Section 297
Board’s
sanction to be required for certain contracts in which particular directors are
interested
[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 Ch. 883, the question was
whether a director who continued to act as such after the expiry of office was
entitled to remuneration as director. The court held that the directors vacated
their office on the last day on which the general meeting for the year could
have been held and were not entitled to any remuneration for the subsequent
period.
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
England. Mr. Chaudhury strongly relied on this decision in support of his
contention that a director whose office had expired because no annual general
meeting was held within the period prescribed was no longer a director and his
acts after the termination of office as director are not protected by section
86 ofthe Companies Act. The learned Additional Solicitor_General also relied on
his this decision in support of his argument that the defendant Ramapada Gupta,
the purchaser of the share, being an outsider is entitled to invoke the rule in
Turquand's case (1956) 6E.&B. 327. It need hardly be said that the decision
is of the highest authority.
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.
[1953] 23 COMP CAS 343 (BOM)
HIGH COURT OF
v.
Ratanchand Khimchand Motishaw
CHAGLA C.J. AND SHAH J.
FIRST APPEAL NO. 566 OF 1952.
SEPTEMBER 22, 1952
Sir Jamshedji Kanga, Y.B. Rege, F.M. Pochkhanawala
and J.M. Puchkhanawala, for the Appellants.
N.A. Mody, and Amarchand & Mangaldas, for the
Respondents.
Chagla C.J.—This appeal raises a very interesting and
important question as to the construction of Section 86 F of the Indian
Companies Act. The facts are proved and not disputed. The respondent was a
director of the Walchandnagar Industries Ltd. In June, 1951, he entered into a
contract with the company for the supply of one tin of ghee, and the question
that arises is whether by reason of the respondent entering into this contract
he has ceased to be a director of the company. Section 86F imposes a personal
disability upon a director of the company and the disability is that 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, is precluded
from entering into any contract for the sale, purchase or supply of goods and
materials with the company. The disqualification is not absolute, because the
section provides that with the consent of the directors, a director can enter
into contracts which are prohibited under this section. It is clear that in
enacting this provision, which is a novel provision and finds no place in the
English Companies Act, the Legislature wanted to suppress a particular mischief
and had a particular object in mind. A director of a company occupies a
responsible position and the Legislature wanted that while occupying that
position he should not be
placed in a situation where there would be a conflict between his interest and
his duty. His duty would be to his company of which he is a director. His
interest would be to enter into a profitable contract with the company. It is
also clear that a director holding the position that he does can obtain undue
benefit by entering into profitable contracts with the company, and in order to
suppress that mischief and to achieve the object which the Legislature had in
mind, Section 86F was enacted. It is a well settled canon of construction that
when we are considering a remedial measure, we must give to the provision of
law as wide an interpretation as possible, of course consistently with the
language used by the Legislature, and if Section 86F is remedial in its nature,
which it undoubtedly is, then it would be wrong to give it a restricted
construction. On the contrary we should try and give it as wide an
interpretation as possible.
Now, the very short question that arises on this
appeal is whether the consent contemplated by Section 86F is a general consent
or a consent which is referable to a particular or a specific contract or
contracts. The contention of Mr. Mody on behalf of the respondent is that the
language used by the Legislature is general and there is no reason why we
should limit the expression "consent" by adding to it the adjective
"specific". Mr. Mody says that if we were to construe the section in
that light, we would really be re-writing Section 86F. Now, if Section 86F
imposes a personal disability upon the directors, then to construe Section 86F
in the manner suggested by Mr. Mody, viz., that by a general resolution the
board of directors can remove the personal disability imposed upon the
directors of the company under Section 86F, would be in effect to give the
power to the board of directors to repeal Section 86F if they were so minded.
They could write off Section 86F from the Companies Act. That would be a
construction entirely inconsistent with the object of the section and the
mischief aimed at. Further, "consent" must imply a knowledge of the
necessary facts and materials which leads to the consent. Consent cannot be
given in the abstract or in vacuo. It can only be given in reference to the
particular contract which a director intends to enter into. Therefore, Section
86F requires that the board of directors should consider both the nature of the
contract that the director wants to enter into and also the case of the
particular director who wants to enter into that contract before the consent is
given. It is only on a consideration of both these factors, viz., the nature of
the contract and the qualifications of the director, that a proper consent
within the meaning of Section 86F can be given for entering into a contract. If
Mr. Mody's contention were to be accepted, the board of directors, without
considering what the nature of the contract was, without considering the value,
without considering the particular material in respect of which the contract
was to be entered into, in anticipation and generally can agree to a director
or directors entering into contracts with the company. In other words, power is
given according to Mr. Mody under Section 86F to remove the personal disability
which the Legislature has imposed upon the directors by Section 86F. In our
opinion, the Legislature having imposed a personal disability upon the
directors under Section 86F, the only power that is given to the board of
directors is not to remove that personal disability generally, but to remove
the personal disability with regard to a particular contract or contracts with
regard to which the board of directors has applied its mind.
