding-up" be
invalid if certain conditions are satisfied. This contention was raised in the
context of an averment that the winding-up order was made on the basis of the
winding-up petitions filed in 1966-67 and if that was so, the commencement of
winding-up would naturally relate back to the institution of the proceedings.
It was, however, not disputed that the winding-up petition filed in 1967 was
eventually withdrawn and dismissed as such and the winding-ap order was made on
July 31, 1975, the winding-up petition being C.P. No. 94/73, filed on November
29, 1973. The acts complained of, whether of 1966 or of 1971, were clearly
outside the reach of s. 531 on that basis.
It must, however, be
pointed out that while none of the applicants has the locus standi to challenge
the decrees or their executability and their applications are not maintainable
under s. 446 of the Act or under any other provision of the Companies Act,
Surender Kumar is certainly interested in the proceedings for the realisation
of the amount by the bank by the disposal of the assets of the company because
on the amount realissed would depend the quantum of the shortfall, which be
would be bound to make good by virtue of the personal decree passed against him
as a guarantor. He is, therefore, certainly interested in the securities sought
to be proceeded against in execution getting the best possible price and if
there is anything in the manner in which the execution proceedings are carried
out, which may affect the quantum of realisation, he would certainly have the
locus standi to approach the court either under s. 446(2)(d), or the execution
Court, seized of the execution proceedings, for appropriate directions with a
view to ensure that the securities are not only fully protected until disposal
but also that they fetch the maximum possible price.
In the result, C.A. No.
441/79 and C.A. No. 144/80 fail and are hereby dismissed. CAs. Nos. 134/80 and
406/80 which merely seek transposition, also consequently fail and are hereby
dismissed. The execution proceedings would be listed for further directions
before the learned company judge on March 3, 1981.
In the peculiar
circumstances, parties would bear their respective costs.
[1940]
10 COMP CAS 244 (
CHANCERY DIVISION
GILT EDGE SAFETY GLASS LTD., In re
CROSSMAN, J.
MARCH 5, 6, 1940
Romer, K.C., and Valentine Holmes, for the
Petitioner.
Roberts, K.C., and A.F.M. Berkeley, for the
Company.
Andrewes Uthwatt, for the Board of Trade.
Crossman, J.—These are two petitions which have been heard together, each petition being by a director of a company called Gilt Edge Safety Glass, Ltd., asking for relief under Section 372 of the Companies Act, 1929, from liability by reason of certain events which have happened and for which they may be held liable. The actual prayer in the two petitions is in this form : The first paragraph is, "That your Petitioner," that is Mr. Maurice Gordon Liverman, "may be relieved by this Honourable Court pursuant to Section 372 of the Companies Act 1929 from any liabilities for fines or penalties which he may have incurred under Section 141 of this said Act "—that is the Companies Act, 1929—"or otherwise by reason of his negligence default breach of duty or breach of trust in having acted without being qualified and while disqualified as a director of the company". The second paragraph is: "That your Petitioner may also be relieved by this Honourable Court pursuant to the said section from any liability which he may be under to the company in respect of his negligence defualt breach of duty or breach of trust in drawing or receiving remuneration or otherwise acting as a director of the company without being qualified and while disqualified to act as such".
This company, Gilt Edge Safety Glass, Ltd., was incorporated in the year 1929 under the name "Gilt Edge Safety Glass, Syndicate, Ltd." In 1931 its capital was increased to an amount which has now been reduced, and in 1935 it adopted its present name of Gilt Edge Safety Glass, Ltd. At the beginning of the year 1936 a company known as Lancegaye Safety Glass (1934), Ltd., acquired the whole of the issued share capital of this company, that is to say, 21,294 ordinary shares of Ł1 each and 17,000 founders shares of 1s. each. On February 26, 1936, those shares were transferred to Lancegaye Safety Glass (1934), Ltd., which company I shall refer to as "Lancegaye". On May 18, 1936, the two petitioners, Mr. Maurice Gordon Liverman and Mr. Charles Walter Latham, who were directors of Lancegaye, were elected directors of Gilt Edge Safety Glass, Ltd., which I shall refer to as "Gilt Edge." Pursuant to the requirements of the articles of "Gilt Edge" ten ordinary shares of Ł1 each were transferred by "Lancegaye" to each of the petitioners as director's qualification. On February 18, 1937, the petitioner, Charles Walter Latham, was appointed managing director of "Gilt Edge" at a 6alary of Ł500 per annum, he being already entitled under the articles of "Gilt Edge" to a salary as director, to which Mr. Liverman was also entitled. On April 12, 1937, an order was made confirming the reduction of the capital of "Gilt Edge" from Ł22,850 to Ł7,381 6s. 8d., a very drastic reduction. That order and the minute approved by the Court were subsequently registered under Section 68 of the Companies Act, 1929.
The result of the registration of that order and the minute was that the petitioners' ten shares of Ł1 each became 200 shares of 4d. each and instead of being of the nominal value of Ł10 they becanie of the nominal value of Ł3 6s. 8d. The articles of "Gilt Edge" require shares of the nominal value of Ł10 to be held by each director as director's qualification.
That being the case, as from the registration of the order confirming the reduction and the minute, "Gilt Edge" was left without any director at all, because all the directors were in the same position, each holding only shares of the nominal value of Ł3 6s. 8d. Then in June, 1939, a company called Triplex Safety Glass, Ltd., acquired practically all the shares in "Lancegaye".
On June 29, 1939, the petitioners purported
to resign their directorships—as a matter of fact, they had not any
directorships to resign—and as from that date they ceased to act as directors.
While they were acting as directors the first petitioner, Mr. Liver-man, had
received the sum of Ł116 15s. 2d. as director's fees, and the other petitioner,
Mr. Latham, had received the sum of Ł1,497 13s. 2d., partly as ordinary
director's fees and partly as salary as managing director. On October 6, 1939,
a summons was issued based on an information sworn by the secretary of
"Gilt Edge", the information alleging that the petitioners acted as
directors of "Gilt Edge" on June 29, 1939, after the expiration of
two months from the date of their appointment, contrary to Section 141 (5) of
the Companies Act, 1929. That information came before the magistrate at the Bow
Street Police Court on October 16, 1939, and was adjourned sine die. On October
18, two days after the adjournment of the summons, a claim was made by the
solicitors of "Gilt Edge" against the petitioners for repayment by
the petitioners of the fees received by them as directors from the date when
the reduction of the capital of "Gilt Edge" took effect, that is to
say, from the date of the registration of the order confirming the reduction
and the minute. On December 13, 1939, the summons at Bow Street Police Court
was restored for January 8, 1940, and on January 4, 1940, the petitioners
presented these petitions, praying for that relief which I have already read.
On January 8, 1940, the summonses at
Article 13 of "Gilt Edge" provides: "The qualification of a director shall be the holding of shares of the company of the aggregate nominal value of at least Ł10, and it shall be his duty to comply with the provisions of Section 73 of the Companies (Consolidation) Act, 1908. A director may act before acquiring his qualification." Section 73 of the Companies (Consolidation) Act, 1908, is the section which is now represented by Section 141 of the Companies Act, 1929. Article 14 provides for the disqualification of directors: "The office of a director shall be vacated,...(2) If he ceases to be a director by virtue of the Companies (Consolidation) Act, 1908, Section 73." That is all that I need read of the articles.
