Section 295
Loans to directors
[1970]
40 Comp. Cas. 674 (Mys)
v.
Bangalore Race Club Ltd.
A. Narayana PaI, J.
January 4, 1968
T. Raghavan
and Balakrishnan for the petitioner.
S. G. Sundara Swamy,
E. S. Venkataramaiah and Mohammed Hafiz for the
respondent.
Narayana Pai, J.—This petition under section 398
of the Companies Act, 1956, is by a member of a company called the Bangalore
Race Club since re-named as Bangalore Turf Club Ltd., and complains of a
certain state of affairs said to be prejudicial to the interests of the company
on the basis of which the petitioner seeks an appropriate order under the said
section. The respondent is the company itself.
Notice
of the petition was directed to the Central Government, the company itself and
individually to twelve members of the managing committee of the company.
The
Central Government has filed a statement through one of its undersecretaries to
the effect that the Company Law Board does not propose to make any
representation in the matter.
The
allegations in the petition are traversed by a common affidavit filed on behalf
of the company and members of its governing body sworn to by an assistant secretary
of the company.
Certain
facts are not disputed. The Bangalore Turf Club, hereinafter referred to as the
"company", was prior to 1962 an unincorporated body of persons
running principally horse races in
There
has been in
It
is common ground that almost from its very inception, the running of races by
the Mysore Race Club was made possible only by reason
of the fact that all assistance and facilities for the purpose, including
subsidies in cash provided to it by the Bangalore Club or the company. Such assistance
by or collaboration with the company was continued even after the Bangalore
Club was incorporated into a company. During the period anterior to the
incorporation, the Bangalore Club had met the losses of the Mysore
Club amounting to little over Rs. 40,000. The losses so met by the Bangalore
Club for the subsequent years were as follows :
|
1963 |
Rs. |
3,600 |
|
1964 |
Rs. |
20,405 |
|
1965 |
Rs. |
52,448 |
|
1966 |
Rs. |
30,540 |
All
these losses were disclosed both in the accounts of the Mysore
Club as well as the company. The balance sheets were from year to year placed
before the general meeting of the shareholders of the company and adopted by
it.
It
would appear, however, that at least from towards the end of 1966 or early 1967
differences of opinion did arise between the members of the company on the
question of the advisability of continuing to provide the Mysore
Club with the assistance as heretofore done and as to the manner in which if at
all such assistance should be made available. Although I may have to refer to
this matter in some detail at a later stage it is sufficient now to observe
that the petitioner and certain other members were strongly of the opinion that
further association with the Mysore Club had better
be discontinued for the reason that it had all along resulted in the company
taking over large losses incurred by the Mysore Club.
At the annual general meeting of the company held on the 20th of March, 1967,
some reference was made to this question by the petitioner and certain other
members of his way of thinking. But, no definite resolution was proposed or
adopted at that meeting on the question of continued association between the
two clubs. The balance-sheet for the year 1966 which disclosed the Mysore Club losses to the extent of Rs. 30,000 was adopted
by the meeting.
On
the 1st of July, 1967, the petitioner and 43 others sent a requisition to the
secretary of the club to arrange for convening an extraordinary general meeting
of the company at which the signatories proposed to move the following resolution :
"Resolved
that in view of the South India Turf Club having been dissolved and the
Bangalore Race Club Ltd. having become an independent turf authority and further
in view of the fact that the Bangalore Race Club Ltd. have lost their appeals
before the Income-tax Tribunal to treat the losses incurred by the Mysore Race Club as losses of the Bangalore Race Club this
extraordinary general body meeting directs the committee to terminate the
agreements entered into between the Bangalore Race Club and the Mysore Race Club and further directs the committee of the
Bangalore Race Club Ltd. not to finance the Mysore
Race Club in any manner in future."
The
committee of the company met on the 14th of July, 1967, at which two of the
matters considered were the above requisition and a letter from the Mysore Race Club seeking the facilities on the same lines
as had been extended to it in previous years. The disposal of these matters as
recorded in the minutes of the said meeting is as follows :
"2.
To consider the letter received from the Mysore Race Club:
Read
and recorded.
The
usual facilities extended during the previous years to the Mysore
Race Club may be allowed during the current year also.
In
the event of the general body not agreeing to this proposal the extension of
facilities referred to above will stand cancelled. Mr. M. H. Raju and Mr. B. R. Ram expressed the opinion that the
subject may be deferred, as the matter is before the general body.
4.
To consider the requisition received from club members to convene an
extraordinary general meeting :
Action
may be taken for convening an extraordinary general meeting in accordance with
the Companies Act. "
The
action taken was to call a meeting on the 21st of August, 1967. At that meeting
the principal matter for consideration was the moving of the resolution set out
in the requisition which I have already copied. One of the members of the
company present at the meeting raised a point of order as to whether the said
resolution when passed could be legally effective and whether therefore the
said resolution could at all be moved and considered at the meeting. The member
who raised the point of order expressed the view that the general body had no
power to issue any such directions to the committee in view of the provisions
of section 291 of the Companies Act and articles 31 and 40(c) of the articles
of association of the company. Then followed a series of
speeches by various members, some of whom cited rulings of various courts in
"I
have carefully examined the point of order raised by Mr. P. Sreenivasan
and the speeches made by way of reply to meet the objections and in support of
the point of order. My ruling on the point of order is as follows
:
The
resolution, if passed, has the effect of interfering with the lawful exercise
of the discretionary powers vested in the committee under the articles of
association, 40(c) and (f), of the Bangalore Race Club. There is no legal
warrant or justification for this kind of interference in the management of the
day to day affairs of the club. There is no provision in the Companies Act of
1956 which fetters the discretion of the committee in such matters or curbs
their authority when once they have acquired that power under the articles of
association.