The facts in this particular case are extremely
striking and significant. The respondent wrote to the company on April 30,
1941, giving a list of the companies of which he was a director and also a list
of the firms of which he was a partner for the purpose of giving particulars
under Section 87(1). Further, he gave a general notification under Section 91A
that he should be considered interested in any subsequent transactions with the
companies and firms whose names he had mentioned. It should be noted that the
respondent never applied for any consent under Section 86F and yet at the
meeting of the board of directors of-May 27, 1941, it was resolved that as
required by Section 86F of the Indian Companies Act the directors should give
their consent to various directors including the respondent to enter into a
contract for sale, purchase or supply of goods and materials with the company.
Therefore, this is a striking instance which goes to show that the board of
directors never applied their mind to the requirements of Section 86F, that
they gave a consent when the consent was not asked for by the respondent, and
light-heartedly, without proper thought or consideration, a grave personal
disability imposed upon the directors by the Legislature was removed by a
stroke of the pen by the board of directors If we were to accept Mr. Mody's
contention, the result would be that the board of directors of all the
companies in India can pass general resolutions of this character removing the
disability from all the directors and permitting directors to enter into as
many contracts with the company as they liked and any control over such
transactions would be removed as far as the directors are concerned.
On the construction Mr. Mody has strongly relied on
the fact that the Legislature has used the plural and not the singular. The
Legislature has prohibited the entering into of any contracts and not any
contract, and Mr. Mody says that the use of the plural was advised and the reason why the plural was used was to permit the
board of directors to give consent with regard to the entering into of
contracts. Now, there is no particular significance attached to the use of the
plural in this context. The plural would undoubtedly include the singular and
the prohibition is with regard to the entering into of any contracts or
contract, and having used the plural, Section 86F goes on to exempt from the
class of prohibited contracts any contract or agreement for the sale, purchase
or supply entered into before the commencement of the Companies (Amendment)
Act, 1936. Therefore, the reason for this particular form of drafting seems to
be that the plural was used in contrast to the singular which is used in the
proviso which follows and which proviso exempts from the class indicated in the
main section the contract or contracts entered into prior to the Companies
(Amendment) Act, 1936.
Then Mr. Mody says that if we were to place this
construction on Section 86F, it would lead to conflict with Section 91A.
Section 91A deals with entirely a different subject-matter. The subject-matter
of Section 91A is disclosure of interest by directors, and it provides that
every director who is directly or indirectly concerned interested in any
contract or arrangement entered into by or on behalf of the company shall
disclose the nature of his interest at the meeting of the directors at which
the contract or arrangement is determined on, if his interest then exists, or
in any other case at the first meeting of the directors after the acquisition
of his interest or the making of the contract or arrangement, and the
consequence of contravention is that the director is liable to a fine. The
consequence of a contravention of Section 86F is much more drastic because
under Section 86-1 (h) the office of the director becomes vacant if he acts in
contravention of Section 86F. What Mr. Mody says is that if a contract is not
determined on at the meeting of the directors, but is subsequently entered
into, then the director can disclose his interest at the first meeting of the
directors after the contract has been entered into and that disclosure would be
sufficient disclosure for the purpose of Section 91A. But Mr. Mody says how
would that be possible if the director were not to take the consent of the
board of directors and entered into a contract which contract falls under
Section 86F. Mr. Mody says it might not have been possible for him to take a
specific consent with regard to that particular contract, and if a general
consent is not permissible then although Section 91A makes it possible for him
to disclose his interest subsequently he would not be able to disclose that
interest or the disclosure of the interest would be immaterial and irrelevant
because before that he would cease to be a director under Section 86F. Section
91A itself does present certain
difficulties with regard to interpretation. For instance, there is a proviso by
which a general notice can be given that a director is a director or a member
of any specified company or that he is a member of a specified firm, and such a
general notice does not require the director to give any special notice
relating to any particular transaction with such firm or company. But the
proviso does not refer to a case where the contract is with the director
personally or when the director is personally interested and not as a director
or a member of a specified company or a member of any specified firm, and it
seems on the construction of Section 91A that perhaps a general notice will not
be sufficient when a director is personally interested in a contract. I am only
pointing out one difficulty with regard to the interpretation of Section 91A.
But we are not called upon in this appeal to construe Section 91A. Section 91A
and Section 86F deal with different subject-matters and the consequences of
contravention of these two sections are different and the penalties indicated
by the Legislature are also different. Contravention of Section 86F results in
the office of the director becoming vacant. The failure to disclose interest
under Section 91A does not result in the office of the director becoming
vacant, but he makes himself liable to the payment of a penalty. Therefore,
there may be a case where as a result of consent not being taken under Section
86F the director ceases to hold office, although if he had taken the consent he
could have made the disclosure with regard to his interest at a subsequent meeting
under Section 91A. Therefore there is no such conflict between Sections 86F and
91A which would require at our hands a construction of Section 86F which will
reconcile it with Section 91A.