The position was that on the reduction of the capital of "Gilt Edge" taking effect the petitioners had vacated their office; they ceased to be directors. Then sub-section (5) of Section 141 of the Act of 1929 provides: [His Lordship read sub-section (5) and continued:] I have been referred to Section 11 of the Summary Jurisdiction Act, 1848, the effect of which is that the petitioners cannot be proceeded against more than six months from the time at which the offence occurred and, therefore, as the last offence occurred on June 23, 1939, no further proceedings under Section 141(5) of the Act of 1929 can be taken against the petitioners.
Section 372 of the Act, which is the section under which I am asked by the petitioners to exercise jurisdiction, is to this effect: [His Lordship read sub-sections (1) and (2) and continued:] Subsection (4)(a) provides: "The persons to whom this section applies are…….(a) directors of a company", so that the petitioners, who come within that sub-section, are persons to whom the section applies. I think that it follows from the decision of Maugham, J., in Batrie & Siaines Linoleum, Ltd., In re, that the phrase "any claim…….in respect of any negligence, default, breach of duty or breach of trust" in Section 372(2) of the Act of 1929 includes proceedings against the petitioners under Section 141(5), and so includes the proceedings against the petitioners which were commenced last October at Bow Street Police Court, as in that case the learned Judge gave relief under Section 372(2) from prospective liability to fines and penalties under Section 141(5).
But it seems to me that Section 372(1) makes the Court which hears the case the only Court which has jurisdiction to give relief in respect of proceedings which have already been commenced. Sub-section (2), on the other hand, which is the sub-section which was added by this Act, was in my judgment intended to meet the case of proceedings which have not been commenced, but which will or may be commenced, and gives this Court jurisdiction to grant relief from prospective liability.
Sub-section (1) does not, in my opinion, enable me to deal in any way with what the magistrate has done or is doing in the proceedings at Bow Street, and those proceedings will be unaffected by any order which I make here. "The Court hearing the case" in sub-section (1) means, in my judgment, the Court hearing the particular case in which the proceedings are taken, and I think that it is for the magistrate at Bow Street to deal with the summons which is pending there for fines and penalties alleged to have been incurred by these petitioners in respect of their negligence, default, breach of duty or breach of trust. It is true that paragraph 1 of the prayer is not expressly limited to the Bow Street proceedings; but, having regard to the fact that no other proceedings under Section 141 of the Act of 1929 have been commenced, those are by reason of Section 11 of the Summary Jurisdiction Act, 1848, the only proceedings for fines and penalties which can now be taken and therefore 1 cannot make any order on paragraph 1 of the prayer.
Paragraph 2 of the prayer is an entirely different matter. [His Lordship read paragraph 2 and continued:] The question that I have to decide is whether I ought to make an order under that sub-section relieving the petitioners from any apprehended liability. It has been suggested here that the last paragraph of Maugham, J.'s judgment in the case to which I have referred shows that I ought not to make any order where the company is unwilling that an order should be made. I think that neither counsel who appear for "Gilt Edge" now contend that that suggestion is justified. It seems to me that what Maugham, J., is referring to in the last paragraph of his judgment is the importance of the Court having information as to the views of the persons concerned before it comes to a decision as to giving relief under sub-section (2). It does not follow, I think, that because the shareholders oppose the application, therefore the Court ought not to exercise its jurisdiction. The opinion of the shareholders is only one of the circumstances which the Court has to take into account. What I have to consider in this case, having satisfied myself as to the first two conditions of the exercise of the jurisdiction—that is to say, honesty and reasonableness—and I think it is substantially admitted by counsel for "Gilt Edge" that in this case the petitioners acted honestly and reasonably—is whether, having regard to all the circumstances of the case, including those connected with their appointment, the petitioners ought fairly to be excused for whatever the particular default is, negligence, default, breach of duty or breach of trust. Here it is admitted, I think, and I do not think there is any question on the evidence as to this, that the petitioners had no idea that they had ceased to be directors of "Gilt Edge" owing to the reduction of the capital. The solicitor who acted in the matter of the reduction had not realised it; he has given evidence before me and it is quite clear that he had not realised it, and I do not think that even an expert lawyer could fairly be blamed for not having observed that particular result of the reduction. It was a pure accident, I think, that the petitioners became disqualified as directors on the reduction taking place. They never thought about it, and the question is whether their not having thought about it amounts to such negligence or default or breach of trust as to prevent their obtaining relief under Section 372. I think that in a sense it may be that they were negligent, and no doubt, without knowing it, they committed a breach of duty in continuing to act as directors when they were no longer qualified. But this was a purely technical defect which would, if it had been realised, have been put right at once, because they were merely representatives of "Lancegaye" which held the shares in "Gilt Edge", and could have transferred sufficient of the 4d. shares to meet the qualification; and I have no doubt that "Lancegaye" would have done so if it had realised the position. Having regard to that fact and to the fact that their not holding shares of the nominal value of Ł10 caused "Gilt Edge" no loss and really made no difference whatever to "Gilt Edge", I find it difficult to see how I can come to the conclusion that the petitioners ought not fairly to be excused for what was a purely technical wrongdoing. It has been suggested that the petitioners in some way or other neglected their duty as directors of "Gilt Edge", and that they got more money than they ought to have got. These suggestions, which came out in the cross-examination of one of the witnesses, seem to me to be wholly irrelevant here, even if I accepted them as facts. The fact, if it be the fact, that the Triplex Company has some grievance against the petitioners does not seem to me to justify me in finding that they ought not fairly to be excused for their negligence or default or breach in the circumstances of the case or in refusing to exercise the discretion, which I have under the section, to relieve them from liability for their conduct.
The result is that I think that this is a case in which I ought to exercise my jurisdiction under Section 372 (2) to relieve the petitioners from prospective liability in respect of their conduct. I propose to make an order under paragraph 2 of the prayer in each petition.
There will be no order under paragraph 1.
The applicants must pay the costs of "Gilt Edge" and of the Board of Trade.
[1935] 5 COMP. CAS. 265 (
HIGH COURT OF
v.
Kyauktaga
Grant Co. Ltd.
SEN, J.
CIVIL
REGULAR SUIT NO. 202 OF 1933
DECEMBER 17, 1934
N.M. Cowasjee, Cowasjee (Junior), Jeejeebhoy,
T.F.R. McDonnel and Foucar, for
the Defendants.
In this case the plaintiff is
suing to recover Rs. 40,000 and interest as being due and payable to him under
an agreement dated November 21, 1932, entered into between him and the
defendant company. Under this agreement the defendant company undertook to pay
the plaintiff Rs. 2,76,858. This sum was to be paid Rs. 5,000 in cash on or
before the execution of the agreement, Rs. 71,848 within 90 days thereafter,
and the balance in five annual instalments of Rs. 40,000 each commencing from
March 1, 1933. The plaintiff states the defendant company paid him Rs. 76,848,
but refused and failed to pay him the instalment of Rs. 40,000 when it became
due and payable, and hence this suit.
The defendant company raises
several defences in its written statement. The first plea in para. 1 of the
written statement that the suit be dismissed as the plaintiff failed to obtain
the leave of the Court to institute the suit as part of the cause of action
arose outside the jurisdiction, was abandoned by learned Counsel. The real
defence to the suit is that the agreement sued upon was procured by the
plaintiff by fraud and in collusion with one A.M. Murray, and particulars of
the fraud and collusion are set out in great detail in para. 7 of the written statement. The defendant company also denies that it ever
entered into the agreement in suit as A.M. Murray ceased to be a director on
November 1932. The defendant company also contends that A.M. Murray who signed
the agreement was not a director and that W.E. Rivers and
(1) Did the defendant company enter into the agreement
referred to in paragraph (1) of the plaint? (2) Did the defendant company make
payment as alleged in para. (2) of the plaint? (3) Was Mr. Murray a director of
the company at the time of the execution of the agreement on November 21, 1932
and was he so held out by the defendant company? (4) Did the plaintiff know at
the time of the execution of the agreement on November 21, 1932, that Mr.