Before
any directive as embodied in the resolution can be issued, the general body
should assume the requisite power by amending the relevant articles of
association by a special resolution.
The
procedure now adopted by the sponsors of the resolution is illegal. Therefore,
I uphold the point of order."
The
petitioner and his friends obviously dissatisfied with the result of the meeting, approached this court with this petition. The
petition was presented on the 5th of September, 1967. After rectifying some of
the defects or deficiencies pointed out by the court, the petition could be
brought up for first orders only early in October, 1967.
In
the meanwhile, the committee of the company appears to have changed its view as
to the manner in which the assistance could be extended to the Mysore Club. I should have stated earlier that the present
committee took office only in March, 1967. In February, 1967, the previous
committee had lent a sum of Rs. 15,000 to the Mysore
Race Club. The meeting of the present committee on the 6th of September, 1967,
appears to have been an emergent meeting, and the only question considered was
the nature of assistance to be extended to the Mysore
Race Club. The matter was brought up by letters of 5th of September, 1967,
addressed to the company by some members as well as by the Mysore
Race Club. As much argument turns on the proceedings of this meeting, I give
below a full copy thereof:
"Minutes
of an emergent meeting of the committee of the Bangalore Race Club Ltd., held
at the registered office of the club, on Wednesday, the 6th September, 1967, at
7 p.m.
Mr.
J. B. Mallaradhya (in the chair)
Mr.
K. N. Guruswamy
Mr.
N. S. Bharath
Mr.
Chandappa Patel
Mr.
R. Subbanna
Mr.
L. S. Venkaji Rao
Mr.
M. Arshad Ali Khan (secretary)
Proposed
by Mr. R. Subbanna and seconded by Mr. Chandappa Patel, Mr. J. B. Mallaradhya
took the chair.
Mr.
K. N. Guruswamy who was present did not participate
in the deliberations. Leave of absence was granted to M/s M. H. Raju, D. M. Shivaswamy, H. C.
Patel, B. R. Ram, the Jagirdar of Ami and C. Krishnaswamy Naidu.
|
AGENDA |
DECISION |
|
1. To consider the request of the Mysore
Race Club to grant permission to run the Mysore
Race Meetings at |
'Letter Dated 5-9-67 from M/s. |
|
|
Letter dated 5-9-67 from Mr. N.S. Bharath
and also letter dated 6-9-67 from Mr. L. S. Venkaji
Rao were read and recorded. |
|
|
Read letter dated 5-9-67 from the Hon. Secretary, Mysore Race Club, requesting permission to run Mysore Races in Bangalore during the current year. |
|
|
RESOLVED that permission be granted, subject to the
following conditions :— |
|
Sd. M. Arshad
Ali Khan |
Sd. J. B. Mallaradhya |
The
petition, after setting out the facts summarised
above,...excepting the committee meeting of 6th
September, 1967, makes the following prayers :
"(a) For the termination or setting aside of any
agreement or arrangement between the company and the Mysore
Race Club or for setting aside any decision of the board of management for the
payment of moneys by way of grant or subsidy for the conduct of the Mysore races.
(b) For an appropriate direction restraining the
negotiation of con tracts or payments to be made by the company to the Mysore Race Club or others in excess of the limits imposed
by section 293 of the Companies Act without first ascertaining the legality
thereof and the opinion and consent of the general body or members.
(c) For a direction that an adjourned general
meeting of the company be held as soon as may be practicable to give effect to
the requisition of the petitioner and other signatories and for the
consideration of the resolution to be moved thereat of which notice has been
duly given, and
(d) for such other order that may be made in the premises as
shall be just."
It
will be seen that the prayers are obviously related to the position obtaining
before the resolution of the committee of 6th September, 1967.
The
counter-affidavit in paragraph 9 thereof makes the following reference to the
previous arrangement between the two clubs :
"... it is true that the agreement between H. H. Maharaja of
Obviously
for the reasons stated in the last sentence in this extract, no further or
detailed information was given of the previous arrangement. But the said
agreements were brought to court by the learned counsel for the respondent at
my request and it appears therefrom that the
arrangement was in the nature of a tripartite understanding between the two
clubs and the Maharaja of Mysore who owned the race
course in
There
is another reason why attention should be confined to the said subsequent
situation, viz., that so far as subsidies to or the bearing of losses ef the Mysore Club are concerned,
they had, as already stated, been displayed in the balance-sheets of the
Bangalore Club from year to year and all balance-sheets up to and inclusive of
the balance-sheet of 1966 had been placed before the general body of
shareholders and adopted by them. There has not been before me any scope for
any controversy in regard to those matters.
In
this view, the questions whether the company may be said to have suffered any
prejudice by reason of the previous association between the two clubs and the
details of the terms of the agreements between them do not arise for
consideration. As there is at present no such long term agreement or
arrangement between the company and the Mysore Club,
the first prayer will not arise. Whether and if so, what arrangement can or should
be or may be entered into between the clubs in future is not a matter on which
I need express any specific opinion at present. There could, however, be no
doubt that the observations and findings that I may record in this case will
govern the conduct of the two clubs in future to the extent those observations
or findings may be of relevance to the course of conduct proposed to be adopted
by them in future.
The
second prayer also and the reference to section 293 of the Companies Act
therein do not arise for consideration because the loan of Rs. 15,000 was made
by the previous committee, and as matters now stand, that loan has since been
recovered.
The
question whether the third prayer does survive, and if so to what extent, is
not capable of an answer at this stage.