Then Mr. Mody has drawn our attention to certain
difficulties and anomalous consequences that would result by reason of the
construction we are placing upon Section 86F. Mr. Mody says that there are many
petty contracts which a director may have to enter into with his company and
with regard to which it would be impossible for him to take specific consent
from time to time, and yet if the construction of Section 86F be what we are
proposing to put upon it, it would either make it impossible for the director
to enter into these petty contracts or, if he did enter into them, would result
in his vacating his office. It is never a safe guide for a construction of a
section merely to look at certain anomalies that may result from a particular
interpretation being put upon the section. It is true that a court must, if it
can possibly do so, give an interpretation to a section which would not result
in difficulties in the working of that section. But, on the other hand, many
legislations, and specially modern legislations, have been so framed and so
drafted that some anomaly or other
is inevitable, and when such anomalies present themselves to the court, the
duty of the court is to draw the attention of the Legislature to the removal of
these anomalies and not to remove them itself by giving a construction contrary
to the intention of the Legislature. It is perfectly true that the fact that no
limit is placed by the Legislature upon the extent or value of the contract
under Section 86F may result in serious difficulties and it would have been
much more advisable for the Legislature to have provided that all contracts are
not prohibited under Section 86F, but contracts exceeding a certain value and
extent, and if that had been done there would have been no difficulty with
regard to Section 86F. But we are not prepared at the instance of Mr. Mody, in
order to remove this anomaly, to give a carte blanche to the board of directors
to remove the personal disability upon the directors and in effect to repeal
Section 86F by passing a general resolution giving consent to a particular director
to enter into any and all contracts for sale, purchase or supply of goods,
whatever the value, the nature or the extent of the contract may be.
The
final argument of Mr. Mody is that we should not speculate as to the intention
or the object of the Legislature and we must construe Section 86F as we find
it. It is perfectly true that the object of the Legislature must be gathered
from the language used by it and that it is not open to the court to alter or
amend that language in order to make it consistent with what the court thinks
might be the object of the Legislature in passing a particular measure. But
when the court is called upon to give a wide or limited interpretation to a
particular expression and when that expression is capable of both those interpretations,
surely it is open to the court to consider what was the object of the
Legislature and what was the mischief aimed at, and the court must try and give
that construction to a particular expression which will be more consistent with
the suppression of the mischief rather than that mischief being allowed to
continue uncontrolled. In this particular case the Legislature has not clearly
indicated whether the consent referred to in Section 86F is a general consent
unrelated to the contract to be entered into by the director or the consent is
with reference to a specific contract or contracts, and in the absence of any
clear indication by the Legislature, we must try and give a construction more
in accordance with the object intended by framing Section 86F rather than a
construction which would defeat that object.
Mr.
Mody has relied on an English case reported in
"An inspector of weights and measures may, with the consent, of the local authority, prosecute before a court of summary jurisdiction or justices any information, complaint or proceeding arising under the Weights and Measures Act or in the discharge of his duties as such Inspector;"
and the question that arose was whether a separate
consent had to be given in each case or whether the Inspector could be
authorised by the local authority to conduct all prosecutions, and the English
Court of Appeal held that the section did not provide that a separate consent
was to be given in each case and if that was the intention of the Legislature a
very much clearer expression of that intention would have been given in that
section. Mr. Mody strongly relies on this judgment which according to him
establishes that when the word "consent" is used without any further
indication by the Legislature, "consent" must be construed to mean
general consent. Section 14 of the Weights and Measures Act and Section 86F of
the Companies Act are not in pari materia. Section 14 of the Weights and
Measures Act deals with the authority to be conferred upon a particular officer
to launch a prosecution. There is no question of any disability being imposed
by the Legislature nor is there any particular object to be achieved or any
mischief to be suppressed, and when it was merely a question of sanctioning a
prosecution, the Court of Appeal in that particular context held that it was
not necessary that the local authority should give a specific and separate
consent with record to each prosecution. It is difficult to contend that in the
light of this decision we must hold that the expression "consent" has
the same connotation in Section 86F although Section 86F is dealing with
entirely a different subject matter.
The court below held, in the suit filed by the
plaintiff for a declaration that he had not ceased to be a director of the
first defendant company, in favour of the plaintiff, and gave to the plaintiff the
declaration that he sought. It is from that decision that the company has come
in appeal before us, and although it may be unfortunate that the plaintiff
should be disqualified by reason of a very small and petty contract which he
entered into, in allowing the appeal we are enforcing the section, although
realising that it may cause hardship in this particular case to the plaintiff,
in the larger and wider interest which the Legislature had in mind and in order
to prevent directors from using their responsible office to their own
advantage. If companies are to be properly administered in this country, the
board of directors must apply their minds to the specific instances where
directors require their consent for entering into contracts with the company.
The appeal will, therefore, be allowed with costs.
Suit dismissed with costs.