Murray was not a director? (5) Was the agreement obtained by the plaintiff by
fraud and in collusion with Mr. Murray, particulars of which are as set out in
para. (7) of the written statement? (6) Did Mr. Murray fraudulently and in
collusion with the plaintiff obtain the agreements from the company? (7) Is the
defendant company estopped from raising the defence put forward in the written
statement that the agreement in suit was not duly executed and duly sanctioned
by reason of their having accepted, ratified and acted upon the said agreement?
For a better understanding of this suit I will shortly set
out the circumstances which led to the execution of the agreement in suit. The
property of the company which consists of 30,000 acres of valuable grant of paddy land was originally
held by the grandfather of H.J. Mylne. H.J. Mylne's father
It was next suggested that the
grant be turned into a company. The defendant Company was subsequently formed.
On November 13, 1931, Exhibit 2-B, an agreement between the defendant company
and the plaintiff was executed whereby the plaintiff
was appointed the manager of the grant on the remuneration and terms set out
therein. Subsequently the Lower Burma Bank Limited was formed. Plaintiff
continued to work as manager under Exhibit 2-B. After this it appears that
Rivers was not satisfied with plaintiff's management and also thought the
remuneration exorbitant and got plaintiff to modify the first agreement and
agree to accept a smaller salary and give up the management of the grant and so
in February 1932, Exhibit 2-C the second agreement was executed. The defendant
company through Rivers continued the management of the grant and Joseph looked
after the Bank. Evidently Rivers still thought plaintiff was getting too much
remuneration and so negotiations for another agreement proceeded. As a result
the third agreement, the agreement in suit, was entered into on November 21,
1932. This is Exhibit 2 D. Under this agreement the two companies, the Lower
Burma Bank, Limited and the Kyauktaga Grant, Limited, agreed to the retirement
of the plaintiff from the said two companies and cancelled the two earlier
agreements, purchased the shares and interest of the plaintiff in the Bank and
the plaintiff agreed to transfer these shares to the Kyauktaga Grant Limited or
its nominees. In consideration thereof the plaintiff was to be paid Rs. 76,848,
Rs. 5,000 on or before the execution of the agreement and Rs. 71,848 within 90
days and five annual instalments of Rs. 40,000 commencing from March 1, 1933.
It was agreed that the plaintiff was to have no further connection with the
Kyauktaga Grant, Ltd., or the Lower Burma Bank, Ltd., and was to be discharged
from all liability. This in short sets out how the agreement in suit was
arrived at.
The plaintiff's case is that the defendant company acted in
accordance with the agreement and paid him in all a sum of Rs. 76,848 in terms
of the said agreement, but when called upon to pay the first instalment of Rs.
40,000 refused to do so and he was compelled to file this suit. (His Lordship
then proceeded to discuss the plaintiff's version and that of the defendant and
after examining the evidence continued.) There remain the legal issues to be
now considered: Issue No. 3 and Issue No. 7. (3) Was Murray a director of the
company at the time of the execution of agreement on November 21, 1932, and was
he so held out by the defendant company.
Under the Articles of Association of the defendant company
"Might I suggest that in your spare time you draw up
an agenda which will be a basis for discussion when we hold our directors'
meeting when Rivers arrives, which I suppose will be the latter half of
July."
There is again Exhibit Z, a letter from
"We devoted Sunday afternoon to business, holding a
meeting where needless to say votes of confidence in our absent colleague were
passed."
Now, the burden of proof that
This brings me to the second
point of the defendant company's learned Counsel's contention that if Murray
was not a director at the time of the meeting at which the agreement in suit
was executed then the defendant company is not bound by that agreement. He has
cited various authorities in support of his contention. Learned Counsel for the
plaintiff, however, argues that assuming that Murray was not a director this
would make no difference in law as to the binding effect of the agreement,
Exhibit D because both the share-holders had agreed, ratified and carried out the
agreement, the subject-matter of the suit. I shall now examine how far this
contention is true in fact and how far it is correct in law. There is no doubt
that
"I gave a power-of-attorney
to Capt. Rivers when he came out at the end of 1932 to effect the third
agreement. Exhibit 2-U is the power-of-attorney I gave him. After the
completion and execution of the third agreement, Exhibit 2-D, Capt. Rivers
informed me that he had effected it. He was acting for me at that time and I
approved of his action at the time."
There is also a letter, Exhibit
2-T, dated December 20, 1932, from Mylne to Joseph, in which he states:
"It is awfully good of you
to fall in with his plans and agree" to the changes, and he explains this
in his evidence meaning: It is awfully good of
Joseph to agree to
Now, as regards Rivers there can be no doubt that he
regarded
As regards the law on the subject I have been referred to
numerous authorities, but I propose to deal with only those which strike me as
pertinent to the point in issue in this case. I shall first refer to the case
of
"There was a meeting of directors on June 24, at which
he was present, and he acted as a director…..that two of the directors who
might have passed a resolution appointing Mr. Nielsen did not go through that
form, but acted with him as a duly appointed director."
It was held that the irregularity was cured by Article 114
of the Articles of the company. Now, in this case a very similar position
arises.
The next case is that of Mahony, P.O. v. East Holyford
Mining Co., Ltd. This case deals with the question of contracts between the
company and third parties. Here certain persons assumed the office of directors
without having been properly appointed and communicated to the bankers of the
company an alleged resolution in accordance with the articles as to the form in
which cheques would be drawn. The bank acted upon this communication and
honoured cheques drawn in the manner described. In the action brought by the
Official Liquidator of the company to recover the amount paid upon these
cheques it was held:
"that, even without the validating clause, as the bank
had dealt bona fide in a manner authorized by the articles of association, with
persons who were the de facto directors of the company, suffered by the
shareholders to occupy that position they were not liable to refund the money
so paid."
In the present case Joseph was given to understand by the
governing director Rivers that he was competent to execute the agreement in
suit along with
"All acts done by any
meeting of the directors or of a committee of directors, or by any person
acting as a director shall, notwithstanding that it be afterwards discovered
that there was some defect in the appointment of any such directors or persons
acting as aforesaid or that they or any of them were disqualified, be as valid
as if every such person had been duly appointed and was qualified to be a
director."
I am of opinion that the said
article is sufficient to cover any irregularity in the appointment of
"I think it an inevitable
inference from the circumstances of the case that every member of the company
assented to the purchase, and the company is bound in a matter intra vires by
the unanimous agreement of its members."
There is again the case of Parker
and Cooper Ltd. v.
In these circumstances I hold
that the defendant company is estopped from raising the defence that the
agreement in suit was not duly executed and duly sanctioned as they have
accepted, ratified and acted upon the said agreement. In view of my findings
there will be a decree for the plaintiff as prayed with costs.
[1970] 40 COMP. CAS. 156 (
HIGH COURT OF
v.
Rawalpindi Theatres (P.) Ltd.
S. K. KAPUR J.
Civil Original No. 51-D of
1964
MAY 6, 1969
P. C. Khanna, Advocate, for the petitioner.
H.
R. Sawhney, Advocate, for the respondent.
S.