The petition, as already stated, proceeds upon the footing
that certain prejudice to the interests of the company has been brought about
by reason of the assistance rendered to the Mysore
Club by the company or by reason of the association of the two clubs for
running races in the name of or on behalf of the Mysore
Club. The
case of the petitioner is that the situation in the matter of the
administration of the affairs of the company is such that the said prejudice
can be relieved against only by an order of this court under section 398 of the
Companies Act.
The
question for consideration is whether and if so what prejudice has resulted by
reason of the action taken by the company pursuant to the resolution of the
committee dated September 6, 1967, and what directions, if any, should be
issued by this court to grant relief against such prejudice or to prevent
recurrence of similar situations resulting in prejudice to the interests of the
company.
Along
with the petition, an Interlocutory Application No. 119 of 1967 was filed in
the first instance for an interim order in the nature of injunction or a
prohibitory order. As the prayers therein were closely connected with the
prayers in the petition which became unnecessary by reason of a change in
circumstances, the application was not pressed. A separate Application No. 120
of 1967 was filed with special reference to the position as under the
resolution of the committee dated September 6, 1967. In view of the express
provisions of the said resolution, I considered it sufficient, in the interests
of all concerned, to make an order directing the company to file into court
accounts of the races scheduled to be held by the Mysore
Club at the Bangalore Race Course on the 8th, 11th, 15th, 18th and 22nd of
October, 1967, as then arranged. In the first instance, accounts for the first
four races were directed to be filed before the 19th of October, 1967. The said
accounts disclosed that the surplus proceeds were sufficient not only to
recover the loan of Rs. 15,000 made pursuant to the resolution of the company
but also to leave an estimated net profit of the order of Rs. 45,000. After
perusing the said accounts, I made a direction for immediate appropriation of
Rs. 15,000 towards the indebtedness and also recorded that according to the
expectation of the parties, the distribution of surplus profits might not be
capable of being completed before the final disposal of the main petition.
The
company has since filed a consolidated account relating to all the five races.
The result disclosed by it is that after recovering the loan of Rs. 15,000,
there remains a net profit of just over Rs. 68,000.
The
prejudice, according to the petitioner, need not necessarily be a financial or
monetary disadvantage in the nature of loss ; it may
also be, according to him, a course of conduct pursued by the managing
committee involving a contravention of certain of the provisions of the
memorandum or articles of association of the company which may be regarded as
fundamental to the constitution of the company. The learned counsel for the
respondent accepts only the first position as correct but not the latter.
If
the contention pressed on behalf of the respondent-company by its learned
counsel is to be accepted, then of course, no prejudice of the type originally
apprehended by the petitioner has in fact resulted. The accounts already
referred to disclose a picture far different from what was apprehended on the
basis of the experience of previous years.
The
matter for investigation therefore is whether there is prejudice of the second
type as contended for by the learned counsel for the petitioner. Here again,
the approach is two-fold: In the first place, it is stated that the very
association with the Mysore Race Club may be regarded
or should be regarded as a step beyond the normal scope of the objects of the
company. The second or alternative approach is that the manner in which the
present arrangement has been contemplated to be given effect to and actually
put through does involve a contravention of some of the fundamental legal
duties and restrictions imposed upon the directors of the company as well as a
departure from the provisions of paragraph 4 of the memorandum of association.
The
first contention of a total lack of relation between the objects of the company
and the company's association with the Mysore Race
Club appears to me to be not well-founded. I have already set out the relevant
portions of the memorandum of association of the company as well as of the
rules of the Mysore Club defining its objects. Both
the clubs are undoubtedly clubs formed with the principal object of encouraging
horse racing. Whereas the memorandum of the company goes into the details of
what may be regarded as allied activities, the relevant rule of the Mysore Club refers to them in general terms. Clauses (c)
and (h) of paragraph 3 of the memorandum of association, the relevant portions
of which have already been referred to above, also make it perfectly clear that
collaboration with or rendering assistance to clubs of the type of the Mysore Race Club were not only matters within the scope of
the principal object of the company but also matters actually contemplated and
provided for in the document of constitution, the memorandum. The close
association between the two clubs for more than a decade is a matter of admission ; although the petitioner was not a member of the
managing committee after the incorporation of the company under the Companies
Act, he was admittedly a person closely associated with both the clubs for a
number of years. The expenses incurred or losses met by the company on account
of its association with the Mysore Race Club during
all the years right down to 1966 had been accepted by the company by its
general body adopting the balance-sheets year after year. I have also referred
to the fact that under the rules of the Mysore Club,
three of its stewards are persons to be nominated by the company itself.
I
do not, therefore, accept the argument that any association by the company with
the Mysore Race Club or any assistance that it may
render to it or any arrangement for extending all facilities to the Mysore Race Club for the purpose of running races can be
straightaway condemned as an activity beyond the scope of the objects of the
company.
Two
matters, however, which have been the subject of detailed and emphatic
arguments before me, are that certain of the directors of the company have had
in existing circumstances such interest in the Mysore
Club as to disentitle them from taking part in any decision relevant to the
company's association with the Mysore Club, and that
the effectuation of the committee's resolution of September 6, 1967, has
resulted in a contravention of the provision of paragraph 4 of the memorandum
of association.
The
first contention may be easily disposed of. From the copy of the minutes of the
meeting of 6th September, 1967, given above, it will be seen that there were
present the following persons at that meeting:
J.
B. Mallaradhya
K.
N. Guruswamy
N.
S. Bharath
Chandappa Patel
R.
Subbanna
L.
S. Venkaji Rao, and
M.
Arshad Alikhan.
The
last among them is a paid employee of the company appointed by its committee
pursuant to article 54 of the articles of association of the company. He is not
a member of the committee. N. S. Bharath and Chandappa Patel are officers of the Government nominated to
the committee by the State Government. Mallaradhya, Venkaji Rao and Subbanna are members of the company nominated by it as
stewards of the Mysore Race Club. Out of them, Subbanna is not a member of the Mysore
Club at all. The other two are members of both the clubs. K. N. Guruswamy is an elected steward of the Mysore
Race Club and also a member of the Bangalore Club. The minutes show that he did
not participate in the deliberations of the committee. The only persons, in
relation to whom the question of law argued arises, are Mallaradhya
and Venkaji Rao and Subbanna, the first question being whether they had any
personal interest or indirect interest in the subject of deliberation, and the
second question being whether they had disclosed their interest or taken part
in the discussion.
The
interest attributed to them is the interest in the Mysore
Race Club as steward of that club. Assuming for a moment that it may be an
interest relevant to section 299 of the Companies Act, no express disclosure by
them of that interest may be said to be essential because they hold the
position of stewards of the Mysore Club under an
appointment of nomination by the company itself. The company, which already
knows these facts, does not stand in need of being informed of the same. It has
been argued on behalf of the respondent that, in the peculiar circumstances of
this case, even these persons cannot be said to hold any such interest as would
attract the provisions of section 299 of the Companies Act or connected
provisions. The argument is that as nominees of the company they are persons
interested in the company itself and not in the Mysore
Club, their position as stewards in the latter club subserving
the interest of the company which, while extending assistance or other
facilities to the Mysore Club, is interested in
continued and efficient management of the affairs of the Mysore
Club. This argument probably is or may be available in the case of Subbanna ;
but it may not be clearly available in the case of Mallaradhya
and Venkaji Rao, who are
not only members of the company but also members of the Mysore
Club. In any event, it is not possible in their case to argue that no situation
at all would arise in which some conflict arises between their interest and
duty. Their participation therefore in the deliberations of the committee at
its meeting of 6th September, 1967, may be inoperative or ineffective from the
point of view of voting strength. The result, however, is not such as to render
the entire resolution totally non-existent or ineffective. Apart from the fact
that the rest of the persons might be sufficient to constitute quorum, the
resolution of 6th September, 1967, appears to have been confirmed at a
subsequent meeting of the committee held on 22nd September, 1967.
Quite
apart from these legal niceties, the one thing that is of considerable
importance from the point of view of the present proceedings is that no mala fides or personal advantage or a desire to secure
personal advantage has been attributed to any one of the persons. The
controversy has always been one of commercial prudence or otherwise of the
arrangement set up under the resolution and not one of dishonesty or mala fide course of conduct.
The
more difficult and subtler arguments are those relating to the alleged
contravention of paragraph 4 of the memorandum, the relevant portion of which reads :
"The
income and property of the club whensoever derived
shall be applied solely towards the promotion of the objects of the club as set
forth in this memorandum of association and no portion thereof shall be paid or
transferred directly or indirectly by way of dividend, bonus or otherwise
howsoever by way of profit to the members of the club ..."
Now,
the Mysore Club is not an incorporated body; it has
at present 23 members out of whom 18 are members of the Bangalore Club also. It
was strongly pressed that the Mysore Club was not a
legal association in the light of section 11 of the Companies Act. The relevant
sub-section thereof, viz., sub-section (2), requires that any association of
more than 20 persons for the purpose of gain should be registered under the
Companies Act as a company. The consequences of disobedience of the said
sub-section are set out in sub-sections (4) and (5) of the said section, viz.,
that the persons so associating themselves will not have the benefit of limited
liability but be subject to personal liability to the fullest extent and that
they may be proceeded against criminally.
For
these reasons, the further argument is that any arrangement with such an
illegal body should itself be regarded as a prohibited matter or, in the
alternative, the arrangement should be regarded as one to which every one of
the individuals constituting the association is a party, that to the extent
such person may also occupy the position of member of the Bangalore Club, the
receipt of profits by the Mysore Club must be
regarded as a receipt of profits by every one of such individuals and that such
receipt is in direct contravention of paragraph 4 of the memorandum.
The
question whether the Mysore Club is affected by
section 11 of the Companies Act depends upon the further question whether it is
an association for gain or not. The argument on behalf of the petitioner is
that whereas the memorandum of association of the Bangalore Club contains the the express provisions under paragraph 4 cited above prohibiting
the distribution of any profits to its members, the rules and regulations of
the Mysore Club do not contain any such provision.
The answer on behalf of the respondent is that, ordinarily, the expression
"Club" connoted an association not for gain and that therefore the
burden is on the petitioner to make out that the Mysore
Club is an association for the purpose of gain and that in discharging that
burden the petitioner is met with the position that the rules of the club do
not provide for any distribution of profits among its members.
Though,
prima facie, the position taken up by the respondent appears to be more
acceptable, I do not think it is necessary to settle this controversy for the
purpose of disposing of this petition. Whether the Mysore
Club is a lawful association or an illegal association, the one thing that is
clear is that it is not an incorporated body. It does not therefore have a
separate corporate legal personality distinct and different from the legal
personality of individuals constituting the same. It is therefore a collection
of persons, and in the eye of the law each one of them may be regarded as
personally enjoying the benefit or personally suffering the consequences of any
act purported to have been done on behalf of the association.
Now,
in the resolution of the committee of the company of September 6, 1967, an
express provision is made for distribution of net profits equally between the
two clubs. The argument on behalf of the petitioner is that the profits or
share of the profits which go to the Mysore Club is a
receipt of profits by the 23 persons who constitute that club, and that 18
among them who are members of the Bangalore Club must be regarded as receiving
profit in contravention of paragraph 4 of the memorandum of association of the
company.