K. Kapur J.—This is a winding up petition
filed by the Concord Finance Private Ltd. against the Rawalpindi Theaters (P.)
Ltd. The petition was instituted at the instance of Surinder Nath, the managing
director of the petitioner company, who claimed that he had been authorised in
this behalf by a resolution of the board of directors. In the written statement
objections were taken by the respondent company that Surinder Nath was not
competent in law to act as the managing director ; that he could not file the
winding up petition in view of section 267(c) of the Companies Act, 1956 ; and
that the petitioner company had not passed any valid and legally binding resolution
authorising the institution of the present proceedings in this court. In the
rejoinder the petitioner company depended on two resolutions of the board of
directors of the petitioner company, dated July 31, 1964 (exhibit P.W. 1/8),
and dated August 7, 1964 (exhibit P. W. 1/9). The petitioner company's case is
that the resolution dated July 31, 1964, which authorised Surinder Nath to
institute the petition for winding up, was passed by two directors only which did not
constitute a valid quorum and, therefore, the said resolution was, in the
meeting dated 7th August, 1964, in which quorum was present, confirmed. The
resolution dated 7th August, 1964, reads :
"Resolved
that the proceedings of the meeting held on 31st July, 1964, are hereby
confirmed with Brig. F.J. Dillon not exercising his vote."
In
the rejoinder the petitioner company stated that Surinder Nath was authorised
"by name to file the petition on behalf of the petitioner
company.........The authority to file the petition was given to me (Surinder
Nath) as an individual. The board did not authorise the managing director to
file the petition, but authorised me as an individual to file the
petition". I have made a mention of this fact for that relieves me from
deciding whether Surinder Nath could, without the aid of authorisation, file
the petition in his capacity as the managing director. The rejoinder shows that
the petitioner company depended solely on the authority delegated to Surinder
Nath for filing the petition and the respondent company had no opportunity to
meet the case as to whether or not Surinder Nath, being the managing director,
was competent to file the petition. If this case had been set up by the
petitioner company it may have been possible for the respondent company to show
that Surinder Nath was, in fact, not the managing director and had, therefore,
no authority as such to file the petition. The petition is founded mainly on
the allegation that the petitioner company is a creditor in the sum of Rs.
28,000 odd and the respondent company is unable to pay its debts. The
petitioner company claims that the said amount has not been paid in spite of
the statutory notice of demand and the latest balance sheet of the respondent
company, exhibit P.W. 1/7, shows beyond doubt that the respondent company is
commercially insolvent and unable to pay its debts. It is alleged that the
respondent company admitted the debt due not only in the pleadings but also in
the various balance sheets. On the pleadings of the parties the following five
issues were framed :
1. Whether Shri Surinder Nath was competent to
file this petition on behalf of Messrs. the Concord Finance (Private) Ltd ?
2. Whether
the petition is mala fide ? If so, what is the effect thereof ?
3. Is
the respondent company unable to pay its debts ?
4. Is
it not otherwise in the interest of the company and its creditors that it be
wound up by the court ?
5. Relief
?
The
fourth issue was, however, deleted by order dated 29th October, 1965.
The
first question that calls for determination is whether Surinder Nath was
competent to file this petition on behalf of the petitioner company. The
authority to file the petition depends on four resolutions, two being the
resolutions by the board of
directors and two by the general body of shareholders. I have already mentioned
about the two resolutions by the board of directors. The resolutions of the
general body of the shareholders are dated 27th June, 1962, and 29th June,
1963. In the first of the two aforementioned meetings quorum of members was not
present. In this meeting Brig. F.J. Dillon, a retired director, was
re-appointed as a director. It was also resolved that J. E. da Fonseca be taken
as a director of the company. The resolution is stated to have been carried
unanimously. Article 47 of the articles of association of the petitioner
company, exhibit P.W. 1/11, prescribes a quorum of "five members
personally present" when the number of members of the company exceeds
twelve. The number of members was admittedly more than twelve at that time.
Articles 49 and 50 provide that where a quorum of members is not present the
meeting shall stand adjourned to the next working day at the same hour and
place and if at the adjourned meeting the requisite quorum be not present
within half an hour after the time fixed for the meeting, the meeting shall
stand dissolved. On 28th February, 1963, a resolution was passed in the board
of directors' meeting of the petitioner-company resolving that "it is
hereby confirmed that Mr. J. E. da Fonseca has been appointed director of the
company with effect from today". In the annual general meeting dated 29th
June, 1963, the proceedings of the general meeting dated 27th June, 1962, were
confirmed and it was resolved that Mr. W. Williamson proposed the name of Mr.
J.E. da Fonseca as director of the company. This was seconded by Ch. Surinder
Nath and it was "unanimously resolved that the appointment of Mr. J.E. da
Fonseca as director of the company be and is hereby confirmed." It
"was noted that Mr. J. E. da Fonseca was appointed as director of the
company with effect from 28th February, 1963". Return of directors,
exhibit D.W. 8/1, showing the "particulars of the persons who are
directors of the company on the day of the last annual general meeting, namely,
27th day of June, 1962, was filed with the Registrar of Companies. Surinder
Nath, the managing director of the petitioner-company, admitted his signatures
thereon and a note to this effect was recorded by me on 27th November, 1968,
while recording the statement of Ram Nath (D.W. 8), an upper division clerk in
the office of the Registrar of Companies. In the said document the name of
Fonseca is not included among the list of directors. It may be pointed out that
the appointment of Fonseca in the general meeting dated 27th June, 1962,
figures as the seventh item. Surinder Nath was asked about the absence of the
7th item in a copy of the "record of the meeting held on June 27, 1962,
sent to the Registrar of Companies". There was a controversy at the bar as
to whether or not Surinder Nath was confronted with the omission of the name in
exhibit D.W. 8/1, Mr. Khanna's suggestion being that he was not so asked. I will reproduce a part of
the statement of Surinder Nath in this behalf :
"I
see from the minutes book containing the minutes of the general body meeting,
that members, Mr. Williamson and myself were present personally in the meeting
held on June 27, 1962. It is incorrect that the record of the meeting of the
general body dated 27th June, 1962, did not originally contain the matter
against 'item No. 7 other business'. I do not know whether a copy of the record
of the meeting held on June 27, 1962, war sent to the Registrar of Companies.
Normally these things were sent by the secretary of the company. I do not know
whether in the copy of the record of the meeting held on June 27, 1962, sent to
the Registrar of Companies on behalf of the petitioner company, the last item
No. 7 was included or not. It is correct that I made a statement on February
10, 1965, that 'a copy of the proceedings of this meeting was filed with the
Registrar, Joint Stock Companies'. The statement containing the record of the
meeting held on June 27, 1962, must have been signed by me. It is incorrect
that I purposely sent an incomplete copy. It is also incorrect that the writing
against item No. 7 was added by me afterwards. The secretary of the company can
explain the omission, but to me it appears that it must have been because of
negligence on the part of my secretary or some other employee in the office. I
did not read the statement although the statement was verified by me as
correct."
The
suggestion of Mr. Khanna, the learned counsel for the petitioner-company, was
that cross-examination of Surinder Nath proceeded on the assumption that
proceedings of every general meeting had to be sent to the Registrar and
whether or not the said 7th item was included in the proceedings so sent,
whereas the correct position is that no such proceedings, except a copy of the
special resolution, if any, passed at a general meeting, has to be sent to the
Registrar of Companies. Mr. Sawhney, the learned counsel for the
respondent-company, on the other hand, contended that questions about the copy
of the record of the meeting held on 27th June, 1962, had reference to the
return of directors, exhibit D.W. 8/1, as well and, in any case, this provided
Surinder Nath with an opportunity to explain why the name of Fonseca was not
included in the return sent to the Registrar, but he failed to render any
proper explanation. A copy of the return of directors was on the record and
Surinder Nath had stated that he signed the statement containing the record of
the meeting dated 27th June, 1962. He also stated that he did not purposely
send an incomplete copy. His explanation was that the secretary alone could
explain the omission. From this it clearly appears that attention of the
witness was drawn to the omission but he failed to render any proper
explanation. Mr. Khanna strongly emphasized the fact that the minutes of the
meeting dated 27th June, 1962, bore the signatures of Rajinder Nath both at the
top of the minutes and at the end and that
Rajinder Nath (D.W. 9) was admittedly inimically disposed towards Surinder Nath
and he had admitted that "my relations with Ch. Surinder Nath are
bad". From this Mr. Khanna wanted me to deduce that the meeting of 27th
June, 1962, must have been held. It is not clear whether Rajinder Nath's
relations with Surinder Nath were, at the relevant time, good or bad. It is not
impossible that in June, 1962, they may be good and he may have signed the
minutes. Rajinder Nath admitted on oath that item No. 7 was correctly recorded.
At the time he was giving his evidence he was admittedly inimical towards
Surinder Nath. He admitted: "It is correct that in the meeting of 27th
June, 1962, Mr. W. Williamson proposed that Mr. Fonseca be taken as a director
of the company. The proposal was seconded by Sh. Surinder Nath and was
unanimously accepted. Item No. 7 of the proceedings is correct." Rajinder
Nath made no effect to explain how and in what circumstances the resolution of
27th June, 1962, strongly challenged by the respondent-company, came into
being.
A few facts about the
proceedings of the general meeting dated 27th June, 1962, may be stated. On
10th February, 1965, Surinder Nath, in the course of his statement, said that
Fonseca was elected as a director in the general meeting dated 27th June, 1962.
D. K. Mahajan J. of the Punjab High Court directed the petitioner to file a
copy of the proceedings of the said general meeting. The respondent-company
then moved an application dated 14th March, 1967 (C.A. No. 52 of 1967),
pointing out that a copy of the proceedings had not been filed and asserting
that Fonseca had not been elected as a director in the general meeting held on
27th June, 1962, and Surinder Nath had taken that position to save the petition
from dismissal. It was prayed that the petitioner be directed to file in this
court a true copy of the proceedings of the said general meeting. On 28th
March, 1967, a copy of the resolution was filed and the respondent-company
again filed an application, being C.A. No. 71 of 1967, alleging that the
resolution was fabricated to save the dismissal of the petition. I have
mentioned these facts because the explanation rendered by Mr. Sawhney to Mr.
Khanna's objection that forgery had nowhere been alleged in the
written-statement and the allegation in the written-statement was confined
merely to a statement that no valid and legal resolution authorising Surinder
Nath to institute the proceedings had been passed depended on these
circumstances and said that the respondent-company could not have raised a more
specific objection in the absence of a copy of the resolution which the
petitioner company had deliberately kept back. Mr. Sawhney also said that in
C.A. 71 of 1967 a positive allegation of fabrication had been made. The onus of
this issue was on the petitioner company. It had, therefore, to prove that
Surinder Nath was competent to file the petition. No allegation about
fabrication had been made in the written statement. No specific issue was claimed on that point. I am
disinclined to uphold a plea of fabrication on what may be said to emerge in
the course of evidence. I rest my decision not on the positive finding that the
minutes of the meeting of 27th June, 1962, were forged but on the negative
finding that the petitioner company has failed to prove that Fonseca was
appointed a director on 27th June, 1962. The return of directors, exhibit D.W.
8/1, weighs heavily in my mind in coming to this conclusion. Mr. Khanna
suggested that the name of Fonseca was not included in the return because
Fonseca, though appointed on 27th June, 1962, as a director, had not agreed to
act as such and this fact he wanted me to deduce from the proceedings of the
board of directors' meeting dated 28th February, 1963. I am unable to spell out
that explanation from the said proceedings. That takes me to the board of
directors' meeting dated 28th February, 1963. The said resolution merely
confirms that "Mr. J. E. da Fonseca has been appointed director of the
company with effect from today". Mr. Khanna did not argue that Fonseca
was, in any case, co-opted as a director by the board of directors on 28th
February, 1963, and I need not, therefore, elaborate on this resolution.
That
takes me to the resolution dated 29th June, 1963. Only four persons, who
admittedly constituted a quorum, were present in the said meeting. The
proceedings of this meeting were confirmed in the meeting dated 30th September,
1964, in which quorum of members was present. This meeting resolved that
"the appointment of Mr. J. E. da Fonseca as director of the company be and
is hereby confirmed". True that the resolution further noted that Fonseca
was appointed as director of the company with effect from 28th February, 1963,
but still, subject to the other objections to the validity of the meeting, I
have no doubt in my mind that at least from 29th June, 1963, Fonseca was
appointed as a director. The resolutions authorising Surinder Nath to file the
petition were passed by the board of directors on July 31, 1964, and August 7,
1964. The petition for winding up was filed on 13th August, 1964. If Fonseca
was appointed as a director in the general meeting dated 29th June, 1963, he
would be a properly appointed director at that time.
I
will now deal with the objections to the validity of the meeting dated 29th
June, 1963, and they are two—(i) there was no quorum present; and (ii) as
admitted by Surinder Nath in his statement recorded on 25th September, 1968,
the meeting had been originally summoned to be held at the registered office of
the petitioner company but was actually held at 1, Man Singh Road, New Delhi,
the residence of D. Fonseca. With respect to the second of the said objections,
Surinder Nath stated that the decision to change the venue of the meeting was
taken on the morning of the date of the meeting and the outside members could
not be informed about the change of the venue. According to him, however, one
man had been posted at
the registered office of the company "to direct any member attending the
meeting to the address, 1,
"Acts
done by a person as a director shall be valid, notwithstanding that it may
afterwards be discovered that his appointment was invalid by reason of any
defect or disqualification or had terminated by virtue of any provision
contained in this Act or in the articles :
Provided
that nothing in this section shall be deemed to give validity to acts done by a
director after his appointment has been shown to the company to be invalid or
to have terminated."
The
proviso does not require that the invalidity must be established in a court of
law. If the irregularity constituting invalidity is brought to the notice of
the director that will satisfy the requirements of the proviso. This section
treats the acts of the directors valid when the appointment of one or some of
them turns out to be invalid. The acts of a de facto director are treated as
valid both vis-a-vis outsiders and vis-a-vis members. In Kanssen v.
"Do
the facts that I have stated establish a defect in the appointment or
qualification of Cromie or Strelitz? There is, as it appears to me, a vital
distinction between (a) an appointment in which there is a defect or, in other
words, a defective appointment, and (b) no appointment at all. In the first
case it is implied that some act is done which purports to be an appointment
but is by reason of some defect inadequate for the purpose; in the second case
there is not a defect; there is no act at all. The section does not say that
the acts of a person acting as director shall be valid notwithstanding that it
is afterwards discovered that he was not appointed a director. Even if it did,
it might well be contended that at least a purported appointment was
postulated. But it does not do so, and it would, I think, be doing violence to
plain language to construe the section as covering a case in which there has
been no genuine attempt to appoint at all."