The
argument so constructed appears to me to lack the foundation on which the
entire structure is built. What is prohibited by paragraph 4 is the
distribution of the properties or assets of the Bangalore Club by way of profits
among its members. The profit itself must be profit earned by the Bangalore
Club before it can attract the provisions of paragraph 4 of its memorandum of
association. Under the resolution of the committee of the Bangalore Club dated
September 6, 1967, the races are an affair of the Mysore
Club and what the Bangalore Club did was to provide the Mysore
Club with the necessary facilities including not only the use of the Bangalore
Race Course but also technical and administrative skill available to the
Bangalore Club. The profits, therefore, are profits of a venture of the Mysore Club. The fact that the Bangalore Club gave all its
assistance to earn that profit cannot, in my opinion, be relied upon to make
out that the profit can in any manner be traced to the ownership of, or earning by, the Bangalore Club. Even the theory of a
joint venture is not, in my opinion, possible in this case because, whatever
may be the case under the rules of the Mysore Club,
the undoubted position under the memorandum of association of the Bangalore
Club is that its working is not for gain. If the assistance rendered to other
associations like the Mysore Club is a matter within
the scope of the objects of the Bangalore Club—and it is so as already held— it
is not open, in my opinion, to make any presumption in that regard, except on
proof of dishonesty, that the rendering of such assistance by it was an act in
derogation of its objects and purposes or was an act motivated by the prospect
of gain. As there is no suggestion of any dishonesty, the rendering of
assistance by the Bangalore Club must in normal course be regarded as a course
of conduct inspired with a desire of achieving the objects of the club and not
with a desire to make any profit or gain. Hence, the entire profits are profits
earned, or must be regarded as profits earned, by the Mysore
Club. If therefore no part of the said profits can be regarded as property or
assets or profits of the Bangalore Club, no question of distribution thereof in
contravention of paragraph 4 of its memorandum can arise.
There
has therefore not been established by the petitioner any prejudice to the
interests of the company either from the point of view of the financial gain or
loss or from the point of view of any departure from its objects or any
contravention of the fundamentals to its constitution.
The
only remaining question is whether there is anything in the manner in which the
extraordinary general body meeting was held which gives rise to anything in the
nature of prejudice.
It
would perhaps have been a matter for some argument if the old method of
rendering assistance to the Mysore Club had been
pursued by way of loans or subsidies or other similar way. In such an event, it
would have been possible for the petitioner to invoke the provisions of section
293 of the Companies Act, particularly clause (e) of sub-section (1) thereof.
Apparently, that was the position in contemplation of the committee at the time
it adopted the resolution No. 2 at its meeting held on 14th July, 1967, in the
light of the requisition already received from the petitioner and 43 others. As
no action was taken on the said resolution and the action actually taken was
one taken pursuant to the resolution of 6th September, 1967, I do not consider
that it is now relevant to the case of the petitioner to examine the legality
of the proceedings or the correctness of the chairman's ruling. I also consider
it not in the interests of either party to express any opinion on the scope of
article 40 of the articles of association in the present proceedings. It will
be for the company or persons in charge of its affairs or management to examine
the exact frontiers of the powers of the committee or general body in regard to
the relations which the company may have or may propose to have with other
associations like the Mysore Club.
In
this connection, the proposition was sought to be made on behalf of the
petitioner that an arrangement of the type mentioned above may result in a
contract between the company and such of its directors as are in their
individual capacity members of the Mysore Club, and
that in the absence of a provision in the articles of association enabling the
directors of the company to enter into a contract with the company, such
persons as are directors cannot at all enter into a contract with the company.
From the point of view of examining whether there has been any prejudice to the
interests of the company for the purpose of or within the meaning of section
398 of the Companies Act, I am not satisfied that any decision on this question
of law is necessary. It is, however, difficult for me to accept the broad
proposition of law that ordinary right to contract which an individual may have
under the Contract Act is taken away from him the moment he becomes a director
of the company in the matter of entering into a contract with that company. The
position of a director is in certain respects fiduciary. The point for
examination in each case is whether, in a given situation, there arises any
conflict between his duty as a director and interest as an individual. Apart
from that essential circumstance which operates as an informative factor, the
only other position that has to be examined is whether having regard to the
terms and nature of the contract, the entering into the same is governed or
controlled by any of the specific provisions of the Companies Act like sections
295, 297, etc.
For
these reasons, I do not think that any case has been made out for interference
under section 398 of the Companies Act. I also do not think that the situation
calls for the issue of any particular directions by me under the said section.
The
petition is dismissed. No costs.
Company
Application 120 of 1967 which has been posted along with the petition stands
closed as no further orders on it arc necessary.
Petition dismissed.
[1991] 70 Comp. Cas. 210 (Bom)
High Court OF
v.
S.P. Bharucha J.
August 3, 1989
J.M. Chagla and S.J. Thakkar for the Petitioners.
H.V. Mehta for the Respondents.
S.P.
Bharucha J.—The petitioners were, at the
relevant time, the directors of the Ahmedabad Advance
Mills Ltd., a company incorporated under the provisions of the Indian Companies
Act, 1882. On May 31, 1977, the company purchased a flat in Clover Apartments
at Cuffe Parade,
In
November and December, 1981, the books and records of the company were
inspected by the Assistant Inspecting Officer of the Office of the Regional
Director, Department of Company Affairs,
On
December 10, 1982, the Registrar of Companies filed a prosecution against the
petitioners in the court of the Addditional of
Metropolitan Magistrate at
This
writ petition is filed to quash the prosecution. The contention is that no loan
had been advanced by the company to its director, the seventh petitioner, and
that, therefore, the provisions of section 295 have no application.