I
do not find from the judgment of the House 01 Lords either affirmance or
rejection of the various propositions laid down by Lord Greene M.R. It is not
necessary in this case to deal with the consequences that will ensue if the
term of office of a director has expired but he nevertheless continued to act
as a director and the impact of the words in the section dealing with that
situation in section 290, as that problem does not arise before me. I will only
indicate that the termination contemplated by section 290 is restricted to
termination "by virtue of any provision contained in this Act or in the
articles". What is the position in this case. There was a purported appointment.
The resolution was confirmed in the subsequent general meeting and the
directors had been acting as such for several years. If there is a purported
appointment and the persons concerned were neither put on enquiry nor were they
conscious of the defect, section 290 will apply. The only evidence brought out
to show that the directors were conscious of the defect and the same was
brought to their notice is the statement of Rajinder Nath (D.W. 9). It is not
possible to place any faith on that statement for more than one reason :
(1) He
admitted enmity with Surinder Nath.
(2) He
admitted his signatures on the proceedings of the meeting dated 27th June,
1962.
(3) According to this witness, one
receipt book of the company is still lying in an almirah in the premises in
which the office of the company used to be situate and that almirah belongs to
Ch. Bhagat Ram and Sons, a firm belonging to Surinder Nath and his four
brothers, Rajinder Nath being one of them, and from which premises Surinder
Nath has been excluded since November, 1962. At least one book of the company
is, therefore, being withheld and Rajinder Nath is a party to it. He also
admitted that he used to sign the balance-sheet as secretary of the company and
that it was no business of his to point out to the auditors that the meetings
were being held without quorum. He had no documentary proof about having
pointed out the defect to Surinder Nath.
I
am, therefore, of the opinion that, in any case, the acts of Fonseca would be
valid after 29th June, 1963. In this view I am also supported by a judgment of
Dua J. (as he then was) in Karnal Distillery Co. Ltd. v Ladli Parshad Jaiswal.
As to the effectiveness of the two resolutions dated July 31, 1964, and August
7, 1964, passed by the board of directors of the company, the power was, in my
opinion, properly delegated. Even if the first of the aforementioned two
meetings be invalid, the second meeting confirmed the proceedings of the first meeting, which
clearly authorised Surinder Nath to institute proceedings. The petition,
therefore, must be held to have been instituted by a competent person duly
authorised by the petitioner-company.
That
takes me to the merits of the case. The latest balance-sheet on the record is
for the period ended March 31, 1962 (exhibit P.W. 1/7). The financial position
of the company, as disclosed by that balance-sheet, is far from satisfactory.
The paid up capital of the company is Rs. 1,32,000 odd. Rs. 2,250 have been
paid in advance on account of calls. The total brought forward loss is about
Rs. 2,30,000 and the profit during the year, Rs. 810. The main assets, shown of
the value of about Rs. 3,00,000, consist of old pictures, which can have a very
little value, if at all, at present. Admittedly, no balance-sheet has been issued
by the respondent-company after 1962 though the blame is sought to be laid for
this on Surinder Nath, who is alleged to be withholding account books and
various other documents of the respondent-company. Joginder Nath appeared as a
witness (D.W. 7) and admitted :
"On
account of this petition the company has suffered so much that it is now in a
miserable condition and the only staff is one peon. When this petition was
filed, the respondent-company had a credit balance, but I do not know the
amount. The credit balance now-a-days may be Rs. 100 or Rs. 200. The last
agreement entered into between the respondent-company and the producers was in
respect of 'Naya Qanun' and this was in 1963......The losses as given in the
last balance-sheet as on 31st of March, 1962, have been reduced by about Rs.
85,000 or more. I have presently no document in support of this."
No
effort was made to establish the financial soundness of the
respon-dent-company. It appears to me that the respondent-company is clearly commercially
insolvent. Commercial insolvency may arise not merely because the company is
not possessed of sufficient assets but also where the assets are so locked up
that they cannot be easily realised and used. In this case the balance-sheet on
the record shows that the company is not only commercially insolvent in the
sense mentioned by me but is also in a bad financial state. As to the amount
claimed by the petitioner-company, the loan has been acknowledged in the
balance-sheet, exhibit P.W. 1/7. A note under that loan given in the
balance-sheet is: "Secured against picture 'Musafir' Concord Finance
Private Limited,
"The
amount in dispute paid to Messrs. Rawalpindi Theatres (P.) Ltd. by Shri
Surinder Nath on behalf of Messrs. Concord Finance (P.) Ltd. was not because
the money was really required by Messrs. Rawalpindi Theatres (P.) Ltd., but it
was to enrich himself out of the profits from the picture 'Musafir'. The amount in dispute
was advanced by him to the respondent-company without any agreement, without
any letter and without any condition whatsoever, in the hope that he would
recover back the amount when realisations were made from the exhibition of the
picture. The picture, however, flopped and recovery was not possible and to
safeguard his position with Messrs. Concord Finance (P.) Ltd. he manipulated to
get those letters, exhibits P.W. 1/1 and P.W. 1/3A, from Shri Washeshar Nath.
These two letters were written at the time letter, exhibit P.W. 1/5A was
written."
He,
however, admitted in cross-examination that there was no documentary evidence
to show that the real intention of Surinder Nath "in making the advance
was to benefit from the picture 'Musafir' "; that "the amount was not
returned to Messrs. Concord Finance (P.) Ltd., because the picture 'Musafir',
in which the amount was invested, had flopped"; and that "the sum of
Rs. 32,000 paid by the petitioner-company may have been utilised for obtaining
the draft for payment to the producers of the picture 'Musafir' ". Mr.
Sawhney, the learned counsel for the respondent-company, raised various
objections to the genuineness of the letters dated 2nd July, 1957 (exhibit
P.W.1/1), dated 6th July, 1957 (exhibit P.W. 1/2), dated 10th July, 1957
(exhibit P.W. 1/3) and dated 10th July, 1957 (exhibit P.W. 1/3A). I need not,
however, elaborate on these objections as it is sufficiently established from
other evidence that the loan was taken by the respondent-company. Joginder Nath
admitted the execution of exhibit P.W. 1/5A. W.N. Choudhry who signed the
letter was the secretary of the respondent-company and, as I have mentioned
already, the amount is shown in the balance sheet. Even Joginder Nath's
statement goes to support the petitioner company.
I
should not be understood as saying that if a petitioner by imposing legal
proceedings on a company reduces it to financial insolvency it would, in all
cases, justify winding up of the company for it is well established that a
person cannot be allowed to take advantage of his own wrong. If, therefore, I
were satisfied that the respondent company has been reduced to its present
unsound position by reason only of the petition, I would have declined to wind
up the respondent company. I am, however, satisfied that, apart from the effect
of the petition, the position of the respondent company has been far from
satisfactory and it was and is commercially insolvent.
Mr.
Sawhney, the learned counsel for the respondent-company, contended that the
petition was mala fide, which was evident from the fact that Surinder Nath was
a surety to the loan claimed by the petitioner company. He drew my attention to
the balance-sheet of the petitioner company, exhibits D.W. 4/2A and D.W. 4/2B.
In the said balance-sheets the loan in question has been considered good
against the personal guarantee of the managing director. I am not impressed
with the argument. If Surinder
Nath is a co-debtor with the respondent, company it would increase his jeopardy
if the company is wound up, for, then, the matter will be in the hands of the
official liquidator. Surinder Nath being a co-debtor with the respondent
company places no other impediment in the way of the petitioner company filing
the petition for winding up.