Section
295, sub-section (1), prohibits a company from directly or indirectly making
any loan to its director without the previous approval of the Central
Government in that behalf. Contravention 67 this : provision punishable under
sub-section (4) either with fine which may extend to Rs. 5,000 or with simple
imprisonment for a term which may extend to six months, provided that where the
loan has been repaid, the punishment by way of imprisonment shall not be
imposed.
The
principal and an interesting question is : What is a
loan? A loan is defined by the Oxford English Dictionary as "a thing lent ; something the use of which is allowed for a time, on
the understanding that it shall be returned or an equivalent given ; esp., a
sum of money lent on these conditions and usually with interest."
The
concept of a loan has received judicial consideration in
As
against this, Mr. Mehta, learned counsel for the respondents, emphasised that section 295 prohibited a company from
giving a loan to its director without the permission of the Central Government,
whether directly or indirectly. In his submission, the company had given the
seventh petitioner a loan in an indirect manner by permitting him to defer
payment of the balance purchase price of the flat and pay interest thereon.
The
essential requirement of a loan is the advance of money (or of some article)
upon the understanding that it shall be returned, and it may or may not carry
interest.
The
debt here arose not out of an advance but out of the sale of the flat by the
company to the seventh petitioner. The company gave to the seventh petitioner
time to pay a part of the purchase price. The seventh petitioner was, thus,
given financial accommodation by the company in the matter of payment of the
debt. Such financial accommodation was not and did not amount to a loan.
When
section 295 refers to an indirect loan to a director, what it means is that the
company shall not give a loan to a director through the agency of one or more
intermediaries The word "indirectly" in the
section cannot be rea3 as converting what is not a loan into a loan.
This,
therefore, is a case where the court, under article 226, may justifiably issue
a writ quashing the prosecution launched against the petitioners. (See State of
West Bengal v. Swapan Kumar Guha,
AIR 1982 SC 949 ; [1983] 53 Comp Cas
114).
Having
regard to the view that I have taken, I do not consider the alternative
submission on behalf of the petitioners that, in any event, the prosecution is
barred by limitation.
In
the result, the petition is made absolute in terms of prayer (a). No order as
to costs.
[1967] 37 COMP. CAS. 693 (AP)
V.
Sri Venkatachalapathi Mills Ltd.
Chandrasekhara Sastry, J.
C.R.P.
NOS. 872-874 OF 1966
SEPTEMBER
22, 1966
JUDGMENT
The suit O.S.No.75
of 1959 on the file of the Subordinate Judge's Court, Chittoor,
was filed by Sri Venkatachalapathy Mills Ltd., Puttur, represented by its managing director Sri A. Chengiah Chetty, against five
defendants, who were said to be the ex-directors of the plaintiff- company. The
suit was filed for a decree directing the defendants jointly and severally to
pay the plaintiff-company the amount claimed, viz., Rs. 96,419 with further
interest at 5 1/2 per cent. from the date of the
plaint till realisation, and for directing the
defendants jointly and severally to pay the plaintiff-company the costs of the
suit with interest thereon.
The basis on
which the suit was filed was that the defendants, when they were the directors
of the plaintiff-company, advanced a loan to a firm of which they were partners
or to a private company of which they were directors of members and this was
contrary to the provisions of section 86D of the Indian Companies Act, 1913.
Therefore, it was claimed by the plaintiff-company that the defendants, who
were the ex-directors and who caused the loss to the company by acting contrary
to the provisions of section 86D of the Indian Companies Act, 1913, were
jointly and severally liable to the plaintiff-company to make good the loss
suffered by it. Pending the suit, the 4th defendant had died on 24th April,
1963. The plaintiff-company filed an application in the lower court on 17th
February, 1964, to bring record the legal representatives of the deceased 4th
defendant with the allegation that the 4th defendant died within 90 days from
the date of the filing of the application. The proposed legal representatives
of the 4th defendant field a counter dated 24th March, 1964 pointing
out that the 4th died about 11 months before that date. The exact
date is not given. There is controversy as to when this counter was filed in
court. Mr. Kuppuswamy, the learned counsel for the
respondent in this revision petition, says that this counter was filed only in
April, 1964. Thereafter, the plaintiff-company filed two applications on 31st
July, 1964, one to excuse the delay in seeking to set aside the abatement
caused by the death of the 4th defendant and another to set aside the
abatement. It is stated that the petition to bring on record the legal
representatives was already filed on 17th February, 1964. These applications
were opposed on behalf of the legal representatives of the 4th defendant on two
grounds: that no sufficient reasons are disclosed by the plaintiff-company for
not filing the petition to bring on record the legal representatives within the
period of 90 days prescribed by the Limitation Act and that there is no reason
for the delay at any rate in filing the petition to set aside the abatement. It
is pointed out that such a petition will have to be filed within 60 days after
the expiry of the 90 days prescribed for bringing on record the legal
representatives. Secondly, it was urged that the cause of action did not
survive against the legal representatives of the 4th defendant and that the
suit therefore abated so far as the deceased 4th defendant was concerned. These
two objections were over-ruled by the lower court and the legal representatives
of the 4th defendant were brought on record. Hence, these civil revision
petitions under section 115 of the Code of Civil Procedure are filed by the
legal representatives of the 4th defendant.
Before me
again the two objections which were urged before the lower court were raised.