In
view of this, I allow the petition and order the respondent-company to be wound
up. I appoint the official liquidator as the liquidator of the company. The
Registrar shall forthwith send to the official liquidator of the court notice
as required by rule 109 of the Companies (Court) Rules, 1959. It will be the
duty of such of the officers as are liable to make out or concur in making out
the company's statement of affairs under section 454 to attend on the official
liquidator at such time and place as he may appoint and to give him all
information he may require. The order for winding up shall be drawn up by the
Registrar and two certified copies thereof shall be sent to the official
liquidator as required by rule 111. Any notice required to be served on the
petitioner company of further proceedings in liquidation shall be served on its
counsel. The order shall, within 14 days, be advertised by the petitioner
company in one issue each of The Indian Express and Vir Arjun Delhi.
The
parties will bear their own costs.
Petition
allowed.
[1934]
4 Comp. Cas. 434 (BOM.)
High
Court of
v.
Shinkar
Rangnekar, J.
December 6, 1933
N.P. Engineer and Sir Jamshed Kanga, for the plaintiffs.
S.R. Tendulkar, M. G. Setalvad, M.L. Manekshah, K.T. Desai, and K.A. Somjee, for the defendant.
Rangnekar J. —The suit is a sequel to a resolution passed by the board of directors of the 6th defendant company and an extraordinary resolution passed in a general meeting and confirmed as a special resolution in another extraordinary general meeting of the shareholders of the company. In pursuance of the last two resolutions an agreement was executed by the 6th defendant company, the effect of which is to appoint the 7th defendant company as managing agents of the 6th defendant company. The plaintiffs, who are some of the directors, have brought this suit for challenging the said resolution and the respective meetings in which they were passed, and for a declaration that the said resolutions were invalid and of no effect, and for an injunction restraining the 7th defendant company from acting on the agreement executed in pursuance thereof.
After the institution of the suit the plaintiffs took out a notice of motion for an interim injunction restraining the 7th defendant company from acting upon the said agreement, and in my interlocutory judgment on the motion I have set out the facts and contentions of the parties. I then directed that a meeting of the shareholders of the 6th defendant company should be held in order to find out whether the company was willing to maintain the suit and to proceed with it. I gave full directions as to notices and advertisement and as to the execution of proxies and other incidental matters, and further directed 1hat the meeting should be presided over by the Commissioner of this Court and the resolution passed should be communicated to this Court. This course was adopted by me on the authority of several English cases, to which it is not necessary to refer here. Accordingly, a meeting of the shareholders of the company was held on September 10, 1933. The Commissioner's report shows that the resolution which was put to the meeting was in these terms : Whether the 6th defendant company, the Indian Cooperative Navigation & Trading Co., Ltd., is willing to maintain the suit and to proceed with it. The report further shows that on a poll being demanded and taken the said resolution was lost. No exceptions to the report are filed by any of the parties.
The grounds on which the resolutions are attacked are set out in paragraph 15 of the plaint. As to the first resolution passed by the board of directors on February 18, 1933, the plaintiffs contend that two of the directors were interested parties, and there was no proper quorum, and that the meeting of the board of directors on the 18th was held indirect violation of a decision arrived at on a previous meeting of the board on February 17, 1933, to the effect that the next meeting of the board of directors should be held on February 20, 1933. In paragraph 8 of the plaint the plaintiffs state as follows: —
"In spite of the aforesaid arrangement an urgent meeting of the board of directors was summoned at the instance of Ghellabhai Hansraj, the 2nd defendant abovenamed, for February 18, 1933, and held on that day at 4 p. m. The following Directors were present, viz., the 3rd plaintiff abovenamed and defendants 1, 2 and 3, the 2nd defendant being in the chair. Notwithstanding the protest of the 3rd plaintiff that the consideration of the said agency agreement was deferred to Monday the 20th, defendants 1, 2 and 3 proceeded to consider and passed a resolution authorizing the said 6th defendant company to enter into the said agreement with the 7th defendant Agency Company. The service of the notice of the said meeting was so effected as to make it certain that the 2nd plaintiff would not be able to attend."
It will be seen from this that there is no complaint in the plaint here that another resolution which was admittedly passed by the board of directors on February 18, 1933, to call an extraordinary general meeting for the purpose of considering certain resolutions as extraordinary resolutions (see Exhibit A to the plaint) was invalid. In the course of the argument, however, it was urged that this resolution to call the meeting was invalid. The minutes show that this resolution was passed unanimously by all the members present including plaintiff No. 3, and the minutes were duly confirmed and signed at the next meeting by plaintiff No. 2.
As to the extraordinary general meeting and the resolutions passed therein on February 27, 1933, the plaintiffs say that the meeting was irregularly and improperly convened and that there was in law no valid extraordinary general meeting held on February 27, 1933. For the same reason the plaintiffs submit that the confirmatory meeting on March 15, 1933, was also invalid and improper. It may be stated that the extraordinary resolutions with regard to the execution of the proposed agreement between the 6th defendant company and the 7th defendant company for employing the latter as managing agents was passed at the extraordinary general meeting of February 27, 1933, and confirmed in the confirmatory meeting of March 15, 1933.
On behalf of the defendants the following issue was raised as a preliminary issue, namely, whether the suit is maintainable. The issue is in the nature of a demurrer to the bill.
It is clear from the facts set
out that the subject-matter of the resolutions challenged and the questions
raised by the plaintiffs are all relating to the internal management of the
company acting within its powers. The contention is that these resolutions are
illegal and void because of certain irregularities. The question, then, is,
whether the Court has jurisdiction to interfere with the internal management of
the company acting within its powers, and, secondly, if so, who can sue.
In
the case of joint stock companies the question often arises, when can a
minority of the shareholders of a company sue for themselves and on behalf of
other shareholders? On this and cognate questions relating to companies the
Courts adhere to the well-known rule in Foss v. Harbottle and Mozley v. Alston.
These cases, which have been followed in numerous decisions to which it is
unnecessary to refer, lay down, firstly, that the Court has no jurisdiction to
interfere with the internal management of the companies acting within their own
powers, and, secondly, to redress a wrong done to the company the action must
prima facie be brought by the company itself. Even where a minority of
shareholders are alleged to have been overborne by the vote of a majority, the
plaintiffs cannot complain of acts which are valid if done with the approval of
the majority of the shareholders or are capable of being confirmed by the
majority, mere irregularity or informality which can be remedied by the
majority being insufficient (see Halsbury, Vol. V, (2nd Edn.), p. 408;
Buckley's Company Law, p. 132: Mac Dougallv. Gardiner and Burland 4. Earle).
Where the action is brought by shareholders the plaintiff should distinctly
allege the illegality of the act complained of and the impossibility of getting
the company to impeach its validity: Halsbury Vol. V, Section 677, p. 411. In
this case there is no such allegation. Mere irregularities committed by the
directors cannot give a cause of action to shareholders and entitle them to
challenge the validity of the resolutions passed, and the aggrieved
shareholders must appeal to the company in general meeting: see
But this supremacy of the majority is subject to certain exceptions. These are, as the authorities show, (1) where the act complained of is ultra vires the company; (2) where the act complained of is a fraud on the minority ; and (3) where there is an absolute necessity to waive the rule in order that there may not be a denial of justice (Palmer's Precedents, Vol. I, p. 1246).