It is pointed out that, even assuming that the plaintiff did not know the exact
date of death of the 4th defendant when the petition for bringing on record the
legal representatives was filed on 17th February, 1964, the plaintiff should
have known about it on the date when the counter was filed in the lower court,
but still the petition to excuse the delay in seeking to set aside the
abatement was filed only on 31st July, 1964. It is argued that there is no
explanation for this delay and that the fact that the plaintiff is a company is
no ground for excusing the delay. Reliance also is placed upon the decision of
the Supreme Court in Union of India v. Ram Charan
A.I.R.1964 S.C.215, where it was pointed out that the mere allegation about the
belated knowledge of the death of the opposite party was not sufficient for
excusing the delay in bringing on record the legal representatives of a
deceased defendant or respondent and that the party in default being the
Government is not a sufficient cause for excusing the delay. It was further
pointed out in the decision that it is for the appellant or the plaintiff in
the first instance to allege why he did not know of the death of the respondent
earlier or why he could not know about it despite his efforts, if he had made
any efforts on having some cause to apprehend that the respondent might have
died and the court will have to decide how far those reasons have been
established and suffice to hold that the appellant or plaintiff had sufficient
cause for not filing an application to bring on record the legal
representatives of the deceased defendant or respondent earlier on the record.
It may be
noticed that, in that particular case, there was no application to set aside
the abatement or to excuse the delay in seeking to set aside the abatement and
there was no specific prayer for setting aside the abatement. In that case the
Punjab High Court refused to excuse the delay in bringing on record the legal
representatives of the deceased appellant on an application filed by the Union
of India and that order was not interfered with by the Supreme Court on appeal.
But, at the same time, the Supreme Court observed that the court on appeal.
But, at the same time, the Supreme Court observed that the court in considering
whether the appellant or a plaintiff has established sufficient cause for his
not continuing the suit in time or for not applying for the setting aside of
the abatement within time, need not be over-strict in expecting such proof of
the suggested cause as it would accept for holding a certain fact established,
both because the question does not relate to the merits of the dispute between
the parties and because if the abatement is set aside, the merits of the
dispute can be determined while, if the abatement is not set aside, the
appellant is deprived of his proving his claim on account of his culpable
negligence or lack of vigilance.
In the present
case the counter-affidavit dated 24th March, 1964, merely contains a vague
statement that the 4th defendant died about eleven months before that date. It
did not specify the exact date on which the 4th defendant died and the
plaintiff-company is situated at Tirupathi and the
4th defendant, when he was alive, was a resident of a village in Chingleput District. Under the circumstances, the lower court held that there was sufficient cause for not filing the
petition for setting aside the abatement in time or for bringing on record
his legal representatives and therefore executed the delay. This being a
revision under section 115 of the Code of Civil Procedure, I do not find any
error of jurisdiction committed by the lower court in excusing the delay in
seeking to set aside the abatement caused by the death of the 4th defendant, in
setting aside the abatement and in bringing on record his legal
representatives.
The next
question is whether the right to sue the 4th defendant survives and his legal
representatives can be brought on record. As already noticed, the claim in the
plaint is one to recover money against all the defendants jointly and
severally. The basis of the claim is under section 86D of the Indian Companies
Act, 1913. I do not see how a suit of this kind to recover money filed against
a person would abate and would not survive as against the legal representatives
on the death of that person. Section 86D of the Indian Companies Act, 1913, is
as follows:
"86D.
(1) No company shall make
any loan or guarantee any loan made to a director of the company or to a firm
of which such director is a partner or to a private company of which such
director is a member or director.
(2) In the event of any contravention
of sub-section (1) any director of the company who is a party to such
contravention shall be punishable with fine which may extend to five hundred
rupees, and if default is made in repayment of the loan or in discharging the
guarantee shall be liable jointly and severally for the amount unpaid.
(3) This section shall not
apply to a private company (except a private company which is the subsidiary
company of a public company) or to a banking company."
The allegation
in the present case is that, when the defendants were the directors of the
plaintiff-company, they made loans to the firm of which the defendants were
partners or to a private company of which the defendants were members or
directors within the meaning of clause (1) of section 86D and the liability is
said to arise because of clause (2) of the said section, which provides that,
if default is made in repayment of the loan or in discharging the guarantee,
those directors shall be liable jointly and severally for the amount unpaid.
Prima facie, the suit, which is one to recover money on the basis of the
liability imposed under section 86D from the defendants, does not abate as
against the 4th defendant on his death.
But Mr. Venugopalareddy, the learned counsel for the petitioners,
drew my attention to section 235 of the Indian Companies Act, 1913, which
reads"
“235. (1)
Where, in the course of winding up a company, it appears that any person who
has taken part in the formation or promotion of the company, or any past or
present director, manager or liquidator, or any officer of the company has
misapplied or retained or become liable or accountable for any money or
property of the company, or been guilty of any misfeasance or breach of trust
in relation to the company, the Court may, on the application of the
liquidator, or of any creditor or contributory made within three years from the
date of the first appointment of a liquidator in the winding up or of the
misapplication, retainer, misfeasance or breach of trust, as the case may be,
whichever is longer, examine into the conduct of the promoter, director,
manager, liquidator or officer, and compel him to repay or restore the money or
property or any part thereof respectively with interest at such rate as the Court
thinks just, or to contribute such sum to the assets of the company by way of
compensation in respect of the misapplication, retainer, misfeasance or breach
of trust as the Court thanks just.
(2) This
section shall apply notwithstanding that the offence is one for which the
offender may be criminally responsible."
This section
empowers the court to assess damages against delinquent directors and other
persons mentioned in the section. It empowers the court, on an application made
within a particular period, to examine into the conduct of the promoter,
director, manager, liquidator or officer and compel him to repay or restore the
money or property or any part thereof respectively with interest or to
contribute such sum to the assets of the company by way of compensation in
respect of the misapplication, retainer, misfeasance or breach of trust as the
court thinks just. Reliance is also placed upon a decision of the Division
Bench of the Madras High Court in Peerdan Juharmal Bank Ltd., In re [1958]28 Comp. Cas.546,549. The
learned judges, after referring to the several decisions, English and Indian,
and the corresponding sections of the English Acts, held that the proceedings
taken under section 235 of the Indian Companies Act, 1913, against a director of
a banking company, ordered to be wound up, cannot be continued after his death,
and the liability, if any of such a director cannot be enforced against his
legal representative in those proceedings. It is pointed out that it is the
language of section 235 of the Act that decides the issue; that the right
conferred under section 235 to file an application is a limited right and that
it ends when the director dies and does not survive after his death. The
learned judges followed the decision in Sankaran Nambiar v. Kottayam Bank [1946]
16 Comp. Cas.36. On the basis of section 235 and on the said decision, it is
argued by Mr. Venugopalareddy that, in the present
case also, the right to sue the 4th defendant does not survive after his death.
He also pointed out that any claim based upon section 86D of the Act will also
come under section 235 of the Act. Therefore, it is argued that the decision of
the Madras High Court given under section 235 equally covers this suit and it
has to be held that the suit has abated as against the 4th defendant.
I am unable to
accept this argument. Section 235 provides for a special procedure and a
limited right to be exercised in the course of winding up of a company. It
enables the court to examine the delinquent directors and other persons
mentioned in the section and compel them to repay or restore the money or
property to the company. It does not take away the general right of suit that
the company has to proceed against any of its ex-directors, who, under law,
would be liable to make good any amount under the provisions of the Companies
Act. What the learned judges in Peerdan Juharmal Bank Ltd., In re [1958] 28 Comp. Cas. 546,549 held was that, on the language of section 235, it has to be held
that an application under that section could not be continued against the legal
representatives of a deceased director. The learned judges did not hold that
the liability of the deceased director to the company is extinguished on his
death. On the other hand, they pointed out:
"It is
the language of section 235 of the Act that decides the issue. It was a limited
right. It ended when Gopalachariar died. We are not
concerned with the question whether the liquidators have any other remedies
against the estate of the deceased gopalachariar. All
we are concerned with is to answer the question we have set out above: Can the
proceedings under section 235 of the Act be continued against the deceased Gopalachariar
?"
That was the
limited scope of the decision of the learned judges and that decision does not
support the argument that the suit to recover money from the defendants based
on the liability created by section 86D of the Indian Companies Act, 1913,
would abate on the death of the concerned director. It follows that these
revision petitions fail and are dismissed with costs in C. R. P. No.872 of
1966. There will be no order as to costs in the other revision petitions.
[1987] 61 COMP. CAS. 8 (MAD)
HIGH COURT of
v.
Asst. Registrar of Companies
DAVID ANNOUSSAMY, J.
AUGUST 11, 1986
A.C. Muthanna for the petitioner.
None
appeared for the respondent.
David Annoussamy, J—This revision petition is against the conviction.
A prosecution was launched by
the Registrar of Companies, Tamil Nadu, for the
violation of the provisions of section 295 of the Companies
Act. Accused No. 1 is a private limited company. Accused Nos. 2 to 4 are
the directors of the company. Accused No. 5 is the beneficiary of the loan. She
happens to be the wife of accused No. 2, the managing director.
The case of the prosecution
is that an advance of Rs. 5,000 was given to accused No. 5 by the directors of
the company and that the advance was recoverable from her at the rate of Rs. 200
per mensem from her salary. Since accused No. 5 is
related to the second accused as a wife, provisions of section 295 of the
Companies Act were violated and the accused were guilty of an offence
punishable under section 295(4) of the Act. The factum
of the advance was not disputed by the accused. Their contention was only that
the advance cannot be construed as a loan within the meaning of section 295 and
that they have not committed any offence. The trial court, placing reliance on
the definition of "loan" as per Black's Law Dictionary and taking
into account the four ingredients of loan as per that definition, came to the
conclusion that the advance paid to accused No. 5 amounted to a loan and
accordingly convicted the accused for an offence punishable under section
295(4) of the Act and sentenced them to pay a fine of Rs. 25 each by its
judgment dated July 19, 1983. As against that judgment, all the accused have
preferred this criminal revision petition.
The only point urged before
me is that the advance given to the employee cannot be construed as a loan
within the mischief of section 295 of the Act. As far as the ingredients are
concerned, the salary advance and the loan are in all respects similar.
Therefore, for the operation to be characterised as a
loan or salary advance, it is the capacity of the person receiving the amount
that will count. In this case, the beneficiary of the amount, namely, accused
No. 5, happens to be the wife of a director and also an employee. For the sole
reason that she is the wife of one of the directors, one cannot jump to the
conclusion that an offence has been committed. If the amount was given to accused No. 5 in her capacity as the wife of the second
accused, it would amount to a loan and if it was given to the fifth accused in
her capacity as an employee, it would amount to a salary advance. In other
words, the court will have, in such cases, to find out whether the alleged
salary advance is a genuine salary advance or a loan disguised as salary
advance. For that purpose, it would be necessary to consider whether the
beneficiary is a bona fide employee, whether the advance falls within the
general scheme of advances given by the company to other employees, whether the
amount given is disproportionate to the salary of the employee, whether the
conditions of repayment or the other conditions of the loan like the rate of
interest are exorbitant, whether there was laxity in the recovery of the
advance, etc. It is in taking into consideration all the circumstances
surrounding the operation that the court can reach the correct conclusion. In
this case, the prosecution has been put on notice that accused No. 5, who is
the wife of the director, is also an employee and that she was given the amount
as salary advance. In order to establish that the amount given as salary
advance is a disguised loan, no evidence whatsoever is available on any aspect
disclosing that there has been a circumvention of law. In the absence of any
such evidence, the case of the prosecution cannot be accepted. Hence, the
revision petition is allowed and the conviction and sentence are set aside.