In this case there is no contention that the resolutions complained of are ultra vires the company. On the other hand, it is clear from the record that the plaintiffs were conscious of this lacuna in the case and were attempting to remedy it by way of an amendment of the plaint. Their summons, which it may be incidentally stated sought inter alia to bring in the second resolution passed unanimously on February 18 for calling the extraordinary general meeting and the confirmatory meeting, was however, dismissed, and the only cause of action now is that the resolutions are invalid because of certain irregularities. Secondly, there is no allegation in the plaint that the plaintiffs personally have suffered any wrong. The whole case on behalf of the plaintiffs is that there was a wrong caused to the company. The report of the Commissioner, however, to which I have referred, shows clearly that the majority of the shareholders have decided not to proceed with the suit, and the position is that they have in effect approved of the resolutions complained of with full knowledge of all the material facts about the alleged irregularities in the passing of the resolutions and in the holding of the meetings complained of. Under these circumstances it is difficult to see how a few shareholders who represent a minority are entitled to maintain the suit and ask the Court to interfere on the question as to who should be the managing agents of the company. In Mac Dougall v. Gardiner James, L.J. observed (p. 23): —
"If there is some one managing the affairs of the company who ought not to manage them, and if they are being managed in a way in which they ought not to be managed, the company are the proper persons to complain of that."
The plaintiffs' counsel attempted to bring the case, apart from the question of justice, within the second exception above referred to, that is, fraud. There is no allegation that the majority have practised any fraud on the minority of share-holders. The whole case is that two of the directors have practised fraud on other directors and perhaps on the shares holders. The only reference to fraud in the whole of the lengthy complaint is in paragraph 5 of the plaint, and the complaint is that the 7th defendant company is a bogus company, and was brought into existence for the purpose of perpetrating fraud on the 6th defendant company, and that defendants Nos. 1 and 3 are members of that company. In the first place, no particulars of the fraud practised on the 6th defendant company are given. The allegation of fraud as made is too vague to act upon. As far as one can see there is nothing in law which can prevent a company from appointing what is called a bogus company as its managing agents if the company so desires.
The position, however, is that the acts complained of being capable of being approved and ratified, the company has now as the result of the Court meeting virtually approved of and adopted the resolutions complained of.
Mr. Engineer argues that there is one more exception, and relies an Baillie v. Oriental Telephone and Electric Company, Limited. He relies upon the exception as stated in Halsbury, Vol. V, p. 409, in the words following: —
"Where, however, the persons against whom relief is sought hold and control the majority of the shares, and will not permit an action to be brought in the company's name, shareholders complaining may bring an action in their own names and on behalf of the others, and they may do so also where the effect of preventing them so suing would be to enable a company by an ordinary resolution to ratify an improperly passed special resolution."
He argues that the special resolution is bad and the suit can lie even though the majority is against it. Now it seems to me that this ease went on its own facts which were of a specially exceptional character. There were two companies concerned in that case, one being the principal company and the other subsidiary company. The directors to the principal company were practically the masters of the situation and could dominate the subsidiary company. On the facts it was held that the notice calling the extraordinary general meeting, the validity of which was challenged, was tricky. Lord Cozens Hardy, M. R. observed (p. 515): —
"I feel no difficulty in saying that special resolutions obtained by means of a notice which did not substantially put the shareholders in the position to know what they were voting about cannot be supported, and in so far as the special resolutions were passed on the faith and footing of such a notice the defendants cannot act upon them."
Kennedy, L. J., delivered no separate judgment. Swinfen eady, L. J., seemed to hold that in certain cases members may sue on behalf of the corporation and such an action may be permitted in the interests of justice. This case is understood by Palmer as a case of a resolution being carried out by a trick. Even so, as Palmer points out, it is the company that must sue and not a few shareholders.
In this case I am clearly of opinion that the claims of justice do not require any departure from the well-recognised rule in Foss v. Harboltle. Apart from the Court meeting, it is clear that even if the notice here is bad, being given as the result of the resolution passed on February 18—which the plaintiffs say is invalid—still the notice was ratified by the holding of the meetings complained of and no complaint was made as to the invalidity of the meetings. The plaintiffs knew the facts. The 3rd plaintiff was present at the extraordinary general meeting of February 27 and all the plaintiffs were present at the confirmatory meeting, plaintiff No. 1 being in the chair. The dissentient shareholders were at the meeting. It was open to them to complain and object to the validity of the meetings. This they did not do, and it is difficult to see how they or any one else can now object. The minutes of the meetings of the board of directors subsequent to the meeting of February 18 clearly show that no complaint was raised on behalf of the plaintiffs. Then they took part in these meetings. The proposed agreement with the 7th defendant company was discussed clause by clause in the directors' meeting as well as in the extraordinary general meeting of February 27. The question as to who were partners in the 7th defendant company was specifically raised and explanation as to the constitution of the company was given. Amendments to the resolution regarding the agreement complained of were invited and some were moved, considered and voted upon. Various other points as to remuneration, & c, were raised, discussed and disposed of. Various clauses of the proposed agreement were after discussion put to the vote separately. Finally, the whole agreement as amended was put to the vote and carried, one shareholder alone dissenting. At the confirmatory meeting plaintiff No. 1 who presided explained to the shareholders at the outset that the resolution was discussed at the last extraordinary general meeting on February 27, 1933, and it was duly passed by the shareholders after due consideration, explanation and amendment. He further stated that if the shareholders required further information they were at liberty to call for it. Plaintiff No. 2 in his speech stated that he wanted further alteration in the agency agreement and complained that his views placed before the directors were not given effect to in the meeting of 27th February. He asked the shareholders to vote against the resolution moved and reject it. One of the shareholders put before the meeting what he had discovered as the result of his inspection of the file of the 7th defendant company from the office of the Registrar of Companies and inter alia disclosed the interests of defendants Nos. 1 and 3 in the company. Another shareholder urged that the agreement would be vitiated as some of the directors of the 6th defendant company were interested in the 7th defendant company and that defendant Shinkar was particularly interested in the 7th defendant company. Then, after the various objections were considered, the resolution was voted upon and declared carried by a large majority. Upon these admitted facts it is clear that the objection to the validity of the meeting, if any, was waived. The irregularities, if any, in the resolution calling this meeting were condoned and the resolution of February 18 was ratified. Having regard to the minutes of the meetings, the notice itself, the advertisement of the notice and the resolution, it is difficult to see how it can be said that the resolution complained of was obtained by a trick.
Mr. Engineer argues that a special resolution
cannot be ratified retrospectivly. I am at a loss to understand the-objection.
There is nothing to prevent a company from passing another special resolution
appointing the 7th defendant company as their agents, and if such a resolution
is passed it would in effect ratify the irregular special resolution complained
of. In this connection 1 may refer to the case of Southern Counties Deposit
Bank v. Rider and
In my opinion to disallow the demurrer is to allow a small minority of the body to which they belong to interfere in the conduct of the majority. This cannot be done, and "an attempt to introduce such a remedy ought to be checked for the benefit of the community." The demurrer, therefore, must be allowed. My finding on the issue is in the negative.
In the result the suit must be dismissed with costs. Notice of motion dismissed with costs. The costs of notice of motion to taxed. There will be three separate sets of costs of the suit and the notice of motion, one for the 6th defendant company, one for the 7th defendant company, and one for defendants 1 to 5. The plaintiffs to pay the costs of and incidental to the meeting held on September 10,1933, in pursuance of the order of August 3, 1933, to the 6th defendant company. The Commissioner to return to the 6th defendant company the proxies and papers relating to the meeting.